PRF Technologies Ltd F-1, filed Jun 30, 2020
PRF Technologies Ltd. (PRFX)
As filed with the Securities and Exchange Commission on June 30, 2020
Registration No. 333-
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM F-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
PAINREFORM LTD.
(Exact name of registrant as specified in its charter)
Not Applicable
(Translation of Registrant’s name into English)
| Israel | 2834 | Not Applicable | ||
| (State or other jurisdiction of | (Primary Standard Industrial | (I.R.S. Employer | ||
| incorporation or organization) | Classification Code Number) | Identification No.) |
60C Medinat Hayehudim
Herzliya, 4676670, Israel
Tel: +972 9-960-1901
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
Dr. David E. Weinstein, President and Chief Medical Officer
39 Round Hill Road
Dobbs Ferry, New York 10522
Tel (917) 282-5135
(Name, address, including zip code, and telephone number, including area code, of agent for service)
Copies to:
Steven J. Glusband, Esq. Guy Ben-Ami, Esq. Carter
Ledyard & |
Ronen Kantor, Esq. Ron Soulema, Esq. Doron
Tikotzky Kantor B.S.R. 4 Tower, 33 Floor 7 Metsada Street, Bnei Brak 5126112 Israel Tel: +972 3 613 3371 |
Barry I. Grossman, Esq. Sarah E. Williams, Esq. Jessica Yuan, Esq. Ellenoff
Grossman & 1345 Avenue
of the New York, NY 10105 Tel: +1 212 370 1300 |
Dr. Shachar Hadar Meitar Law Offices 16 Abba Hillel Silver Rd Ramat Gan 5250608, Israel Tel: +972 3 6103635 |
Approximate date of commencement of proposed sale to the public: As soon as practicable after this registration statement is declared effective.
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. ☐
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933.
Emerging growth company ☒
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. ☒
CALCULATION OF REGISTRATION FEE
| Title of each class of securities to be registered | Proposed
Maximum Aggregate Offering Price(1)(2) | Amount of Registration | ||||||
| Ordinary shares, par value NIS 0.01 per share(4) | $ | $ | ||||||
| Underwriters’ Warrants | $ | $ | ||||||
| Ordinary shares issuable upon exercise of Underwriters’ Warrants (4) (5) | $ | $ | ||||||
| Total | $ | 25,000,000.00 | $ | 3,245.00 | ||||
(1) |
In accordance with Rule 457(o) under the Securities Act of 1933, as amended (the “Securities Act”), the number of shares being registered and the proposed maximum offering price per share are not included in this table. |
| (2) | The proposed maximum aggregate offering price has been estimated solely for the purpose of calculating the amount of the registration fee pursuant to Rule 457(o) under the Securities Act, and includes ordinary shares, par value NIS 0.01 per share, of PainReform Ltd. that the underwriters have an option to purchase to cover over-allotments, if any. |
| (3) | Calculated pursuant to Rule 457(o) based on an estimate of the proposed maximum aggregate offering price of the securities registered hereunder. |
| (4) | Pursuant to Rule 416 under the Securities Act, the shares registered hereby also include an indeterminate number of additional shares as may from time to time become issuable by reason of stock splits, distributions, recapitalizations, or other similar transactions. |
| (5) | Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(g) under the Securities Act. We have agreed to issue upon the closing of this offering warrants to the underwriters entitling them to purchase up to 15% of the aggregate number of ordinary shares sold in this offering (the “Underwriters’ Warrants”). The Underwriters’ Warrants are exercisable at a per-share exercise price equal to 125% of the public offering price per share of the ordinary shares. |
The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.
The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the Securities and Exchange Commission has declared this registration statement effective. This preliminary prospectus is not an offer to sell these securities and we are not soliciting offers to buy these securities in any state or jurisdiction where such offer or sale is not permitted.
SUBJECT
TO COMPLETION, DATED
JUNE 30, 2020
PRELIMINARY PROSPECTUS
PainReform Ltd.
[________] Ordinary Shares
This is our initial public offering. There is currently no public market for our ordinary shares. We expect the initial public offering price of the ordinary shares being offered to be between $ and $ per share. We have applied to list our ordinary shares on the Nasdaq Capital Market under the symbol “PRFX.”
We are an emerging growth company, as defined in the U.S. Jumpstart Our Business Startups Act of 2012, or the JOBS Act, and, as such, have elected to comply with certain reduced public company reporting requirements.
Investing in the securities offered in this prospectus involves a high degree of risk. See “Risk Factors” beginning on page 8 of this prospectus to read about factors you should consider before purchasing any of our ordinary shares.
| Per Ordinary Share | Total | |||||||
| Initial public offering price | $ | $ | ||||||
| Underwriting discounts and commissions(1) | $ | - | $ | |||||
| Net Proceeds to us (before expenses) | $ | $ | ||||||
| (1) | Please refer to the section entitled “Underwriting” beginning on page 111 of this prospectus for additional information regarding underwriting compensation. |
Neither the United States Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.
We have granted the underwriters an option to purchase up to additional ordinary shares from us at the public offering price, less the underwriting discount, within 30 days from the date of this prospectus to cover over-allotments.
The underwriters expect to deliver the ordinary shares against payment on or about , 2020.
| Maxim Group LLC | Joseph Gunnar & Co., LLC |
| Joint Book-Runner | Joint Book- Runner |
The date of this prospectus is , 2020.
TABLE OF CONTENTS
You should rely only on the information contained in this prospectus and any related free-writing prospectus that we authorize to be distributed to you. Neither we nor the underwriters have authorized any person to provide you with information different from that contained in this prospectus, any amendment or supplement to this prospectus or any related free-writing prospectus that we authorize to be distributed to you. Neither we nor the underwriters take responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you.
We and the underwriters are offering to sell our ordinary shares and seeking offers to purchase our ordinary shares only in jurisdictions where such offers and sales are permitted. This prospectus is not an offer to sell, nor is it seeking an offer to buy, the ordinary shares in any state or jurisdiction where such offer or sale is not permitted.
For investors outside the U.S. we have not, and the underwriters have not, done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the U.S. Persons outside the U.S. who come into possession of this prospectus must inform themselves, and observe any restrictions relating to, the offering of the ordinary shares and the distribution of this prospectus outside the U.S.
The information in this prospectus speaks only as of the date of this prospectus unless the information specifically indicates that another date applies, regardless of the time of delivery of this prospectus or of any sale of the ordinary shares offered hereby. Our business, financial condition, results of operations, and prospects may have changed since that date. Neither the delivery of this prospectus nor the sale of the ordinary shares means that information contained in this prospectus is correct after the date of this prospectus.
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Market data and certain industry data and forecasts used throughout this prospectus were obtained from sources we believe to be reliable, including market research databases, publicly available information, reports of governmental agencies, and industry publications and surveys. We have relied on certain data from third party sources, including industry forecasts and market research, which we believe to be reliable based on our management’s knowledge of the industry. While we are not aware of any misstatements regarding the industry data presented in this prospectus, our estimates involve risks and uncertainties and are subject to change based on various factors, including those discussed under the heading “Risk Factors” and elsewhere in this prospectus.
Our financial statements are prepared and presented in accordance with accounting principles generally accepted in the U.S., or GAAP. Our historical results do not necessarily indicate our expected results for any future periods.
Certain figures included in this prospectus have been subject to rounding adjustments. Accordingly, figures shown as totals in certain tables may not be an arithmetic aggregation of the figures that precede them.
Unless the context otherwise requires, references in this prospectus to the “Company,” “PainReform,” “we,” “us,” “our” and other similar designations refer to PainReform Ltd.
PAINREFORM® and our other registered or common law trademarks, trade names or service marks appearing in this prospectus are owned by us. Solely for convenience, trademarks and trade names referred to in this prospectus, including logos, artwork and other visual displays, may appear without the ® or ™ 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 of the applicable licensor to these trademarks and trade names. Unless otherwise stated in this prospectus, we do not intend our use or display of other companies’ trade names or trademarks to imply a relationship with, or endorsement or sponsorship of us by, any other companies.
Unless derived from our financial statements or otherwise noted, the terms “shekels,” “Israeli shekels” and “NIS” refer to New Israeli Shekels, the lawful currency of the State of Israel, and the terms “dollar,” “U.S. dollar,” “US$,” “USD,” and “$” refer to U.S. dollars, the lawful currency of the U.S. All references to “shares” in this prospectus refer to the ordinary shares of PainReform Ltd., par value NIS 0.01 per share. All references to “Companies Law” refer to the Israeli Companies Law, 5759-1999, as amended.
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This is only a summary of the prospectus and does not contain or summarize all of the information contained in this prospectus which is material and/or which may be important to you. Before making an investment in our ordinary shares, you should read this entire prospectus, including the sections of this prospectus entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and the related notes included elsewhere in this prospectus.
Overview
We are a clinical stage specialty pharmaceutical company focused on the reformulation of established therapeutics. Our proprietary extended release drug-delivery system is designed to increase the therapeutic window treatment without the need for increasing the frequency of administration and without increasing the overall therapeutic dose. Our strategy is to incorporate generic drugs with our proprietary extended release drug-delivery system in order to create extended release drug products and to take advantage of the 505(b)(2) regulatory pathway created by the U.S. Food and Drug Administration (“FDA”). The 505(b)(2) new drug application (“NDA”) process, provides for FDA approval of a new drug based in part on data that was developed by others, including published literature references and data previously reviewed by the FDA in its approval of a separate application. Using this pathway can significantly reduce the future time and costs associated with clinical development. PRF-110, our first product, is based on the local anesthetic ropivacaine, targeting the post-operative pain relief market. PRF-110 is an oil-based, viscous, clear solution that is deposited directly into the surgical wound bed prior to closure to provide localized and extended post-operative analgesia.
In a small 15 patient Phase 2 proof-of-concept clinical study in herniorrhaphy (hernia repair), PRF-110 provided substantial pain reduction for up to 72 hours post-operatively. A comparison of these results to historical data for ropivacaine alone suggests a substantial advantage to using PRF-110 over the local anesthetic, ropivacaine, alone. As indicated in the FDA approved drug description for ropivacaine, such drug provides pain relief for only 2 to 6 hours. The surgeons that participated in the PRF-110 Phase 2 trial reported that it was easily integrated into the procedure and non-disruptive of existing surgical techniques. Ropivacaine, the active drug used in PRF-110, is a safe and well characterized local anesthetic and the other components that make up the remainder of the PRF-110 formulation are classified as GRAS (Generally Regarded As Safe) by the FDA, mitigating many potential safety issues that are common in drug development. In a phase 1 safety study conducted in Israel, healthy volunteers were treated with subcutaneous PRF-110. In that study no serious adverse events were noted and PRF-110 showed a prolonged pain reduction when the subjects were tested for their responses to mild or moderate pain stimuli.
Our Strengths
We believe our competitive strengths include the following:
| ● | We have a highly experienced leadership team; |
| ● | PRF-110 evidenced prolonged pain control and no serious adverse effects in Phase 1 and Phase 2 clinical trials; |
| ● | Our ability to take advantage of the 505(b)(2) regulatory pathway to incorporate generic drugs with our proprietary extended release drug-delivery system in order to create extended release drug products; and |
| ● | Our history of developing PRF-110 in a cost-effective manner. |
Our Strategy
Our first priority is to continue the drive toward commercialization of PRF-110. Upon completion of this offering, we plan to expeditiously begin our Phase 3 clinical trials as we move toward an NDA and PRF-110 approval. We believe that we are well positioned to accomplish this because:
| ● | We have amassed an extensive toxicology portfolio for PRF-110, demonstrating that there were no PRF-110-related serious adverse events in either healthy subjects or in surgical patients; |
| ● | Based on extensive toxicology and pharmacokinetic studies, as well as positive Phase 2 results, the FDA has granted our company an IND (Investigational New Drug) for PRF-110 and approved the initiation of Phase 3 trials for the treatment of post-operative pain; |
| ● | Unlike many drug trials that take months to years to complete and which are complex and whose endpoints are difficult to interpret, the planned trials are expected to last for a brief number of days with a one-month follow-up period, with primary endpoints based on measurement on the familiar scale of 1 (no pain) to 10 (worst imaginable pain); |
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| ● | Upon completion of the Phase 3 studies, if successful, we plan to apply for a New Drug Approval for the management of post-operative pain; and |
| ● | If and when approved for commercial sale, we intend to capitalize on the opportunity and carry out post-approval trials in a number of additional surgical indications including: breast augmentation/reduction, bariatric procedures, hysterectomy, cholecystectomy as well as orthopedic procedures including joint replacements and open fracture repair. We intend to capitalize on these opportunities to become the leader in opiate-free, long-acting local and regional analgesia. |
Following the establishment of PRF-110 in the post-operative pain market, we plan to build on our platform technology to broaden our product base. Our extended release drug-delivery system is a non-aqueous, viscous formulation that can be used for the delivery of many drugs that are currently difficult to administer for long-term, continuous dosing without an iv access, including antibiotics and chemotherapeutics. We intend to develop a pipeline of drugs than can be delivered once, using our platform technology, and thereafter be bio-available for extended release. In addition, if successful, we plan to expand by developing, acquiring or in-licensing products, or technologies that we believe will be a strategic fit with our focus on the surgical and hospital marketplace.
Once approved, we plan to launch PRF-110 either by ourselves or with a strategic partner that is experienced in marketing products in surgical environments. These environments include:
| ● | Hospitals |
| ● | Free-standing surgical centers |
| ● | Surgical offices |
Our Industry
The pharmaceutical industry is extremely competitive. PRF-110, if approved, will compete in a highly competitive market. Our competitors in this market may succeed in developing products that could render PRF-110 and future product candidates obsolete or non-competitive. Many of our potential competitors have significantly more financial, technical and other resources than we do, which may give them a competitive advantage. In addition, they may have substantially more experience in effecting strategic combinations, in-licensing technology, developing drugs, obtaining regulatory approvals and manufacturing and marketing products. We cannot give any assurances that we can compete effectively with these other biotechnology and pharmaceutical companies.
If we are able to successfully develop PRF-110 for postoperative pain management, we will compete with EXPAREL® (bupivacaine liposome injectable suspension, marketed by Pacira Pharmaceuticals, Inc.), MARCAINE (bupivacaine, marketed by Hospira, Inc.) and generic forms of bupivacaine; NAROPIN (ropivacaine, marketed by Fresenius Kabi USA, LLC) and generic forms of ropivacaine;) and potentially other products in development.
Our Initial Product
PRF-110 is a viscous clear oil-based solution that is instilled (deposited) directly into the surgical wound to provide localized and extended post-operative analgesia. Its physical characteristics and composition are key to it being well-tolerated and its ease of use:
| ● | PRF-110 is highly viscous and thus stays in place when placed into a surgical wound bed. |
| ● | PRF-110 remains within the surgical site when the skin is closed, without being toxic or proinflammatory. |
| ● | PRF-110 is easy to administer and its use is consistent with current surgical practice. |
| ● | PRF-110 is highly uniform and resistant to degradation in the wound, resulting is sustained/extended release of the analgesic. |
| ● | Ropivacaine, the active drug used in PRF-110, is a safe and well characterized local anesthetic. |
| ● | The components that make up the remainder of the PRF-110 formulation are classified as GRAS (Generally Regarded as Safe) by the FDA. |
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We sponsored a Phase 2 proof-of-concept study designed to assess the safety and efficacy of PRF-110 in hernia repair surgeries. The study was performed at the Sourasky Medical Center, the Galilee Medical Center and the Assaf Harofeh Medical Center, all located in Israel. The primary objective of the study was to evaluate the safety and tolerability of PRF 110 following hernia repair surgery performed by abdominal incision. The secondary objective was to evaluate pain intensity and the use of rescue pain medications following hernia surgery and application of PRF 110 at the incision site. While this study was not powered to determine statistical significance, a comparison of these results to placebo historical data evidenced lower average pain scores for up to 72 hours in comparison to the use of ropivacaine alone, which provided pain relief for only 2- to 6 hours. In this study with 15 subjects, PRF-110 provided pain reduction for up to 72 hours post-operatively. Prior to undertaking the Phase 2 study PRF-110 was, at the request of the FDA, rigorously tested in preclinical models of wound healing in which it was shown to have no effect on the strength of the healed skin, no effect on bones and no effect on the integrity of sutures and surgical mesh. Based on extensive toxicology and pharmacokinetic measures, as well as positive Phase 2 results, the FDA has granted our company an IND (Investigational New Drug) for PRF-110 and approved the initiation of Phase 3 trials for the treatment of post-operative pain. If PRF-110 approval for hernia repair and bunionectomy is obtained, we expect that these indications will be the focus of our initial commercialization efforts.
If, and when, approved for commercial sale, and upon becoming revenue-positive, we intend to quickly capitalize on the opportunity and carry out post-approval Phase 4 clinical trials in a number of additional surgical indications, including breast augmentation/reduction, bariatric procedures, hysterectomy and cholecystectomy, as well as orthopedic procedures including joint replacements and open fracture repair.
Our extended release drug-delivery system is a non-aqueous, viscous formulation that we believe can be used for the delivery of many drugs to treat a variety of indications that are currently difficult to administer for long-term, continuous dosing without a permanent or semi-permanent iv access. This is based on the physical – chemical characteristics of our drug delivery system that make it adaptable for the delivery of different classes and types of injectable drugs. Included in these potential applications are antibiotics to treat infections in difficult to reach tissues, such as bone or poorly vascularized limbs, and chemotherapeutics that currently require repeated administration to treat a variety of cancers. We intend to develop a pipeline of drugs than can be delivered once, using our platform technology, and thereafter be bio-available for extended release. A decision will be made as to specific indications when funds become available. The cost of each of such studies will be dependent upon a variety of factors including, the surgical indication, the number of centers involved in the study, the length of the study and the extent of the requisite follow-up. In addition, if successful, we plan to expand by developing, acquiring or in-licensing products or technologies that we believe will be a strategic fit with our focus on the surgical and hospital marketplace.
PRF-110 is made with a very efficient, scalable manufacturing process which contributes to a cost of goods that we anticipate will be extremely competitive. We believe this will facilitate a future sales strategy both flexible and profitable.
In contrast to the oil-based PRF-110, the only currently marketed non-opiate extended relief post-surgical topical product is a liposomal formulation containing bupivacaine. Liposomes require special handling, are fragile, and the product is a water-based suspension of liposomes. Mishandling of drug-filled liposomes is known to result in the release of free drug into the water, and thus reduces efficacy over time. Moreover, the physical characteristic of this product requires multiple injections which is a burdensome task to the surgeon. In comparison, PRF-110 is simply applied into the wound, prior to suturing.
Intellectual Property
Our success will depend significantly on our ability to obtain and maintain patent and other proprietary protection for commercially important technology, inventions, and know-how related to our business, defend and enforce our patents, preserve the confidentiality of our trade secrets, and operate without infringing on the valid and enforceable patents and other proprietary rights of third parties.
We strive to protect the proprietary technologies that we believe are important to our business, including seeking and maintaining patent protection intended to cover our extended release drug-delivery system. As of December 31, 2019, our exclusively owned patent portfolio includes three U.S. patents, 11 foreign patents and five pending foreign patent applications. The claims of these patents and patent applications are directed toward various aspects of our extended release drug-delivery system and research programs. For more information regarding the risks related to our intellectual property, see “Risk Factors—Risks Related to Our Intellectual Property.”
Risks Associated with Our Business
An investment in our ordinary shares involves a high degree of risk. Any of the factors set forth under “Risk Factors” may limit our ability to successfully execute our business strategy. You should carefully consider all of the information set forth in this prospectus and, in particular, should evaluate the specific factors set forth under “Risk Factors” in deciding whether to invest in our securities. Among these important risks are the following:
| ● | We have incurred significant losses since our inception and expect to incur losses for the foreseeable future. We may never achieve or maintain profitability. |
| ● | We will need substantial additional funding, which may not be available to us on acceptable terms or at all. If we are unable to raise capital when needed, we may be forced to delay, reduce and/or eliminate our research and drug development programs or future commercialization efforts. |
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| ● | Raising additional capital may cause dilution to our shareholders, including purchasers of shares in this offering, restrict our operations or require us to relinquish rights to our product candidates. |
| ● | We are dependent on the success of our lead product candidate, PRF-110, for which two clinical trials are planned. Our clinical trials of PRF-110 may not be successful. If we are unable to obtain approval for and commercialize PRF-110 or experience significant delays in doing so, our business will be materially harmed. |
| ● | We have limited experience in conducting and managing clinical trials necessary to obtain regulatory approvals. If our drug candidates and technologies do not receive the necessary regulatory approvals, we will be unable to commercialize our products. |
| ● | Even if we or our collaborative/strategic partners or potential collaborative/strategic partners receive approval to market our drug candidates, if our products fail to achieve market acceptance, we will never record meaningful revenues. |
| ● | If our competitors develop and market products that are less expensive or more effective than our product, our revenues and results may be harmed and our commercial opportunities may be reduced or eliminated. |
| ● | Maintain patent protection for our product, our competitors could develop and commercialize products and technology similar or identical to our product candidates, and our ability to successfully commercialize any product candidates we may develop, and our science may be adversely affected. |
| ● | As a “foreign private issuer,” we are permitted, and intend, to follow certain home country corporate governance practices instead of otherwise applicable SEC and the Nasdaq Capital Market requirements, which may result in less protection than is accorded to investors under rules applicable to domestic U.S. issuers. |
| ● | It may be difficult to enforce a U.S. judgment against us, our officers or our directors or to assert U.S. securities law claims in Israel. |
| ● | Your rights and responsibilities as a shareholder will be governed by Israeli law which may differ in some respects from the rights and responsibilities of shareholders of U.S. companies. |
| ● | No public market for our ordinary shares currently exists, and an active trading market may not develop or be sustained following this offering. |
| ● | Because we are not subject to compliance with rules requiring the adoption of certain corporate governance measures, our shareholders have limited protections against interested director transactions, conflicts of interest and similar matters. |
| ● | Failure to achieve and maintain effective internal controls in accordance with Section 404 of the Sarbanes-Oxley Act could have a material adverse effect on our business and operating results. In addition, current and potential shareholders could lose confidence in our financial reporting, which could have a material adverse effect on our share price. |
| ● | U.S. shareholders may suffer adverse tax consequences if we are characterized as a passive foreign investment company, or PFIC, for U.S. federal income tax purposes. |
Implications of Our Emerging Growth Company and Foreign Private Issuer Status
As a company with less than $1.07 billion in revenue for our year ended December 31, 2018, we qualify as an “emerging growth company” under Section 2(a) of the Securities Act of 1933, as amended, or the Securities Act, as modified by the U.S. Jumpstart Our Business Startups Act of 2012, or the JOBS Act. As an emerging growth company, we may take advantage of certain exemptions from reporting requirements that generally apply to public companies, including the ability to present only two years of audited financial statements in addition to any required interim financial statements and correspondingly reduced disclosure in management’s discussion and analysis of financial condition and results of operations in the registration statement for offering of which this prospectus forms a part, exemption from the auditor attestation requirements with respect to internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, and, to the extent that we no longer qualify as a foreign private issuer, exemption from say-on-pay, say-on-frequency, and say-on-golden parachute voting requirements, and reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements.
We will remain an emerging growth company until the earliest of: (i) the last day of our fiscal year during which we have total annual gross revenue of at least $1.07 billion; (ii) the last day of our fiscal year following the fifth anniversary of the completion of this offering; (iii) the date on which we have, during the previous three-year period, issued more than $1.0 billion in non-convertible debt; or (iv) the date on which we are deemed to be a “large accelerated filer” under the Securities Exchange Act of 1934, as amended, or the Exchange Act. Once we cease to be an emerging growth company, we will not be entitled to the exemptions provided to emerging growth companies under the JOBS Act.
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Upon consummation of this offering, we will report under the Exchange Act as a non-U.S. company with foreign private issuer status. Even after we no longer qualify as an emerging growth company, as long as we continue to qualify as a foreign private issuer under the Exchange Act, we will be exempt from certain provisions of the Exchange Act that are applicable to U.S. domestic public companies, including:
| ● | the sections of the Exchange Act regulating the solicitation of proxies, consents or authorizations with respect to a security registered under the Exchange Act; |
| ● | the sections of the Exchange Act requiring insiders to file public reports of their share ownership and trading activities and liability for insiders who profit from trades made in a short period of time; and |
| ● | the rules under the Exchange Act requiring the filing with the SEC of quarterly reports on Form 10-Q containing unaudited financial statements and other specified information, and current reports on Form 8-K upon the occurrence of specified significant events we intend to report our results of operations voluntarily on a quarterly basis. |
Both foreign private issuers and emerging growth companies are also exempt from certain more stringent executive compensation disclosure rules. Thus, even if we no longer qualify as an emerging growth company, but remain a foreign private issuer, we will continue to be exempt from the more stringent compensation disclosures required of companies that are neither an emerging growth company nor a foreign private issuer.
As a foreign private issuer we will also have four months after the end of each fiscal year to file our annual report with the U.S. Securities and Exchange Commission, or the SEC. Our executive officers, directors, and principal shareholders will be exempt from the requirements to report transactions in our equity securities and from the short-swing profit liability provisions contained in Section 16 of the Exchange Act. As a foreign private issuer, we will also not be subject to the requirements of Regulation FD (Fair Disclosure) promulgated under the Exchange Act.
We would cease to be a foreign private issuer at such time as more than 50% of our outstanding voting securities are held by U.S. residents and any of the following three circumstances applies: (i) the majority of our executive officers or directors are U.S. citizens or residents, (ii) more than 50% of our assets are located in the U.S. or (iii) our business is administered principally in the U.S.
In this prospectus, we have taken advantage of certain of the reduced reporting requirements as a result of being an emerging growth company and a foreign private issuer. Accordingly, the information contained herein may be different than the information you receive from other public companies in which you hold equity securities.
Corporate Information
We were incorporated under the laws of the State of Israel in November 2007. Our principal executive offices are located at the offices of the general partner of our principal shareholder, Medica Venture Partners at 60C Medinat Hayehudim, Herzliya, 4676670, Israel. Our telephone number is +972-9-960-1901. Our corporate website address is www.painreform.com. Information contained on or accessible through our website is not a part of this prospectus, and the inclusion of our website address in this prospectus is an inactive textual reference only.
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THE OFFERING
| Ordinary shares to be offered | ordinary shares | |
| Ordinary shares to be outstanding immediately after this offering | ordinary shares | |
| Over-allotment option | ordinary shares | |
| Use of proceeds | We estimate that the net proceeds to us from this offering will be approximately $ , or approximately $ if the underwriters exercise their option to purchase [ ] additional ordinary shares in full, after deducting the estimated underwriting discount and estimated offering expenses payable by us, based on an assumed initial public offering price of $ per ordinary share, which is the midpoint of the price range set forth on the cover page of this prospectus.
We intend to use the net proceeds from this offering, together with our existing cash and cash equivalents, (i) to conduct and complete two Phase 3 clinical trials for PRF-110, (ii) development activities and preparation of initial NDAs, (iii) purchase of directors and officers liability insurance, and (iv) for general corporate purposes including, general and administrative expenses and working capital. See “Use of Proceeds” for more information about the intended use of proceeds from this offering.
| |
| Upon the closing of this offering, assuming an offering size as set forth on the cover page of this prospectus and an initial public offering price of $ per share (the midpoint of the estimated price range set forth on the cover page of this prospectus), will beneficially own, in the aggregate, approximately % of our ordinary shares (or approximately % of our ordinary shares if the underwriters’ option to purchase additional shares is exercised in full). As a result, we will not be a “controlled company” within the meaning of the listing rules of the Nasdaq Capital Market. See the sections titled “Management—Controlled Company Exception” and “Principal Shareholders.” | ||
| Proposed Nasdaq Capital Market symbol | We have applied to have our ordinary shares listed on the Nasdaq Capital Market under the symbol “PRFX.” | |
| Risk Factors | You should carefully read the section titled “Risk Factors” and other information included in this prospectus for a discussion of factors that you should consider before deciding to invest in our ordinary shares. |
The number of ordinary shares that will be outstanding after this offering is based on [ ] ordinary shares outstanding as of [________], 2020 and the immediate conversion of [ ] upon closing of this offering of (i) 8,862,800 convertible preferred shares on a [ ] basis as into [ ] ordinary shares upon the closing of this offering, (ii) $3,928,000 of principal convertible debt plus $XXX accrued interest into [ ] ordinary shares, and (iii) $1,562,000 of convertible notes issued in August and December 2019 plus $XXX of accrued interest into [ ] ordinary shares; and excludes:
| ● | options to purchase 1,120,014 ordinary shares, with a weighted average exercise price of NIS $0.545 per share, granted under the 2008 PainReform Option Plan and the 2019 PainReform Option Plan; |
| ● | [ ] ordinary shares issuable upon exercise of the warrants issued in August and December 2019 in connection with a bridge financing; |
Except as otherwise noted, the information in this prospectus assumes or gives effect to:
| ● | no exercise by the underwriters of their option to purchase additional ordinary shares in this offering to cover over-allotments; |
| ● | the adoption and effectiveness of our amended and restated articles of association upon the effectiveness of the registration statement of which this prospectus forms a part; and |
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SUMMARY FINANCIAL DATA
You should read the following selected financial data in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the financial statements, related notes and other financial information included elsewhere in this prospectus.
The following table sets forth a summary of our statements of comprehensive loss and summary of our consolidated balance sheet data for the periods indicated. The statements of comprehensive loss for the years ended December 31, 2019 and 2018 and the balance sheet data as of December 31, 2019 and 2018 have been derived from our financial statements included elsewhere in this prospectus, which have been prepared in accordance with U.S. GAAP. Historical results are not necessarily indicative of the results expected in the future.
Statements of Comprehensive Loss
(U.S. dollars except share and per share data)
| Year Ended December 31, | ||||||||
| 2019 | 2018 | |||||||
| Operating Expenses: | ||||||||
| Research and development expenses | $ | (136,000 | ) | $ | (223,000 | ) | ||
| Selling, general and administrative expenses | (553,000 | ) | (277,000 | ) | ||||
| Operating Loss | (689,000 | ) | (500,000 | ) | ||||
| Financial expense, net | (590,000 | ) | (328,000 | ) | ||||
| Net Loss and Comprehensive loss | (1,279,000 | ) | (828,000 | ) | ||||
| Basic and diluted net loss per share | (1.39 | ) | (1.08 | ) | ||||
| Weighted average number of shares of ordinary share used in computing basic and diluted net loss per share | 1,729,670 | 1,729,670 | ||||||
Balance Sheet Data:
(U.S. dollars)
| As of December 31, | ||||||||
| 2019 | 2018 | |||||||
| Cash and cash equivalents | $ | 941,000 | $ | 40,000 | ||||
| Restricted cash | 6,000 | 6,000 | ||||||
| Other current assets | 25,000 | 34,000 | ||||||
| Total current assets | 972,000 | 80,000 | ||||||
| Other non-current asset | 192,000 | - | ||||||
| Total current liabilities | 6,339,000 | 18,000 | ||||||
| Convertible debt | - | 4,520,000 | ||||||
| Derivative warrant liability | 447,000 | - | ||||||
| Temporary equity | 6,621,000 | 6,621,000 | ||||||
| Shareholders’ deficit | (12,243,000 | ) | (11,078,000 | ) | ||||
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Investing in our ordinary shares involves a high degree of risk. Before you decide to invest in our ordinary shares, you should consider carefully the risks described below, together with the other information contained in this prospectus, including our financial statements and the related notes appearing at the end of this prospectus. We believe the risks described below are the risks that are material to us as of the date of this prospectus. If any of the following risks actually occur, our business, financial condition, results of operations and future growth prospects could be materially and adversely affected. In these circumstances, the market price of our ordinary shares could decline, and you may lose all or part of your investment.
Risks Related to Our Financial Position and Need for Additional Capital
We have incurred significant losses since our inception and expect to incur losses for the foreseeable future. We may never achieve or maintain profitability.
We have incurred operating losses since our inception and expect to continue to incur operating losses for the foreseeable future. During the two years ended December 31, 2019 and 2018, we incurred losses of $1,279,000 and $828,0000, respectively. We have not yet commercialized our initial drug candidate, PRF-110, or our drug delivery system and cannot be sure that we will ever be able to do so. Even if we commercialize PRF-110, we may not become profitable. Our ability to achieve profitability depends on a number of factors, including our ability to complete our development efforts, obtain regulatory approval and successfully commercialize PRF-110.
We expect to continue to incur losses for the foreseeable future, and these losses will likely increase as we:
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● | initiate and manage clinical trials for PRF-110; |
| ● | seek regulatory approvals; | |
| ● | implement internal systems and infrastructures; | |
| ● | hire management and other personnel; and | |
| ● | progress PRF-110 towards commercialization. |
If PRF-110 fails in clinical trials or does not gain regulatory clearance or approval, or if it does not achieve market acceptance, we may never become profitable. Even if we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis. Our inability to achieve and then maintain profitability would negatively affect our business, financial condition, results of operations and cash flows. Moreover, our prospects must be considered in light of the risks and uncertainties encountered by a development-stage company in highly regulated and competitive markets, such as the biopharmaceutical market, where regulatory approval and market acceptance are uncertain. There can be no assurance that our efforts will ultimately be successful or result in revenues or profits.
Our limited operating history may make it difficult for you to assess our future viability. We have never generated revenues and may never be profitable.
We are an early clinical stage company. Our operations to date have been limited to organizing and staffing our company, business planning, raising capital, developing our lead product candidate, PRF-110, identifying potential product candidates, conducting preclinical studies of our product candidates and conducting clinical trials. We have not yet demonstrated our ability to successfully complete large-scale, pivotal clinical trials, obtain marketing approvals, manufacture commercial-scale drug products or arrange for a third party to do so on our behalf, or conduct sales and marketing activities necessary for successful drug commercialization. Consequently, any predictions made about our future success or viability may not be as accurate as they could be if we had a longer operating history.
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In addition, as a business with a limited operating history, we may encounter unforeseen expenses, difficulties, complications, delays and other known and unknown factors. We may need to transition from a company with a research focus to a company capable of supporting commercial activities. We may not be successful in such a transition.
As we continue to build our business, we expect our financial condition and operating results may fluctuate significantly from quarter to quarter and year to year due to a variety of factors, many of which are beyond our control. Accordingly, you should not rely upon the results of any particular quarterly or annual periods as indications of future operating performance.
We will need substantial additional funding, which may not be available to us on acceptable terms or at all. If we are unable to raise capital when needed, we may be forced to delay, reduce and/or eliminate our research and drug development programs or future commercialization efforts.
Developing drug products, including conducting clinical trials, is a time-consuming, expensive and uncertain process. We expect our expenses to increase in connection with our ongoing activities, particularly as we conduct clinical trials of, and seek marketing approval for, PRF-110. In addition, if we obtain marketing approval for PRF-110, we expect to incur significant commercialization expenses related to drug sales, marketing, manufacturing and distribution to the extent that such sales, marketing, manufacturing and distribution are not the responsibility of any collaborator that we may have at such time. Furthermore, commencing upon the completion of this offering, we expect to incur additional costs associated with operating as a public company. Accordingly, we will need to obtain substantial additional funding in connection with our continuing operations. If we are unable to raise capital when needed or on attractive terms, we may be forced to delay, reduce and/or eliminate our research.
We plan to use the net proceeds from this offering to fund our ongoing clinical trials of PRF-110 and additional research and clinical development activity related to PRF-110 and other programs and for working capital and other general corporate purposes, which may include additional research, hiring additional personnel, capital expenditures and the costs of operating as a public company. We will be required to expend significant funds in order to advance the development of PRF-110, as well as any other product candidates. In any event, the net proceeds from this offering and our existing cash and cash equivalents may not be sufficient to fund the completion of development of PRF-110. Accordingly, we will be required to obtain further funding through public or private equity offerings, debt financings, collaborations and licensing arrangements or other sources. We do not have any committed external source of funds. Adequate additional financing may not be available to us on acceptable terms, or at all. Our failure to raise capital as and when needed would have a negative impact on our financial condition and our ability to pursue our business strategy.
We believe that the net proceeds from this offering, together with our existing cash and cash equivalents, will enable us to fund our operating expenses and capital expenditure requirements for at least 12 months from the date of the prospectus, including the completion of our two planned Phase 3 clinical studies for PRF-110. Our estimate as to how long we expect the net proceeds from this offering, together with our existing cash and cash equivalents, to be able to continue to fund our operations is based on assumptions that may prove to be wrong, and we could use our available capital resources sooner than we currently expect. Further, changing circumstances, some of which may be beyond our control, could cause us to consume capital significantly faster than we currently anticipate, and we may need to seek additional funds sooner than planned. Our future capital requirements will depend on many factors, including:
| ● | the scope, progress, results and costs of our current and future clinical trials of PRF-110 for our current targeted uses; |
| ● | the costs, timing and outcome of regulatory review of PRF-110; |
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| ● | the extent to which we acquire or invest in businesses, products and technologies, including entering into or maintaining licensing or collaboration arrangements for PRF-110 on favorable terms, although we currently have no commitments or agreements to complete any such transactions; |
| ● | the costs and timing of future commercialization activities, including drug sales, marketing, manufacturing and distribution, for any of our product candidates for which we receive marketing approval, to the extent that such sales, marketing, manufacturing and distribution are not the responsibility of any collaborator that we may have at such time; |
| ● | the amount of revenue, if any, received from commercial sales of PRF-110, should it receive marketing approval; |
| ● | the costs of preparing, filing and prosecuting patent applications, maintaining, defending and enforcing our intellectual property rights and defending intellectual property-related claims; |
| ● | our headcount growth and associated costs as we expand our business operations and our research and development activities; and |
| ● | the costs of operating as a public company. |
Additional funds may not be available when we need them, on terms that are acceptable to us, or at all. If adequate funds are not available to us on a timely basis, we may be required to delay, limit, reduce or terminate preclinical studies, clinical trials or other research and development activities for our product candidates or delay, limit, reduce or terminate our establishment of sales and marketing capabilities or other activities that may be necessary to commercialize PRF-110 or any future products.
Raising additional capital may cause dilution to our shareholders, including purchasers of our ordinary shares in this offering, restrict our operations or require us to relinquish rights to our product candidates.
We expect our expenses to increase in connection with our planned operations. Until such time, if ever, as we can generate substantial revenues, we expect to finance our cash needs through a combination of equity offerings, debt financings, collaborations, strategic alliances and/or licensing arrangements. To the extent that we raise additional capital through the sale of equity or convertible debt securities, your ownership interest may be diluted, and the terms of these securities could include liquidation or other preferences and anti-dilution protections that could adversely affect your rights as a shareholder. In addition, debt financing, if available, would result in fixed payment obligations and may involve agreements that include restrictive covenants that limit our ability to take specific actions, such as incurring additional debt, making capital expenditures, creating liens, redeeming shares or declaring dividends, that could adversely impact our ability to conduct our business. In addition, securing financing could require a substantial amount of time and attention from our management and may divert a disproportionate amount of their attention away from day-to-day activities, which may adversely affect our management’s ability to oversee the development of our product candidates.
If we raise additional funds through collaborations, strategic alliances or licensing arrangements with third parties, we may have to relinquish valuable rights to our technology, future revenue streams or product candidates or grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds when needed, we may be required to delay, reduce and/or eliminate our product candidate development or future commercialization efforts or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves.
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We are an emerging growth company and the reduced disclosure requirements applicable to emerging growth companies may make our ordinary shares less attractive to investors.
We are an emerging growth company, as defined in the JOBS Act, and we may take advantage of certain exemptions from various requirements that are applicable to other public companies that are not applicable to emerging growth companies. For as long as we remain an emerging growth company we are permitted and intend to rely on exemptions from certain disclosure requirements that are applicable to other public companies that are not “emerging growth companies.” These exemptions include:
| ● | being permitted to provide only two years of audited financial statements, in addition to any required unaudited condensed interim financial statements, with correspondingly reduced “Management’s discussion and analysis of financial condition and results of operations” disclosure; |
| ● | not being required to comply with the auditor attestation requirements in the assessment of our internal control over financial reporting; |
| ● | not being required to comply 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; and |
| ● | reduced disclosure obligations regarding executive compensation. |
We may take advantage of these provisions for up to five years or such earlier time that we are no longer an emerging growth company. We would cease to be an emerging growth company upon the earlier to occur of: (1) the last day of the fiscal year in which we have total annual gross revenue of $1.07 billion or more; (2) the date on which we have issued more than $1.0 billion in nonconvertible debt during the previous three years; or (3) the date on which we are deemed to be a large accelerated filer under the rules of the SEC. We may choose to take advantage of some but not all of these reduced burdens, and therefore the information that we provide holders of our ordinary shares may be different than the information you might receive from other public companies in which you hold equity. In addition, Section 107 of the JOBS Act also provides that an emerging growth company can take advantage of an extended transition period for complying with new or revised accounting standards applicable to public companies.
When we are no longer deemed to be an emerging growth company, we will not be entitled to the exemptions provided in the JOBS Act discussed above. We cannot predict if investors will find our ordinary shares less attractive as a result of our reliance on exemptions under the JOBS Act. If some investors find our ordinary shares less attractive as a result, there may be a less active trading market for our ordinary shares and our share price may be more volatile.
We will incur increased costs as a result of operating as a public company listed on a U.S. national securities exchange and our management will be required to devote substantial time to new compliance initiatives.
Historically, we have operated as a private company. As a public company listed on a U.S. national securities exchange, particularly after we are no longer an emerging growth company, we will incur significant legal, accounting and other expenses that we did not incur as a private company. In addition, the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, and rules implemented by the U.S. Securities and Exchange Commission, or the SEC, and the Nasdaq Capital Market, impose various requirements on public companies, including requirements to file annual reports with respect to our business and financial condition and operations and establish and maintain effective disclosure and financial controls and corporate governance practices. Our management and other personnel have limited experience operating as a public company, which may result in operational inefficiencies or errors, or a failure to improve or maintain effective internal controls over financial reporting, or ICFR, and disclosure controls and procedures, or DCP, necessary to ensure timely and accurate reporting of operational and financial results. Our existing management team will need to devote a substantial amount of time to these compliance initiatives, and we may need to hire additional personnel to assist us with complying with these requirements. Moreover, these rules and regulations will increase our legal and financial compliance costs and will make some activities more time consuming and costly.
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Pursuant to Section 404 of the Sarbanes-Oxley Act, or Section 404, we will be required to furnish a report by our management on our ICFR, which, after we are no longer an emerging growth company, must be accompanied by an attestation report on ICFR issued by our independent registered public accounting firm. To achieve compliance with Section 404 within the prescribed period, we will document and evaluate our ICFR, which is both costly and challenging. In this regard, we will need to continue to dedicate internal resources, potentially engage outside consultants and adopt a detailed work plan to assess and document the adequacy of our ICFR, continue steps to improve control processes as appropriate, validate through testing that controls are functioning as documented and implement a continuous reporting and improvement process for ICFR. Despite our efforts, there is a risk that neither we nor our independent registered public accounting firm will be able to conclude within the prescribed timeframe that our ICFR is effective as required by Section 404. This could result in a determination that there are one or more material weaknesses in our ICFR, which could cause an adverse reaction in the financial markets due to a loss of confidence in the reliability of our financial statements.
In addition, changing laws, regulations and standards relating to corporate governance and public disclosure are creating uncertainty for public companies, increasing legal and financial compliance costs and making some public company required activities more time consuming. These laws, regulations and standards are subject to varying interpretations, in many cases due to their lack of specificity and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. We intend to invest resources to comply with evolving laws, regulations and standards, and this investment may result in increased general and administrative expenses and divert management’s time and attention from revenue generating activities to compliance activities. If our efforts to comply with new laws, regulations and standards differ from the activities intended by regulatory or governing bodies, regulatory authorities may initiate legal proceedings against us and our business may be harmed.
We also expect that being listed on a U.S. national securities exchange and complying with applicable rules and regulations will make it more expensive for us to obtain director and officer liability insurance, and we may be required to incur substantially higher costs to obtain and maintain the same or similar coverage that is currently in place. These factors could also make it more difficult for us to attract and retain qualified executive officers and members of our board of directors.
Risks Related to the Discovery, Development and Commercialization of Our Initial Product Candidate
We are dependent on the success of our initial product candidate, PRF-110, for which two clinical trials are planned. Our clinical trials of PRF-110 may not be successful. If we are unable to obtain approval for and commercialize PRF-110 or experience significant delays in doing so, our business will be materially harmed.
Our future success is substantially dependent on our ability to timely obtain marketing approval for, and then successfully commercialize, PRF-110, our lead product candidate. We are investing all of our efforts and financial resources in the research and development of PRF-110. Our business currently depends entirely on the successful development and commercialization of PRF-110. We currently have no drugs approved for sale and generate no revenues from sales of any products, and we may never be able to develop a marketable product.
PRF-110 will require additional clinical development, evaluation of clinical, preclinical and manufacturing activities, marketing approval in multiple jurisdictions, substantial investment and significant marketing efforts before we generate any revenues from product sales. We are not permitted to market or promote PRF-110 before we receive marketing approval from the FDA and comparable foreign regulatory authorities, and we may never receive such marketing approvals.
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The success of PRF-110 will depend on several factors, including the following:
| ● | successful and timely completion of our ongoing clinical trials of PRF-110; |
| ● | initiation and successful patient enrollment and completion of additional clinical trials on a timely basis; |
| ● | our ability to demonstrate PRF-110’s safety, tolerability and efficacy to the FDA or any comparable foreign regulatory authority for marketing approval; |
| ● | timely receipt of marketing approvals for PRF-110; |
| ● | maintaining patent protection, trade secret protection and regulatory exclusivity, both in the U.S. and internationally; |
| ● | successfully defending and enforcing our rights in our intellectual property portfolio; |
| ● | avoiding and successfully defending against any claims that we have infringed, misappropriated or otherwise violated any intellectual property of any third party; |
| ● | the performance of our future collaborators, if any; |
| ● | the extent of, and our ability to timely complete, any required post-marketing approval commitments imposed by FDA or other applicable regulatory authorities; |
| ● | establishment of supply arrangements with third-party raw materials and drug product suppliers and manufacturers who are able to manufacture clinical trial and commercial quantities of PRF-110 and to develop, validate and maintain a commercially viable manufacturing process that is compliant with current Good Manufacturing Practices, or cGMP, at a scale sufficient to meet anticipated demand and over time enable us to reduce our cost of manufacturing; |
| ● | establishment of scaled production arrangements with third-party manufacturers to obtain finished products that are compliant with cGMP and appropriately packaged for sale; |
| ● | successful launch of commercial sales following any marketing approval; |
| ● | a continued acceptable safety profile following any marketing approval; |
| ● | commercial acceptance by patients, the medical community and third-party payors; |
| ● | the availability of coverage and adequate reimbursement and pricing by third-party payors and government authorities; |
| ● | the availability, perceived advantages, relative cost, relative safety and relative efficacy of alternative and competing treatments; and |
| ● | our ability to compete with other post-operative pain (“POP”) treatments. |
We do not have complete control over many of these factors, including certain aspects of clinical development and the regulatory submission process, potential threats to our intellectual property rights and the manufacturing, marketing, distribution and sales efforts of any future collaborator. Accordingly, we cannot assure you that we will ever be able to generate revenue through the sale of PRF-110. If we are not successful in commercializing PRF-110, or are significantly delayed in doing so, our business will be materially harmed.
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The spread of the coronavirus may adversely affect our development efforts including the planned clinical trials for PRF-110.
In December 2019, a novel strain of coronavirus, COVID-19, was identified in Wuhan, China. This virus continues to spread globally and as of May 2020, has spread to over 212 countries and territories, including the United States and Israel. The spread of COVID-19 has resulted in the World Health Organization declaring the outbreak of COVID-19 as a “pandemic,” or a worldwide spread of a disease. Many countries around the world, including Israel and the United States, have imposed quarantines and restrictions on travel, mass gatherings, closing of non-essential businesses and shelter-in-place orders to slow the spread of the virus. While the spread of COVID-19 has not yet directly impacted our operations, COVID-19 may result in the inability of our outside scientific collaborators, suppliers, consultants, advisors and other third parties to work with us on a timely basis and will likely impact the timing of the initiation of our planned clinical studies and the enrollment of patients. The extent to which COVID-19 impacts our development efforts will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of COVID-19 and the actions to contain COVID-19 or treat its impact, among others.
Risks Related to Our Drug Development and Business
We have not yet commercialized any products or technologies, and we may never become profitable.
We have not yet commercialized any products or technologies, and we may never be able to do so. We do not know when or if we will complete any of our product development efforts, obtain regulatory approval for any product candidates incorporating our technologies or successfully commercialize any approved products. Even if we are successful in developing products that are approved for marketing, we will not be successful unless these products gain market acceptance for appropriate indications at favorable reimbursement rates. The degree of market acceptance of these products will depend on a number of factors, including:
| ● | the timing of regulatory approvals in the countries, and for the uses, we seek; | |
| ● | the competitive environment; | |
| ● | the establishment and demonstration in the medical community of the safety and clinical efficacy of our products and their potential advantages over existing therapeutic products; | |
| ● | our ability to enter into strategic agreements with pharmaceutical and biotechnology companies with strong marketing and sales capabilities; | |
| ● | the adequacy and success of distribution, sales and marketing efforts; and | |
| ● | the pricing and reimbursement policies of government and third-party payors, such as insurance companies, health maintenance organizations and other plan administrators. |
Physicians, patients, third-party payors or the medical community in general may be unwilling to accept, utilize or recommend, and in the case of third-party payors, cover any of our products or products incorporating our technologies. As a result, we are unable to predict the extent of future losses or the time required to achieve profitability, if at all. Even if we successfully develop one or more products that incorporate our technologies, we may not become profitable.
The loss of the services of our key personnel would negatively affect our business.
To successfully develop our drug candidates, we must be able to attract and retain highly skilled personnel, including consultants and employees. The retention of their services cannot be guaranteed. Our failure to retain and/or recruit such professionals might impair our performance and materially affect our technological and product development capabilities and our product marketing ability. Our future success depends to a large extent on the continued services of our senior management and key personnel, including, in particular, Dr. David Weinstein, Prof. Eli Hazum and Dr. Sigal Aviel. Any loss of the services of members of our senior management or other key personnel, and especially those of Dr. David Weinstein, Prof. Eli Hazum and Dr. Sigal Aviel would adversely affect our business. We do not currently maintain key-person insurance on the lives of any of our key personnel.
We may be unable to attract, develop and retain additional employees required for our development and future success.
Our success is largely dependent on the performance of our management team and certain key employees and our continuing ability to attract, develop, motivate and retain highly qualified and skilled employees. Qualified individuals are in high demand, and we may incur significant costs to attract and retain them. The inability to attract suitably qualified persons when needed, could prevent us from executing on our business plan and strategy, and we may be unable to find adequate replacements on a timely basis, or at all.
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If we are unable to successfully complete our clinical trial programs for PRF-110, or if such clinical trials take longer to complete than we project, our ability to execute our current business strategy will be adversely affected.
Whether or not and how quickly we complete clinical trials depends in part upon the rate at which we are able to engage clinical trial sites and, thereafter, the rate of enrollment of patients, and the rate at which we are able to collect, clean, lock and analyze the clinical trial database. Patient enrollment is a function of many factors, including the size of the patient population, the proximity of patients to clinical sites, the eligibility criteria for the study, the existence of competitive clinical trials, and whether existing or new drugs are approved for the indication we are studying. If we experience delays in identifying and contracting with sites and/or in patient enrollment in our clinical trial programs, we may incur additional costs and delays in our development programs, and may not be able to complete our clinical trials on a cost-effective or timely basis.
We have limited experience in conducting and managing clinical trials necessary to obtain regulatory approvals. If our drug candidates and technologies do not receive the necessary regulatory approvals, we will be unable to commercialize our products.
We have not received, and may never receive, regulatory approval for commercial sale for PRF-110. We currently do not have any drug candidates pending approval with the Food and Drug Administration, or FDA or with regulatory authorities of other countries. In order to obtain FDA approval to market a new drug product, we or our potential partners must demonstrate proof of efficacy in humans. To meet these requirements, we and/or our potential partners will have to conduct “adequate and well-controlled” clinical trials.
Clinical development is a long, expensive and uncertain process. Clinical trials are very difficult to design and implement, in part because they are subject to rigorous regulatory requirements. Satisfaction of regulatory requirements typically depends on the nature, complexity and novelty of the product and requires the expenditure of substantial resources. The commencement and rate of completion of clinical trials may be delayed by many factors, including:
| ● | obtaining regulatory approvals to commence a clinical trial; |
| ● | reaching agreement on acceptable terms with prospective contract research organizations (“CROs”) and trial sites, the terms of which can be subject to extensive negotiation and may vary significantly among different CROs and trial sites; |
| ● | slower than expected rates of patient recruitment due to narrow screening requirements and competing clinical studies; |
| ● | the inability of patients to meet protocol requirements imposed by the FDA or other regulatory authorities; |
| ● | the need or desire to modify our manufacturing process; |
| ● | delays, suspension, or termination of the clinical trials due to the institutional review board responsible for overseeing the study at a particular study site; and |
| ● | governmental or regulatory delays or “clinical holds” requiring suspension or termination of the trials. |
Following the completion of a clinical trial, regulators may not interpret data obtained from clinical tests of our drug candidate the same way that we do, which could delay, limit or prevent our receipt of regulatory approval. In addition, the designs of any clinical trials may not be reviewed or approved by the FDA prior to their commencement, and consequently the FDA could determine that the parameters of any studies are insufficient to demonstrate efficacy in humans. Failure to approve a completed study could also result from several other factors, including unforeseen safety issues, the determination of dosing, low rates of patient recruitment, the inability to monitor patients adequately during or after treatment, the inability or unwillingness of medical investigators to follow our clinical protocols, and the lack of effectiveness of the trials.
If the clinical trials fail to satisfy the criteria required, the FDA and/or other regulatory agencies/authorities may request additional information, including additional clinical data, before approval of marketing a product. Negative or inconclusive results or medical events during a clinical trial could also cause us to delay or terminate our development efforts. If we experience delays in the testing or approval process, or if we need to perform more or larger clinical trials than originally planned, our financial results and the commercial prospects for our drug candidates and technologies may be materially impaired.
Clinical trials have a high risk of failure. A number of companies in the pharmaceutical industry, including biotechnology companies, have suffered significant setbacks in clinical trials, even after achieving promising results in earlier trials. It may take us many years to complete the testing of our drug candidates and technologies, and failure can occur at any stage of this process.
Even if regulatory approval is obtained, our products and their manufacture will be subject to continual review, and there can be no assurance that such approval will not be subsequently withdrawn or restricted. Changes in applicable legislation or regulatory policies, or discovery of problems with the products or their manufacture, may result in the imposition of regulatory restrictions, including withdrawal of the product from the market, or result in increased costs to us.
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If third parties on which we will have to rely for clinical trials do not perform as contractually required or as we expect, we may not be able to obtain regulatory approval for or commercialize our products.
We will have to depend on independent clinical investigators, and other third-party service providers to conduct the clinical trials of our drug candidates and technologies. We also may, from time to time, engage a clinical research organization for the execution of our clinical trials. We will rely heavily on these parties for successful execution of our clinical trials, but we will not control many aspects of their activities. Nonetheless, we are responsible for confirming that each of our clinical trials is conducted in accordance with the general investigational plan and protocol. Our reliance on these third parties that we do not control does not relieve us of our responsibility to comply with the regulations and standards of the FDA and/or other foreign regulatory agencies/authorities relating to good clinical practices. Third parties may not complete activities on schedule or may not conduct our clinical trials in accordance with regulatory requirements or the applicable trial’s plans and protocols. The failure of these third parties to carry out their obligations could delay or prevent the development, approval and commercialization of our products, or could result in enforcement action against us.
If we do not establish or maintain drug development and marketing arrangements with third parties, we may be unable to commercialize our drug candidates and technologies into products.
We do not possess all of the capabilities to fully commercialize our drug candidates and technologies on our own. From time to time, we may need to contract with third parties to:
| ● | assist us in developing, testing and obtaining regulatory approval; |
| ● | manufacture our drug candidates; and |
| ● | market and distribute our products. |
We can provide no assurance that we will be able to successfully enter into agreements with such third-parties on terms that are acceptable to us. If we are unable to successfully contract with third parties for these services when needed, or if existing arrangements for these services are terminated, whether or not through our actions, or if such third parties do not fully perform under these arrangements, we may have to delay, scale back or end one or more of our drug development programs or seek to develop or commercialize our drug candidates independently, which could result in delays. Moreover, if these development or marketing agreements take the form of a partnership or strategic alliance, such arrangements may provide our collaborators with significant discretion in determining the efforts and resources that they will apply to the development and commercialization of our products. Accordingly, to the extent that we rely on third parties to research, develop or commercialize our products, we may be unable to control whether such products will be scientifically or commercially successful.
Even if we or our collaborative/strategic partners or potential collaborative/strategic partners receive approval to market our drug candidates, if our products fail to achieve market acceptance, we will never record meaningful revenues.
Even if PRF-110 is approved for sale, it may not be commercially successful in the marketplace. Market acceptance of our product candidates will depend on a number of factors, including:
| ● | perceptions by members of the health care community, including physicians, of the safety and efficacy of our product; |
| ● | the potential advantages that our product offers over existing treatment methods or other products that may be developed; |
| ● | the cost-effectiveness of our product relative to competing products; |
| ● | the availability of government or third-party pay or reimbursement for our products; and |
| ● | the effectiveness of our and/or our partners’ sales, marketing and distribution efforts. |
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PRF-110, if successfully developed and commercially launched, will compete with both currently marketed and new products marketed by other companies. Health care providers may not accept or utilize our product candidates unless our products bring clear and demonstrable advantages over other products currently marketed for the same indication. Because we expect sales of PRF-110 will generate substantially all of our revenues for the foreseeable future, the failure of PRF-110 to find market acceptance would harm our business and future prospects.
If the third parties upon whom we rely to manufacture our products do not successfully manufacture our products, our business will be harmed.
We do not currently have the ability to manufacture the compounds that we need to conduct our clinical trials and, therefore, rely upon, and intend to continue to rely upon, certain manufacturers to produce and supply our drug candidates for use in clinical trials and for future sales. In order to commercialize our products, such products will need to be manufactured in commercial quantities while adhering to all regulatory and other local requirements, all at an acceptable cost. We may not be able to enter into future third-party contract manufacturing agreements on acceptable terms, if at all.
If our contract manufacturers or other third parties fail to deliver PRF-110 for clinical use on a timely basis, with sufficient quality, and at commercially reasonable prices, and we fail to find replacement manufacturers or sources, we may be required to delay or suspend clinical trials or otherwise discontinue development and production of PRF-110.
Our contract manufacturers will be required to produce our clinical drug candidates under strict compliance with cGMP in order to meet acceptable regulatory standards for our clinical trials. If such standards change, the ability of contract manufacturers to produce our drug candidates on the schedule we require for our clinical trials may be affected. In addition, contract manufacturers may not perform their obligations under their agreements with us or may discontinue their business before the time required by us to successfully produce and market our drug candidates. Any difficulties or delays in our contractors’ manufacturing and supply of drug candidates could increase our costs, cause us to lose revenue or make us postpone or cancel clinical trials.
In addition, our contract manufacturers will be subject to ongoing periodic, unannounced inspections by the FDA and corresponding foreign or local governmental agencies to ensure strict compliance with, among other things, cGMP, in addition to other governmental regulations and corresponding foreign standards. We will not have control over, other than by contract, third-party manufacturers’ compliance with these regulations and standards. No assurance can be given that our third-party manufacturers will comply with these regulations or other regulatory requirements now or in the future.
In the event that we are unable to obtain or retain third-party manufacturers, we will not be able to commercialize our products as planned. If third-party manufacturers fail to deliver the required quantities of our products on a timely basis and at commercially reasonable prices, our ability to develop and deliver products on a timely and competitive basis may be adversely impacted and our business, financial condition or results of operations will be materially harmed.
If our competitors develop and market products that are less expensive or more effective than our product, our revenues and results may be harmed and our commercial opportunities may be reduced or eliminated.
The pharmaceutical industry is highly competitive. Our commercial opportunities may be reduced or eliminated if our competitors develop and market products that are less expensive, more effective or safer than our product. Some of these potential competing drugs are already commercialized or are further advanced in development than PRF-110. Even if we are successful in our developmental efforts, PRF-110 may not compete successfully with products produced by our competitors, who may be able to market their drugs more effectively.
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Many of our competitors have significantly greater capital resources, larger research and development staffs and facilities and greater experience in drug development, regulation, manufacturing and marketing than we do. These organizations also compete with us to recruit qualified personnel, attract partners for joint ventures or other collaborations, and license technologies that are competitive with ours. As a result, our competitors may be able to more easily develop products that could render our technologies or our drug candidates obsolete or noncompetitive. Development of new drugs, medical technologies and competitive medical devices may damage the demand for our products without any certainty that we will successfully and effectively contend with those competitors.
Any of our product candidates for which we, or our future collaborators, obtain marketing approval in the future will be subject to substantial penalties if we, or they, fail to comply with regulatory requirements or if we, or they, experience unanticipated problems with our product candidates following approval.
Any of our product candidates for which we, or our future collaborators, obtain marketing approval in the future, will be subject to continual review by the FDA or comparable foreign regulatory authorities. For example in the U.S., the FDA and other agencies, including the Department of Justice, or the DOJ, closely regulate and monitor the post-approval marketing and promotion of drugs to ensure that they are manufactured, marketed and distributed only for the approved indications and in accordance with the provisions of the approved labeling. The FDA imposes stringent restrictions on manufacturers’ communications regarding off-label use and if we, or our future collaborators, do not market any of our product candidates for which we, or they, receive marketing approval for only their approved indications, we, or they, may be subject to warnings or enforcement action for off-label marketing. Violation of the FDCA and other statutes, including the False Claims Act, relating to the promotion and advertising of prescription drugs may lead to investigations or allegations of violations of federal and state healthcare fraud and abuse laws and state consumer protection laws.
In addition, later discovery of previously unknown adverse events or other problems with our product candidates or their manufacturers or manufacturing processes, or failure to comply with regulatory requirements, may yield various results, including:
| ● | litigation involving patients taking our drug; | |
| ● | restrictions on such drugs, manufacturers or manufacturing processes; | |
| ● | restrictions on the labeling or marketing of a drug; | |
| ● | restrictions on drug distribution or use; | |
| ● | requirements to conduct post-marketing studies or clinical trials; | |
| ● | warning letters or untitled letters; | |
| ● | withdrawal of the drugs from the market; | |
| ● | refusal to approve pending applications or supplements to approved applications that we submit; | |
| ● | recall of drugs; | |
| ● | fines, restitution or disgorgement of profits or revenues; | |
| ● | suspension or withdrawal of marketing approvals; | |
| ● | damage to relationships with any potential collaborators; | |
| ● | restrictions on coverage by third-party payors; | |
| ● | unfavorable press coverage and damage to our reputation; | |
| ● | refusal to permit the import or export of drugs; | |
| ● | drug seizure; or | |
| ● | injunctions or the imposition of civil or criminal penalties. |
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Recently enacted and future legislation, and a change in existing government regulations and policies, may increase the difficulty and cost for us and our future collaborators to obtain marketing approval of and commercialize our product candidates and affect the prices we, or they, may obtain.
In the U.S. and some foreign jurisdictions, there have been and continue to be a number of legislative and regulatory changes and proposed changes regarding the healthcare system that could prevent or delay marketing approval of our product candidates, restrict or regulate post-approval activities and affect our ability, or the ability of our future collaborators, to profitably sell any drugs for which we, or they, obtain marketing approval. We expect that current laws, as well as other healthcare reform measures that may be adopted in the future, may result in more rigorous coverage criteria and additional downward pressure on the price that we, or our future collaborators, may receive for any approved drugs.
In the U.S., the Congress and recent presidential administrations have enacted or are considering a number of legislative and regulatory proposals to change the healthcare system in ways that could affect our ability to sell PRF-110, if approved, and to do so profitably. Among policy makers and payors in the U.S. and elsewhere, there is significant interest in promoting changes in healthcare systems with the stated goals of containing healthcare costs, improving quality and expanding access.
In the U.S., the pharmaceutical industry has been a particular focus of efforts to reform the healthcare system and has been significantly affected by major legislative initiatives, including the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act (collectively, “PPACA”), which contains provisions that may potentially affect the profitability of PRF-110, including, for example, increased rebates for products sold to Medicaid programs, extension of Medicaid rebates to Medicaid managed care plans, mandatory discounts for certain Medicare Part D beneficiaries and annual fees based on pharmaceutical companies’ share of sales to federal health care programs, and expansion of the entities eligible for discounts under the Public Health Services pharmaceutical pricing program. There have been judicial and Congressional challenges to the PPACA, as well as efforts by the Trump administration to repeal or replace certain aspects of the PPACA that contribute to regulatory uncertainty that could affect the profitability of our products. Since January 2017, President Trump has signed several Executive Orders and other directives designed to delay the implementation of certain provisions of the PPACA or otherwise circumvent some of the requirements mandated by the PPACA. In December 2018, a federal district court in Texas ruled the individual mandate was unconstitutional and could not be severed from the PPACA. As a result, the court ruled the remaining provisions of the PPACA were also invalid, though the court declined to issue a preliminary injunction with respect to the PPACA. In April 2019, in a brief filed in the Fifth Circuit Court of Appeals, the Trump Administration took the position that the individual mandate was unconstitutional, that it could not be severed from the PPACA, and, as a result, the PPACA must be invalidated in its entirety. The case is pending before the Fifth Circuit, and it remains unclear whether, and to what extent, the PPACA may be affected by the Fifth Circuit’s and possibly other courts’ rulings.
While Congress has not enacted legislation to comprehensively repeal the PPACA, at least two bills affecting the implementation of the PPACA have been signed into law, including the repeal, effective January 1, 2019, of the tax-based shared responsibility payment imposed by the PPACA on certain individuals who fail to maintain qualifying health coverage for all or part of a year, which is commonly referred to as the “individual mandate.” Additionally, on January 22, 2018, President Trump signed a continuing resolution on appropriations for fiscal year 2018 that delayed the implementation of certain fees mandated by the PPACA, including the so-called “Cadillac” tax on certain high-cost employer-sponsored health insurance plans and the annual fee imposed on certain health insurance providers. Moreover, effective January 1, 2019, the Bipartisan Budget Act of 2018, among other things, further amends portions of the Social Security Act implemented as part of the PPACA to increase from 50% to 70% the point-of-sale discount that pharmaceutical manufacturers participating in the Coverage Gap Discount Program provide to eligible Medicare Part D beneficiaries during the coverage gap phase of the Part D benefit, commonly referred to as the “donut hole,” and to reduce standard beneficiary cost sharing in the coverage gap from 30% to 25% in most Medicare Part D plans. In the future, there may be additional challenges and/or amendments to the PPACA. It remains to be seen precisely what any new legislation will provide, when or if it will be enacted, and what impact it will have on the availability and cost of healthcare items and services, including drug products.
Other legislative changes have been proposed and adopted since PPACA was enacted. These changes include the Budget Control Act of 2011, which, among other things, led to aggregate reductions in Medicare payments to providers of up to 2% per fiscal year that started in April 2013 and, due to subsequent statutory amendments, will continue through 2027 unless additional Congressional action is taken. The American Taxpayer Relief Act of 2012, which, among other changes, reduced Medicare payments to several types of providers and increased the statute of limitations period for the government to recover overpayments to providers from three to five years. These legislative changes may result in additional reductions in Medicare and other healthcare funding and otherwise affect the prices we may obtain for any of our product candidates for which we may obtain regulatory approval or the frequency with which any such product candidate is prescribed or used.
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More recently, the cost of prescription pharmaceuticals has been the subject of considerable discussion in the U.S. Congress has begun developing legislation and the Trump Administration has proposed and begun implementing regulatory reforms to further increase transparency around prices and price increases, lower out-of-pocket costs for consumers, and decrease spending on prescription drugs by government programs. Congress has conducted or is in the process of conducting inquiries into the prescription drug industry’s pricing practices. The Trump Administration’s budget proposal for fiscal year 2019 contained additional drug price control measures that could be enacted in future legislation, including, for example, measures to end Medicare Part B coverage of medications and to shift those medication costs to Medicare Part D, to allow some states to negotiate prescription drug prices under Medicaid and to eliminate cost sharing for generic drugs for low-income patients. While several proposed reform measures will require Congress to pass legislation to become effective, Congress and the Trump Administration have each indicated that it will continue to seek new legislative and/or regulatory measures to address prescription drug costs. At the state level, legislatures are increasingly passing legislation and states are implementing regulations designed to control spending on, and patient out-of-pocket costs for, drug products. Implementation of cost containment measures or other healthcare reforms that affect the pricing and/or availability of drug products may impact our ability to generate revenue, attain or maintain profitability, or commercialize products for which we may receive regulatory approval in the future.
We expect that these and other healthcare reform measures that may be adopted in the future may result in more rigorous coverage criteria and/or new payment methodologies, and place additional downward pressure on the price that we receive for any approved product and/or the level of reimbursement physicians receive for administering any approved product we might bring to market. Reductions in reimbursement levels and imposition of more rigorous coverage criteria or new payment methodologies may negatively impact the prices we receive or the frequency with which our products are prescribed or administered. Any coverage or reimbursement policies instituted by Medicare or other federal health care programs may result in similar policies from private payors. The implementation of cost containment measures or other healthcare reforms may affect our ability to generate revenue, attain or maintain profitability, or commercialize our product candidates. We expect that additional state and federal healthcare reform measures will be adopted in the future, any of which could limit the amounts that federal and state governments will pay for healthcare products and services, which could result in reduced demand for our product candidates or additional pricing pressures.
The pricing of prescription pharmaceuticals is also subject to governmental control outside the U.S. In these countries, pricing negotiations with governmental authorities can take considerable time after the receipt of marketing approval for a product. To obtain reimbursement or pricing approval in some countries, we may be required to conduct a clinical trial that compares the cost-effectiveness of our product candidates to that of other available therapies. If reimbursement of our products is unavailable or limited in scope or amount, or if pricing is set at unsatisfactory levels, our ability to generate revenues and become profitable could be impaired.
Legislative and regulatory proposals have also been made to expand post-approval requirements and restrict sales and promotional activities for drug products. We cannot be sure whether additional legislative changes will be enacted, or whether the FDA regulations, guidance or interpretations will be changed, or what the impact of such changes on the marketing approvals of our product candidates, if any, may be. In addition, increased scrutiny by the U.S. Congress of the FDA’s approval process may significantly delay or prevent marketing approval, as well as subject us and any future collaborators to more stringent drug labeling and post-marketing testing and other requirements.
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Changes in funding for the FDA could hinder FDA’s ability to hire and retain key leadership and other personnel, or otherwise prevent new products from being developed or commercialized in a timely manner.
The ability of the FDA to review and approve new products can be affected by a variety of factors, including government budget and funding levels, ability to hire and retain key personnel and accept the payment of user fees, and statutory, regulatory, and policy changes. Average review times at the FDA have fluctuated in recent years as a result. 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 the FDA has had to furlough critical FDA employees and stop critical activities. If a prolonged government shutdown occurs, it could significantly impact the ability of the FDA to timely review and process our regulatory submissions, which could have a material adverse effect on our business.
Our business and operations would suffer in the event of IT system failures, cybersecurity attacks, data breaches, or vulnerabilities in our or our third-party vendors’ information security program or defenses.
Our business relies upon information technology systems operated by us and by our third party service providers. These systems may fail or experience operational disruption, experience cybersecurity attacks, or be damaged by computer viruses and unauthorized access. In the ordinary course of business, we collect, store and transmit confidential information (including but not limited to intellectual property, proprietary business information and personal information). It is critical that we do so in a secure manner to maintain the confidentiality and integrity of such confidential information. While we are currently in the process of developing and implementing policies and procedures to ensure the security and integrity of our information technology systems and confidential and proprietary information, we do not currently have any such policies and procedures formally in place. If we fail to develop and maintain adequate policies and procedures for the protection of our information technology systems and confidential and proprietary information, we may be vulnerable to security breaches or disruptions and system breakdowns or other damage or interruptions.
We also have outsourced elements of our operations to third parties, and as a result we manage a number of third-party vendors and other contractors and consultants who have access to or store our confidential information. We do not conduct audits or formal evaluations of our third-party vendors’ information technology systems and cannot be sure that our third-party vendors have sufficient measures in place to ensure the security and integrity of their information technology systems and our confidential and proprietary information. If our third-party vendors fail to protect their information technology systems and our confidential and proprietary information, we may be vulnerable to disruptions in service and unauthorized access to our confidential or proprietary information and we could incur liability and reputational damage and the further development and commercialization of our product candidates could be delayed. While we have not, to our knowledge, experienced any material IT system failures or cybersecurity attacks to date, we cannot assure you that our data protection efforts and our investment in information technology will prevent significant breakdowns, data leakages, breaches in our systems or those of our third-party vendors and other contractors and consultants, or other cyber incidents that could have a material adverse effect upon our reputation, business, operations or financial condition. If such an event were to occur and cause interruptions in our operations, it could result in a material disruption of our development programs, business operations, a breach of sensitive personal information or a loss or corruption of critical data assets including trade secrets or other proprietary information. For example, the loss of clinical trial data from future clinical trials could result in delays in our regulatory approval efforts and significantly increase our costs to recover or reproduce the data. Such IT system failures, cybersecurity attacks or vulnerabilities to our or our third-party vendors’ information security programs or defenses could result in legal liability, reputational damage, business interruption, and our competitive position could be harmed and the further development and commercialization of our products or any future products could be delayed or disrupted. Moreover, containing and remediating any IT system failure, cybersecurity attack or vulnerability may require significant investment of resources. Furthermore, significant security breaches or disruptions of our internal information technology systems or those of our third-party vendors and other contractors and consultants could result in the loss, misappropriation and/or unauthorized access, use, or disclosure of, or the prevention of access to, confidential information (including trade secrets or other intellectual property, proprietary business information and personal information), which could result in financial, legal, business and reputational harm to us. [fix]
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We face product liability risks and may not be able to obtain adequate insurance.
The use of our drug candidates in clinical trials, and the sale of any approved products, exposes us to liability claims. If we cannot successfully defend ourselves against product liability claims, we may incur substantial liabilities or be required to cease clinical trials of our drug candidates and technologies or limit commercialization of any approved products.
We believe that we will be able to obtain sufficient product liability insurance coverage for our planned clinical trials. We intend to expand our insurance coverage to include the commercial sale of any approved products if marketing approval is obtained; however, insurance coverage is becoming increasingly expensive. We may not be able to maintain insurance coverage at a reasonable cost. We may not be able to obtain additional insurance coverage that will be adequate to cover product liability risks that may arise. Regardless of merit or eventual outcome, product liability claims may result in:
| ● | decreased demand for a product; |
| ● | damage to our reputation; |
| ● | withdrawal of clinical trial volunteers; and |
| ● | loss of revenues. |
Consequently, a product liability claim or product recall may result in material losses.
Significant interruptions in our access to certain key inputs such as raw materials and drug products may impair our business.
Our business is dependent on a number of key inputs and their related costs, including raw materials, drug products supplied by third parties and production facilities for our drug products. Any significant interruption, price increase or negative change in the availability of the supply chain for our key inputs could curtail or preclude our ability to produce our product candidate. Our ability to compete is dependent on us having access, at a reasonable cost and in a timely manner, to key raw materials and drug products, skilled consultants and production facilities. No assurance can be given that we will be successful in maintaining our required supply of raw materials, and drug products or that we will be able to continue to attract skilled consultants with respect to our development efforts.
We may not be able to successfully identify and execute strategic alliances or other relationships with third parties or to successfully manage the impacts of acquisitions, dispositions or relationships on our operations.
We currently have, and may expand the scope of, and may in the future enter into, strategic alliances with third parties that we believe will complement or augment our existing business. Our ability to complete further such strategic alliances is dependent upon, and may be limited by, among other things, the availability of suitable candidates and capital. In addition, strategic alliances could present unforeseen integration obstacles or costs, may not enhance our business and may involve risks that could adversely affect us, including the investment of significant amounts of management time that may be diverted from operations in order to pursue and complete such transactions or maintain such strategic alliances. Future strategic alliances could result in the incurrence of debt, costs and contingent liabilities, and there can be no assurance that future strategic alliances will achieve, or that our existing strategic alliances will continue to achieve, the expected benefits to our business or that we will be able to consummate future strategic alliances on satisfactory terms, or at all.
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Although we do not currently plan to engage in other material strategic transactions, such as acquisitions, we may from time to time consider such transactions. Material strategic transactions involve a number of risks, including:
| ● | the potential disruption of our ongoing business; |
| ● | the distraction of management away from the ongoing oversight of our existing business activities; |
| ● | incurring additional indebtedness; |
| ● | the anticipated benefits and cost savings of those transactions not being realized fully, or at all, or taking longer to realize than anticipated; |
| ● | an increase in the scope and complexity of our operations; and | |
| ● | the loss or reduction of control over certain of our assets. |
A strategic transaction may result in a significant change in the nature of our business, operations and strategy, and we may encounter unforeseen obstacles or costs in implementing a strategic transaction or integrating any acquired business into our operations.
Risks Related to Our Intellectual Property
We are subject to risks relating to intellectual property rights and risks of infringement.
We are dependent upon our proprietary technology and we rely primarily on a combination of patent, copyright and trademark laws, trade secrets, confidentiality procedures and contractual provisions to protect our proprietary rights. To protect our technologies, documentation and other written materials, we primarily rely on trade secret and copyright laws, which afford only limited protection. It is possible that others will develop technologies that are similar or superior to our technology. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our products or to obtain and use information that we regard as proprietary. It is difficult to police the unauthorized use of products in our field, and we expect piracy to be a persistent problem, although we are unable to determine the extent to which piracy of our products exists. In addition, the laws of certain countries do not protect our proprietary rights as fully as do the laws of the U.S. and Israel. We cannot be certain that our means of protecting our proprietary rights will be adequate or that our competitors will not independently develop similar technology.
We are not aware that we have infringed any proprietary rights of third parties. It is possible, however, that third parties will claim that we have infringed upon their intellectual property rights. It would be time consuming for us to defend any such claims, with or without merit, and any such claims could:
| ● | result in costly litigation; |
| ● | divert management’s attention and resources; |
| ● | cause product shipment delays; and |
| ● | require us to enter into royalty or licensing agreements. Such royalty or licensing agreements, if required, may not be available on terms acceptable to us, if at all. |
If there is a successful claim of infringement against us and we are not able to license the infringed or similar technology or other intellectual property, our business, operating results and financial condition would be materially adversely affected. In addition, we could be subject to damages, injunction from use, sale or licensing of our product, as well as attorneys’ fees.
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If we are unable to maintain patent protection for our products, our competitors could develop and commercialize products and technology similar or identical to our product candidates, and our ability to successfully commercialize any product candidates we may develop, and our science may be adversely affected.
As with our competitors, our ability to maintain and solidify a proprietary position for our product candidates will depend upon our success in obtaining effective patent claims that cover such product candidates, their manufacturing processes and their intended methods of use, and enforcing those claims once granted. Furthermore, in some cases, we may not be able to obtain issued claims covering our product candidates which are sufficient to prevent third parties, such as our competitors, from either utilizing our technology or designing around any patent claims to avoid infringing them. Any failure to obtain or maintain patent protection with respect to our product candidates could have a material adverse effect on our business, financial condition, and results of operations.
Changes in either the patent laws or their interpretation in the U.S. and other countries may diminish our ability to protect our inventions, obtain, maintain, and enforce our intellectual property rights and, more generally, could affect the value of our intellectual property or narrow the scope of our issued patents. Additionally, we cannot predict whether the patent applications we or our licensors are currently pursuing will issue as patents in any particular jurisdiction or whether the claims of any issued patents will provide sufficient protection from competitors or other third parties.
The patent prosecution process is expensive, time-consuming, and complex, and we may not be able to file, prosecute, maintain, enforce, or license all necessary or desirable patent applications at a reasonable cost or in a timely manner. It is also possible that we will fail to identify patentable aspects of our research and development output in time to file for or obtain patent protection. Although we enter into non-disclosure and confidentiality agreements with parties who have access to confidential or patentable aspects of our research and development output, such as our employees, corporate collaborators, outside scientific collaborators, suppliers, consultants, advisors and other third parties, any of these parties may breach the agreements and disclose such output before a patent application is filed, thereby jeopardizing our ability to seek patent protection. If any licensors are not fully cooperative or disagree with us as to the prosecution, maintenance or enforcement of any patent rights, such patent rights could be compromised or even lost entirely. If there are material defects in the form, preparation or prosecution of our patents or patent applications, such patents or applications may be subject to challenges based on invalidity and/or unenforceability. Any of these outcomes could impair our ability to prevent competition from third parties, which may have an adverse impact on our business.
Patents also have a limited lifespan. In the U.S., subject to certain extensions that may be obtained in some cases, the natural expiration of a utility patent is generally 20 years from its earliest effective filing date, and the natural expiration of a design patent is generally 14 years after its issue date, unless the filing date occurred on or after May 13, 2015, in which case the natural expiration of a design patent is generally 15 years after its issue date. Various extensions may be available; however the life of a patent, and the protection it affords, is limited. Without patent protection for our products and services, we may be open to competition. Further, if we encounter delays in our development efforts, the period of time during which we could market our products and services under patent protection would be reduced.
Obtaining and maintaining our patent protection depends on compliance with various procedural measures, document submissions, fee payments and other requirements imposed by government patent agencies, and our patent protection could be reduced or eliminated for non-compliance with these requirements.
Periodic maintenance fees, renewal fees, annuity fees and various other government fees on patents and applications will be due to be paid to the U.S. Patent and Trademark Office (the “USPTO”) and various government patent agencies outside of the U.S. over the lifetime of our and our licensors’ patents and applications. The USPTO and various non-U.S. government agencies require compliance with several procedural, documentary, fee payment and other similar provisions during the patent application process and after patent issuance. In some cases, an inadvertent lapse can be cured by payment of a late fee or by other means in accordance with the applicable rules. There are situations, however, in which non-compliance can result in abandonment or lapse of the patent or patent application, resulting in a partial or complete loss of patent rights in the relevant jurisdiction. In such an event, potential competitors might be able to enter the market in that jurisdiction with similar or identical products or technology, which could have a material adverse effect on our business, financial condition, and results of operations.
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If our patents and other intellectual property rights do not adequately protect our products, we may lose market share to competitors and be unable to operate our business profitably.
The degree of future protection afforded by our intellectual property rights is uncertain because intellectual property rights have limitations, can be expensive or difficult to enforce, and may not adequately protect our business or permit us to maintain our competitive advantage. For example:
| ● | others may be able to make products that are similar to our product candidates or utilize similar science or technology but that are not covered by the claims of the patents that we may own or license from our licensors or that incorporate certain research in our product candidates that is in the public domain; |
| ● | we might not have been the first to file patent applications covering our inventions; |
| ● | others may independently develop similar or alternative technologies or duplicate any of our technologies without infringing our intellectual property rights; |
| ● | issued patents that we hold rights to may be held invalid or unenforceable, including as a result of legal challenges by our competitors or other third parties; |
| ● | our competitors or other third parties might conduct research and development activities in countries where do not have patent rights and then use the information learned from such activities to develop competitive products for sale in our major commercial markets; |
| ● | the patents of others may harm our business if, for example, we are found to have infringed those patents or if those patents serve as prior art to our patents which could potentially invalidate our patents; and |
| ● | we may choose not to file a patent in order to maintain certain trade secrets or know-how, and a third party may subsequently file a patent covering such intellectual property, which could ultimately result in public disclosure of the intellectual property if the third party’s patent application is published or issues to a patent. |
Should any of these events occur, they could have a material adverse effect on our business, financial condition, and results of operations.
Our reliance on third parties requires us to share our trade secrets and other intellectual property, which increases the possibility that a competitor will discover them or that our trade secrets and other intellectual property will be misappropriated or disclosed.
We seek to protect our proprietary technology and processes, in part, by entering into confidentiality agreements with our employees, consultants, scientific advisors and contractors. We also seek to preserve the integrity and confidentiality of our data, trade secrets and intellectual property by maintaining the physical security of our premises and physical and electronic security of our information technology systems.
Despite our efforts to protect our trade secrets, our competitors or other third parties may discover our trade secrets, either through breach of confidentiality agreements, independent development or publication of information including our trade secrets by third parties. A competitor’s or other third party’s discovery of our trade secrets would impair our competitive position and have an adverse impact on our business, financial condition, results of operations and prospects.
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Further, although we expect all of our employees and consultants and other third parties who may be involved in the development of intellectual property for us to assign their inventions to us, and all of our employees, consultants, advisors and any third parties who have access to our proprietary know-how, information, or technology to enter into confidentiality agreements, we cannot provide any assurances that we have entered into such agreements with all applicable third parties or that all such agreements have been duly executed. Even if we have entered into such agreements, we cannot assure you that our counterparties will comply with the terms of such agreements or that the assignment of intellectual property rights under such agreements is self-executing. We may be forced to bring claims against third parties, or defend claims that they may bring against us, to determine the ownership of what we regard as our intellectual property. If we fail in prosecuting or defending any such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights.
Intellectual property litigation could cause us to spend substantial resources and distract our personnel from their normal responsibilities.
There is a great deal of litigation concerning intellectual property in our industry, and we or our licensors could become involved in litigation. Even if resolved in our or our licensors’ favor, litigation or other legal proceedings relating to intellectual property claims may cause us or our licensors to incur significant expenses, and could distract our technical and management personnel from their normal responsibilities. In addition, there could be public announcements of the results of hearings, motions or other interim proceedings or developments, and if securities analysts or investors perceive these results to be negative, it could have a substantial adverse effect on the price of our securities. Such litigation or proceedings could substantially increase our operating losses and reduce our resources available for development activities. We may not have sufficient financial or other resources to adequately conduct or defend against such litigation or proceedings. Some of our competitors may be able to sustain the costs of such litigation or proceedings more effectively than we can because of their substantially greater financial resources. Uncertainties resulting from the initiation and continuation of patent litigation or other proceedings could have a material adverse effect on our business, financial condition, results of operations and ability to compete in the marketplace.
Risks Relating to Operations in Israel
Conditions in the Middle East and in Israel may harm our operations.
Our executive office, research and development facilities, as well as some of our planned clinical sites are or will be located in Israel. Most of our officers and directors are residents of Israel. Accordingly, political, economic and military conditions in Israel and the surrounding region may directly affect our business and operations. Since the establishment of the State of Israel in 1948, a number of armed conflicts have taken place between Israel and its neighboring countries, and between Israel and the Hamas and Hezbollah militant groups. Any hostilities involving Israel or the interruption or curtailment of trade between Israel and its trading partners could adversely affect our operations and results of operations. In recent years, the hostilities involved missile strikes against civilian targets in various parts of Israel, including areas in which our employees and some of our consultants are located, and negatively affected business conditions in Israel.
Our offices, located in Herzliya, Israel, are within the range of the missiles and rockets that have been fired sporadically at Israeli cities and towns from Gaza and South Lebanon since 2006, with escalations in violence during which there were a substantially larger number of rocket and missile attacks aimed at Israel. In addition, Iran has threatened to attack Israel and is widely believed to be developing nuclear weapons. Iran is also believed to have a strong influence among extremist groups in the region, such as Hamas in Gaza, Hezbollah in Lebanon, and various rebel militia groups in Syria. Since September 2015, there has been an increase in terrorist attacks on Israeli civilians including shootings, stabbings and car rammings which has impacted the general feeling of personal safety in the country. These situations may potentially escalate in the future to more violent events which may affect Israel and us. Any armed conflicts, terrorist activities or political instability in the region could adversely affect business conditions, could harm our results of operations and could make it more difficult for us to raise capital. Parties with whom we do business may decline to travel to Israel during periods of heightened unrest or tension, forcing us to make alternative arrangements when necessary in order to meet our business partners face to face. In addition, 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. Further, in the past, the State of Israel and Israeli companies have been subjected to economic boycotts. Several countries still restrict business with the State of Israel and with Israeli companies. These restrictive laws and policies may have an adverse impact on our operating results, financial condition or the expansion of our business.
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Our commercial insurance does not cover losses that may occur as a result of events associated with the security situation in the Middle East. Although the Israeli government currently covers the reinstatement value of direct damages that are caused by terrorist attacks or acts of war, we cannot assure you that this government coverage will be maintained. Any losses or damages incurred by us could have a material adverse effect on our business. Any armed conflicts or political instability in the region would likely negatively affect business conditions and could harm our results of operations.
Provisions of Israeli law may delay, prevent or otherwise impede a merger with, or an acquisition of, our company, which could prevent a change of control, even when the terms of such a transaction are favorable to us and our shareholders.
As a company incorporated under the laws of the State of Israel, we are subject to Israeli corporate law which requires approval by the Israeli Registrar of Companies (the “Registrar”) for merger transactions, imposes specific thresholders and criteria for tender offer acquisitions of shares, requires special approvals for transactions involving directors, officers or significant shareholders, and regulates other matters that may be relevant to these types of transactions. For example, a merger may not be consummated unless at least 50 days have passed from the date that a merger proposal was filed by each merging company with the Registrar and at least 30 days from the date that the shareholders of both merging companies approved the merger. In addition, the holder of a majority of each class of securities of the target company must approve a merger. Moreover, a full tender offer can only be completed if the acquirer receives at least 95% of the issued share capital (provided that a majority of the offerees that do not have a personal interest in such tender offer shall have approved the tender offer, except that if the total votes to reject the tender offer represent less than 2% of the company’s issued and outstanding share capital, in the aggregate, approval by a majority of the offerees that do not have a personal interest in such tender offer is not required to complete the tender offer), and the shareholders, including those who indicated their acceptance of the tender offer, may, at any time within six months following the completion of the tender offer, petition the court to alter the consideration for the acquisition (unless the acquirer stipulated in the tender offer that a shareholder that accepts the offer may not seek appraisal rights).
Furthermore, Israeli tax considerations may make potential transactions unappealing to us or to those of our shareholders whose country of residence does not have a tax treaty with Israel exempting such shareholders from Israeli tax. For example, Israeli tax law does not recognize tax-free share exchanges to the same extent as U.S. tax law. With respect to mergers, Israeli tax law allows for tax deferral in certain circumstances but makes the deferral contingent on the fulfillment of numerous conditions, including a holding period of two years from the date of the transaction during which sales and dispositions of shares of the participating companies are restricted. 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 actual disposition of the shares has occurred.
These and other similar provisions could delay, prevent or impede an acquisition of us or our merger with another company, even if such an acquisition or merger would be beneficial to us or to our shareholders.
It may be difficult to enforce a U.S. judgment against us, our officers or our directors or to assert U.S. securities law claims in Israel.
Service of process upon us, since we are incorporated in Israel, and upon our directors and officers, who reside outside the U.S., may be difficult to obtain within the U.S. In addition, because substantially all of our assets and most of our directors and officers are located outside the U.S., any judgment obtained in the U.S. against us or any of our directors and officers may not be collectible within the U.S. There is a doubt as to the enforceability of civil liabilities under the Securities Act or the Exchange Act pursuant to original actions instituted in Israel. Subject to particular time limitations and provided certain conditions are met, executory judgments of a U.S. court for monetary damages in civil matters may be enforced by an Israeli court.
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As a “foreign private issuer,” we are permitted, and intend, to follow certain home country corporate governance practices instead of otherwise applicable SEC and the Nasdaq Capital Market requirements, which may result in less protection than is accorded to investors under rules applicable to domestic U.S. issuers.
We are a “foreign private issuer” and are not subject to the same requirements that are imposed upon U.S. domestic issuers by the Securities and Exchange Commission, or the SEC. Under the Exchange Act, we will be subject to reporting obligations that, in certain respects, are less detailed and less frequent than those of U.S. domestic reporting companies. For example, we will not be required to issue quarterly reports or proxy statements that comply with the requirements applicable to U.S. domestic reporting companies. Furthermore, although under regulations promulgated under the Companies Law, as an Israeli public company listed overseas we will be required to disclose the compensation of our five most highly compensated officer holders on an individual basis (rather than on an aggregate basis), this disclosure will not be as extensive as that required of U.S. domestic reporting companies. We will also have four months after the end of each fiscal year to file our annual reports with the SEC and will not be required to file current reports as frequently or promptly as U.S. domestic reporting companies. Furthermore, our officers, directors and principal shareholders will be exempt from the requirements to report transactions and short-swing profit recovery required by Section 16 of the Exchange Act. Also, as a “foreign private issuer,” we are not subject to the requirements of Regulation FD (Fair Disclosure) promulgated under the Exchange Act. These exemptions and leniencies will reduce the frequency and scope of information and protections available to you in comparison to those applicable to a U.S. domestic reporting companies.
In addition, as a “foreign private issuer,” we are permitted to follow certain home country corporate governance practices instead of those otherwise required under the listing rules of the Nasdaq Capital Market for domestic U.S. issuers. For instance, we follow home country practice in Israel with regard to, among other things, board of directors independence requirements, director nomination procedures, compensation committee matters. In addition, we will follow our home country law instead of the listing rules of the Nasdaq Capital Market that require that we obtain shareholder approval for certain dilutive events, such as the establishment or amendment of certain equity based compensation plans, an issuance that will result in a change of control of us, certain transactions other than a public offering involving issuances of a 20% or greater interest in the company, and certain acquisitions of the stock or assets of another company. We may in the future elect to follow home country corporate governance practices in Israel with regard to other matters. Following our home country corporate governance practices as opposed to the requirements that would otherwise apply to a U.S. company listed on the Nasdaq Capital Market may provide less protection to you than what is accorded to investors under the listing rules of the Nasdaq Capital Market applicable to domestic U.S. issuers.
We would lose our foreign private issuer status if a majority of our shares are owned by U.S. residents and a majority of our directors or executive officers are U.S. citizens or residents or we fail to meet additional requirements necessary to avoid loss of foreign private issuer status. The regulatory and compliance costs to us under U.S. securities laws as a U.S. domestic issuer may be significantly higher.
Under applicable U.S. and Israeli law, we may not be able to enforce covenants not to compete and therefore may be unable to prevent our competitors from benefiting from the expertise of some of our former employees. In addition, employees may be entitled to seek compensation for their inventions irrespective of their agreements with us, which in turn could impact our future profitability.
We generally enter into non-competition agreements with our employees and key consultants. These agreements prohibit our employees and key consultants, if they cease working for us, from competing directly with us or working for our competitors or clients for a limited period of time. We may be unable to enforce these agreements under the laws of the jurisdictions in which our employees work and it may be difficult for us to restrict our competitors from benefitting from the expertise our former employees or consultants developed while working for us. For example, Israeli courts have required employers seeking to enforce non-compete undertakings of a former employee to demonstrate that the competitive activities of the former employee will harm one of a limited number of material interests of the employer which have been recognized by the courts, such as the secrecy of a company’s confidential commercial information or the protection of its intellectual property. If we cannot demonstrate that such interests will be harmed, we may be unable to prevent our competitors from benefiting from the expertise of our former employees or consultants and our ability to remain competitive may be diminished.
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In addition, Chapter 8 of the Israeli Patents Law, 5727-1967, or the Patents Law, deals with inventions made in the course of an employee’s service and during his or her term of employment, whether or not the invention is patentable, or service inventions. Section 134 of the Patents Law, sets forth that if there is no agreement which explicitly determines whether the employee is entitled to compensation for the service inventions and the extent and terms of such compensation, such determination will be made by the Compensation and Rewards Committee, a statutory committee of the Israeli Patents Office. As a result, it is unclear if, and to what extent, our research and development employees may be able to claim compensation with respect to our future revenue. As a result, we may receive less revenue from future products if such claims are successful, which in turn could impact our future profitability.
Your rights and responsibilities as a shareholder will be governed by Israeli law which may differ in some respects from the rights and responsibilities of shareholders of U.S. companies.
We are incorporated under Israeli law. The rights and responsibilities of the holders of our ordinary shares are governed by our Articles of Association and Israeli law. These rights and responsibilities differ in some respects from the rights and responsibilities of shareholders in typical U.S.-based corporations. In particular, a shareholder of an Israeli company has a duty to act in good faith toward the company and other shareholders and to refrain from abusing its power in the company, including, among other things, in voting at the 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 interested party transactions requiring shareholder approval. In addition, a shareholder who knows 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 implications of these provisions that govern shareholders’ actions. 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 Relating to Our International Operations
Our international clinical trials may be delayed or otherwise adversely impacted by social, political and economic factors affecting the particular foreign country.
We may conduct clinical trials in different geographical locations. Our ability to successfully initiate, enroll and complete a clinical trial in any of these countries, or in any future foreign country in which we may initiate a clinical trial, are subject to numerous risks unique to conducting business in foreign countries, including:
| ● | difficulty in establishing or managing relationships with clinical research organizations and physicians; |
| ● | different standards for the conduct of clinical trials and/or health care reimbursement; |
| ● | our inability to locate qualified local consultants, physicians, and partners; |
| ● | the potential burden of complying with a variety of foreign laws, medical standards and regulatory requirements, including the regulation of pharmaceutical products and treatment; and |
| ● | general geopolitical risks, such as political and economic instability, and changes in diplomatic and trade relations. |
Any disruption to our planned international clinical trial program could significantly delay our product development efforts.
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We are subject to anti-bribery, anti-corruption, and anti-money laundering laws, including the U.S. Foreign Corrupt Practices Act. Violations of such laws could result in criminal prosecution and substantial penalties.
The U.S. Foreign Corrupt Practices Act (the “FCPA”) and similar worldwide anti-bribery laws generally prohibit companies and their intermediaries from making, offering or authorizing improper payments to non-U.S. government officials for the purpose of obtaining or retaining business. We do business and may do additional business in the future in countries or regions where strict compliance with anti-bribery laws may conflict with local customs and practices. Violations of anti-bribery laws (either due to our acts or our inadvertence) may result in criminal and civil sanctions and could subject us to other liabilities in the U.S. and elsewhere. Even allegations of such violations could disrupt our business and result in a material adverse effect on our business and operations.
We are committed to doing business in accordance with applicable anti-corruption laws and our own internal policies and procedures. We also plan to implement policies and procedures concerning compliance with the FCPA that is disseminated to employees, directors, contractors and agents. Our policies and procedures and any future improvements, however, may prove to be less than effective, and our employees and consultants may engage in conduct for which we might be held responsible. Some foreign jurisdictions may require us to utilize local agents and/or establish joint ventures with local operators or strategic partners. Even though some of our agents and partners may not themselves be subject to the FCPA or other non-U.S. anti-bribery laws to which we may be subject, if our agents or partners make improper payments to non-U.S. government officials in connection with engagements or partnerships with us, we could be investigated and potentially found liable for violation of such anti-bribery laws and could incur civil and criminal penalties and other sanctions, which could have a material adverse effect on our business, financial position, results of operations and cash flows.
We are exposed to risks relating to the laws of various countries as a result of our international operations.
We are exposed to various levels of political, economic, legal and other risks and uncertainties associated with operating in or exporting to other jurisdictions. These risks and uncertainties include, but are not limited to, changes in the laws, regulations and policies, political instability, currency controls, fluctuations in currency exchange rates and rates of inflation, labor unrest, changes in taxation laws, regulations and policies, restrictions on foreign exchange and repatriation and changing political conditions and governmental regulations relating to foreign investment.
Changes, if any, in the laws, regulations and policies around the world may adversely affect the operations or profitability of our international operations. Specifically, our operations may be affected in varying degrees by government regulations with respect to, but not limited to, restrictions on advertising, production, price controls, export controls, controls on currency remittance, increased income taxes, restrictions on foreign investment, and government policies rewarding contracts to local competitors or requiring domestic producers or vendors to purchase supplies from a particular jurisdiction. Failure to comply strictly with applicable laws, regulations and local practices could result in additional taxes, costs, civil or criminal fines or penalties or other expenses being levied on our international operations, as well as other potential adverse consequences such as the loss of necessary permits or governmental approvals.
Risks Relating to Ownership of Our Ordinary Shares
There has been no prior public market for our ordinary shares, and an active, liquid and orderly trading market for our ordinary shares may not develop or be maintained in the United States, which could limit your ability to sell our ordinary shares.
There has been no public market for our ordinary shares. Although we intend to apply to list our ordinary shares on the Nasdaq Capital Market, an active U.S. public market for our ordinary shares may not develop or be sustained after this offering. If an active market does not develop, the value of our ordinary shares may be impaired and you may experience difficulty selling the ordinary shares that you purchase in this offering.
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Because we are not subject to compliance with rules requiring the adoption of certain corporate governance measures, our shareholders have limited protections against interested director transactions, conflicts of interest and similar matters.
The Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”), as well as rule changes proposed and enacted by the SEC and the NASDAQ Stock Market as a result of Sarbanes-Oxley, require the implementation of various measures relating to corporate governance. These measures are designed to enhance the integrity of corporate management and the securities markets and apply to securities which are listed on the NASDAQ Stock Market. Because we are not presently required to comply with many of the corporate governance provisions and because we chose to avoid incurring the substantial additional costs associated with such compliance any sooner than necessary, we have not yet adopted all of these measures. As of the date of this prospectus, we are not in compliance with requirements relating to the distribution of annual and interim reports, the holding of shareholders meetings and solicitation of proxies for such meeting and requirements for shareholder approval for certain corporate actions.
Regardless of whether such compliance is required, the absence of such standards of corporate governance may leave our shareholders without protections against interested director transactions, conflicts of interest and similar matters and investors may be reluctant to provide us with funds necessary to expand our operations.
Failure to achieve and maintain effective internal controls in accordance with Section 404 of the Sarbanes-Oxley Act could have a material adverse effect on our business and operating results. In addition, current and potential shareholders could lose confidence in our financial reporting, which could have a material adverse effect on our share price.
Effective internal controls are necessary for us to provide reliable financial reports and effectively prevent fraud. If we cannot provide reliable financial reports or prevent fraud, our operating results could be harmed. In the event that we consummate this offering, we will be required to document and test our internal control procedures in order to satisfy the requirements of Section 404 of the Sarbanes-Oxley, which requires annual management assessments of the effectiveness of our internal controls over financial reporting. During the course of our testing, we may identify deficiencies or material weaknesses which we may not be able to remediate immediately. In addition, if we fail to maintain the adequacy of our internal controls, as such standards are modified, supplemented or amended from time to time, we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal controls over financial reporting in accordance with Section 404 of the Sarbanes-Oxley. Failure to achieve and maintain an effective internal control environment could also cause investors to lose confidence in our reported financial information, which could have a material adverse effect on our ordinary share price.
Because certain of our directors and executive officers are among our largest shareholders, they can exert significant control over our business and affairs and have actual or potential interests that may depart from investors.
As of May 11, 2020, certain of our directors and executive officers collectively and beneficially own 10.19% of our outstanding ordinary shares. The interests of such persons may differ from the interests of our other shareholders. As a result, in addition to their board seats and offices, such persons will have significant influence over and control all corporate actions requiring shareholder approval, irrespective of how our other shareholders may vote, including the following actions:
| ● | to elect or defeat the election of our directors; |
| ● | amend or prevent amendment of our charter documents or by-laws; |
| ● | effect or prevent a merger, sale of assets or other corporate transaction; and |
| ● | to control the outcome of any other matter submitted to our shareholders for vote. |
Such persons’ share ownership may discourage a potential acquirer from making a tender offer or otherwise attempting to obtain control of our company, which in turn could reduce our stock price or prevent our shareholders from realizing a premium over our share price.
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Our management team will have immediate and broad discretion over the use of the net proceeds from this offering and may not use them effectively.
Our management will have broad discretion in the application of the net proceeds arising from this offering. Our shareholders may not agree with the manner in which our management chooses to allocate the net proceeds from this offering. The failure by our management to apply these funds effectively could have a material adverse effect on our business, financial condition and results of operation. Pending their use, we may invest the net proceeds from this offering in a manner that does not produce income, do not yield a favorable return to our investors or even lose value. The decisions made by our management may not result in positive returns on your investment and you will not have an opportunity to evaluate the economic, financial or other information upon which our management bases its decisions.
FINRA sales practice requirements may also limit your ability to buy and sell shares of our ordinary shares, which could depress the price of such shares.
FINRA rules require broker-dealers to have reasonable grounds for believing that an investment is suitable for a customer before recommending that investment to the customer. Prior to recommending speculative low-priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer’s financial status, tax status and investment objectives, among other things. Under interpretations of these rules, FINRA believes that there is a high probability such speculative low-priced securities will not be suitable for at least some customers. Thus, FINRA requirements make it more difficult for broker-dealers to recommend that their customers buy our ordinary shares, which may limit your ability to buy and sell shares of our ordinary shares, have an adverse effect on the market for shares of our ordinary shares, and thereby depress price of our ordinary shares.
Even if our securities are listed on the Nasdaq Capital Market, there can be no assurance that our securities, including our ordinary shares, will continue to be listed or, if listed, that we will be able to comply with the continued listing standards of the Nasdaq Capital Market, which could limit investors’ ability to make transactions in our securities and subject us to additional trading restrictions.
Assuming that we are able to successfully list our ordinary shares on the Nasdaq Capital Market, we cannot assure you that we will be able to meet the Nasdaq Capital Market’s continued listing requirement or maintain other listing standards. If our ordinary shares are delisted by the Nasdaq Capital Market, and we are not able to list our securities on another national securities exchange, we expect our securities could be quoted on an over-the-counter market. If this were to occur, then we could face significant material adverse consequences, including:
| ● | less liquid trading market for our securities; |
| ● | more limited market quotations for our securities; |
| ● | determination that our ordinary shares and/or warrants are a “penny stock” that requires brokers to adhere to more stringent rules and possibly resulting in a reduced level of trading activity in the secondary trading market for our securities; |
| ● | more limited research coverage by stock analysts; |
| ● | loss of reputation; and |
| ● | more difficult and more expensive equity financings in the future. |
The National Securities Markets Improvement Act of 1996, which is a federal statute, prevents or preempts the states from regulating the sale of certain securities, which are referred to as “covered securities.” If our ordinary shares remain listed on the Nasdaq Capital Market, our ordinary shares will be covered securities. Although the states are preempted from regulating the sale of our securities, the federal statute does allow the states to investigate companies if there is a suspicion of fraud, and, if there is a finding of fraudulent activity, then the states can regulate or bar the sale of covered securities in a particular case. If our securities were no longer listed on the Nasdaq Capital Market and therefore not “covered securities,” we would be subject to regulation in each state in which we offer our securities.
Future issuance of our ordinary shares could dilute the interests of existing shareholders.
We may issue additional shares of our ordinary shares in the future in connection with a financing or an acquisition. The issuance of a substantial number of shares of ordinary shares could have the effect of substantially diluting the interests of our existing shareholders and any subsequent sales or resales by our shareholders could have an adverse effect on the market price of our ordinary shares.
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We do not intend to pay dividends for the foreseeable future, and our investors must rely on increases in the market prices of our ordinary shares for returns on equity investment.
To date, we have not paid any cash dividends on our ordinary shares. The declaration and payment of dividends, if any, will always be subject to the discretion of our board of directors. The timing and amount of any dividends declared will depend on, among other things, our earnings, financial condition and cash requirements and availability and our ability to obtain debt and equity financing on acceptable terms as contemplated by our growth strategy. For the foreseeable future, earnings generated from our operations will be retained for use in our business and not used to pay dividends. Accordingly, our investors must rely on increases in the market prices of our ordinary shares for returns on equity investment.
U.S. shareholders may suffer adverse tax consequences if we are characterized as a passive foreign investment company, or PFIC, for U.S. federal income tax purposes.
Generally, if for any taxable year, 75% or more of our gross income is passive income, or at least 50% of our assets are held for the production of, or produce, passive income, we would be characterized as a PFIC for U.S. federal income tax purposes. We believe that we were a PFIC for U.S. federal income tax purposes for our 2018 and 2019 taxable years and we expect to be a PFIC for our current taxable year. We must determine our PFIC status annually based on tests that are factual in nature. Our status in future years will depend on our income, assets and activities in those years. In any taxable year in which we are characterized as a PFIC for U.S. federal income tax purposes, a U.S. Holder, as defined under the heading “United States Federal Income Taxation,” that owns ordinary shares could face adverse U.S. federal income tax consequences, including having gains realized on the sale of ordinary shares classified as ordinary income, rather than as capital gain, the loss of the preferential rate applicable to dividends received on ordinary shares by U.S. Holders who are individuals, and having interest charges apply to distributions by us and the proceeds of ordinary share sales. Certain elections exist that may alleviate some adverse consequences of PFIC status and would result in an alternative treatment (such as mark-to-market treatment) of the ordinary shares. If we are a PFIC in any year, U.S. Holders may be subject to additional Internal Revenue Service, or IRS, filing requirements, including the filing of IRS Form 8621, as a result of directly or indirectly owning stock of a PFIC. It is not expected that a U.S. Holder will be able to make a QEF election because we do not intend to provide U.S. Holders with the information necessary to make a QEF election. U.S. Holders are urged to consult their own tax advisors regarding the application of the PFIC rules. For more information, See “United States Federal Income Taxation.”
The market price of our ordinary shares may be highly volatile, which could result in substantial losses for purchasers of our ordinary shares in this offering.
The trading price of our ordinary shares is likely to be volatile. The stock market in general has experienced extreme volatility that has often been unrelated to the operating performance of particular companies. As a result of this volatility, you may not be able to sell your ordinary shares at or above the initial public offering price. The following factors, in addition to other risk factors described in this section, may have a significant impact on the market price of our ordinary shares:
| ● | changes or developments in laws or regulations governing our business; |
| ● | announcements of regulatory approvals or the failure to obtain them, or specific label indications or patient populations for their use, or changes or delays in the regulatory review process; |
| ● | unsatisfactory results of preclinical studies or clinical trials; |
| ● | adverse actions taken by regulatory agencies with respect to our manufacturing supply chain or sales and marketing activities; |
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| ● | announcements of innovations or new products by us or our competitors; |
| ● | any intellectual property infringement, misappropriation or other actions in which we may become involved; |
| ● | any adverse changes to our relationships with manufacturers or suppliers; |
| ● | announcements concerning our competitors; |
| ● | achievement of expected product sales and profitability or our failure to meet expectations; |
| ● | our commencement of, or involvement in, litigation; and |
| ● | any changes in our board of directors or management. |
If our results fall below the expectations of investors or securities analysts, the price of our ordinary shares could decline substantially. Furthermore, any fluctuations in our operating results may, in turn, cause the price of our shares to fluctuate substantially. We believe that quarterly comparisons of our financial results are not necessarily meaningful and should not be relied upon as an indication of our future performance.
Further, the stock market in general may experience extreme price and volume fluctuations that are unrelated or disproportionate to the operating performance of companies. Broad market and industry factors may negatively affect the market price of our ordinary shares regardless of our actual operating performance. In addition, a systemic decline in the financial markets and related factors beyond our control may cause our share price to decline rapidly and unexpectedly. Price volatility of our ordinary shares might be worse if the trading volume of our ordinary shares is low. In the past, following periods of volatility in the market price of a company’s securities, securities class-action litigation often has been instituted against that company. Such litigation, if instituted against us, could cause us to incur substantial costs to defend such claims and divert management’s attention and resources, which could seriously harm our business, financial condition, results of operations and prospects.
Moreover, the liquidity of our ordinary shares will be limited, not only in terms of the number of ordinary shares that can be bought and sold at a given price, but by potential delays in the timing of executing transactions in our ordinary shares and a reduction in security analyst and media’s coverage of our company, if any. These factors may result in lower prices for our ordinary shares than might otherwise be obtained and could also result in a larger spread between the bid and ask prices for our ordinary shares. In addition, without a large float, our ordinary shares will be less liquid than the stock of companies with broader public ownership and, as a result, the trading prices of our ordinary shares may be more volatile. In the absence of an active public trading market, an investor may be unable to liquidate its investment in our ordinary shares. Trading of a relatively small volume of our ordinary shares may have a greater impact on the trading price of our ordinary shares than would be the case if our public float were larger. We cannot predict the prices at which our ordinary shares will trade in the future.
The grant and future exercise of registration rights may adversely affect the market price of our ordinary shares.
Pursuant to the registration rights agreement among the Company and certain investors, we are required to comply with a demand that the Company register their registrable securities. The registration of these securities will permit the public resale of such securities. The registration and availability of such a significant number of securities for trading in the public market may have an adverse effect on the market price of our ordinary shares.
If securities or industry analysts do not publish or cease publishing research or reports about us, our business or our market, or if they adversely change their recommendations or publish negative reports regarding our business or our traded securities, our securities price and trading volume could be negatively impacted.
The trading market for our ordinary shares will be influenced by the research and reports that industry or securities analysts may publish about us, our business, our market or our competitors. We do not have any control over these analysts. Securities and industry analysts do not currently, and may never, publish research on our company. If no securities or industry analysts commence coverage of our company, the trading price for our ordinary shares would likely be negatively impacted. In the event securities or industry analysts initiate coverage, if one or more of the analysts who cover us downgrade our ordinary shares or publish inaccurate or unfavorable research about our business, the price of our ordinary shares would likely decline. In addition, if our operating results fail to meet the forecast of analysts, the price of our ordinary shares would likely decline. If one or more of these analysts cease coverage of our company or fail to publish reports on us regularly, demand for our ordinary shares could decrease, which might cause the price of our ordinary shares and trading volume to decline.
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements made under “Prospectus Summary,” “Risk Factors,” “Use of Proceeds,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Business,” and elsewhere in this prospectus constitute forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expects,” “plans,” “project,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” “intends,” or “continue,” or the negative of these terms or other comparable terminology.
These forward-looking statements may include, but are not limited to, statements relating to our objectives, plans, and strategies; statements that contain projections of results of operations or of financial condition; statements relating to the research, development, and use of our products; and all statements (other than statements of historical facts) that address activities, events, or developments that we intend, expect, project, believe, or anticipate will or may occur in the future.
Forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties. We have based these forward-looking statements on assumptions and assessments made by our management in light of their experience and their perception of historical trends, current conditions, expected future developments, and other factors they believe to be appropriate.
Important factors that could cause actual results, developments, and business decisions to differ materially from those anticipated in these forward-looking statements include, among other things:
| ● | the outcomes of preclinical studies, clinical trials and other research regarding PRF-110 and future product candidates; | |
| ● | the commercialization and pricing of our products; | |
| ● | our competitors’ development, marketing and sale of products that compete with our products; and | |
| ● | our expectations regarding future growth, including; |
| o | our ability to develop an active trading market for our ordinary shares and whether the market price of our ordinary shares is volatile; and |
| o | our expectations regarding the maintenance of our foreign private issuer status and emerging growth company status. |
These statements are only current predictions and are subject to known and unknown risks, uncertainties, and other factors that may cause our or our industry’s actual results, levels of activity, performance, or achievements to be materially different from those anticipated by the forward-looking statements. We discuss many of these risks in this prospectus in greater detail under the heading “Risk Factors” and elsewhere in this prospectus. You should not rely upon forward-looking statements as predictions of future events.
Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, or achievements. Except as required by law, we are under no duty to update or revise any of the forward-looking statements, whether as a result of new information, future events or otherwise, after the date of this prospectus.
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We estimate that the net proceeds to us from our issuance and sale of ordinary shares in this offering will be approximately $ , or $ if the underwriters exercise in full their option to purchase additional shares, assuming an initial public offering price of $ per share, which is the midpoint of the price range set forth on the cover page of this prospectus, and after deducting the estimated underwriting discount and estimated offering expenses payable by us.
Each $1.00 increase (decrease) in the assumed initial public offering price of $ per ordinary share would increase (decrease) the net proceeds to us from this offering, after deducting the estimated underwriting discount and estimated offering expenses payable by us, by $ , assuming that the number of ordinary shares offered by us, as set forth on the cover page of this prospectus, remains the same. We may also increase or decrease the number of ordinary shares we are offering. An increase (decrease) of 1,000,000 in the number of ordinary shares we are offering, as set forth on the cover page of this prospectus, would increase (decrease) the net proceeds to us from this offering, after deducting the estimated underwriting discount and estimated offering expenses payable by us, by $ , assuming the assumed initial public offering price stays the same.
Based on proposals we received from contract research organizations, we estimate that the total cost of the two pivotal clinical trials will be approximately $16.5 million. We also intend to use approximately $1.5 million for development activities and preparation of initial NDAs, $ for the purchase of directors and officers liability insurance and the balance for general corporate purposes, including general and administrative expenses and working capital. Commencing upon the completion of this offering, we expect to incur additional costs associated with operating as a public company. Accordingly, we will need to obtain substantial additional funding. If we are unable to raise capital when needed or on attractive terms, we may be forced to delay, reduce and/or eliminate our research.
Based on our current plans, we believe that the net proceeds from this offering, together with our existing cash and cash equivalents, will be sufficient to fund our operations for at least the next months. We have based this estimate on assumptions that may prove to be incorrect, and we could use our available capital resources sooner than we currently expect.
These expected uses of net proceeds from this offering represent our intentions based upon our current plans and business conditions which could change in the future as our plans and business conditions evolve. The amounts and timing of our actual expenditures may vary significantly and will depend upon numerous factors, including the progress of our clinical trials and research and development efforts. Accordingly, our management will have broad discretion in applying the net proceeds of this offering and investors will be relying on the judgment of our management regarding the application of those net proceeds.
Pending their use, we may invest the net proceeds from this offering in a manner that does not produce income.
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We have never declared or paid any cash dividends to the holders of our ordinary shares, and we do not anticipate or intend to pay cash dividends in the foreseeable future. Payment of cash dividends, if any, in the future will be at the discretion of our board of directors in compliance with applicable legal requirements and will depend on a number of factors, including future earnings, our financial condition, operating results, contractual restrictions, capital requirements, business prospects, our strategic goals and plans to expand our business, applicable law and other factors that our board of directors may deem relevant.
The Companies Law imposes further restrictions on our ability to declare and pay dividends. See “Description of Share Capital — Dividend and Liquidation Rights” for additional information. Payment of dividends may be subject to Israeli withholding taxes. See “Material Tax Considerations — Certain Israeli Tax Considerations” for additional information.
The following table sets forth our cash and capitalization as of December 31, 2019 as follows:
| ● | on an actual basis; |
| ● | on a pro forma basis to give effect to the effectiveness of our amended and restated Articles of Association immediately prior to the closing of this offering and to the conversion upon closing of this offering of: (i) all of our outstanding convertible preferred shares on a ___for-_____ basis into 8,862,800 of our ordinary shares; and (ii) $3,929,000 of principal convertible debt and $________ of accrued interest into [ ] ordinary shares, and (iii) $1,562,000 of convertible notes and $_____ of accrued interest into [ ] ordinary shares; and |
| ● | on a pro forma as adjusted basis to give effect to (i) the pro forma adjustments described in the preceding clauses; and (ii) the issuance and sale by us of [ ] ordinary shares in this offering at an assumed initial public offering price of [$ ] per share (which is the midpoint of the range set forth on the cover page of this prospectus), after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. |
The pro forma and pro forma as adjusted information set forth in the table below is illustrative only and will be adjusted based on the actual initial public offering price and other terms of this offering determined at pricing. You should read the information in this table together with our financial statements and related notes included elsewhere in this Prospectus and the sections titled “Selected Financial Data,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
| As of December 31, 2019 | ||||||||||||
| Actual | Pro Forma | Pro Forma as Adjusted(1,2) | ||||||||||
| (unaudited) | ||||||||||||
| (in dollars, except share data) | ||||||||||||
| Cash(1)(2) | 941,000 | |||||||||||
| Other assets | 223,000 | |||||||||||
| Total current liabilities | 6,339,000 | |||||||||||
| Total non current liabilities | 447,000 | |||||||||||
| Shareholders’ equity(1, 2) : | ||||||||||||
| Convertible preferred shares, par value NIS 0.01 per share; 18,300,000 shares authorized, 8,862,800 shares issued and outstanding, actual and pro forma; and no shares authorized, issued and outstanding pro forma; as adjusted | 6,621,000 | |||||||||||
| Ordinary share par value NIS 0.01 per share; 4,700,000 shares authorized, 1,729,670 shares issued and outstanding; [ ] shares authorized and [ ] shares issued and outstanding, proforma; [______] shares authorized and [ ] shares issued and outstanding,___ pro forma; as adjusted | 5,000 | |||||||||||
| Additional paid-in capital | 180,000 | |||||||||||
| Accumulated deficit | (12,428,000 | ) | ||||||||||
| Total shareholders’ equity (deficit) | $ | (12,243,000 | ) | $ | $ | |||||||
| (1) | Each $1.00 increase or decrease in the assumed initial public offering price of [$ ] per share (which is the midpoint of the price range set forth on the cover page of this prospectus) would increase or decrease each of cash, total shareholders’ equity and total capitalization on a pro forma as adjusted basis by approximately [ $ million], assuming the number of shares offered, as set forth on the cover page of this prospectus, remains the same, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. |
| (2) | Each 1,000,000 share increase or decrease in the number of shares offered in this offering would increase or decrease each of cash, total shareholders’ equity and total capitalization on a pro forma as adjusted basis by approximately [$ ] million, assuming that the price per share for the offering remains at [$ ] (which is the midpoint of the price range set forth on the cover page of this prospectus), and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. |
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The total number of ordinary shares to be outstanding after this offering is based on 1,729,670 ordinary shares outstanding as of December 31, 2019 and reflects:
| ● | the automatic conversion on a [ ] for [ ] basis of all outstanding convertible preferred shares into _________ ordinary shares upon the closing of this offering; and |
| ● | the automatic conversion of 3,929,000 of principal convertible debt, and $1,212,000 of accrued interest, into _________ ordinary share; and |
| ● | the automatic conversion of $1,562,000 of convertible notes and $_____ of accrued interest into [ ] ordinary shares. |
The ordinary shares outstanding as of December 31, 2019 exclude the following:
| ● | 1,120,014 ordinary shares issuable upon the exercise of options to purchase our ordinary shares at a weighted average exercise price of $0.546 per share, issuable pursuant to the 2008 PainReform Option Plan and 2019 PainReform Option Plan, of which 875,899 options are vested; and | |
| ● | [ ] ordinary shares issuable upon exercise of the warrants issued in August and December 2019 in connection with a bridge financing. |
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If you invest in our ordinary shares, your ownership interest will be immediately diluted to the extent of the difference between the offering price per ordinary share and the pro forma as adjusted net tangible book value per ordinary share after completion of the offering. Dilution results from the fact that the per ordinary share offering price is substantially in excess of the book value per ordinary share attributable to the existing holders of our presently outstanding ordinary shares.
Net tangible book value represents the amount of our total consolidated tangible assets, less the amount of our total consolidated liabilities. Dilution is determined by subtracting the net tangible book value per Ordinary Share (as adjusted for the offering) from the initial public offering price per Ordinary Share and after deducting the underwriting discounts, non-accountable expense allowance and the estimated offering expenses payable by us.
Our pro forma net tangible book value as of December 31, 2019 was $[ ], or $[ ] per ordinary share. Pro forma net tangible book value represents the amount of our total tangible assets less total liabilities, after giving effect to the conversion of all of our convertible preferred shares. Pro forma net tangible book value per share represents pro forma net tangible book value divided by the total number of shares outstanding as of June 30, 2019, after giving effect to (i) the conversion of all our outstanding convertible preferred shares into ordinary shares; and (ii) the pro forma adjustment described above.
After giving further effect to the sale of ordinary shares in this offering at an assumed initial public offering price of $ per ordinary share, which is the midpoint of the price range set forth on the cover page of this prospectus, after deducting the estimated underwriting discount and estimated offering expenses, our pro forma as adjusted net tangible book value December 31, 2019 would have been $ per share. This represents an immediate increase in pro forma as adjusted net tangible book value of $ per share to existing shareholders and immediate dilution of $ per ordinary share to new investors.
The following table sets forth the estimated net tangible book value per ordinary share after the offering and the dilution to persons purchasing ordinary shares based on the foregoing offering assumptions.
| Assumed initial public offering price per ordinary share | $ | |||||||
| Pro forma net tangible book value (deficit) per share as of June 30, 2019 before this offering | $ | [ ] | ||||||
| Increase in pro forma as adjusted net tangible book value per share attributable to investors in this offering | $ | [ ] | ||||||
| Pro forma as adjusted net tangible book value per share after this offering | $ | [ ] | ||||||
| Increase in pro forma as adjusted net tangible book value per ordinary share attributable to new investors in this offering | $ | |||||||
| Pro forma as adjusted net tangible book value per ordinary share after this offering | $ | |||||||
| Dilution in pro forma as adjusted net tangible book value per share to new investors in this offering | $ |
The dilution information discussed above is illustrative only and will change based on the actual initial public offering price and other terms of this offering determined at pricing.
Each $1.00 increase (decrease) in the assumed initial public offering price of $ per share, which is the midpoint of the price range set forth on the cover page of this prospectus, would increase (decrease) our pro forma as adjusted net tangible book value per share after this offering by $ per share and the dilution to new investors by $ per share, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discount and estimated offering expenses payable by us. We may also increase or decrease the number of shares we are offering. Each increase of 1,000,000 shares in the number of our ordinary shares offered by us, as set forth on the cover page of this prospectus, would increase the pro forma as adjusted net tangible book value by $ per share and decrease the dilution to new investors by $ per share, assuming the assumed initial public offering price remains the same and after deducting the estimated underwriting discount and estimated offering expenses payable by us. Similarly, each decrease of 1,000,000 shares in the number of our ordinary shares offered by us, as set forth on the cover page of this prospectus, would decrease the pro forma as adjusted net tangible book value by $ per share and increase the dilution to new investors by $ per share, assuming the assumed initial public offering price remains the same and after deducting the estimated underwriting discount and estimated offering expenses payable by us.
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If the underwriters exercise their option to purchase additional ordinary shares in full, our pro forma as adjusted net tangible book value per share after this offering would be $ , representing an immediate increase in pro forma as adjusted net tangible book value per share of $ to existing shareholders and immediate dilution in pro forma as adjusted net tangible book value per share of $ to new investors purchasing ordinary shares in this offering, assuming an initial public offering price of $ per share, which is the midpoint of the price range set forth on the cover page of this prospectus, and after deducting the estimated underwriting discount and estimated offering expenses payable by us.
The following table summarizes on a pro forma as adjusted basis as described above:
| ● | the total number of our ordinary shares purchased from us by our existing ordinary shareholders and preferred shareholders and by new investors purchasing shares in this offering; |
| ● | the total number of our ordinary shares to be issued upon closing of this offering upon conversion of the convertible debt and notes outstanding as of December 31, 2019; |
| ● | the total consideration paid to us by our existing ordinary shareholders and preferred shareholders (including the consideration attributable to the shares to be issued to the holders of our outstanding convertible notes and bonds) and by new investors purchasing shares in this offering, assuming an initial public offering price of $ per share, the midpoint of the range set forth on the cover page of this prospectus, before deducting the estimated underwriting discount and estimated offering expenses payable by us; and |
| ● | the average price per share paid by existing ordinary shareholders and preferred shareholders (including the consideration attributable to the shares to be issued to the holders of our outstanding convertible notes and bonds) and by new investors purchasing shares in this offering. |
| Average | ||||||||||||||||||||
| Shares Purchased | Total Consideration | Price Per | ||||||||||||||||||
| Number | Percent | Amount | Percent | Share | ||||||||||||||||
| Existing shareholders (1) | % | $ | % | $ | ||||||||||||||||
| New investors | % | |||||||||||||||||||
| Total | 100.0 | % | 100.0 | % | ||||||||||||||||
| (1) | Includes existing ordinary shareholders and preferred shareholders and assumes the conversion of all our outstanding convertible notes and bonds. |
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A $1.00 increase (decrease) in the assumed initial public offering price of $ per share, the midpoint of the range set forth on the cover page of this prospectus, would increase (decrease) the total consideration paid to us by new investors by $ assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and before deducting the estimated underwriting discount and estimated offering expenses payable by us. We may also increase or decrease the number of shares we are offering. Each increase (decrease) in 1,000,000 ordinary shares offered by us would increase (decrease) the total consideration paid to us by new investors by $ , assuming the assumed initial public offering price remains the same and before deducting the estimated underwriting discount and estimated offering expenses payable by us. The as adjusted information discussed above is illustrative only and will change based on the actual offering price, the actual number of ordinary shares offered by us and other terms of this offering determined at pricing.
The table above assumes no exercise of the underwriters’ option to purchase additional ordinary shares in this offering. If the underwriters’ option to purchase additional shares is exercised in full, the number of ordinary shares held by existing shareholders would be reduced to % of the total number of our ordinary shares outstanding after this offering, and the number of ordinary shares held by new investors purchasing ordinary shares in this offering would be increased to % of the total number of our ordinary shares outstanding after this offering.
The number of ordinary shares to be outstanding after this offering is based on 1,729,670 ordinary shares outstanding as of December 31, 2019.
To the extent any outstanding options are exercised, new options are issued under our equity incentive plans, or we issue additional ordinary shares in the future, there will be further dilution to investors participating in this offering.
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The following selected statements of comprehensive loss data for the years ended December 31, 2019 and 2018 and selected balance sheet data as of December 31, 2019 and 2018 have been derived from our financial statements included elsewhere in this prospectus. Our financial statements have been prepared in accordance with U.S. GAAP. Historical results are not necessarily indicative of the results expected in the future.
You should read the following selected financial data in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the financial statements, related notes and other financial information included elsewhere in this prospectus.
Statements of Comprehensive Loss:
(U.S. Dollars, except share and per share data)
| Year Ended December 31, | ||||||||
| 2019 | 2018 | |||||||
| Operating expenses: | ||||||||
| Research and development | $ | (136,000 | ) | $ | (223,000 | ) | ||
| Selling, general and administrative | (553,000 | ) | (277,000 | ) | ||||
| Operating loss | (689,000 | ) | (500,000 | ) | ||||
| Financial expense, net | (590,000 | ) | (328,000 | ) | ||||
| Net loss and comprehensive loss | (1,279,000 | ) | (828,000 | ) | ||||
| Basic and diluted net loss per share | (1.39 | ) | (1.08 | ) | ||||
| Weighted average number of shares of ordinary share used in computing basic and diluted net loss per share | 1,729,670 | 1,729,670 | ||||||
Balance
Sheet Data:
(U.S. Dollars)
| As of December 31, | ||||||||
| 2019 | 2018 | |||||||
| Cash and cash equivalents | $ | 941,000 | $ | 40,000 | ||||
| Restricted cash | 6,000 | 6,000 | ||||||
| Other current assets | 25,000 | 34,000 | ||||||
| Total current assets | 972,000 | 80,000 | ||||||
| Other non-current asset | 192,000 | - | ||||||
| Total current liabilities | 6,339,000 | 18,000 | ||||||
| Convertible debt | - | 4,520,000 | ||||||
| Derivative warrant liability | 447,000 | - | ||||||
| Temporary equity | 6,621,000 | 6,621,000 | ||||||
| Shareholders’ deficit | (12,243,000 | ) | (11,078,000 | ) | ||||
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis of our financial condition and results of operations together with the section titled “Selected Financial Data” and our financial statements and related notes included elsewhere in this prospectus. This discussion and other parts of this prospectus contain forward-looking statements that involve risk and uncertainties, such as statements of our plans, objectives, expectations, and intentions. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the section titled “Risk Factors.” You should carefully read the “Risk Factors” section of this prospectus to gain an understanding of the important factors that could cause actual results to differ materially from our forward-looking statements. Please also see the section entitled “Cautionary Note Regarding Forward-Looking Statements.”
We are a clinical stage specialty pharmaceutical company focused on the reformulation of established therapeutics. Our proprietary extended release drug-delivery system prolongs the in vivo activity of APIs, thus increasing the therapeutic window for patient treatment. Our strategy is to incorporate generic drugs with our proprietary extended release drug-delivery system in order to create extended release drug products and to take advantage of the 505(b)(2) regulatory pathway created by the FDA. The 505(b)(2) new drug application (“NDA”) process, provides for FDA approval of a new drug based in part on data that was developed by others, including published literature references and data previously reviewed by the FDA in its approval of a separate application. Using this pathway can significantly reduce the time and costs associated with clinical development. PRF-110, our first product, is based on the local anesthetic ropivacaine, targeting the post-operative pain relief market. PRF-110 is an oil-based, viscous, clear solution that is deposited directly into the surgical wound bed prior to closure to provide localized and extended post-operative analgesia.
In a small 15 patient Phase 2 proof-of-concept clinical study in herniorrhaphy (hernia repair), PRF-110 provided substantial pain reduction for up to 72 hours post-operatively. A comparison of these results to historical data for ropivacaine alone suggests a substantial advantage to using PRF-110 over the local anesthetic (ropivacaine) alone. As indicated in the FDA approved drug description for ropivacaine, such drug provides pain relief for only 2 to 6 hours. The surgeons that participated in the PRF-110 Phase 2 trial reported that it was easily integrated into the procedure and non-disruptive of existing surgical techniques. Ropivacaine, the active drug used in PRF-110, is a safe and well characterized local anesthetic and the other components that make up the remainder of the PRF-110 formulation are classified as GRAS (Generally Regarded As Safe) by the FDA, mitigating many potential safety issues that are common in drug development. In a phase 1 safety study conducted in Israel, healthy volunteers were treated with PRF-110.
No adverse events were attributed to PRF-110 treatment. Pharmacokinetic studies using subcutaneous administration of PRF-110 in healthy volunteers indicated that PRF-110 had good tolerability including low systemic exposure and no significant clinical adverse events.
Since our inception in November 2007, we have devoted substantially all of our efforts to organizing and planning our business, building our management and technical team, developing our proprietary drug delivery system and PRF-110, and raising capital.
We have never generated any revenue and have funded our business primarily through the sale of our capital share and issuance of convertible loans. We have raised net proceeds of $6.6 million from the sale of convertible preferred shares. As of December 31, 2019 and December 31, 2018, we had $941,000 and $80,000 in cash and cash equivalents, respectively. We recorded net losses of $1,279,000 and $828,000 for the years ended December 31, 2019 and 2018, respectively. As of December 31,2019, we had an accumulated deficit of approximately $12,428,000.
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In December 2019, a novel strain of coronavirus, COVID-19, was identified in Wuhan, China. This virus continues to spread globally and as of March 2020, has spread to over 170 countries, including the United States and Israel. The spread of COVID-19 has resulted in the World Health Organization declaring the outbreak of COVID-19 as a “pandemic,” or a worldwide spread of a new disease. Many countries around the world, including Israel and the United States, have imposed quarantines and restrictions on travel and mass gatherings to slow the spread of the virus. While the spread of COVID-19 has not yet directly impacted our operations, the continued spread of COVID-19 may result in the inability of our outside scientific collaborators, suppliers, consultants, advisors and other third parties to work with us on a timely basis and will likely impact the timing of the initiation of our planned clinical studies and the enrollment of patients. The extent to which COVID-19 impacts our development efforts will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of COVID-19 and the actions to contain COVID-19 or treat its impact, among others.
We expect to continue to incur significant expenses and increasing losses for next several years. Our net losses may fluctuate significantly from period to period, depending on the timing of our planned clinical trials and expenditures on our other research and development and commercial development activities. We expect our expenses will increase substantially over time as we:
| ● | continue the ongoing and planned preclinical and clinical development of our drug candidates; |
| ● | build a portfolio of drug candidates through the acquisition or in-license of drugs, drug candidates or technologies; |
| ● | initiate preclinical studies and clinical trials for any additional drug candidates that we may pursue in the future; |
| ● | seek marketing approvals for our current and future drug candidates that successfully complete clinical trials; |
| ● | establish a sales, marketing and distribution infrastructure to commercialize any drug candidate for which we may obtain marketing approval; |
| ● | develop, maintain, expand and protect our intellectual property portfolio; |
| ● | implement operational, financial and management systems; and |
| ● | attract, hire and retain additional administrative, clinical, regulatory and scientific personnel. |
Financial Operations Overview
Revenue
We have not generated any revenue and do not expect to generate any revenue unless or until we obtain regulatory approval of and commercialize one or more of our current or future drug candidates. In the future, we may also seek to generate revenue from a combination of research and development payments, license fees and other upfront or milestone payments.
Research and Development Expenses
Research and development expenses consist primarily of costs incurred for our research activities, which include, among other things:
| ● | employee-related expenses, including salaries, benefits and stock-based compensation expense; |
| ● | fees paid to consultants for services directly related to our drug development and regulatory effort; |
| ● | expenses incurred under agreements with contract research organizations, as well as contract manufacturing organizations and consultants that conduct preclinical studies and clinical trials; |
| ● | costs associated with preclinical activities and development activities; |
| ● | costs associated with technology and intellectual property licenses; |
| ● | milestone payments and other costs under licensing agreements; and |
| ● | depreciation expense for assets used in research and development activities. |
Costs incurred in connection with research and development activities are expensed as incurred. Costs for certain development activities, such as clinical trials, are recognized based on an evaluation of the progress to completion of specific tasks using data such as patient enrollment, clinical site activations or other information provided to us by our vendors.
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Research and development activities are and will continue to be central to our business model. We expect our research and development expenses to increase for the foreseeable future as we advance our current and future drug candidates through preclinical studies and clinical trials. The process of conducting preclinical studies and clinical trials necessary to obtain regulatory approval is costly and time-consuming. It is difficult to determine with certainty the duration and costs of any preclinical study or clinical trial that we may conduct. The duration, costs and timing of clinical trial programs and development of our current and future drug candidates will depend on a variety of factors that include, but are not limited to, the following:
| ● | number of clinical trials required for approval and any requirement for extension trials; |
| ● | per patient trial costs; |
| ● | number of patients that participate in the clinical trials; |
| ● | number of sites included in the clinical trials; |
| ● | countries in which the clinical trial is conducted; |
| ● | length of time required to enroll eligible patients; |
| ● | potential additional safety monitoring or other studies requested by regulatory agencies; and |
| ● | efficacy and safety profile of the drug candidate. |
In addition, the probability of success for any of our current or future drug candidates will depend on numerous factors, including competition, manufacturing capability and commercial viability. We will determine which programs to pursue and how much to fund each program in response to the scientific and clinical success of each drug candidate, as well as an assessment of each drug candidate’s commercial potential.
General and Administrative Expenses
General and administrative expenses consist primarily of employee-related expenses, including salaries, benefits and share-based compensation. Other general and administrative expenses include travel expenses, conferences, professional fees for consultants, tax and legal services and facility-related costs.
We expect that general and administrative expenses will increase in the future as we expand our operating activities and incur additional costs associated with being a publicly traded company. These increases will include legal and accounting fees, costs associated with maintaining compliance with The NASDAQ Stock Market LLC and the Securities and Exchange Commission, or the SEC, directors’ and officers’ liability insurance premiums and fees associated with investor relations. In addition, if our current or future drug candidates are approved for sale, we expect that we would incur expenses associated with building our commercial and distribution infrastructure.
Financial Expenses, Net
Financial expenses, net, primarily consists from accrued interest on convertible notes, bank management fees and commissions and exchange rate differences expenses.
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Results of Operations
Year Ended December 31, 2019 Compared to Year Ended December 31, 2018
| Year Ended December 31, | ||||||||
| 2019 | 2018 | |||||||
| Operating expenses: | ||||||||
| Research and development | $ | 136,000 | $ | 223,000 | ||||
| General and administrative | 553,000 | 277,000 | ||||||
| Total operating costs | 689,000 | 500,000 | ||||||
| Financial expenses | 590,000 | 328,000 | ||||||
| Net loss | $ | 1,279,000 | $ | 828,000 | ||||
Operating Expenses
Research and development expenses. Research and development expenses were $136,000 for the year ended December 31, 2019 compared to $223,000 for the year ended December 31, 2018, a decrease of $87,000 or 39%. In 2019, the components of our research and development expenses were: (i) Salary expenses of $59,419 (ii) patent prosecution expenses of $41,557; (iii) costs of chemistry, manufacturing and controls of $19,667; (iv) share based compensation expenses of $14,000; (v) payments to consultants of $1,479 and (vi) costs associated with clinical and pre-clinical trials of less than $1,000. In 2018, the components of our research and development expenses were: (i) costs associated with pre-clinical trials of $69,279; (ii) payments to consultants of $61,706; (iii) patent prosecution expenses of $51,232; and (iv) costs of chemistry, manufacturing and controls of $41,360.The decrease in research and development expenses during 2019 period is primarily due to our decreased use of subcontractors and consultants following completion of two clinical trials.
General and administrative expenses. General and administrative expenses were $553,000 for the year ended December 31, 2019 compared to $277,000 for the year ended December 31, 2018, an increase of $276,000 or 99.6%. The increase in general and administrative expenses is primarily due to a $124,000 increase in professional services and consultants’ fees, an increase of $60,000 in payroll and related expenses (The increase in payroll and related expenses related to our entering into an agreement with Professor Eli Hazum, our Acting Chief Executive Officer and Chief Technology Officer, effective April 2018 (previously Professor Hazum provided consultancy services to the company through and under the management services provided by Zori Medica (2010) Ltd.) and an increase of $75,000 in share-based payment expenses.
Financial expenses. Financial expense was $590,000 for the year ended December 31, 2019 compared to financial expenses of $328,000 for the year ended December 31, 2018, an increase of $262,000 or 78.8%. The increase is primarily due to a $161,000 increase in finance expenses from the amortization of the loan discount on the August and December convertible notes, a $55,000 increase in accrued interest expense with respect to our outstanding convertible debt and a $47,000 increase in issuance costs allocated to the derivative warrants.
Net loss. As a result of the foregoing, we incurred a net loss of $1,279,000 for the year ended December 31, 2019 compared to a net loss of $828,000 for the year ended December 31, 2018, an increase of $451,000 or 54.4%.
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Liquidity and Capital Resources
Overview
Since our inception through December 31, 2019, we have raised aggregate net proceeds of $6,621,000 from the sale of convertible preferred shares and issuance of $3,929,000 of convertible notes, which was used to fund our operations. In August and December 2019, we completed a bridge financing consisting of convertible notes and warrants in the total principal amount of $1,562,000. As of December 31, 2019, we had an accumulated deficit of approximately $12,428,000, cash and cash equivalents of $941,000 and negative working capital.
From 2014 to 2018, we issued convertible notes to our investors who were already existing shareholders. The convertible notes bear interest at a rate of 8% compounded annually and are due on December 31, 2020. As of December 31, 2019, the principal amount of convertible notes outstanding was $[ ]. Each of the holders of the convertible notes may convert the convertible notes held by them into Series A-1 Preferred Shares, par value NIS 0.01, at a price of $0.747 per share. If the conversion option is not exercised as of the end of the loan term, we are entitled to pay each holder the principal outstanding plus accrued interest. Upon the closing of a qualified investment (the issuance of $3,000,000 of preferred securities to a third party), the convertible notes will be automatically converted into securities of our company on the same terms and conditions as in such qualified investment. The conversion will be on the same terms and conditions and bearing the same rights, subject to a conversion price per share equal to the lowest price per share paid under the qualified investment, less an agreed upon percentage equal to 3% multiplied by the number of months from the grant date of issuance of the applicable convertible note.
In August and December 2019, we sold units consisting of convertible notes and warrants to purchase ordinary shares of our company to accredited investors in a private placement for total proceeds of $1,420,000. Each unit consisted of (i) a 5% senior secured convertible promissory note in the principal amount of $110,000 that matures one year after issuance, and (ii) a five-year warrant to purchase a number of our ordinary shares. The principal balance and unpaid accrued interest on these senior secured convertible promissory notes will automatically convert into our ordinary shares upon the closing of a qualified IPO (such as this offering) at a per share conversion price equal to the lesser of (i) 70% of the per share purchase price of shares or other units in the qualified IPO and (ii) the quotient obtained by dividing (x) $30,000,000 by (y) our fully diluted capitalization immediately prior to the qualified IPO.
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Each investor was issued a warrant to purchase ordinary shares of the company at a per share exercise price equal to (a) if a qualified IPO has occurred on or before one calendar year after the issuance, 120% of the conversion price or (b) if a qualified IPO has not occurred on or before one calendar year after the issuance at a conversion price of $0.8475. The number of ordinary shares issuable upon exercise of each warrant if a qualified IPO has occurred on or before one calendar year after the issuance, will be determined by dividing $110,000 by the conversion price of the convertible notes. If a qualified IPO has not occurred on or before one calendar year after the issuance, the number of ordinary shares issuable upon exercise of each warrant will be determined by dividing ) $110,000 by $0.8475. The warrants contain an anti-dilution protection feature, to adjust the exercise price and number of warrant shares if ordinary shares are sold or issued for a consideration per share less than the exercise price then in effect.
We have incurred losses and experienced negative operating cash flows since our inception and anticipate that we will continue to incur losses for at least the next several years. We incurred net losses of approximately $1,279,000 and $828,000 for the years ended December 31, 2019 and 2018, respectively.
We believe following this offering, we will have sufficient funds to fund our current operating plans through at least the next 12 months.
Until such time, if ever, as we can generate revenue, we expect to finance our cash needs through a combination of equity offerings, debt financings and potential collaborations, license and development agreements. To the extent that we raise additional capital through future equity offerings or debt financings, your ownership interest will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect your rights as a shareholder. Debt and equity financings, 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. There can be no assurance that such financings will be obtained on terms acceptable to us, if at all. If we are unable to raise additional capital in sufficient amounts or on terms acceptable to us we may have to significantly delay, scale back or discontinue our research and development programs or future commercialization efforts. If we raise additional funds through collaborations, strategic alliances or marketing, distribution or licensing arrangements with third parties for one or more of our current or future drug candidates, we may be required to relinquish valuable rights to our technologies, future revenue streams, research programs or drug candidates or to grant licenses on terms that may not be favorable to us. Our failure to raise capital as and when needed would have a material adverse effect on our financial condition and our ability to pursue our business strategy.
Cash Flows
The following table sets forth the major components of our statements of cash flows for the periods presented:
Year Ended December 31, 2019 | Year Ended December 31, 2018 | |||||||
| Net cash used in operating activities | $ | (609,000 | ) | $ | (635,000 | ) | ||
| Net cash used in investing activities | - | - | ||||||
| Net cash provided by financing activities | 1,510,000 | 488,000 | ||||||
| Increase (decrease) in cash and cash equivalents and restricted cash | 901,000 | (147,000 | ) | |||||
| Cash and cash equivalents and restricted cash, at the beginning of year | 46,000 | 193,000 | ||||||
| Cash and cash equivalents and restricted cash, at the end of year | $ | 947,000 | $ | 46,000 | ||||
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Net cash used in operating activities
For the years ended December 31, 2019 and 2018, net cash used in operating activities was $609,000 and $635,000, respectively. The decrease in net cash used in operating activities was mainly due to an increase in net loss of $451,000 and an increase in other current assets of $169,000 (out of which, $192,000 relates to deferred offering costs related to the IPO) which was offset by a decrease in other account payables of $205,000, an increase in accrued interest and amortization of a discount on convertible notes of $217,000, an increase in share-based compensation expense of $89,000 and an increase in convertible loan issuance costs of $47,000. The decrease in other account payables was due to the decrease in utilization of subcontractors and consultants following completion of two clinical trials.
Net cash used in investing activities
For the years ended December 31, 2019 and 2018, the change in net cash used in investing activities was immaterial.
Net cash provided by financing activities
For the years ended December 31, 2019 and 2018, net cash provided by financing activities was $1,510,000 and $488,000, respectively. The increase in net cash provided by financing activities was mainly due to the proceeds received from the sale in August and December 2019 of units consisting of $1,562,000 of convertible notes and warrants to purchase ordinary shares of our company.
Contractual Obligations
As of December 31, 2019, we had the following contractual obligations, as defined in the rules and regulations of the SEC.
| Payments due by period | ||||||||
| Less than 1 year | Total | |||||||
| Other accounts payable | $ | 166,000 | $ | 166,000 | ||||
| Convertible notes and August and December 2019 Convertible Notes | 6,723,000 | 6,723,000 | ||||||
| Total | $ | 6,889,000 | $ | 6,889,000 | ||||
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Off-Balance Sheet Arrangements
We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined in the rules and regulations of the SEC.
Quantitative and Qualitative Disclosures about Market Risk
Foreign Exchange Risk
Our reporting and functional currency is the U.S. dollar, but some portion of our operational expenses are in the New Israeli Shekel and Euro. As a result, we are exposed to some currency fluctuation risks. We may, in the future, decide to enter into currency hedging transactions to decrease the risk of financial exposure from fluctuations in the exchange rate of the currencies mentioned above in relation to the NIS. These measures, however, may not adequately protect us and our operations could be adversely affected if we are unable to effectively hedge against currency fluctuations in the future.
Liquidity risk
We monitor forecasts of our liquidity reserve (comprising cash and cash equivalents). We generally carry this out based on our expected cash flows in accordance with practice and limits set by our management. We are in the process of expanding our operations and the expenses associated therewith and we are therefore exposed to liquidity risk. However, we believe that our existing funds, together with the net proceeds from this offering, will enable us to fund our operating expenses and capital expenditure requirements for the twelve months following this offering.
Critical Accounting Policies and Judgments and Estimates
Our statements are prepared in accordance with GAAP. Some of the accounting methods and policies used in preparing our financial statements under GAAP are based on complex and subjective assessments by our management or on estimates based on past experience and assumptions deemed realistic and reasonable based on the circumstances concerned. The actual value of our assets, liabilities and shareholders’ equity and of our accumulated deficit could differ from the value derived from these estimates if conditions change and these changes had an impact on the assumptions adopted. See Note 2 to our financial statements for a description of our significant accounting policies.
Derivative warrant liability
During the year ended December 31, 2019, the Company issued warrants related to its August and December 2019 convertible notes. The warrants were classified as liabilities and measured at fair value on the issuance date and as of December 31, 2019 with changes in fair value recognized as finance expenses in the statements of comprehensive loss.
We determined the fair value of the Company's warrants using Black-Scholes model of which the most significant assumption was the underlying share price and volatility.
As there has been no public market for our ordinary shares to date, a third-party valuation was performed as of the issuance date of the warrants and as of December 31, 2019 to arrive at the ordinary share price. The Company's value was determined using the income approach which involved forecasting future cash flows and costs for each period under various scenarios.
The Company's ordinary share value was determined using the option pricing method which allocated the company’s value between ordinary, preferred shares and employee options based on a standard model for pricing options.
Expected volatility for the Company’s ordinary shares was calculated based on comparable public companies in the same industry.
The assumptions underlying the aforementioned valuations represent our board’s and management’s best estimates, which involve inherent uncertainties and the application of significant judgment. The fair value of the derivative warrant liability could be difference if factors or expected outcomes change and we use significantly different assumptions or estimates.
Following the closing of this offering, the underlying ordinary share value used in calculating the fair value of the derivative warrant liability will be determined based on the quoted market price of our ordinary shares.
Share Based Compensation
General and administrative expenses include share based compensation to the company’s Chief Executive Officer and Chief Operating Officer. Fair value of share based compensation was obtained using a the Black & Scholes option pricing model, which requires a number of assumptions, of which the most significant are the expected share price, volatility, and the expected option term. Expected volatility was calculated based on comparable public companies in the same industry. The expected share option term is calculated for share options granted to employees, non-employees and directors using the “simplified” method. The risk-free interest rate is based on the yield from U.S. treasury bonds with an equivalent term.
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Controls and Procedures
We are not currently required to comply with the SEC rules that implement Sections 302 and 404 of the Sarbanes-Oxley Act, and we are therefore not required to make a formal assessment of the effectiveness of our internal control over financial reporting for that purpose. Upon becoming a public company, we will be required to comply with certain of these rules, which will require management to certify financial and other information in our annual reports and provide an annual management report on the effectiveness of our internal control over financial reporting in future Annual Reports on Form 20-F. Only in the event that we are deemed to be a large accelerated filer or an accelerated filer would we be required to comply with the independent registered public accounting firm attestation requirement. Further, for as long as we remain an emerging growth company as defined in the JOBS Act, we intend to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies including, but not limited to, not being required to comply with the independent registered public accounting firm attestation requirement.
We may have internal controls that need improvement in areas such as:
| ● | staffing for financial, accounting and external reporting areas, including segregation of duties; | |
| ● | reconciliation of accounts; |
| ● | proper recording of expenses and liabilities in the period to which they relate; | |
| ● | evidence of internal review and approval of accounting transactions; | |
| ● | documentation of processes, assumptions and conclusions underlying significant estimates; and | |
| ● | documentation of accounting policies and procedures. |
Because it will take time, management involvement and perhaps outside resources to determine what internal control improvements are necessary for us to meet regulatory requirements and market expectations for our operation, we may incur significant expenses in meeting our public reporting responsibilities, particularly in the areas of designing, enhancing, or remediating internal and disclosure controls. Doing so effectively may also take longer than we expect, thus increasing our exposure to financial fraud or erroneous financial reporting.
JOBS Act Exemptions and Foreign Private Issuer Status
We qualify as an “emerging growth company” as defined in the U.S. Jumpstart Our Business Startups Act of 2012, or the JOBS Act. An emerging growth company may take advantage of specified reduced reporting and other burdens that are otherwise applicable generally to public companies. This includes an exemption from the auditor attestation requirement in the assessment of our internal control over financial reporting pursuant to the Sarbanes-Oxley Act of 2002. We may take advantage of this exemption for up to five years or such earlier time that we are no longer an emerging growth company. We will cease to be an emerging growth company if we have more than $1.07 billion in total annual gross revenue, have more than $700.0 million in market value of our ordinary shares held by non-affiliates or issue more than $1.0 billion of non-convertible debt over a three-year period. We may choose to take advantage of some but not all of these provisions that allow for reduced reporting and other burdens.
Upon consummation of this offering, we will report under the Securities Exchange Act of 1934, as amended, or the Exchange Act, as a non-U.S. company with foreign private issuer status. Even after we no longer qualify as an emerging growth company, as long as we qualify as a foreign private issuer under the Exchange Act, we will be exempt from certain provisions of the Exchange Act that are applicable to U.S. domestic public companies, including:
| ● | the sections of the Exchange Act regulating the solicitation of proxies, consents or authorizations in respect of a security registered under the Exchange Act; | |
| ● | the sections of the Exchange Act requiring insiders to file public reports of their stock ownership and trading activities and liability for insiders who profit from trades made in a short period of time; |
| ● | the rules under the Exchange Act requiring the filing with the SEC of quarterly reports on Form 10-Q containing unaudited financial and other specified information, or current reports on Form 8-K, upon the occurrence of specified significant events; and | |
| ● | Regulation FD, which regulates selective disclosures of material information by issuers. |
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| Overview |
We are a clinical stage specialty pharmaceutical company focused on the reformulation of established therapeutics. Our proprietary extended release drug-delivery system prolongs the in vivo activity of APIs (active pharmaceutical ingredients), thus increasing the therapeutic window for patient treatment. Our strategy is to incorporate generic drugs with our proprietary extended release drug-delivery system in order to create extended release drug products and to take advantage of the 505(b)(2) regulatory pathway created by the U.S. Food and Drug Administration (“FDA”). The 505(b)(2) new drug application (“NDA”) process, provides for FDA approval of a new drug based in part on data that was developed by others, including published literature references and data previously reviewed by the FDA in its approval of a separate application. PRF-110, our first product, is based on the local anesthetic ropivacaine, targeting the post-operative pain relief market. PRF-110 is an oil-based, viscous, clear solution that is deposited directly into the surgical wound bed prior to closure to provide localized and extended post-operative analgesia.
In a small 15 patient Phase 2 proof-of-concept clinical study in hernia repair, PRF-110 provided substantial pain reduction for up to 72 hours post-operatively. A comparison of these results to historical data for ropivacaine alone suggests a substantial advantage to using PRF-110 over the local anesthetic, ropivacaine, alone. As indicated in the FDA approved drug description, ropivicaine provides pain relief for only 2 to 6 hours. The surgeons that participated in the PRF-110 Phase 2 trial reported that it was easily integrated into the procedure and was non-disruptive of existing surgical techniques. Ropivacaine, the active drug used in PRF-110, is a safe and well characterized local anesthetic and the other components that make up the remainder of the PRF-110 formulation are classified as GRAS (Generally Regarded As Safe) by the FDA, mitigating many potential safety issues that are common in drug development.
The Opportunity
We believe that there is a great unmet need for effective, long-lasting, non-opiate treatments for post-operative pain. The current market in post-operative pain treatment is approximately $12 billion, which is expected to grow to over $45 billion by the end of 2026 (Persistence Market Research, 2018). These market projections are based on the current generation of post-operative pain products, which largely consist of systemically administered opiates. At present, most of the available analgesics are dosed every four to six hours, requiring nursing attention when in the hospital, or discharge of the patients with an excess of drugs to treat anticipated pain. This exposure to opiates is a significant risk factor leading to opiate abuse disorder (Hah, et al. Chronic Opioid Use After Surgery: Implications for Perioperative Management in the Face of the Opioid Epidemic. 2017). PRF-110 was created to prolong analgesia at the surgical site, thus facilitating early post-operative ambulation, speeding recovery and reducing time in hospital. In addition, it is anticipated that PRF-110 will reduce opiate exposure and thereby lessen the risk of opiate abuse disorder.
As reported by the Center for Disease Control and Prevention (“CDC”) in 2017, there are more than 48 million surgical procedures performed annually in the U.S. in both hospitals and in ambulatory surgery centers. We believe that many of these invasive and painful procedures should be eligible for treatment with extended release ropivacaine through our product, PRF-110. As reported in Pharmacotherapy, 2013, 99% of all surgeries are treated with opiates. The extended release nature of PRF-110 is intended to reduce pain for up to 72 hours from the time of surgery, thereby obviating/diminishing the need for additional pain medications. The only currently available extended release product (Exparel) was used in slightly more than 1 million surgeries in 2018. We believe that its comparatively high price of approximately $300 per dose has hampered wide spread acceptance to date.
We believe that PRF-110 will significantly extend post-operative analgesia, will be significantly cheaper to produce than the currently available extended release product and, unlike that product, will not require delicate handing. We plan to launch PRF-110 either by ourselves or with a strategic partner that is experienced in marketing products in surgical environments.
The Potential to Positively Impact the Opioid Epidemic
There is a societal imperative to reduce opioid use. While opioids are a valuable tool in the treatment of severe pain, especially post-surgical pain, their use carries a significant risk of abuse. Opiate-based analgesia is currently a mainstay of post-operative pain management: According to a medical study, 99% of all surgical patients receive opiates as part of their post-operative care. It has been found that chronic opiate misuse and dependency can begin with as little as three days of post-operative treatment. The current thinking in the field of pain management is that limiting opioid exposure in the post-operative period is likely to have a positive impact on future opiate misuse and dependency rates. We have developed PRF-110 with this in mind. However, until longitudinal studies to test this hypothesis are completed, we cannot state with certainty that the use of PRF-110 will have a material impact on the opiate epidemic.
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Post-operative patients heal faster and with few complications when their pain is reduced, which results in faster ambulation and reduced need for opiate analgesia. PRF-110 is intended meet the goal of extended surgical site anesthesia with a reduced need for opiate treatment. Initially, PRF-110 will be used to address only a small percentage of the surgical procedures requiring post-operative analgesia.
Our Vision
We believe that patients deserve safe, effective, lasting treatments that are cost effective. PRF-110 is an embodiment of this philosophy. Our studies to date have shown that a single application of PRF-110, either instilled directly into a surgical wound, or injected, provides safe, extended analgesia/anesthesia without the potential complications of opiates or nonsteroidal anti-inflammatory drugs. Moreover, PRF-110 has comparatively modest production costs compared the currently available extended release product. With a largely unmet need in the post-operative pain market, we believe that there is a great market opportunity for such a product.
The 505(b)(2) NDA pathway provides the fastest, most efficient way to deliver proven, safe and well-studied APIs in a novel, proprietary form to provide extended release to address unmet medical needs. Utilizing this pathway, PRF-110 is a Phase 3-ready drug, with an approved IND (investigational new drug) application, in which we have paired our patented, proprietary extended release drug-delivery system with the well-characterized, safe and approved local anesthetic ropivacaine, to treat post-surgical pain. We believe that PRF-110 embodies our vision of drug development:
| ● | addressing unmet medical needs; |
| ● | de-risked drug development by using long-established APIs and our patented, proprietary extended release drug-delivery system; |
| ● | reduced development costs; |
| ● | rapid preclinical and clinical testing; |
| ● | well understood paths to approval: and |
| ● | the potential to disrupt current practices. |
Advantages of PRF-110
PRF-110 is a viscous clear oil-based solution that is instilled (deposited) directly into the surgical wound to provide localized and extended post-operative analgesia. Its physical characteristics and composition are key to it being well-tolerated and ease of use:
| ● | PRF-110 is highly viscous and thus stays in place when placed into a surgical wound bed. |
| ● | PRF-110 remains within the surgical site when the skin is closed, without being toxic or proinflammatory. |
| ● | PRF-110 is easy to administer and its use is consistent with current surgical practice. |
| ● | PRF-110 is highly uniform and resistant to degradation in the wound, resulting is sustained,/extended release of the analgesic. |
| ● | Ropivacaine, the active drug used in PRF-110, is a safe and well-characterized local anesthetic. |
| ● | The components that make up the remainder of the PRF-110 formulation are classified as GRAS (Generally Regarded As Safe) by the FDA. |
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A hernia repair phase 2 clinical study was conducted in 15 hernia patients at the Sourasky Medical Center, the Galilee Medical Center and the Assaf Harofeh Medical Center, all located in Israel. The primary objective of the study was to evaluate the safety and tolerability of PRF 110 following hernia repair surgery performed by abdominal incision. The secondary objective was to evaluate pain intensity and the use of rescue pain medications following hernia surgery and application of PRF 110 at the incision site. While this study was not powered to determine statistical significance, a comparison of these results to placebo historical data evidenced lower average pain scores for up to 72 hours in comparison to the use of ropivacaine alone, which provided pain relief for only 2 to 6 hours. PRF-110 was well tolerated and demonstrated an excellent pharmacotoxicity profile, with no serious adverse events ascribed to the drug. The participating surgeons found the application of the product to be easy and compliant with standard surgical techniques. Prior to undertaking the Phase 2 study, PRF-110 was rigorously tested, at the request of the FDA, in preclinical models of wound healing in which it was shown to have no effect on the strength of the healed skin, no effect on bones and no effect on the integrity of sutures of surgical mesh. Based on extensive toxicology and pharmacokinetic studies, as well as positive Phase 2 results, the FDA has granted our company an IND (Investigational New Drug) for PRF-110 and approved the initiation of Phase 3 trials for the treatment of post-operative pain.
PRF-110 is made with a very efficient, scalable manufacturing process which contributes to a cost of goods that we anticipate will be extremely competitive. We believe this will facilitate a future sales strategy to be both flexible and profitable.
In contrast to the oil-based PRF-110, the only currently marketed non-opiate extended relief post-surgical topical product, is a liposomal formulation containing bupivacaine. Liposomes require special handling, are fragile, and the product is a water-based suspension of liposomes. Mishandling of drug-filled liposomes is known to result in the release of the free drug into the water, and thus reduce efficacy over time. Moreover, the physical characteristic of this product requires multiple injections which is a burdensome task to the surgeon. In comparison, PRF-110 is simply applied into the wound, prior to suturing.
Our Strategy
We operate as a virtual company which has allowed for considerable cost savings in personnel and physical plant expenses, while expediting the decision-making process. Our three experienced employees are empowered to make decisions about critical issues in drug development, which are then carried out on a fee-for-service basis. We do not own or operate our own laboratory, rather the work is outsourced. We benefit by paying only for the work done and not having a constant overhead. This process has allowed us to optimize the development of PRF-110.
Moving forward, our first priority is to continue the drive toward commercialization of PRF-110. Upon completion of this offering, we plan to expeditiously begin our Phase 3 clinical trials as we move toward an NDA and PRF-110 approval. We believe that we are well positioned to accomplish this:
| ● | We have amassed a human toxicology portfolio for PRF-110, demonstrating that there are no PRF-110-asociated serious adverse events in either healthy controls or in surgical patients. |
| ● | Based on extensive toxicology and pharmacokinetic studies, as well as positive Phase 2 results, the FDA has granted our company an IND for PRF-110 and approved the initiation of Phase 3 trials for the treatment of post-operative pain. |
| ● | Unlike many drug trials that take months to years to complete and which are complex and whose endpoints are difficult to interpret, the planned trials are expected to last for a brief number of days with a one-month follow-up, with primary endpoints based on measurement on the familiar scale of 1 (no pain) to 10 (worst imaginable pain). |
| ● | Upon completion of the Phase 3 studies, if successful, we plan to apply for a New Drug Approval for the management of post-operative pain. |
| ● | If and when approved for commercial sale, we intend to capitalize on the opportunity and carry out post-approval trials in a number of additional surgical indications, including breast augmentation/reduction, bariatric procedures, hysterectomy, cholecystectomy as well as orthopedic procedures including joint replacements and open fracture repair. We intend to capitalize on these opportunities to become the leader in opiate-free, long-acting local and regional analgesia. |
Following the establishment of PRF-110 in the post-operative pain market, we plan to build on our platform technology to broaden our product base. Our extended release drug-delivery system is a unique non-aqueous, viscous formulation that can be used for the delivery of many drugs that are currently difficult to administer for long-term, continuous dosing without an iv access, including antibiotics and chemotherapeutics. We intend to develop a pipeline of drugs than can be delivered once, using our platform technology, and thereafter be bio-available for extended release.
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In addition, if successful, we plan to expand by developing, acquiring or in-licensing products or technologies that we believe will be a strategic fit with our focus on the surgical and hospital marketplace. Once approved, we plan to launch PRF-110 either by ourselves or with a strategic partner that is experienced in marketing products in surgical environments. The environments include:
| ● | Hospitals; |
| ● | Free-standing surgical centers; and |
| ● | Surgical offices. |
Our Commitment to Research and Innovation
Our commitment to research and innovation is best witnessed by the fact that we developed both our proprietary platform technology and PRF-110 “in-house,” without in-licensing. We believe we have the leadership onboard and intend to recruit additional personnel to continue in this tradition, as we continue to build our product line of extended release products, both in pain and in other indications having unmet or underserved needs.
| Manufacturing |
We currently contract with third parties for the manufacture of our product candidates for certain preclinical trials and clinical trial materials, including raw materials and consumables necessary for their manufacture, consistent with applicable cGMP requirements. We intend to continue to contract for these materials in the future, including commercial manufacture, if our product candidates receive marketing approval. We do not own or operate cGMP manufacturing facilities, nor do we currently plan to build our own cGMP manufacturing capabilities for the production of our product candidates for clinical or commercial use. Although we rely upon contract manufacturers for the manufacture of our product candidates for IND-enabling trials and clinical trials, we have personnel with extensive manufacturing experience who oversee our contract manufacturers. In the future, we may also rely upon collaboration partners, in addition to contract manufacturers, for the manufacture of our product candidates or any products for which we obtain marketing approval.
Intellectual Property
We strive to protect the proprietary technologies that we believe are important to our business, including seeking and maintaining patent protection intended to cover our extended release drug-delivery system.
Our success will depend significantly on our ability to obtain and maintain patent and other proprietary protection for commercially important technology, inventions, and know-how related to our business, defend and enforce our patents, preserve the confidentiality of our trade secrets, and operate without infringing the valid and enforceable patents and other proprietary rights of third parties.
A third party may hold intellectual property, including patent rights, which are important or necessary to the development or commercialization of our future product candidates. If it becomes necessary for us to use patented or proprietary technology of third parties to develop or commercialize our product candidates, we may need to seek a license from such third parties. Our business could be harmed, possibly materially, if we are unable to obtain such a license on terms that are commercially reasonable, or at all.
We may seek to expand our intellectual property estate by filing patent applications directed to dosage forms, methods of treatment, indications, formulations and additional compounds and their derivatives. Specifically, we have sought and will continue to seek patent protection in the U.S. and internationally for PRF-110 and our proprietary extended release drug-delivery system. The chemical structure of ropivacaine, the API contained in PRF-110 is in the public domain. Accordingly, we do not own or license any composition of matter patents claiming the ropivacaine compound and will not in the future own or license any composition of matter patents claiming the chemical structure of ropivacaine as described in the public domain.
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The patent positions of biopharmaceutical companies like us are generally uncertain and involve complex legal, scientific and factual questions. In addition, the coverage claimed in a patent application can be significantly reduced before the patent is issued, and its scope can be reinterpreted after issuance. Consequently, we do not know whether PRF-110 or any future product candidates will be protectable or remain protected by enforceable patents. We cannot predict whether the patent applications we are currently pursuing will issue as patents in any particular jurisdiction or whether the claims of any issued patents will provide sufficient proprietary protection from competitors. Any patents that we hold may be challenged, circumvented or invalidated by third parties.
Because patent applications in the U.S. and certain other jurisdictions are maintained in secrecy for 18 months, and since publication of discoveries in the scientific or patent literature often lags actual discoveries, we cannot be certain of the priority of inventions covered by pending patent applications. Moreover, we may have to participate in interference proceedings declared by the U.S. Patent and Trademark Office, or USPTO, to determine priority of invention or in post-grant challenge proceedings at the USPTO or at a foreign patent office, such as inter partes review and post grant review proceedings at the USPTO and opposition proceedings at the European Patent Office, that challenge priority of invention or other features of patentability. Such proceedings could result in substantial cost, even if the eventual outcome is favorable to us. For more information regarding the risks related to our intellectual property, see “Risk Factors—Risks Related to Our Intellectual Property.”
Patent portfolio
Our patent portfolio is currently based on formulation patents and methods of use patents for PRF-110 and a second set of patents that cover the formulation, manufacturing and composition of a lipid-based, nonaqueous drug delivery system. As of December 31, 2019, our patent portfolio includes fourteen (14) issued patents, of which three (3) are U.S. patents and eleven (11) are foreign patents in Australia, China, Israel, Japan, and the Russian Federation. In addition, we have five (5) foreign patent applications that are pending in India, the EU, and Canada.
The priority date of the applications was May 2013. In general, most patents have a 20 year life-time, however certain extensions may be applied to drugs under development pursuant to The Hatch-Waxman Act. As such, the earliest expiry date would be May 2033, which under certain conditions could possibly be extended to 2040 or beyond.
Intellectual property protection
The term of individual patents depends upon the legal term of the patents in the countries in which they are obtained. In most countries in which we file, the patent term is 20 years from the earliest date of filing a non-provisional patent application.
In the U.S., the Hatch-Waxman Act permits a patent holder to apply for patent term extension of a patent that covers an FDA-approved drug, which, if granted, can extend the patent term of such patent to compensate for part of the patent term lost during the FDA regulatory review process. This extension can be for up to five years beyond the original expiration date of the patent. The length of the patent term extension is related to the length of time the drug is under regulatory review. Patent term extension cannot extend the remaining term of a patent beyond a total of 14 years from the date of product approval, only one patent applicable to an approved drug may be extended and only those claims covering the approved drug, a method for using it, or a method for manufacturing it may be extended.
Similar provisions are available in Europe and other non-U.S. jurisdictions to extend the term of a patent that covers an approved drug. In the future, if and when our product candidates receive FDA approval, we expect to apply for patent term extensions on patents covering those product candidates. While we intend to seek patent term extensions to any of our patents in any jurisdiction where such extensions are available, there is no guarantee that the applicable authorities, including the FDA and the USPTO in the U.S., will agree with our assessment of whether such extensions should be granted, and even if granted, the length of such extensions.
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In addition to our reliance on patent protection for our product candidates and research programs, we also rely on trade secrets and confidentiality agreements to protect our technology, know-how and other aspects our business that are not amenable to, or that we do not consider appropriate for, patent protection. Although we take steps to protect our proprietary information and trade secrets, including through contractual means with our employees and consultants, third parties may independently develop substantially equivalent proprietary information and techniques or otherwise gain access to our trade secrets or disclose our technology. Thus, we may not be able to meaningfully protect our trade secrets. It is our policy to require our employees, consultants, outside scientific collaborators, sponsored researchers and other advisors to execute confidentiality agreements upon the commencement of employment or consulting relationships with us. These agreements provide that all confidential information concerning our business or financial affairs developed or made known to the individual or entity during the course of the party’s relationship with us is to be kept confidential and not disclosed to third parties except in specific circumstances. In the case of employees, the agreements provide that all inventions conceived by the individual, and which are related to our current or planned business or research and development or made during normal working hours, on our premises or using our equipment or proprietary information, are our exclusive property. However, such confidentiality agreements and invention assignment agreements can be breached and we may not have adequate remedies for any such breach. For more information regarding the risks related to our intellectual property, see “Risk Factors—Risks Related to Our Intellectual Property.”
Competition
The pharmaceutical industry is extremely competitive. PRF-110, if approved, will compete in a highly competitive market. Our competitors in this market may succeed in developing products that could render PRF-110 and future product candidates obsolete or non-competitive. Many of our potential competitors have significantly more financial, technical and other resources than we do, which may give them a competitive advantage. In addition, they may have substantially more experience in effecting strategic combinations, in-licensing technology, developing drugs, obtaining regulatory approvals and manufacturing and marketing products. We cannot give any assurances that we can compete effectively with these other biotechnology and pharmaceutical companies.
If we are able to successfully develop PRF-110 for postoperative pain management, we will compete with EXPAREL® (bupivacaine liposome injectable suspension, marketed by Pacira Pharmaceuticals, Inc.) MARCAINE (bupivacaine, marketed by Hospira, Inc.) and generic forms of bupivacaine; NAROPIN (ropivacaine, marketed by Fresenius Kabi USA, LLC) and generic forms of ropivacaine; and potentially other products in development such as HTX011 (a bupivacaine formulation of Heron Therapeutics Inc., which also contains a synthetic polymer and a small amount of a nonsteroidal anti-inflammatory drug, meloxicam). Additional competitive development programs include:
| ● | Posimir by Durect (DRRX). This product failed in a Phase III clinical trial based on safety problems. Prior to this failure, Durect was acquired by Sandoz in a structured deal totaling more than US$240MM (PR Newswire). An FDA advisory committee has recently issued an evenly split decision on Durect’s extended-release formulation of bupivacaine due to both safety and efficacy issues. |
| ● | Innocoll has developed a surgically implantable and bioresorbable bupivacaine-collagen matrix but was sent a Refusal letter by the FDA requiring that it be submitted as a Drug/Device combination. Innocoll was later acquired by Gurnet Point Capital for $209M in July 2017. |
| ● | CA-008 from Concentric Analgesics is a water-soluble, non-opioid prodrug (a biologically inactive compound which can be metabolized in the body to produce a drug) that is rapidly converted to capsaicin in the body when it is injected into the surgical site post-operatively. They have recently completed a Phase II clinical trial. |
| ● | TLC590, from the Taiwan Liposome Company, is a liposomal formulation of ropivacaine that has recently completed Phase I/II trials in patients following hernia surgery. |
| ● | LIQ865 is an injectable conjugate of ropivacaine and a PGLA co-polymer, developed by Liquida Technologies. This product is administered subcutaneously at the operative site following closure. A Phase Ia clinical trial has been completed in Denmark and a Phase 1b clinical trial has been completed in the U.S. It has been reported that a Phase 2 trial was initiated in early 2019. |
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Government Regulation
Government regulation and product approvals
Government authorities in the U.S., at the federal, state and local level, and in other countries and jurisdictions, including the EU, extensively regulate, among other things, the research, development, testing, manufacture, quality control, approval, packaging, storage, recordkeeping, labeling, advertising, promotion, distribution, marketing, post-approval monitoring and reporting, and import and export of drug products. The processes for obtaining marketing approvals in the U.S. and in foreign countries and jurisdictions, along with subsequent compliance with applicable statutes and regulations and other regulatory authorities, require the expenditure of substantial time and financial resources.
Review and approval of drugs in the U.S.
In the U.S., the FDA approves drug products under the Federal Food, Drug, and Cosmetic Act, or FDCA, and implementing regulations. The failure to comply with applicable requirements under the FDCA and other applicable laws at any time during the product development process, approval process or after approval may subject an applicant and/or sponsor to a variety of administrative or judicial sanctions, including refusal by the FDA to approve pending applications, withdrawal of an approval, imposition of a clinical hold, issuance of warning letters and other types of letters, product recalls, product seizures, total or partial suspension of production or distribution, injunctions, fines, refusals of government contracts, restitution, disgorgement of profits, or civil or criminal investigations and penalties brought by the FDA and the Department of Justice or other governmental entities.
An applicant seeking approval to market and distribute a new drug product in the U.S. must typically undertake the following:
| ● | completion of preclinical laboratory tests, animal studies and formulation studies in compliance with the FDA’s good laboratory practice, or GLP, regulations; |
| ● | submission to the FDA of an IND, which must take effect before human clinical trials begin; |
| ● | approval by an independent institutional review board, or IRB, representing each clinical site before each clinical trial may be initiated; |
| ● | performance of adequate and well-controlled human clinical trials in accordance with good clinical practices, or GCP, to establish the safety and efficacy of the proposed drug product for each proposed indication; |
| ● | preparation and submission to the FDA of an NDA requesting marketing for one or more proposed indications; |
| ● | review by an FDA advisory committee, where appropriate or 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 cGMP, requirements and to assure that the facilities, methods and controls are adequate to preserve the product’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; |
| ● | payment of user fees and securing FDA approval of the NDA; and |
| ● | compliance with any post-approval requirements, including the potential requirement to implement a Risk Evaluation and Mitigation Strategy, or REMS, and the potential requirement to conduct post-approval studies. |
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Satisfaction of FDA pre-market approval requirements typically takes many years and the actual time required may vary substantially based upon the type, complexity, and novelty of the product candidate or disease. A clinical hold may occur at any time during the life of an IND and may affect one or more specific trials or all trials conducted under the IND.
Preclinical studies
Before an applicant begins clinical testing in humans of a compound with potential therapeutic value in humans, the drug candidate enters the preclinical testing stage. Preclinical studies include laboratory evaluation of product chemistry, toxicity and formulation, as well as in vitro and animal studies to assess the potential safety and activity of the drug for initial testing in humans and to establish a rationale for therapeutic use. The conduct of preclinical studies is subject to federal regulations and requirements, including GLP regulations. The results of the preclinical tests, together with manufacturing information, analytical data, any available clinical data or literature and plans for clinical trials, among other things, are submitted to the FDA as part of an IND. Some long-term preclinical testing, such as animal tests of reproductive adverse events and carcinogenicity, may continue after the IND is submitted.
The IND and IRB processes
An IND is an exemption from the FDCA that allows an unapproved drug to be shipped in interstate commerce for use in an investigational clinical trial and a request for FDA authorization to administer an investigational drug to humans. Such authorization must be secured prior to interstate shipment and administration of any new drug that is not the subject of an approved NDA. In support of a request for an IND, a sponsor must submit a protocol for each clinical trial and any subsequent protocol amendments must be submitted to the FDA as part of the IND. Following commencement of a clinical trial under an IND, the FDA may also place a clinical hold or partial clinical hold on that trial. A clinical hold is an order issued by the FDA to the sponsor to delay a proposed clinical investigation or to suspend an ongoing investigation. A partial clinical hold is a delay or suspension of only part of the clinical work requested under the IND. For example, a specific protocol or part of a protocol is not allowed to proceed, while other protocols may do so. No more than 30 days after imposition of a clinical hold or partial clinical hold, the FDA will provide the sponsor a written explanation of the basis for the hold. Following issuance of a clinical hold or partial clinical hold, an investigation may only resume after the FDA has notified the sponsor that the investigation may proceed. The FDA will base that determination on information provided by the sponsor correcting the deficiencies previously cited or otherwise satisfying the FDA that the investigation can proceed.
We have been granted an IND to conduct Phase 3 trials for PRF-110.
A sponsor may choose, but is not required, to conduct a foreign clinical study under an IND. When a foreign clinical study is conducted under an IND, all IND requirements must be met unless waived. When the foreign clinical study is not conducted under an IND, the sponsor must ensure that the study complies with certain FDA regulatory requirements in order to use the study as support for an IND or application for marketing approval. Specifically, FDA has promulgated regulations governing the acceptance of foreign clinical trials not conducted under an IND, establishing that such studies will be accepted as support for an IND or application for marketing approval if the study was conducted in accordance with GCP, including review and approval by an independent ethics committee, or IEC, and use of proper procedures for obtaining informed consent from subjects, and the FDA is able to validate the data from the study through an on-site inspection if FDA deems such inspection necessary. The GCP requirements encompass both ethical and data integrity standards for clinical studies. The FDA’s regulations are intended to help ensure the protection of human subjects enrolled in non-IND foreign clinical trials, as well as the quality and integrity of the resulting data. They further help ensure that non-IND foreign studies are conducted in a manner comparable to that required for IND studies. If a marketing application is based solely on foreign clinical data, the FDA requires that the foreign data be applicable to the U.S. population and U.S. medical practice; the studies must have been performed by clinical investigators of recognized competence; and the FDA must be able to validate the data through an on-site inspection or other appropriate means, if the FDA deems such an inspection to be necessary.
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In addition to the foregoing IND requirements, 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 and reapprove the study at least annually. The IRB must review and approve, among other things, the study protocol and informed consent information to be provided to study subjects. An IRB must operate in compliance with FDA regulations. An IRB can suspend or terminate approval of a clinical trial at its institution, or an institution it represents, if the clinical trial is not being conducted in accordance with the IRB’s requirements or if the product candidate has been associated with unexpected serious harm to patients.
Additionally, some trials are overseen by an independent group of qualified experts organized by the trial sponsor, known as a data safety monitoring board (“DSMB”) or data safety monitoring committee. The DSMB provides clinical subject safety oversight on a regular ongoing basis while the trial is in progress. Based on their reviews, the DSMB provides authorization for whether or not a trial may move forward at designated check points based on safety data available from the study that is available only to the DSMB. Suspension or termination of development during any phase of clinical trials can occur if it is determined that the participants or patients are being exposed to an unacceptable health risk.
Other reasons for suspension or termination may be made by us for reasons other than safety including, but not limited to, evolving business objectives and/or competitive climate.
Information about certain clinical trials must be submitted within specific timeframes to the National Institutes of Health, or NIH, for public dissemination on its ClinicalTrials.gov website.
Human clinical trials in support of an NDA
Clinical trials involve the administration of the 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 study protocols detailing, among other things, the inclusion and exclusion criteria, the objectives of the study, the parameters to be used in monitoring safety and the effectiveness criteria to be evaluated.
Human clinical trials are typically conducted in the following sequential phases, which may overlap or be combined:
| Phase 1: | The drug is initially introduced into healthy human subjects or, in certain indications such as cancer, 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 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. | ||
| Phase 4: | Post-approval studies, which are conducted following initial approval, are typically conducted to gain additional experience and data from treatment of patients in the intended therapeutic indication.
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Progress reports detailing the results of the clinical trials must be submitted at least annually to the FDA and more frequently if serious adverse events (“SAEs”) occur. In addition, IND safety reports must be submitted to the FDA for any of the following: serious and unexpected suspected adverse reactions; findings from other studies or animal or in vitro testing that suggest a significant risk in humans exposed to the drug; and any clinically important increase in the case of a serious suspected adverse reaction over that listed in the protocol or investigator brochure. Phase 1, Phase 2 and Phase 3 clinical trials may not be completed successfully within any specified period, or at all. Furthermore, the FDA or the sponsor may suspend or terminate a clinical trial at any time on various grounds, including a finding that the research subjects are being exposed to an unacceptable health risk. Similarly, an IRB can suspend or terminate approval of a clinical trial at its institution, or an institution it represents, 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. The FDA will typically inspect one or more clinical sites to assure compliance with GCP and the integrity of the clinical data submitted.
Concurrent with clinical trials, companies generally 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 drug candidate and, among other things, must develop methods for testing the identity, strength, quality, and purity of the final drug. Additionally, appropriate packaging must be selected and tested and stability studies must be conducted to demonstrate that the drug candidate does not undergo unacceptable deterioration over its shelf life.
Submission of an NDA to the FDA
Assuming successful completion of required clinical testing and other requirements, the results of the preclinical studies and clinical trials, together with detailed information relating to the product’s chemistry, manufacture, controls and proposed labeling, among other things, are submitted to the FDA as part of an NDA requesting approval to market the drug product for one or more indications. Data can come from company-sponsored clinical trials intended to test the safety and effectiveness of a use of a product, or from several alternative sources, including investigator-initiated trials that are not sponsored by the company. Under federal law, the submission of most NDAs is additionally subject to an application user fee, which for federal fiscal year 2019 is $2,588,478. The sponsor of an approved NDA is also subject to annual program fees, which for fiscal year 2019 are $309,915 per eligible product.
The FDA conducts a preliminary review of an NDA within 60 days of its receipt and informs the sponsor whether the application is sufficiently complete to permit substantive review. The FDA may request additional information rather than accept an NDA for filing. In this event, the application must be resubmitted with the additional information. The resubmitted application is also subject to review before the FDA accepts it for filing. Once the submission is accepted for filing, the FDA begins an in-depth substantive review. The FDA has agreed to specified performance goals in the review process of NDAs. Most such applications are meant to be reviewed within ten months from the filing date, and most applications for “priority review” products are meant to be reviewed within six months of the filing date. The review process and the Prescription Drug User Fee Act goal date may be extended by the FDA for three additional months to consider new information or clarification provided by the applicant to address an outstanding deficiency identified by the FDA following the original submission.
Before approving an NDA, the FDA typically will inspect the facility or facilities where the product is or will be manufactured. These pre-approval inspections may cover all facilities associated with an NDA submission, including drug component manufacturing (such as APIs), finished drug product manufacturing, and control testing laboratories. The FDA will not approve an application unless it determines that the manufacturing processes and facilities are in compliance with cGMP requirements and adequate to assure consistent production of the product within required specifications. Additionally, before approving an NDA, the FDA will typically inspect one or more clinical sites to assure compliance with GCP.
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505(b)(2) NDAs
As an alternative path to FDA approval for modifications to formulations or uses of products previously approved by the FDA pursuant to an NDA, an applicant may submit an NDA under Section 505(b)(2) of the FDCA. Section 505(b)(2) was enacted as part of the Hatch-Waxman Amendments and permits the filing of an NDA where at least some of the information required for approval comes from studies not conducted by, or for, the applicant, and for which the applicant has not obtained a right of reference. If the 505(b)(2) applicant can establish that reliance on FDA’s previous findings of safety and effectiveness is scientifically and legally appropriate, it may eliminate the need to conduct certain preclinical studies or clinical trials of the new product. The FDA may also require companies to perform additional bridging studies or measurements, including clinical trials, to support the change from the previously approved reference drug. The FDA may then approve the new product candidate for all, or some, of the label indications for which the reference drug has been approved, as well as for any new indication sought by the 505(b)(2) applicant.
Section 505(b)(2) applications are subject to any non-patent exclusivity period applicable to the referenced product, which may delay approval of the 505(b)(2) application even if FDA has completed its substantive review and determined the drug should be approved. In addition, 505(b)(2) applications must include patent certifications to any patents listed in the Orange Book as covering the referenced product. If the 505(b)(2) applicant seeks to obtain approval before the expiration of an applicable listed patent, the 505(b)(2) applicant must provide notice to the patent owner and NDA holder of the referenced product. If the patent owner or NDA holder brings a patent infringement lawsuit within 45 days of such notice, the 505(b)(2) application cannot be approved for 30 months or until the 505(b)(2) applicant prevails, whichever is sooner. If the 505(b)(2) applicant loses the patent infringement suit, FDA may not approve the 505(b)(2) application until the patent expires, plus any period of pediatric exclusivity.
We intend to follow the 505(b)(2) approval pathway permitted under the FDCA to maximize the commercial opportunities for these product candidates.
The FDA’s decision on an NDA
On the basis of the FDA’s evaluation of the NDA and accompanying information, including the results of the inspection of the manufacturing facilities, the FDA may issue 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 generally outlines the deficiencies in the submission and may require substantial additional testing or information in order for the FDA to reconsider the application. If and when those deficiencies have been addressed to the FDA’s satisfaction in a resubmission of the NDA, the FDA will issue an approval letter. The FDA has committed to reviewing such resubmissions in two or six months depending on the type of information included. Even with submission of this additional information, the FDA ultimately may decide that the application does not satisfy the regulatory criteria for approval.
If the FDA approves a product, it may limit the approved indications for use for the product, require that contraindications, warnings or precautions be included in the product labeling, require that post-approval studies, including Phase 4 clinical trials, be conducted to further assess the drug’s safety after approval, require testing and surveillance programs to monitor the product after commercialization, or impose other conditions, including distribution restrictions or other risk management mechanisms, including REMS, which can materially affect the potential market and profitability of the product. The FDA may prevent or limit further marketing of a product based on the results of post-market studies or surveillance programs. After approval, many types of changes to the approved product, such as adding new indications, manufacturing changes and additional labeling claims, are subject to further testing requirements and FDA review and approval.
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Post-approval requirements
Drugs manufactured or distributed pursuant to FDA approvals are subject to pervasive and continuing regulation by the FDA, including, among other things, requirements relating to recordkeeping, periodic reporting, product sampling and distribution, advertising and promotion and reporting of adverse experiences with the product. After approval, most changes to the approved product, such as adding new indications or other labeling claims, are subject to prior FDA review and approval. There also are continuing, annual user fee requirements for any marketed products and the establishments at which such products are manufactured, as well as new application fees for supplemental applications with clinical data.
In addition, drug manufacturers and other entities involved in the manufacture and distribution of approved drugs are required to register their establishments with the FDA and state agencies, and are subject to periodic unannounced inspections by the FDA and these state agencies for compliance with cGMP requirements. 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 and impose reporting and documentation requirements upon the sponsor and any third-party manufacturers that the sponsor may decide to use. Accordingly, manufacturers must continue to expend time, money, and effort in the area of production and quality control to maintain cGMP compliance.
Once an 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 AEs of unanticipated severity or frequency, or with manufacturing processes, or failure to comply with regulatory requirements, may result in 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:
| ● | restrictions on the marketing or manufacturing of the product, including total or partial suspension of production, complete withdrawal of the product from the market or product recalls; |
| ● | fines, warning letters or holds on post-approval clinical trials; |
| ● | refusal of the FDA to approve pending NDAs or supplements to approved NDAs, or suspension or revocation of product license approvals; |
| ● | product seizure or detention, or refusal to permit the import or export of products; or |
| ● | injunctions or the imposition of civil or criminal penalties. |
The FDA strictly regulates marketing, labeling, advertising and promotion of products that are placed on the market. Drugs may be promoted only for the approved indications and in accordance with the provisions of the approved labeling. The FDA and other agencies actively enforce the laws and regulations prohibiting the promotion of off-label uses, and a company that is found to have improperly promoted off-label uses may be subject to significant liability.
In addition, the distribution of prescription drug products is subject to the Prescription Drug Marketing Act, or PDMA, which regulates the distribution of drugs and drug samples at the federal level, and sets minimum standards for the registration and regulation of drug distributors by the states. Both the PDMA and state laws limit the distribution of prescription drug product samples and impose requirements to ensure accountability in distribution.
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Regulations Outside the U.S.
Regulations and procedures governing approval of drug products in the EU
In order to market any product outside of the U.S., a company must also comply with numerous and varying regulatory requirements of other countries and jurisdictions regarding quality, safety and efficacy and governing, among other things, clinical trials, marketing authorization, commercial sales and distribution of products. Whether or not it obtains FDA approval for a product, the company would need to obtain the necessary approvals by the comparable foreign regulatory authorities before it can commence clinical trials or marketing of the product in those countries or jurisdictions. Specifically, the process governing approval of drug products in the EU generally follows the same lines as in the U.S. and involves satisfactorily completing preclinical studies and adequate and well-controlled clinical trials to establish the safety and efficacy of the product for each proposed indication, as well as the submission to the relevant competent authorities of a marketing authorization application, or MAA, and actual granting of a marketing authorization by these authorities before the product can be marketed and sold in the EU.
Clinical Trial Approval. Pursuant to the currently applicable Clinical Trials Directive 2001/20/EC and the Directive 2005/28/EC on Good Clinical Practice, a system for the approval of clinical trials in the EU has been implemented through national legislation of the member states. Under this system, an applicant must obtain approval from the competent national authority of an EU member state in which the clinical trial is to be conducted, or in multiple member states if the clinical trial is to be conducted in a number of member states. Furthermore, the applicant may only start a clinical trial at a specific study site after the competent ethics committee has issued a favorable opinion. The clinical trial application must be accompanied by an investigational drug product dossier with supporting information prescribed by Directive 2001/20/EC and Directive 2005/28/EC and corresponding national laws of the member states and further detailed in applicable guidance documents.
In April 2014, the EU adopted a new Clinical Trials Regulation, (EU) No 536/2014, which will replace the current Clinical Trials Directive 2001/20/EC. To ensure that the rules for clinical trials are identical throughout the EU, the new EU clinical trials legislation was passed as a regulation that is directly applicable in all EU member states without the need for implementation into the member states’ national laws. All clinical trials performed in the EU are required to be conducted in accordance with the Clinical Trials Directive 2001/20/EC until the new Clinical Trials Regulation (EU) No 536/2014 becomes applicable. According to the current plans of the European Medicines Agency, or EMA, the new Clinical Trials Regulation will become applicable in 2020. The Clinical Trials Directive 2001/20/EC will, however, still apply three years from the date of entry into application of the Clinical Trials Regulation to (i) clinical trials applications submitted before the entry into application and (ii) clinical trials applications submitted within one year after the entry into application if the sponsor opts for old system.
The new Clinical Trials Regulation aims to simplify and streamline the approval of clinical trial in the EU. The main characteristics of the regulation include: a streamlined application procedure via a single entry point, the EU portal; a single set of documents to be prepared and submitted for the application as well as simplified reporting procedures that will spare sponsors from submitting broadly identical information separately to various bodies and different member states; a harmonized procedure for the assessment of applications for clinical trials, which is divided in two parts. Part I is assessed jointly by all member states concerned. Part II is assessed separately by each member state concerned; strictly defined deadlines for the assessment of clinical trial applications; and the involvement of the ethics committees in the assessment procedure in accordance with the national law of the member state concerned but within the overall timelines defined by the Clinical Trials Regulation.
Marketing Authorization. To obtain a marketing authorization for a product under EU regulatory systems, an applicant must submit an MAA either under a centralized procedure administered by the EMA or one of the procedures administered by competent authorities in EU member states (decentralized procedure, national procedure or mutual recognition procedure). A marketing authorization may be granted only to an applicant established in the EU. In the case of pediatric patients, Regulation (EC) No 1901/2006 provides that prior to obtaining a marketing authorization in the EU, applicants have to demonstrate compliance with all measures included in an EMA-approved Paediatric Investigation Plan, or PIP, covering all subsets of the pediatric population, unless the EMA has granted (1) a product-specific waiver, (2) a class waiver or (3) a deferral for one or more of the measures included in the PIP.
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The centralized procedure provides for the grant of a single marketing authorization by the European Commission that is valid for all EU member states. Pursuant to Regulation (EC) No 726/2004, the centralized procedure is compulsory for specific products, including for medicines produced by certain biotechnological processes, products designated as orphan drug products, advanced therapy products and products with a new active substance indicated for the treatment of certain diseases, including products for the treatment of cancer. For products with a new active substance indicated for the treatment of other diseases and products that are highly innovative or for which a centralized process is in the interest of patients, the centralized procedure may be optional.
Under the centralized procedure, the Committee for Medicinal Products for Human Use, or the CHMP, established at the EMA is responsible for conducting the initial assessment of a product. The CHMP is also responsible for several post-authorization and maintenance activities, such as the assessment of modifications or extensions to an existing marketing authorization. Under the centralized procedure in the EU, the maximum timeframe for the evaluation of an MAA is 210 days, excluding clock stops, when additional information or written or oral explanation is to be provided by the applicant in response to questions of the CHMP. Accelerated evaluation might be granted by the CHMP in exceptional cases, when a drug product is of major interest from the point of view of public health and in particular from the viewpoint of therapeutic innovation. If the CHMP accepts such request, the time limit of 210 days will be reduced to 150 days but it is possible that the CHMP can revert to the standard time limit for the centralized procedure if it considers that it is no longer appropriate to conduct an accelerated assessment.
Regulatory data protection in the EU. In the EU, new chemical entities approved on the basis of a complete independent data package qualify for eight years of data exclusivity upon marketing authorization and an additional two years of market exclusivity pursuant to Regulation (EC) No 726/2004, as amended, and Directive 2001/83/EC, as amended. Data exclusivity prevents regulatory authorities in the EU from referencing the innovator’s data to assess a generic (abbreviated) application for a period of eight years. During an additional two-year period of market exclusivity, a generic marketing authorization application can be submitted, and the innovator’s data may be referenced, but no generic drug product can be marketed until the expiration of the market exclusivity. The overall ten-year period will be extended to a maximum of 11 years if, during the first eight years of those ten years, the marketing authorization 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. Even if a compound is considered to be a new chemical entity so that the innovator gains the prescribed period of data exclusivity, another company nevertheless could also market another version of the product if such company obtained marketing authorization based on an MAA with a complete independent data package of pharmaceutical tests, preclinical tests and clinical trials.
Periods of authorization and renewals. A marketing authorization is valid for five years in principle and the marketing authorization may be renewed after five years on the basis of a re-evaluation of the risk-benefit balance by the EMA or by the competent authority of the authorizing member state. To this end, the marketing authorization holder must provide the EMA or the competent authority with a version of the file in respect of quality, safety and efficacy, including all variations introduced since the marketing authorization was granted, at least six months before the marketing authorization ceases to be valid. Once renewed, the marketing authorization shall be valid for an unlimited period, unless the European Commission or the competent authority decides, on justified grounds relating to pharmacovigilance, to proceed with one additional five-year renewal. Any authorization which is not followed by the actual placing of the drug on the EU market (in case of centralized procedure) or on the market of the authorizing member state within three years after authorization ceases to be valid (the so-called sunset clause).
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Regulatory requirements after a marketing authorization has been obtained. In the event an authorization for a drug in the EU is obtained, the holder of the marketing authorization is required to comply with a range of requirements applicable to the manufacturing, marketing, promotion and sale of drug products. These include:
| ● | Compliance with the EU’s stringent pharmacovigilance or safety reporting rules, pursuant to which post-authorization studies and additional monitoring obligations can be imposed, has to be ensured. | |
| ● | The manufacturing of authorized drugs, for which a separate manufacturer’s license is mandatory, must also be conducted in strict compliance with the EMA’s GMP requirements and comparable requirements of other regulatory bodies in the EU, which mandate the methods, facilities and controls used in manufacturing, processing and packing of drugs to assure their safety and identity. | |
| ● | The marketing and promotion of authorized drugs, including industry-sponsored continuing medical education and advertising directed toward the prescribers of drugs and/or the general public, are strictly regulated in the EU notably under Directive 2001/83EC, as amended, and EU member state laws. |
Coverage and reimbursement
Sales of PRF-110 and any future candidates, if approved, will depend, in part, on the extent to which such products will be covered by third-party payors, such as government health care programs, commercial insurance and managed healthcare organizations. These third-party payors are increasingly limiting coverage or reducing reimbursements for medical products and services. In addition, the U.S. government, state legislatures and foreign governments have continued implementing cost-containment programs, including price controls, restrictions on reimbursement and requirements for substitution of generic products. Third-party payors decide which therapies they will pay for and establish reimbursement levels. Third-party payors often rely upon Medicare coverage policy and payment limitations in setting their own coverage and reimbursement policies. However, decisions regarding the extent of coverage and amount of reimbursement to be provided for any drug candidates that we develop will be made on a payor-by-payor basis. Each payor determines whether or not it will provide coverage for a therapy, what amount it will pay the manufacturer for the therapy, and on what tier of its formulary it will be placed. The position on a payor’s list of covered drugs, or formulary, generally determines the co-payment that a patient will need to make to obtain the therapy and can strongly influence the adoption of such therapy by patients and physicians. Adoption of price controls and cost-containment measures, and adoption of more restrictive policies in jurisdictions with existing controls and measures, could further limit our net revenue and results. Decreases in third-party reimbursement for our drug candidates or a decision by a third-party payor to not cover our drug candidates could reduce physician usage of our drug candidates, once approved, and have a material adverse effect on our sales, results of operations and financial condition.
Outside the U.S., ensuring adequate coverage and payment for our product candidates will face challenges. Pricing of pharmaceuticals is subject to governmental control in many countries. Pricing negotiations with governmental authorities can extend well beyond the receipt of marketing approval for a product and may require us to conduct a clinical trial that compares the cost effectiveness of our product candidates or products to other available therapies. The conduct of such a clinical trial could be expensive and result in delays in our commercialization efforts.
In the EU, pricing and reimbursement schemes vary widely from member state to member state. Some countries provide that products may be marketed only after a reimbursement price has been agreed. Some countries may require the completion of additional studies that compare the cost-effectiveness of a particular drug candidate to currently available therapies (so called health technology assessment, or HTA) in order to obtain reimbursement or pricing approval. EU member states may approve a specific price for a product or it may instead adopt a system of direct or indirect controls on the profitability of the company placing the product on the market. Other member states allow companies to fix their own prices for products, but monitor and control prescription volumes and issue guidance to physicians to limit prescriptions. Recently, many countries in the EU have increased the amount of discounts required on pharmaceuticals and these efforts could continue as countries attempt to manage healthcare expenditures, especially in light of the severe fiscal and debt crises experienced by many countries in the EU. The downward pressure on healthcare costs in general, particularly prescription drugs, has become intense. As a result, increasingly high barriers are being erected to the entry of new products. Political, economic and regulatory developments may further complicate pricing negotiations, and pricing negotiations may continue after reimbursement has been obtained. Reference pricing used by various EU member states, and parallel trade (arbitrage between low-priced and high-priced member states), can further reduce prices. There can be no assurance that any country that has price controls or reimbursement limitations for drug products will allow favorable reimbursement and pricing arrangements for any of our products, if approved in those countries.
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Other Healthcare Laws
Because of our current and future arrangements with healthcare professionals, principal investigators, consultants, customers and third-party payors, we will also be subject to healthcare regulation and enforcement by the federal government and the states and foreign governments in which we will conduct our business, including our clinical research, proposed sales, marketing and educational programs. Failure to comply with these laws, where applicable, can result in the imposition of significant civil penalties, criminal penalties, or both.
The U.S. laws that may affect our ability to operate, among others, include: the federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act, which governs the conduct of certain electronic healthcare transactions and protects the security and privacy of protected health information; certain state laws governing the privacy and security of health information in certain circumstances, some of which are more stringent than HIPAA and many of which differ from each other in significant ways and may not have the same effect, thus complicating compliance efforts; the federal healthcare programs’ Anti-Kickback Statute, which prohibits, among other things, persons from knowingly and willfully soliciting, receiving, offering or paying remuneration, directly or indirectly, in exchange for or to induce either the referral of an individual for, or the purchase, order or recommendation of, any good or service for which payment may be made under federal healthcare programs such as the Medicare and Medicaid programs; federal false claims laws which prohibit, among other things, individuals or entities from knowingly presenting, or causing to be presented, claims for payment from Medicare, Medicaid, or other third-party payors that are false or fraudulent; federal criminal laws that prohibit executing a scheme to defraud any healthcare benefit program or making false statements relating to healthcare matters; the Physician Payments Sunshine Act, which requires manufacturers of drugs, devices, biologics, and medical supplies to report annually to the U.S. Department of Health and Human Services information related to payments and other transfers of value to physicians (defined to include doctors, dentists, optometrists, podiatrists and chiropractors) and teaching hospitals, and ownership and investment interests held by physicians and their immediate family members; and state law equivalents of each of the above federal laws, such as anti-kickback and false claims laws which may apply to items or services reimbursed by any third-party payor, including commercial insurers.
In addition, many states have similar laws and regulations, such as anti-kickback and false claims laws 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 our product is sold in a foreign country, we may be subject to similar foreign laws.
Sales and Marketing
Given our stage of development, we have not yet established a commercial organization or distribution capabilities. We may selectively pursue strategic collaborations with third parties in order to maximize the commercial potential of our drug candidates.
Manufacturing and Clinical Supplies
We do not own or operate manufacturing facilities for the production of commercial or clinical quantities of PRF-110. We rely on a small number of third-party manufacturers to produce our compounds and expect to continue to do so to meet the preclinical and clinical requirements of our product candidates and for all of our commercial needs. We currently have long-term commercial supply agreements with certain third-party manufacturers. Our manufacturing and processing agreements require that all third-party contract manufacturers and processors produce active pharmaceutical ingredients and finished products in accordance with the FDA’s current Good Manufacturing Practices (“cGMP”) and all other applicable laws and regulations.
Some of the critical materials and components used in manufacturing PRF-110 are sourced from single suppliers. An interruption in the supply of a key material could significantly delay our research and development process or increase our expenses for commercialization or development of products. Specialized materials must often be manufactured for the first time for use in drug delivery technologies, or materials may be used in the technologies in a manner that is different from their customary commercial uses. The quality of materials can be critical to the performance of a drug delivery technology, so a reliable source that provides a consistent supply of materials is important. Materials or components needed for our drug delivery technologies may be difficult to obtain on commercially reasonable terms, particularly when relatively small quantities are required or if the materials traditionally have not been used in pharmaceutical products.
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Legal proceedings
We are not currently subject to any legal proceedings.
Facilities
We have facilities in Herzliya, Israel and Westchester, New York. Our Herzliya facilities consist of office space that is being provided without cost by Medica Venture Partners, the general partner of our principal shareholder. Our Westchester office consists of approximately 250 square feet that has been made available to us without cost by our President and Chief Medical Officer, David Weinstein. We expect to lease additional space upon conclusion of this offering.
Employees
As of December 31, 2019, we had three (3) part-time personnel engaged in research and development. Not included are our Executive Chairman, Ehud Geller, and his administrative assistant, whose services are presently provided without cost. We are not bound by any collective bargaining agreements. We consider the relationship with our employees to be good. We also use outside consultants and contractors with special expertise and skills for limited engagements, including drug product manufacture and quality assurance. We plan to contract with a contract research organization that is knowledgeable and experienced in developing drugs for post-operative pain.
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Senior Management
Our day-to-day management is carried out through our executive officers, who are engaged by us through employment and consultancy agreements.
The following table sets forth certain information relating to our executive officers, including their ages as of the date of this prospectus.
| Name | Age | Position | ||
| Prof. Eli Hazum | 72 | Acting Chief Executive Officer and Chief Technology Officer | ||
| Dr. David E. Weinstein | 62 | President and Chief Medical Officer | ||
| Dr. Ehud Geller | 73 | Acting Chief Financial Officer | ||
| Dr. Sigal Aviel | 56 | Chief Operating Officer |
A brief biography of each person who serves as an executive officer of our Company is set forth below:
Prof. Eli Hazum has been the acting Chief Executive Officer since 2012, our Chief Technology Officer since April 2018 and a director of our company since December 2019. From 2011 to November 2019, he served as our chief executive officer. He has been a partner and CSO of Medica Venture Partners since 1995. Prior to joining Medica, Prof. Hazum spent five years at Glaxo Inc. as Head of the Department of Receptor Research and Metabolic Diseases and as a member of the Corporate Committee for New Technology Identification in osteoporosis, worldwide. Mr. Hazum received his Ph.D. degree in the field of hormone biochemistry from the Weizmann Institute of Science, BSc and MSc degrees in Chemistry from Tel Aviv University and an executive MBA degree from Humberside University in the UK. Mr. Hazum will devote 60% of his time to the company upon completion of this offering.
Dr. David E. Weinstein has served as our President and Chief Medical Officer since March [ ], 2020. Dr. Weinstein served as a consultant to our company since May 2019. Since October 2018, he has served as CEO of AndroBiosciences, LLC, a men’s health company focused on orphan indications, and since July 2015, he has served as CEO of RiverTown Therapeutics, Inc., a regenerative medicine company. He is also the President and CEO of David Weinstein Consulting, Inc. Dr. Weinstein served as Chief Scientific and Chief Medical Officer to InteKrin Therapeutics. Inc. from 2011 until May 2015, when it was acquired by Coherus BioSciences Inc. (NASDAQ:CHRS) for whom he consulted from 2013 to 2016. He was the founder of and served as Chief Science Officer of GliaMed, Inc. from September 2001 to July 2011 and as Chief Executive Officer from 2002 and 2009. Dr. Weinstein holds an MD degree and MS and PhD degrees in neuroscience from New York University. Dr. Weinstein will devote his full time efforts to PainReform upon completion of this offering.
Dr. Ehud Geller has been the Chairman of our Board of Directors since November 2008 and our Acting Chief Financial Officer since January 2020. Since 1995, he has been the General Partner of Medica Venture Partners. Between 1979 and 1985, Dr. Geller was President of the Pharmaceutical Division of Teva Pharmaceutical Industries (NYSE:TEVA) and Executive VP of the Teva Group. At Teva, he led the acquisition of Ikapharm Ltd. He served as the President and CEO of Interpharm Laboratories, Ltd. from 1985 to 1990. During these years he also served as head of the Israeli Pharmaceutical Manufacturers Association and as a Board Member on the Tel Aviv Stock Exchange (TASE). Dr. Geller has a B.Sc. degree in Chemical Engineering, an MBA degree from Columbia University/Drexel Institute and a Ph.D. degree in pharmaceutical/chemical engineering from Drexel Institute, Philadelphia. Since 1995, he has been the General Partner of Medica Venture Partners. Mr. Geller was selected to serve on the board of directors as Chairman due to his significant experience leading and growing companies in the pharmaceutical industry and his significant leadership experience. His experience leading the company’s management and the depth of his knowledge of our business enable him to provide valuable leadership on complex business matters that we face on an ongoing basis.
Dr. Sigal Aviel has served as our Chief Operating Officer since 2014. Dr. Aviel held the position of Chief R&D Officer at MediWound Ltd. (NASDAQ:MDWD), a company specializing in deep burns and chronic wound care, between 2013 and 2014. Previously, between 2011 and 2013, she served as a vice president of clinical and regulatory affairs at Biokine Therapeutics Ltd. focusing on cancer therapy. Between 2005 and October 2010, she directed both platform and project development at Protalix Biotherapeutics Ltd. (NYSE American: PLX). Dr. Aviel holds a PhD degree in Immunology and Microbiology from Duke University Medical School as well as an executive MBA degree from the Kellogg School of Business and a BSc degree in Biology from Tel Aviv University. Dr. Aviel will devote 50% of her time to the company upon completion of this offering.
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Compensation of Senior Management
The aggregate compensation paid by us to our executive officers for the year ended December 31, 2019 and 2018, was approximately $316,000 and $257,000, respectively, including share-based compensation expenses which were $28,000 and less than $1,000, respectively. This amount does not include business travel, professional and business association dues and expenses reimbursed to officers, and other benefits commonly reimbursed or paid by companies in Israel.
Board Composition; Powers, Duties and Responsibilities
The following table sets forth certain information relating to our directors, including their ages as of the date of this prospectus.
| Name | Age | Position | ||
| Dr. Ehud Geller | 73 | Executive Chairman | ||
| Efi Cohen-Arazi | 65 | Director | ||
| Prof. Eli Hazum | 72 | Director | ||
| Assif Stoffman | 47 | Director |
Mr. Efi Cohen-Arazi, Mr. Assif Stoffman and Prof. Eli Hazum serve on our Audit and Compensation Committees. Eli Hazum will be replaced by an independent director upon the conclusion of the offering.
Except for the external directors, each director is elected for an annual term that ends at each annual general meeting of our shareholders. See “External Directors” below.
A brief biography of each director of our company who is not an executive officer is set forth below:
Efi Cohen-Arazi was the Co-Founder & CEO of Rainbow Medical, Israel’s leading medical device innovation house since 2008. From 2004 to 2006 Mr. Cohen Arazi served as the CEO and Co-Founder of IntecPharma Ltd. and as Chairman of CollPlant Ltd. since 2006. Mr. Cohen Arazi served as a board director for numerous biotech/medtech companies since 2005. Mr. Cohen-Arazi was the Senior VP Head of Operations at Immunex Corporation in Seattle, Washington until 2002 when it was acquired by Amgen where he served as VP and General Manager of the TO site in California. Mr. Cohen Arazi served at Merck-Serono Group in Switzerland and Israel between 1988 and 2000. Mr. Cohen-Arazi graduated summa cum laude with a M.Sc. degree from the Hebrew University of Jerusalem, Israel.
Assif Stoffman has served as a director of the company since January 2020. Since January 2020, Mr. Stoffman is co-managing XT Hi-Tech, the venture capital arm of the global shipping & industrial group XT Holdings. Between 2012 and June 2018, Mr. Stoffman was the co-founder and CEO of MValve Technologies Ltd, pioneering a revolutionary concept in treating mitral valve disease. Prior to MValve, between 2009 and 2012 Mr. Stoffman served as Executive Vice President of XT Hi-Tech, in charge of software and healthcare investments. Mr. Stoffman was the founding investor and executive chairman of Checkmarx (acquired by Insight Venture Partners), and served on the board of directors of JetPrep (acquired by Cantel Medical; NYSE: CMD), CmyCasa (acquired by Adobe; NASDAQ: ADBE) and Activiews (acquired by Stryker; NYSE:SYK). Between 2004 and 2008 Mr. Stoffman was the CEO of Naiot Venture Accelerator, a leading healthcare and software accelerator, where he was leading the foundation of numerous start-up companies. Mr. Stoffman holds an LL.M. (negotiations and dispute resolution) degree from Bar-Ilan University and LL.B. and BA (Business Administration) degrees from the Interdisciplinary Center, Herzliya.
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Foreign Private Issuer
Under the Companies Law, companies incorporated under the laws of the State of Israel whose shares are publicly traded, including companies with shares listed on the Nasdaq Capital Market, are considered public companies under Israeli law and are required to comply with various corporate governance requirements under Israeli law relating to matters such as external directors, the audit committee, the compensation committee and an internal auditor. This is the case even if our shares are not listed on a stock exchange in Israel. These requirements are in addition to the corporate governance requirements imposed by the Listing Rules of the Nasdaq Capital Market, or the Nasdaq Marketplace Rules, and other applicable provisions of U.S. securities laws to which we are subject (as a foreign private issuer).
As a foreign private issuer, we are permitted to follow certain Israeli corporate governance practices instead of the Nasdaq Capital Market 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”:
| ● | our articles contain a quorum requirement such that the quorum for any meeting of shareholders is two or more shareholders holding at least 25% of our voting rights and if the meeting is adjourned for lack of quorum, the quorum for such adjourned meeting will be any number of shareholders, instead of 25% of our voting rights; |
| ● | our equity incentive plan is 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; |
| ● | with the exception of directors elected by our board of directors and external directors, our directors are elected by an annual meeting of our shareholders to hold office until the next annual meeting following one year from his or her election. The nominations for directors, which are presented to our shareholders by our board of directors, are generally made by the board of directors itself, in accordance with the provisions of our amended and restated articles of association and the Companies Law. Nominations need not be made by a nominating committee of our board of directors consisting solely of independent directors, as required under the Nasdaq Marketplace Rules; |
| ● | as opposed to making periodic reports to shareholders and proxy solicitation materials available to shareholders in the manner specified by the Nasdaq Marketplace 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 the requirements provided in the Nasdaq Marketplace Rules 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 Capital Market. We may in the future decide to use the foreign private issuer exemption with respect to some or all of the other the Nasdaq Capital Market corporate governance rules. Following the closing of this offering, we also intend to comply with Israeli corporate governance requirements under the Companies Law applicable to public companies. Accordingly, our shareholders may not be afforded the same protection as provided under Nasdaq Marketplace Rules.
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Board Practices
Our amended and restated articles of association provide that we may have between five and eight and directors, including directors who serve as external directors under the Companies Law. At the closing of this offering, our board of directors will consist of six directors. Other than our external directors, our directors are elected by an ordinary resolution at the annual and/or special general meeting of our shareholders. Each director who is not an external director will hold office until the next annual general meeting of our shareholders, unless they are removed by a majority of the shares voted at a general meeting of our shareholders or upon the occurrence of certain events, in accordance with the Companies Law and our amended and restated articles of association.
Because our ordinary shares do not have cumulative voting rights in the election of directors, the holders of a majority of the voting power represented at a shareholders meeting have the power to elect all of our directors up for election or re-election, subject to the special approval requirements for external directors.
In addition, if a director’s office becomes vacant, the remaining serving directors may continue to act in any manner, provided that their number is of the minimal number specified in our amended and restated articles of association. If the number of serving directors is lower than such minimum number, then our board of directors may only act in an emergency or to fill the office of director which has become vacant up to a number equal to the minimum number provided for pursuant to our amended and restated articles of association, or in order to call a general meeting of our shareholders for the purpose of electing directors to fill any of our vacancies. In addition, the directors may appoint, immediately or of a future date, additional director(s) to serve until the subsequent annual general meeting of our shareholders, provided that the total number of directors in office shall not exceed directors.
Pursuant to the Companies Law and our amended and restated articles of association, a resolution proposed at any meeting of our board of directors at which a quorum is present is adopted if approved by a vote of a majority of the directors present and voting. A quorum of the board of directors requires at least a majority of the directors then in office who are lawfully entitled to participate in the meeting.
Under the Companies 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 the holders of a majority of the shares of the company represented and voted at the meeting in person or by proxy or written ballot and for a term not exceeding three (3) years from the date of the shareholder’s meeting, provided that:
| ● | at least a majority of the shares of non-controlling shareholders or shareholders that do not have a personal interest in the approval voted at the meeting are voted in favor (disregarding abstentions); or | |
| ● | the total number of shares of non-controlling shareholders or shareholders that do not have a personal interest in the approval voted against the proposal does not exceed 2% of the aggregate voting rights in the company. |
In addition, a person subordinated, directly or indirectly, to the chief executive officer may not serve as the chairman of the board of directors; the chairman of the board of directors may not be vested with authorities that are granted to those subordinated to the chief executive officer; and the chairman of the board of directors may not serve in any other position in the company or a controlled company, except as a director or chairman of a controlled company.
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. He or she must be able to thoroughly comprehend the financial statements of the listed 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 [ ] director with the requisite financial and accounting expertise. The board of directors has determined that [ ] have the requisite financial and accounting expertise.
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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 Capital Market, are required to appoint at least two external directors. While the Companies Law carves out certain exemptions, we cannot avail ourselves of these exemptions at this time.
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 the following, or an affiliated entity: (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 chief executive officer (referred to in the Companies Law as a general manager), 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 entity, 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.
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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.
According to regulations promulgated under the Companies law, at least one of the external directors is required to have “financial and accounting expertise,” unless another member of the audit committee, who is an independent director under the Nasdaq Stock Market rules, has “financial and accounting expertise,” and the other external director or directors are required to have “professional expertise.” An external director may not be appointed to an additional term unless: (1) such director has “accounting and financial expertise;” or (2) he or she has “professional expertise,” and on the date of appointment for another term there is another external director who has “accounting and financial expertise” and the number of “accounting and financial experts” on the board of directors is at least equal to the minimum number determined appropriate by the board of directors.
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 by way of (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 only apply for one year from the date such external director ceased to be engaged in such capacity.
The provisions of the Companies Law set forth special approval requirements for the election of external directors. External directors must be elected by a majority vote of the shares present and voting at a shareholders meeting, provided that either:
| ● | such majority includes at least a majority of the shares held by shareholders who are non-controlling shareholders and do not have a personal interest in the election of the external director (other than a personal interest not deriving from a relationship with a controlling shareholder) that are voted at the meeting, excluding abstentions, to which we refer as a disinterested majority; or |
| ● | the total number of shares voted by non-controlling shareholders and by shareholders who do not have a personal interest in the election of the external director, against the election of the external director, does not exceed 2% of the aggregate voting rights in the company. |
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The initial term of an external director is three years. Thereafter, an external director may be reelected by shareholders to serve in that capacity for up to two additional three-year terms, provided that:
| ● | 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. In such event, the external director so reappointed may not be a Related or Competing Shareholder, as defined below, or a relative of such shareholder, at the time of the appointment, and is not and has not had any affiliation with a Related or Competing Shareholder, at such time or during the two years preceding such person’s reappointment to serve an additional term as external director. The term “Related or Competing Shareholder” means a shareholder proposing the reappointment or a shareholder holding 5% or more of the outstanding shares or voting rights of the company, provided, that at the time of the reappointment, such shareholder, the controlling shareholder of such shareholder, or a company controlled by such shareholder, have a business relationship with the company or are competitors of the company; |
| ● | the external director proposed his or her own nomination, and such nomination was approved in accordance with the requirements described above; |
| ● | his or her service for each such additional term is recommended by the board of directors and is approved at a shareholders meeting by the same majority required for the initial election of an external director (as described above). |
The term of office for external directors for Israeli companies traded on certain foreign stock exchanges, including the Nasdaq Marketplace Rules, may be extended indefinitely in increments of additional three-year terms, in each case provided that the audit committee and the board of directors of the company confirm that, in light of the external director’s expertise and special contribution to the work of the board of directors and its committees, the reelection for such additional period(s) is beneficial to the company, and provided that the external director is reelected subject to the same shareholder vote requirements as if elected for the first time (as described above).
External directors may be removed from office by a special general meeting of shareholders called by the board of directors, which approves such dismissal by the same shareholder vote percentage required for their election, after receiving the board of directors arguments for such removal, or by a court, in each case, only under limited circumstances, including ceasing to meet the statutory qualifications for appointment, or violating their duty of loyalty to the company. If an external directorship becomes vacant and there are fewer than two external directors on the board of directors at the time, then the board of directors is required under the Companies Law to call a shareholders meeting as soon as practicable to appoint a replacement external director.
Each committee of the board of directors that is authorized to exercise the powers of the board of directors must include at least one external director, except that the audit committee and the compensation committee must include all external directors then serving on the board of directors.
External directors may be compensated only in accordance with regulations adopted under the Companies Law.
Committees of the Board of Directors
Audit Committee
Under the Companies Law, the board of directors of a public company must appoint an audit committee, comprised of at least three directors.
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Nasdaq Capital Market requirements
Under the Nasdaq Marketplace 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 currently consists of three (3) persons. The current members of the audit committee are Efi Cohen-Arazi, Eli Hazum and Assif Stoffman. Upon the conclusion of this Offering, Eli Hazum and Assif Stoffman will be replaced as members of our audit committee with two (2) independent directors so that each member of our audit committee will be independent as such term is defined in Rule 10A-3 under the Exchange Act, and each member of our audit committee members will satisfy the additional requirements applicable under the Nasdaq Marketplace Rules to members of audit committees. [ ] will serve as chairman of the committee. Our board of directors has determined that [ ] is an “audit committee financial expert” as defined by the SEC rules and has the requisite financial experience as defined by the Nasdaq Marketplace Rules.
Under the Companies Law, we are required to appoint an audit committee. The audit committee must be comprised of at least three directors, including all of the external directors, one of whom must serve as chairman of the committee. Under the Companies Law, the audit committee may not include the chairman of the board of directors, a controlling shareholder of the company or a relative of a controlling shareholder, a director employed by or providing services on a regular basis to the company, to a controlling shareholder or to an entity controlled by a controlling shareholder or a director most of whose livelihood depends on a controlling shareholder.
In addition, as explained above, under the Companies Law, the audit committee of a publicly traded company must consist of a majority of unaffiliated directors. In general, an “unaffiliated director” under the Companies Law is defined as either an external director or as a director who meets the following criteria:
| ● | he or she meets the qualifications for being appointed as an external director, except for the requirement that the director be an Israeli resident (which does not apply to companies whose securities have been offered outside of Israel or are listed outside of Israel); and |
| ● | he or she has not served as a director of the company for a period exceeding nine consecutive years, provided that, for this purpose, a break of less than two years in service shall not be deemed to interrupt the continuation of the service. |
The Companies Law further requires that generally, any person who does not qualify to be a member of the audit committee may not attend the audit committee’s meetings and voting sessions, unless such person was invited by the chairperson of the committee for the purpose of presenting on a specific subject; provided, however, that an employee of the company who is not the controlling shareholder or a relative of a controlling shareholder may attend the discussions of the committee, provided that any resolutions approved at such meeting are voted on without his or her presence. A company’s legal advisor and company secretary who are not the controlling shareholder or a relative of a controlling shareholder may attend the meeting and voting sessions, if required by the committee.
The quorum required for the convening of meetings of the audit committee and for adopting resolutions by the audit committee is a majority of the members of the audit committee, provided such majority is comprised of a majority of independent directors, at least one of whom is an external director.
Approval of transactions with related parties
Under the Companies Law, the approval of the audit committee is required to effect specified actions and transactions with office holders and controlling shareholders and their relatives, or in which they have a personal interest. See “Management—Fiduciary duties and approval of specified related party transactions under Israeli law.” The audit committee may not approve an action or a transaction with a controlling shareholder or with an office holder unless at the time of approval the audit committee meets the composition requirements under the Companies Law.
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Audit committee role
Our board of directors has adopted an audit committee charter setting forth the responsibilities of the audit committee consistent with the rules of the SEC and the Nasdaq Marketplace Rules, which include, among others:
| ● | retaining and terminating our independent auditors, subject
to the ratification of the board of directors, and in the case of retention, to that
of the shareholders; |
| ● | pre-approving of audit and non-audit services and related
fees and terms, to be provided by the independent auditors; |
| ● | overseeing the accounting and financial reporting processes
of the Company and audits of our financial statements, the effectiveness of our internal
control over financial reporting and making such reports as may be required of an audit
committee under the rules and regulations promulgated under the Exchange Act; |
| ● | reviewing with management and our independent auditor our
annual and quarterly financial statements prior to publication or filing (or submission,
as the case may be) to the SEC; |
| ● | recommending to the board of directors the retention and
termination of the internal auditor, and the internal auditor’s engagement fees
and terms, in accordance with the Companies Law as well as approving the yearly or periodic
work plan proposed by the internal auditor; |
| ● | reviewing with our general counsel and/or external counsel,
as deem necessary, legal and regulatory matters that could have a material impact on
the financial statements; |
| ● | identifying irregularities in our business administration,
inter alia, by consulting with the internal auditor or with the independent auditor,
and suggesting corrective measures to the board of directors; and |
| ● | reviewing policies and procedures with respect to transactions
(other than transactions related to the compensation or terms of services) between the
company and officers and directors, or affiliates of officers or directors, or transactions
that are not in the ordinary course of the Company’s business and deciding whether
to approve such acts and transactions if so required under the Companies Law. |
Under the Companies Law, our audit committee is responsible for:
| ● | determining whether there are deficiencies or irregularities in the business management practices of our company, including in consultation with our internal auditor or the independent auditor, and making recommendations to the board of directors to improve such practices; |
| ● | determining the approval process for transactions with a controlling shareholder or in which a controlling shareholder has a personal interest; |
| ● | determining whether to approve certain related party transactions (including transactions in which an office holder has a personal interest and whether such transaction is extraordinary or material under Companies Law) (see “— Approval of Related Party Transactions under Israeli Law”); |
| ● | where the board of directors approves the working plan of the internal auditor, to examine such working plan before its submission to the board of directors and proposing amendments thereto; |
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| ● | examining our internal controls and internal auditor’s performance, including whether the internal auditor has sufficient resources and tools to dispose of its responsibilities; |
| ● | examining the scope of our auditor’s work and compensation and submitting a recommendation with respect thereto to our board of directors or shareholders, depending on which of them is considering the appointment of our auditor; and |
| ● | establishing procedures for the handling of employees’ complaints as to the management of our business and the protection to be provided to such employees. |
Compensation Committee and Compensation Policy
Upon completion of this offering, we intend to establish a compensation committee. The members of this committee will be Mr. Efi Cohen-Arazi, Mr. Assif Stoffman and an additional member. Mr. [ ] will serve as chairperson of the committee.
Israeli Companies Law Requirements
Under the Companies Law, the board of directors of a public company must appoint a compensation committee. The duties of the compensation committee include the recommendation to our board of directors of a policy regarding the terms of engagement of office holders (as defined in the Companies Law), to which we refer as a compensation policy. The term “office holder” is defined under the Companies Law as a chief executive officer (referred to in the Companies Law as the general manager), chief business manager, deputy general manager, vice general manager, any other person assuming the responsibilities of any of these positions regardless of that person’s title, a director and any other manager directly subordinate to the general manager. That policy must be adopted by our board of directors, after considering the recommendations of the compensation committee, and will need to be approved by our shareholders, which approval requires what we refer to as a Special Majority Approval for Compensation. A Special Majority Approval for Compensation requires shareholder approval by a majority vote of the ordinary shares present and voting at a meeting of shareholders called for such purpose, provided that either: (i) such majority includes at least a majority of the ordinary shares held by all shareholders who are not controlling shareholders and do not have a personal interest in such compensation arrangement, excluding abstentions; or (ii) the total number of ordinary shares of non-controlling shareholders and shareholders who do not have a personal interest in the compensation arrangement and who vote against the arrangement does not exceed 2% of the company’s aggregate voting rights.
Even if our shareholders do not approve the compensation policy, the board of directors may resolve to approve the compensation policy if and to the extent the compensation committee and the board determine, in its judgment following internal discussions and after reconsidering the compensation policy, that approval of the compensation policy is in the best interests of the company.
Pursuant to regulations promulgated under the Companies Law, if a company adopts a compensation policy in advance of its initial public offering and describes it in its prospectus, then the compensation policy shall be deemed a validly adopted policy and will remain in effect for a term of five years from the date the company becomes a public company. Our compensation policy will be approved by our shareholders prior to the effectiveness of the registration statement of which this prospectus forms a part and, in accordance with the regulations promulgated under the Companies Law, will be in effect for a period of five years from the effectiveness of the registration statement of which this prospectus forms a part. The compensation policy will be reviewed from time to time by our compensation committee and our board of directors, according to the requirements of 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 long-term objectives, business plan and policies, and creation of appropriate incentives for office holders. It must also consider, among other things, the company’s risk management, size and the nature of its operations. The compensation policy must furthermore consider the following additional factors:
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| ● | the education, skills, expertise and accomplishments of the relevant office holder; |
| ● | the office holder’s roles and responsibilities and prior compensation agreements with him or her; |
| ● | the relationship between the terms offered and the average compensation of the company’s personnel, including those employed through outsourcing firms; |
| ● | the impact of disparities in salary upon work relationships in the company; |
| ● | the possibility of reducing variable compensation at the discretion of the board of directors; |
| ● | the possibility of setting a limit on the exercise value of non-cash variable equity-based compensation; and |
| ● | as to severance compensation, the period of service of the office holder, the terms of his or her compensation during such service period, the company’s performance during that period of service, the person’s contribution towards the company’s achievement of its goals and the maximization of its profits, and the circumstances under which the person is leaving the company. |
The compensation policy must also include the following principles:
| ● | the link between variable compensation and long-term performance and measurable criteria; |
| ● | the relationship between variable and fixed compensation, and the ceiling for the value of variable compensation; |
| ● | the conditions under which an office holder would be required to repay compensation paid to him or her if it was later shown that the data upon which such compensation was based was inaccurate and was restated in the company’s financial statements; |
| ● | the minimum holding or vesting period for variable, equity-based compensation while referring to an appropriate long-term perspective based incentives; and |
| ● | maximum limits for retirement payments. |
Our compensation policy, which will become effective upon closing of this offering, is designed to promote retention and motivation of directors and executive officers. Additionally, our compensation policy is designed to align the interests of our directors and executive officers with our long-term performance and will serve as a risk management tool. Under our compensation policy, a portion of an executive officer’s compensation package is targeted to reflect our short- and long-term goals, as well as the executive officer’s individual performance. Our compensation policy also includes measures designed to reduce an executive officer’s incentives to take excessive risks that may harm us in the long term. Such measures include limits on the value of cash bonuses and equity-based compensation for executive officers, limits on the ratio between an executive officer’s variable and total compensation, and minimum vesting periods for equity-based compensation.
Our compensation policy takes into account an executive officer’s individual characteristics, such as his or her respective position, educational background, scope of responsibilities and contributions 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.
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Pursuant to our compensation policy, compensation that may be granted to an executive officer may include base salary, an annual bonus, other cash bonuses (such as a signing bonus or special bonus for special achievements, such as an outstanding personal achievement, outstanding personal effort or outstanding company performance), equity-based compensation, benefits and retirement compensation and termination of service arrangements. All cash bonuses are limited to a maximum amount linked to the executive officer’s base salary. In addition, the total variable compensation components (cash bonuses and equity-based compensation) may not exceed 85% of each executive officer’s total compensation package with respect to any given calendar year.
An annual cash bonus may be awarded to executive officers upon the attainment of pre-set periodic objectives and individual targets. The annual cash bonus that may be granted to our executive officers (excluding 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 is subject to minimum thresholds. The annual cash bonus that may be granted to executive officers (excluding 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. Such objectives will include the weight 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.
Under our compensation policy, equity-based compensation for executive officers (including members of our board of directors) is designed in a manner consistent with the underlying objectives in determining such person’s annual cash bonus; namely, to enhance the alignment between such person’s interests with the company’s long-term interests and those of our shareholders and to strengthen the retention and motivation of such persons in the medium to long term.
Our compensation policy provides for executive officer’s compensation to be 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. Equity-based compensation shall be granted from time to time and will be individually determined and awarded based on 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 that allow the company, under certain conditions, to recover bonuses paid in excess. Moreover, the compensation policy enables our chief executive officer to approve immaterial changes to the terms of an executive officer’s employment (provided that the changes of the terms of employment are in accordance our compensation policy) and allows the company to exculpate, indemnify and insure our executive officers and directors subject to certain limitations.
Our compensation policy also provides for compensation for the members of our board of directors to be determined either (i) in accordance with the amounts set forth 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.
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Compensation Committee Roles
The compensation committee is responsible for (i) recommending the compensation policy to our board of directors for its approval (and subsequent approval by our shareholders) and (ii) undertaking duties related to the compensation policy and to the compensation of our office holders, including:
| ● | recommending whether a compensation policy should continue in effect, if the then-current policy has a term of greater than five years from the company’s initial public offering, or otherwise three years (approval of either a new compensation policy or the continuation of an existing compensation policy must in any case occur five years from the company’s initial public offering, or otherwise every three years); |
| ● | recommending to the board of directors periodic updates to the compensation policy; |
| ● | assessing implementation of the compensation policy; |
| ● | determining whether to approve the terms of compensation of certain office holders which, according to the Companies Law, require the committee’s approval; and |
| ● | determining whether the compensation terms of a candidate for the position of the chief executive officer of the company needs to be brought to approval of the shareholders according to the Companies Law. |
Our compensation committee charter, to be effective upon closing of this offering, sets forth the responsibilities of the compensation committee, which include:
| ● | the responsibilities set forth in the compensation policy; |
| ● | reviewing and approving the granting of options and other incentive awards to the extent such authority is delegated by our board of directors; and |
| ● | reviewing, evaluating and making recommendations regarding the compensation and benefits for our non-employee directors. |
In addition, our compensation committee is responsible for:
| ● | overseeing our corporate governance functions on behalf of the board; |
| ● | making recommendations to the board regarding corporate governance issues; |
| ● | identifying and evaluating candidates to serve as our directors consistent with the criteria approved by the board; |
| ● | reviewing and evaluating the performance of the board; |
| ● | serving as a focal point for communication between director candidates, non-committee directors and our management; selecting or recommending to the board for selection candidates to the board; and |
| ● | making other recommendations to the board regarding affairs relating to our directors. |
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 cannot be an interested party or an office holder or a relative of an interested party or an office holder, nor may the internal auditor be the company’s independent auditor or its representative. 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, (iii) any person who serves as an office holder of the company or (iv) a member of the company’s independent accounting firm, or anyone on his or her behalf. As of the date of this prospectus, we have not yet appointed our internal auditor.
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Fiduciary duties and approval of specified related party transactions under Israeli law
Fiduciary duties of office holders
The Companies Law imposes a duty of care and a duty of loyalty on all office holders of a company.
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. The 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 others, a duty to use reasonable means, in light of the circumstances, to obtain:
| ● | information on the advisability of a given action brought for his or her approval or performed by virtue of his or her position; and |
| ● | all other important information pertaining to these actions. |
The duty of loyalty requires an office holder to act in good faith and for the benefit of the company, and includes, among others, 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 benefit for himself or herself or for 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 that would otherwise constitute a breach of the duty of loyalty of an office holder, 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, including any related material information or document, 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 methods of obtaining such approval.
Disclosure of personal interests of an office holder and approval of acts and 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 with the company. An interested office holder’s disclosure must be made promptly and in any event no later than the first meeting of the board of directors at which the transaction is considered. An office holder is not obliged to make such disclosure 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 as an extraordinary transaction.
Under the Companies Law, once an office holder has complied with the above disclosure requirements, 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, or approve an action by the office holder that would otherwise be deemed a breach of duty of loyalty, however, a company may not approve a transaction or action that is not performed by the office holder in good faith or is not in the company’s interest.
Under the Companies Law, unless the articles of association of a company provide otherwise, a transaction with an office holder or a transaction with a third party in which the office holder has a personal interest (an action of an office holder that would otherwise be deemed a breach of duty of loyalty), which is not an extraordinary transaction as defined under the Companies Law, requires approval of the board of directors. Our amended and restated articles of association do not provide otherwise.
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Under the Companies Law, an extraordinary transaction in which an office holder has a personal interest requires approval first by the company’s audit committee and subsequently by the board of directors. The compensation of, or an undertaking to indemnify or insure, an office holder who is not a director requires approval first by the company’s compensation committee, then by the company’s board of directors, and, if such compensation arrangement or an undertaking to indemnify or insure is inconsistent with the company’s stated compensation policy or if the office holder is the chief executive officer (apart from a number of exceptions), then such arrangement is subject to a Special Approval for Compensation. Arrangements regarding the compensation, indemnification or insurance of a director or the chief executive officer of the company, require the approval of the compensation committee, board of directors and, subject to certain exceptions, shareholders by an ordinary majority, in that order, and in the case of the chief executive officer or under certain circumstances, a Special Approval for Compensation.
An office holder who has a personal interest in a matter that is considered at a meeting of the board of directors or the audit committee may generally not be present at the meeting or vote on the matter unless a majority of the directors or members of the audit committee have a personal interest in the matter, or unless the chairman of the audit committee or board of directors (as applicable) determines that he or she should be present to present the transaction that is subject to approval. If a majority of the directors have a personal interest in the matter, such matter also requires approval of the shareholders of the company.
Under the Companies Law, the definition of a “personal interest” includes the personal interest of a person in an action or a transaction of a company, including the personal interest of such person’s relative or the interest of any corporation in which the person and/or such person’s relative is a director or chief executive officer, a 5% or more shareholder or holds 5% or more of the voting rights, or has the right to appoint at least one director or the chief executive officer, 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 the proxy to another person to vote on his or her behalf, regardless of whether the proxy holder has discretion how to vote on the matter.
Under the Companies Law, an “extraordinary transaction” is defined as any of the following:
| ● | a transaction other than in the ordinary course of business; |
| ● | a transaction that is not on market terms; or |
| ● | a transaction that may have a material impact on the company’s profitability, assets or liabilities. |
Disclosure of personal interests of a controlling shareholder and approval of transactions
Under the Companies Law, the disclosure requirements that apply to an office holder also apply to a controlling shareholder of a public company. See “Management — Audit committee — Approval of transactions with related parties” for a definition of controlling shareholder. Unless exempted under the Companies Law, extraordinary transactions with a controlling shareholder or in which a controlling shareholder has a personal interest, which includes transactions for the provision of services by a controlling shareholder or his or her relative, whether directly or indirectly, including through a company controlled by such controlling shareholder, and if such controlling shareholder or relative thereof is an office holder in the company, any transactions regarding his or her terms of office, require the approval of the audit committee, the board of directors and a majority of the shares voted by the shareholders of the company participating and voting on the matter in a shareholders’ meeting. In addition, the shareholder approval must fulfill one of the following requirements, which we refer to as a Special Majority:
| ● | at least a majority of the shares held by shareholders who do not have a personal interest in the transaction are voted in favor of approving the transaction, excluding abstentions; or | |
| ● | the shares voted by shareholders who do not have a personal interest in the transaction who vote against the transaction represent no more than 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.
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Arrangements regarding the compensation, indemnification or insurance of a controlling shareholder in his or her capacity as an office holder require the approval of the compensation committee, board of directors and shareholders by a Special Majority and the terms thereof may not be inconsistent with the company’s stated compensation policy.
Pursuant to regulations promulgated under the Companies Law, certain transactions and arrangements with a controlling shareholder or his or her relative, or with directors or office holders, which would otherwise require approval of a company’s shareholders, may be exempt from shareholder approval under certain conditions.
The Companies Law requires that every shareholder that participates, in person, by proxy or by voting instrument, in a vote regarding a transaction with a controlling shareholder, must indicate in advance or in the ballot whether or not that shareholder has a personal interest in the vote in question. Failure to so indicate will result in the invalidation of that shareholder’s vote.
Disclosure of Compensation of Executive Officers
For so long as we qualify as a foreign private issuer, we are not required to comply with the proxy rules applicable to U.S. domestic companies, including the requirement applicable to emerging growth companies to disclose the compensation of our chief executive officer and other two most highly compensated executive officers on an individual, rather than an aggregate, basis. Nevertheless, regulations promulgated under the Companies Law will require us, after we become a public company, to disclose the annual compensation of our five most highly compensated office holders on an individual basis, rather than on an aggregate basis. This disclosure will not be as extensive as that required of a U.S. domestic issuer. We intend to commence providing such disclosure, at the latest, in the proxy statement for our first annual general meeting of shareholders following this offering, which will be furnished under cover of a Form 6-K and we may elect to provide such information at an earlier date.
Compensation of Directors and Executive Officers
Directors. Under the Companies Law, the compensation of our directors requires the approval of our compensation committee, the subsequent approval of the board of directors and, unless exempted under regulations promulgated under the Companies Law, the approval of the shareholders at a general meeting. If the compensation of our directors is inconsistent with our stated compensation policy, then, those provisions that must be included in the compensation policy according to the Companies Law must have been considered by the compensation committee and board of directors, and shareholder approval will also be required, provided that:
| ● | at least a majority of the shares held by 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 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.
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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 general 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 above mentioned shareholder duties, and in the event of discrimination against other shareholders, additional remedies are available to the injured shareholder.
In addition, any controlling shareholder, any shareholder that knows that its vote can determine the outcome of a shareholder vote and any shareholder that, under a company’s articles of association, has the power to appoint or prevent the appointment of an office holder, or any other power with respect to the company, has 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 completed intended to obviate the need to control a special tender offer (see “Description of Share Capital—Acquisitions under Israeli law”), or a private placement which qualifies as a related party transaction (see “Management—Board practices—Fiduciary duties and approval of specified related party transactions under Israeli law”), approval at a general meeting of the shareholders of a company is required.
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Exculpation, Insurance and Indemnification of Office Holders
Under the Companies Law, a company may not exculpate an office holder from liability for a breach of the duty of loyalty. A 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 the 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. An Israeli company may not exculpate a director from liability arising out of a breach of the duty of care with respect to a dividend or distribution to shareholders.
Under the Companies Law and the 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 as an office holder, either pursuant to an undertaking made in advance of an event or following an event, provided a provision authorizing such indemnification is contained in its articles of association:
| ● | a monetary liability incurred by or imposed on him or her in favor of another person pursuant to a judgment, including a settlement or arbitrator’s award approved by a court. However, if an undertaking to indemnify an office holder with respect to such liability is provided in advance, then such undertaking must be limited to certain 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 foreseen events and described above amount or criteria; | |
| ● | reasonable litigation expenses, including reasonable attorneys’ fees, incurred by the office holder as (1) a result of an investigation or proceeding instituted against him or her by an authority authorized to conduct such investigation or proceeding, provided that (i) no indictment was filed against such office holder as a result of such investigation or proceeding; and (ii) no financial liability was imposed upon him or her as a substitute for the criminal proceeding as a result of such investigation or proceeding or, if such financial liability was imposed, it was imposed with respect to an offense that does not require proof of criminal intent; or (2) in connection with a monetary sanction; | |
| ● | a monetary liability imposed on him or her in favor of an injured party at an Administrative Procedure (as defined below) pursuant to Section 52(54)(a)(1)(a) of the Securities Law; | |
| ● | expenses incurred by an office holder in connection with an Administrative Procedure under the Securities Law, including reasonable litigation expenses and reasonable attorneys’ fees; and | |
| ● | reasonable litigation expenses, including attorneys’ fees, incurred by the office holder or imposed by a court in proceedings instituted against him or her by the company, on its behalf or by a third party or in connection with criminal proceedings in which the office holder was acquitted or as a result of a conviction for an offense that does not require proof of criminal intent. |
“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 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 breach of duty of loyalty to the company, provided that the office holder acted in good faith and had a reasonable basis to believe that the act would not harm the company; | |
| ● | a 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. |
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Under the Companies Law, a company may not indemnify, exculpate or insure an office holder against any of the following:
| ● | a breach of duty of loyalty, except for indemnification and insurance for a breach of the duty of loyalty to the company to the extent that the office holder acted in good faith and had a reasonable basis to believe that the act would not harm the company; | |
| ● | a breach of the duty of care committed intentionally or recklessly, excluding a breach arising out of the negligent conduct of the office holder; | |
| ● | an act or omission committed with intent to derive illegal personal benefit; or | |
| ● | a fine 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 certain office holders or under certain circumstances, also by the shareholders. See “Management—Board practices—Fiduciary duties and approval of specified related party transactions under Israeli law.”
Our amended and restated articles of association permit us to, exculpate, indemnify and insure our office holders as permitted under the Companies Law. Our office holders are currently covered by a directors and officers’ liability insurance policy. We intend to obtain a new policy that insures our officers and directors against the cost of defense, settlement or payment of a judgment in some circumstances and insures us against our obligations to indemnify our officers and directors. We are not aware of any pending or threatened litigation or proceeding involving any of our directors or officers in which indemnification is sought, nor are we aware of any pending or threatened litigation that may result in claims for indemnification by any director or officer.
We have entered into agreements with each of our directors and executive officers exculpating them, to the fullest extent permitted by law, from liability to us for damages caused to us as a result of a breach of duty of care, and undertaking to indemnify them to the fullest extent permitted by law. The insurance is subject to our discretion depending on its availability, effectiveness and cost. Effective as of the consummation of this offering, the maximum amount set forth in such agreements is (1) with respect to indemnification in connection with a public offering of our securities, the gross proceeds raised by us and/or any selling shareholder in such public offering, and (2) with respect to all permitted indemnification, the greater of (i) an amount equal to 25% of our shareholders’ equity, based on our most recent financial statements made publicly available before the date on which the indemnity payment is made and (ii) $40 million. In the opinion of the SEC, indemnification of directors and executive officers for liabilities arising under the Securities Act however, is against public policy and therefore unenforceable.
A stockholder’s investment may be adversely affected to the extent we pay the costs of settlement and damage awards against officers and directors pursuant to these indemnification provisions. We believe that these provisions, the insurance and the indemnity agreements are necessary to attract and retain talented and experienced officers and directors.
Equity Incentive Plan
2008 PainReform Option Plan
We adopted our 2008 PainReform Option Plan (the “2008 Plan”), on August 7, 2008. The 2008 Plan has expired and no additional grants may be made. As of December 31, 2019, options to purchase 461,645 ordinary shares remain outstanding with an exercise price of $0.08 per share.
2019 PainReform Option Plan
We adopted our 2019 PainReform Option Plan (the “2019 Plan”), on June 12, 2019 and it is scheduled to expire on June 11, 2029. The 2019 Plan provides for the grant of options to our directors, officers, employees, consultants, advisers and service providers. As of December 31, 2019, options to purchase 658,369 ordinary shares were outstanding with no additional ordinary shares available for future issuance. Of such outstanding options, options to purchase 441,706 ordinary shares were vested as of December 31, 2019, with a weighted average exercise price of US$ 0.754 per share.
The 2019 Plan provides for options to be granted at the determination of our board of directors (which is entitled to delegate its powers under the 2019 Plan to our compensation committee) subject to applicable laws. Upon termination of employment for any reason, other than in the event of death or disability or for cause, all unvested options will expire and all vested options at time of termination will generally be exercisable for 90 days following termination, subject to the terms of the 2019 Plan and the governing option agreement. If we terminate a grantee’s employment or engagement for cause (as defined in the 2019 Plan) the grantee’s right to exercise all vested and unvested the options granted to him or her will expire immediately. Upon termination of employment due to death or disability, all the vested options at the time of termination will be exercisable for 12 months after date of termination, subject to the terms of the 2019 Plan and the governing option agreement.
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Pursuant to the 2019 Plan, we may award options pursuant to Section 102 of the Israeli Income Tax Ordinance [New Version], 5721-1961, or the Ordinance, and section 3(I) of the Ordinance, based on entitlement and compliance with the terms for receiving options under these sections of the Ordinance. Section 102 of the Ordinance provides to employees, directors and officers who are not controlling shareholders (i.e., such persons are not deemed to hold 10% of our share capital, or to be entitled to 10% of our profits or to appoint a director to our board of directors) and are Israeli residents, favorable tax treatment for compensation in the form of shares or options issued or granted, as applicable, to a trustee under the “capital gains track” for the benefit of the applicable employee, director or officer and are (or were) to be held by the trustee for at least two years after the date of grant or issuance. Options granted under Section 102 of the Ordinance will be deposited with a trustee appointed by us in accordance with Section 102 of the Ordinance and the relevant income tax regulations and guidelines, and will be granted in the employee income track or the capital gains track.
Options granted under the 2019 Plan are subject to applicable vesting schedules and generally expire 10 years from the grant date.
In the event that options allocated under the 2019 Plan expire or otherwise terminate in accordance with the provisions of the 2019 Plan, such expired or terminated options will become available for future grant awards and allocations under the 2019 Plan.
The following table sets forth information with respect to the beneficial ownership of our shares as of May 11, 2020 as adjusted to reflect the sale of ordinary shares offered by us in this offering, by:
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● | each of our executive officers and directors; |
| ● | each person or entity known by us to beneficially own 5% or more of our outstanding shares; and | |
| ● | all of our executive officers and directors as a group. |
As of May 11, 2020, 1,729,670 of our ordinary shares are outstanding. Beneficial ownership is determined in accordance with the rules of the SEC. These rules generally attribute beneficial ownership of securities to persons who possess sole or shared voting or investment power with respect to those securities, and include shares subject to options and warrants that are exercisable within 60 days from the date of this registration statement. Such shares are also deemed outstanding for purposes of computing the percentage ownership of the person holding the option, but not the percentage ownership of any other person. As of December 31, 2019, none of our outstanding ordinary shares were held of record by U.S. Persons.
Unless otherwise indicated below, to our knowledge, all persons named in the table have sole voting and investment power with respect to their shares, except to the extent that authority is shared by spouses under community property laws. None of our shareholders has informed us that he, she, or it is affiliated with a registered broker-dealer or is in the business of underwriting securities. None of our shareholders has different voting rights from other shareholders.
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Except as otherwise noted below, the address for persons listed in the table is c/o Medica Venture Partners, 60C Medinat Hayehudim, Herzliya, 4676670, Israel.
| Ordinary Shares Beneficially Owned Before The Offering | Percentage Owned Before The Offering | Ordinary Shares Beneficially Owned After The Offering | Percentage Owned After The Offering | |||||||||||||
| 5% Shareholders | ||||||||||||||||
| XT Hi-Tech Investments (1992) Ltd. (1) | 4,673,025 | 27.62 | % | XX.XX | % | |||||||||||
| D Partners 2 (2) | 1,402,375 | 8.29 | % | |||||||||||||
| Medica III Investments (3) | 9,018,083 | 53.30 | % | |||||||||||||
| Executive officers and directors | ||||||||||||||||
| Dr. David E. Weinstein (4) | 323,924 | 3.21 | % | % | ||||||||||||
| Dr. Sigal Aviel(5) | 191,871 | 2.81 | % | |||||||||||||
| Professor Eli Hazum (6) | 461,645 | 4.17 | % | % | ||||||||||||
| Assif Stoffman (7) | - | % | ||||||||||||||
| Total for all directors, director nominees and executive officers as a group (4 persons) | 977,440 | 10.19 | % | | | |||||||||||
| (1) | XT Hi-Tech Investments (1992) Ltd., is an indirect wholly owned subsidiary of XT Investments Ltd., which is a direct wholly-owned subsidiary of XT Holdings Ltd., of which Orona Investments Ltd. (“Orona”) and Lynav Holdings Ltd. (“Lynav”) are each the direct owners of one-half of the outstanding ordinary shares. Orona is indirectly owned 56% by Mr. Udi Angel, who also indirectly owns 100% of the means of control of Orona. Lynav is held 95% by CIBC Bank and Trust Company (Cayman) Ltd. (“CIBC”) as trustee of a discretionary trust established in the Cayman Islands. Udi Angel is member of the board of directors of XT Hi-Tech Investments (1992) Ltd. and has a casting vote with respect to various decisions taken by the board including voting and disposition over shares held by XT Hi-Tech Investments (1992) Ltd. The principal business address XT Hi-Tech Investments (1992) Ltd. is 9 Andrei Sakharov St., Haifa, Israel. |
| (2) | D Partners 2 is a fund comprised of two limited partnerships formed under the laws of the Cayman Islands and of Israel. Mr. Shlomo Dovrat, Mr. Harel Beit-On, Mr. Avi Zeevi and Mr. Eylon Penchas hold indirect interests of more than 5% in, and are directors in, and/or shareholders of, various entities that comprise the General Partner of D Partners 2 and may be deemed to be the beneficial owners of the PainReform shares held by D Partners 2. Mr. Dovrat, Mr. Beit-On, Mr. Zeevi and Mr. Penchas disclaim beneficial ownership of the shares held by D Partners 2 except to the extent of their respective pecuniary interests therein. D Partners 2 and the individuals and entities that control it are part of a group generally known as “Viola Partners” or the “Viola” group. The principal business address of D Partners 2 is Ackerstein Towers Building D, Abba Eban Blvd 12, Herzliya, Israel. |
| (3) | Medica III Investment group includes Medica III Investments (International) L.P., Medica III Investments (Israel) L.P., Medica III Investments (S.F.) L.P., Medica III Investments (P.F.) L.P., Medica III Investments (Israel) (B) L.P., Poalim Medica III Investments L.P. The beneficial owners under Medica Group are: MCP Opportunity Secondary Program III L.P 10.57%, NYC Police Pension Fund 8.8%, Quantum Partners LDC 13.2%, Migdal Insurance Company Ltd 8.8%. None of which include individuals who hold more than 5% interest. Medica III Management L.P., an entity held 50% by Dr. Ehud Geller and 50% by Mrs. Batsheva Elran, is the managing entity of Medica III Fund. The principal business address of Medica III Investment is 60C Medinat Hayehudim, Herzliya, 4676670, Israel. |
| (4) | Consists of 323,924 options exercisable within 60 days of the date of this prospectus. |
| (5) | Consists of 191,871 options exercisable within 60 days of the date of this prospectus. |
| (6) | Consists of 461,645 options exercisable within 60 days of the date of this prospectus. |
| (7) | Mr. Stoffman is co-managing XT Hi-Tech, the venture capital arm of the global shipping and industrial group XT Holdings. Mr. Stoffman disclaims beneficial ownership of 4,673,025 ordinary shares held by XT Hi-Tech Investments (1992) Ltd. |
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CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
The following is a description of the material terms of those transactions with related parties to which we are party to date.
Relationships and Transactions with Directors and Executive Officers
Medica III Investments holds in the aggregate approximately [ ] % and [ ] % of our issued and outstanding share capital immediately prior to and immediately following the completion of this offering, respectively.
Prof. Eli Hazum has been a partner and CSO of Medica Venture Partners since 1995.
Any future agreements with Medica III Investments must be reviewed and approved by our audit committee and board of directors. See “Management - Approval of Related Party Transactions under Israeli Law.”
Service Agreements
On May 13, 2019 we entered into a service agreement with Dr. Weinstein under which he will serve as the CEO of the company and upon the successful completion of a financing of $25 million he will be appointed as the company’s CEO. From such time as the bride financing was completed (August 2019), until the completion of the offering he will receive a monthly fee of $5,000 which will increase to $27,083 per month upon successful completion of an offering with proceeds of $25 million. In addition to the monthly fee, upon completion of the $25 million financing and subject to the sole discretion of the Board, he may be entitled to: (i) a performance based bonus in the aggregate amount of up to six (6) times his monthly fee; (ii) an additional grant of options to purchase ordinary shares of the company under 2019 Plan as determined by the Board; and (iii) other standard benefits provided by companies similar to the company. The engagement will continue unless terminated by either party, subject to 30 days’ prior written notice or immediately in the event of just cause.
Israel Office Sublease
Since January 2014, we have subleased office space and received management services from Zori Medica 2010 Ltd., a private company affiliated with Medica Venture Partners, a controlling shareholder of the company, subject to an annual rental fee of $33,000 and a $20,000 quarterly management fee, which continued until the end of March 2018. The sublease ceased as of August 2019, and since then we have been provided with office space at no cost by Medica Venture Partners.
Indemnification Agreements
Prior to the effectiveness of the registration statement of which this prospectus forms a part, we intend to enter into separate indemnification agreements with each of our current office holders and other executives, exculpating them from a breach of their duty of care to us to the fullest extent permitted by law and undertaking to indemnify them to the fullest extent permitted by law, including with respect to liabilities resulting from this offering to the extent such liabilities are not covered by insurance. See “[ ]” for additional information.
Employment and Consulting Agreements
We have entered into employment or consulting agreements with all of our executive officers and key employees. These agreements contain standard provisions for a company in our industry regarding non-solicitation, confidentiality of information, non-competition and assignment of inventions. Our executive officers will not receive benefits upon the termination of their respective engagement with us, other than, as the case may be prior notice payment or mandatory severance payments salary and benefits (including accrued pension and limited accrual of vacation days) during the required notice period for termination of their employment, which varies for each individual. The agreements are terminable by us at will, subject to prior notice, which varies for each individual.
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Dr. Sigal Aviel has provided consulting services to our company since October 2014. On January 1, 2019, we entered into an employment agreement with Dr. Aviel pursuant to which she serves as our Chief Operating Officer. Dr. Aviel’s employment agreement provides for 93 monthly hours of service in consideration of a monthly gross base salary that will result in a cost to us that is equivalent in NIS to $9,000. Dr. Aviel will also be entitled to 14 days annual vacation days as well as full social benefits. The employment may terminate upon 60 days’ prior written notice by either party.
On April 1, 2018, we entered into a direct consultancy agreement with Prof. Hazum under which he was engaged to serve as our CEO on a 3 days per week basis. In December 2019, he was appointed as our Chief Technology Officer. In consideration for his services, Prof. Hazum is entitled to a monthly fee of $12,000. The engagement may be terminated upon 60 days’ prior written notice by either party.
The following description of our share capital and provisions of our amended and restated articles of association which will be effective upon the completion of this offering are summaries and do not purport to be complete.
General
Upon the closing of this offering, our authorized share capital will consist of [ ] ordinary shares, par value NIS 0.01 per share, of which [ ] will be issued and outstanding (assuming that the underwriters do not exercise their option to purchase additional ordinary shares).
All of our ordinary shares have identical voting and other rights in all respects. All of our issued and outstanding ordinary shares are duly authorized, validly issued, fully paid and non-assessable. Our amended and restated articles of association and the laws of the State of Israel do not restrict the ownership or voting of ordinary shares by non-residents of Israel, except with respect to citizens of countries that are, or have been, in a state of war with Israel.
Preferred Shares
Upon the consummation of this offering and the effectiveness of our amended and restated certificate of incorporation that will become effective immediately prior to the consummation of this offering, we will have no authorized or outstanding preferred shares.
Each currently outstanding Series A-1 Preferred Share (each a “Preferred Share”) is convertible, at the option of the holder at any time, and without the payment of additional consideration by the holder into the number of ordinary shares as is determined by dividing the original issue price for such Preferred Share by the conversion price that is in effect at the time of conversion. The initial conversion price is the original issue price for such Preferred Shares. The original issue price was $0.747 per share (“Original Issue Price”). The applicable conversion price of each is subject to adjustment upon any future stock splits or combinations, dividends and distributions, recapitalizations, or upon the issuance of any new securities as a price per share lower than the applicable conversion price of the Preferred Shares in effect immediately prior to such issuance.
All outstanding Preferred Shares will automatically be converted into fully paid and nonassessable ordinary shares, at the conversion price at the time in effect for such Preferred Shares, upon the earlier of: (i) the date specified in a written notice received by the company from the holders of at least the holders of a majority of the Preferred outstanding, or (ii) the consummation of a qualified public offering (such as this offering).
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Registration Number and Purposes of the Company
Our purpose as set forth in our amended and restated articles of association is to engage in any lawful activity. Our Israeli company number is 514418581. The address of our registered office is 60C Medinat Hayehudim, Herzliya, 4676670, Israel.
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.
Election of Directors
Under our amended and restated articles of association to be effective upon completion of this offering, our board of directors must consist of not less than three (3) but no more than nine (9) directors, including any external directors required to be appointed by the Companies Law. Pursuant to our amended and restated articles of association, other than the external directors, for whom special election requirements apply, and directors appointed by our board of directors, each of our directors will be appointed by [a simple majority] vote of holders of our voting shares, participating and voting at a general meeting of our shareholders.
In addition, our amended and restated articles of association allow our board of directors to fill vacancies on the board of directors or to appoint new directors up to the maximum number of directors permitted under our amended and restated articles of association. Such directors serve for a term of office equal to the remaining period of the term of office of the directors(s) whose office(s) have been vacated or in the case of new directors, to serve until the subsequent annual general meeting of our shareholders.
External directors are elected for an initial term of three years, may be elected for additional terms of three years each under certain circumstances, and may be removed from office pursuant to the terms of the Companies Law. For further information on the election and removal of external directors, see “Management — External Directors — Election and Dismissal of External Directors.”
Dividend and Liquidation Rights
We may declare a dividend to be paid to the holders of our ordinary shares in proportion to their respective shareholdings. Under the Companies Law, dividend distributions are determined by the board of directors and do not require the approval of the shareholders of a company unless the company’s articles of association provide otherwise. Our amended and restated articles of association do not require shareholder approval of a dividend distribution and provide that dividend distributions may be determined by our board of directors.
Pursuant to the Companies Law, the distribution amount is limited to the greater of retained earnings or earnings generated over the previous two years, according to our then last reviewed or audited financial statements, provided that the end of the period to which the financial statements relate is not more than six months prior to the date of the distribution. If we do not meet such criteria, then we may distribute dividends 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.
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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 general meeting of shareholders are referred to in our amended and restated articles of association as special general meetings. Our board of directors may call special general 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 general meeting upon the written request of (i) any two or more of our directors or one-quarter or more of the members of our board of directors or (ii) one or more shareholders holding, in the aggregate, either (a) 5% or more of our outstanding issued shares and 1% or more of our outstanding voting power or (b) 5% or more of our outstanding voting power.
Under Israeli law, one or more shareholders holding at least 1% of the voting rights at the general meeting may request that the board of directors include a matter in the agenda of a general meeting to be convened in the future, provided that it is appropriate to discuss such a matter at the general meeting.
Subject to the provisions of the Companies Law and the regulations promulgated thereunder, shareholders entitled to participate and vote at general meetings are the shareholders of record on a date to be decided by the board of directors, which may generally be between four and 40 days prior to the date of the meeting. Furthermore, the Companies Law requires that resolutions regarding the following matters must be passed at a general meeting of our shareholders:
| ● | amendments to our 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; | |
| ● | a merger; 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 certain matters, notice must be provided at least 35 days prior to the meeting. Under the Companies Law and our amended and restated articles of association, shareholders are not permitted to take action by way of written consent in lieu of a meeting.
Voting
Quorum
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. The quorum required for our general meetings of shareholders is of at least two shareholders present in person, by proxy or written ballot, who hold or represent between them at least 25% of our outstanding voting rights. A meeting adjourned for lack of a quorum shall be adjourned either to the same day in the next week, at the same time and place, to such day and at such time and place as indicated in the notice to such meeting, or to such day and at such time and place as the chairperson of the meeting shall determine. At the reconvened meeting, any number of shareholders present in person or by proxy shall constitute a quorum, unless a meeting was called pursuant to a request by our shareholders, in which case the quorum required is one or more shareholders, present in person or by proxy and holding the number of shares required to call the meeting as described under “—Shareholder Meetings.”
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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. Under the Companies Law, each of (i) the approval of an extraordinary transaction with a controlling shareholder, (ii) the terms of employment or other engagement of the controlling shareholder of the company or such controlling shareholder’s relative (even if such terms are not extraordinary) requires the approval described above under “Management—Fiduciary duties and approval of specified related party transactions under Israeli law— Disclosure of personal interests of a controlling shareholder and approval of transactions” and (iii) approval of certain compensation-related matters require the approval described above under “—Board of directors and officers—Compensation Committee.” Under our amended and restated articles of association, the alteration of the rights, privileges, preferences or obligations of any class of our shares requires a simple majority of the class so affected (or such other percentage of the relevant class that may be set forth in the governing documents relevant to such class), in addition to the ordinary majority vote of all classes of shares voting together as a single class at a shareholder meeting. 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 and voting on the resolution.
Access to corporate records
Under the Companies Law, all shareholders generally have the right to review minutes of our general meetings, our shareholder register, including with respect to material shareholders, our articles of association, our financial statements, other documents as provided in the Companies Law, and any document we are required by law to file publicly with the Companies Registrar or the Israel Securities Authority. Any shareholder who specifies the purpose of its request may request to review any document in our possession that relates to any action or transaction with a related party which requires shareholder approval under the Companies Law. We may deny a request to review a document if we determine that the request was not made in good faith, that the document contains a commercial secret or a patent or that the document’s disclosure may otherwise impair our interests.
Acquisitions under Israeli law
Full tender offer
A person wishing to acquire shares of a public Israeli company and who would as a result hold over 90% of the target company’s issued and outstanding share capital or that of a certain class of shares is required by the Companies Law to make a tender offer to all of the company’s shareholders or the shareholders who holds shares of the same class for the purchase of all of the issued and outstanding shares of the company or of the same class, as applicable.
If the shareholders who do not respond to or accept the offer hold less than 5% of the issued and outstanding share capital of the company or of the applicable class of the shares, 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 the shareholder accepted the tender offer or not, may, within six months from the date of acceptance of the tender offer, petition the 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 unless the acquirer stipulated that a shareholder that accepts the offer may not seek appraisal rights. If 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 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.
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Special tender offer rules
The Companies Law provides that an acquisition of shares of a public Israeli 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 at least 25% of the voting rights in the company. This rule 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 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.
These requirements do not apply if the acquisition (i) occurs in the context of a private placement, provided that the general meeting approved the acquisition as a private offering whose purpose is to give the acquirer at least 25% of the voting rights in the company if there is no person who holds at least 25% of the voting rights in the company, or as a private offering whose purpose is to give the acquirer 45% of the voting rights in the company, if there is no person who holds 45% of the voting rights in the company, (ii) was from a shareholder holding at least 25% of the voting rights in the company and resulted in the acquirer becoming a holder of at least 25% of the voting rights in the company, or (iii) was from a holder of more than 45% of the voting rights in the company and resulted in the acquirer becoming a holder of more than 45% of the voting rights in the company.
The 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 special tender offer is accepted by a majority of the votes of those offerees who gave notice of their position in respect of the offer, excluding the votes of a holder of control in the offeror, a person who has personal interest in acceptance of the special tender offer, holders of 25% or more of the voting rights in the company or anyone on their behalf, including their relatives and entities controlled by them.
In the event that a special tender offer is made, a company’s board of directors is required to express its opinion on the advisability of the offer, or shall abstain from expressing any opinion if it is unable to do so, provided that it gives the reasons for its abstention. In addition, the board of directors must disclose any personal interest each member of the board of directors has in the offer or stems therefrom. An office holder in a target company who, in his or her capacity as an office holder, performs an action the purpose of which is to cause the failure of an existing or foreseeable special tender offer or is to impair the chances of its acceptance, is liable to the potential purchaser and shareholders for damages resulting from his or her acts, unless such office holder acted in good faith and had reasonable grounds to believe he or she was acting for the benefit of the company. However, office holders of the target company may negotiate with the potential purchaser in order to improve the terms of the special tender offer, and may further negotiate with third parties in order to obtain a competing offer.
If a special tender offer was accepted by a majority of the shareholders who announced their stand on such offer, then shareholders who did not respond to the special tender offer or had objected to the offer may accept the offer within four days of the last day set for the acceptance of the offer.
In the event that 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 shall refrain from making a subsequent tender offer for the purchase of shares of the target company and cannot execute 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.
Mergers
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, a majority of each party’s shareholders and, in the case of the target company, a majority vote of each class of its shares, voted on the proposed merger at a shareholders meeting. The board of directors of a merging company is required pursuant to the Companies Law to discuss and determine whether in its opinion there exists a reasonable concern that as a result of a proposed merger, the surviving company will not be able to satisfy its obligations towards its creditors, such determination taking into account the financial status of the merging companies. If the board of directors has determined that such a concern exists, it may not approve a proposed merger. Following the approval of the board of directors of each of the merging companies, the boards of directors must jointly prepare a merger proposal for submission to the Israeli Registrar of Companies.
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For purposes of the shareholder vote, unless a court rules otherwise, the merger will not be deemed approved if a majority 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 25% or more of the outstanding shares or the right to appoint 25% or more of the directors of the other party, vote against the merger. In addition, if the non-surviving entity of the merger has more than one class of shares, the merger must be approved by each class of shareholders. If the transaction would have been approved 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 of the parties to the merger and the consideration offered to the shareholders. Pursuant to the Companies Law, if a merger is with a company’s 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 above under “Board Practices — Fiduciary duties and approval of specified related party transactions under Israeli law.”).
Under the Companies Law, each merging company must send a copy of the proposed merger plan to its secured creditors. Unsecured creditors are entitled to receive notice of the merger pursuant to regulations promulgated under the Companies Law. 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 the target company. The court may further give instructions to secure the rights of creditors.
In addition, a merger may not be completed unless at least 50 days have passed from the date that a proposal for approval of the merger was filed with the Israeli Registrar of Companies and 30 days from the date that shareholder approval of both merging companies was obtained.
Anti-takeover measures
The Companies Law allows us to create and issue shares having rights different from those attached to our ordinary shares, including shares providing certain preferred rights with respect to voting, distributions or other matters and shares having preemptive rights. As of the closing of this offering, no preferred shares will be authorized under our amended and restated articles of association. In the future, if we do authorize, create and issue a specific class of preferred shares, such class of shares, depending on the specific rights that may be attached to it, may have the ability to frustrate or prevent a takeover or otherwise prevent our shareholders from realizing a potential premium over the market value of their ordinary shares. The authorization and designation of a class of preferred shares will require an amendment to our amended and restated articles of association, which requires the prior approval of the holders of a majority of the voting power attaching to our issued and outstanding shares at a general meeting. The convening of the meeting, the shareholders entitled to participate and the majority vote required to be obtained at such a meeting will be subject to the requirements set forth in the Companies Law as described above in “—Voting Rights.”
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.
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Changes in Capital
Our amended and restated articles of association enable us to increase or reduce our share capital. Any such change is subject to Israeli law and must be approved by a resolution duly passed 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 American Stock Transfer and Trust Company. Its address is 6201 15th Avenue, Brooklyn, New York 11219, and its telephone number is 800-937-5449.
Listing
We have applied to have our ordinary shares listed on the Nasdaq Capital Market under the symbol PRFX”.
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for our ordinary shares. We cannot predict the effect, if any, that market sales of ordinary shares or the availability of ordinary shares for sale will have on the market price prevailing from time to time. As we describe below, only a limited number of ordinary shares will be available for sale shortly after this offering due to contractual and legal restrictions on resale. Nevertheless, sales of our ordinary shares in the public market after the restrictions lapse, or the perception that those sales may occur, could cause the prevailing market price to decrease or to be lower than it might be in the absence of those sales or perceptions.
Sale of Restricted Shares
Upon the closing of this offering, we will have ordinary shares outstanding. The ordinary shares sold in this offering will be freely tradable without restriction or further registration under the Securities Act. However, if ordinary shares are purchased by “affiliates,” as that term is defined in Rule 144 under the Securities Act, their sales of ordinary shares would be subject to volume limitations and other restrictions that are described below other than the holding period requirement.
Other than ordinary shares to be sold in this offering, the remaining ordinary shares outstanding upon completion of this offering were issued and sold in reliance on exemptions from the registration requirements of the Securities Act or in transactions outside of the United States and not subject to the Securities Act. These securities may be sold in the public market only if they are registered under the Securities Act, or if they qualify for an exemption from registration under Section 4(a)(1) of the Securities Act or Rule 144 thereunder. These rules are summarized below.
Our ordinary shares outstanding upon closing of this offering will be eligible for sale into the public market as follows:
| Approximate Number of Ordinary Shares | Description | |
| | After the date of this prospectus, freely tradeable ordinary shares sold in this offering. | |
| | After 180 days from the date of this prospectus, except as otherwise discussed below, the lock-up period will expire, and these additional ordinary shares will be saleable, subject, in some cases, to holding periods and volume limitations. |
Rule 144
In general, under Rule 144 as currently in effect, and subject to the terms of any lock-up agreement, commencing 90 days after the closing of this offering, a person (or persons whose shares are aggregated), including an affiliate, who has beneficially owned our ordinary shares for six months or more, including the holding period of any prior owner other than one of our affiliates (i.e., commencing when the shares were acquired from the Company or from an affiliate of the Company as restricted securities), is entitled to sell our shares, subject to the availability of current public information about us. In the case of an affiliate shareholder, the right to sell is also subject to the fulfillment of certain additional conditions, including manner of sale provisions and notice requirements, and to a volume limitation that limits the number of shares to be sold thereby, within any three-month period, to the greater of:
| ● | 1% of the number of ordinary shares then outstanding; or |
| ● | the average weekly trading volume of our ordinary shares on the Nasdaq Capital Market during the four calendar weeks preceding the filing of a notice on Form 144 with respect to the sale. |
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The six month holding period of Rule 144 does not apply to sales of unrestricted securities. Accordingly, persons who hold unrestricted securities may sell them under the requirements of Rule 144 described above without regard to the six-month holding period, even if they were considered our affiliates at the time of the sale or at any time during the ninety days preceding such date.
Under Rule 144 as currently in effect, a person (or persons whose shares are aggregated) who is not considered to have been one of our affiliates at any time during the 90 days preceding a sale and who has beneficially owned the shares proposed to be sold for at least one year, including the holding period of any prior owner other than one of our affiliates, is entitled to sell his, her or its shares under Rule 144 without complying with the provisions relating to the availability of current public information or with any other conditions under Rule 144. Therefore, unless subject to a lock-up agreement or otherwise restricted, such shares may be sold immediately upon the closing of this offering.
Regulation S
Regulation S under the Securities Act provides that securities owned by any person may be sold without registration in the United States, provided that the sale is effected in an offshore transaction and no directed selling efforts are made in the United States (as these terms are defined in Regulation S), subject to certain other conditions. In general, this means that our ordinary shares may be sold in some manner outside the United States without requiring registration in the United States.
Rule 701
In general, under Rule 701, any of our employees, directors, officers, consultants or advisors who received or purchased ordinary shares from us under our 2019 PainReform Share Option Plan or other written agreement before the closing of this offering is entitled to resell these shares.
The SEC has indicated that Rule 701 will apply to typical share options granted by an issuer before it becomes subject to the reporting requirements of the Exchange Act, along with the shares acquired upon exercise of these options, including exercises after the closing of this offering. Securities issued in reliance on Rule 701 are restricted securities and, subject to the contractual restrictions described above (see “Lock-Up Agreements”), may be sold beginning 90 days after the closing of this offering in reliance on Rule 144 by:
| ● | persons other than affiliates, without restriction; and | |
| ● | affiliates, subject to the manner-of-sale, current public information and filing requirements of Rule 144, in each case, without compliance with the six-month holding period requirement of Rule 144. |
Form S-8 Registration Statement
Following the completion of this offering, we intend to file a registration statement on Form S-8 under the Securities Act to register up to 1,120,014 ordinary shares, in the aggregate, issued or reserved for issuance under our equity incentive plans. The registration statement on Form S-8 will become effective automatically upon filing.
Ordinary shares issued upon exercise of a share option and registered pursuant to the Form S-8 registration statement will, subject to vesting provisions and Rule 144 volume limitations applicable to our affiliates, be available for sale in the open market immediately unless they are subject to the 180-day lock-up period or, if subject to the lock-up, immediately after the 180-day lock-up period expires. See “Management — Equity Incentive Plans.”
Registration Rights Agreement
In connection with the investment of Medica III Investments, D Partners II and Ofer Hi-Tech Investments Ltd., in preferred shares of our company in November 2008, we entered into a registration rights agreement (the “Registration Rights Agreement”). Pursuant to the Registration Rights Agreement, we granted these investors certain registration rights as described below:
S-1 Demand. If at any time after one hundred eighty (180) days after the effective date of the registration statement for an IPO, the Company receives a request from holders of a majority of the registrable securities then outstanding, we will be required to use commercially reasonable efforts to file a Form F-1 registration statement with respect to at least forty percent (40%) of the registrable securities then outstanding (or a lesser percent if the anticipated aggregate offering price, net of selling expenses, would exceed $5 million.
S-3 Demand. If we receive a request from holders of at least ten percent (10%) of the registrable securities then outstanding at any time when we are eligible to use a Form F-3 registration statement, we the will be required to file a Form F-3 registration statement with the SEC with respect to the outstanding registrable securities of such holders having an anticipated aggregate offering price, net of selling expenses, of at least $1 million.
Registration Expenses. We have agreed to pay all expenses arising from or incident to our performance of, or compliance with, the Registration Rights Agreement, subject to certain limited exceptions.
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The following description is not intended to constitute a complete analysis of all tax consequences relating to the ownership or disposition of our ordinary shares. You should consult your own tax advisor concerning the tax consequences of your particular situation, as well as any tax consequences that may arise under the laws of any state, local, foreign, including Israel, or other taxing jurisdiction.
Certain Israeli Tax Considerations
The following is a brief summary of the material Israeli income tax laws applicable to us. This section also contains a discussion of material Israeli tax consequences concerning the ownership and disposition of 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 residents of Israel or investors in securities who are subject to special tax regimes not covered in this discussion. To the extent that the discussion is based on new tax legislation that has not yet been subject to judicial or administrative interpretation, we cannot assure you that the appropriate tax authorities or the courts will accept the views expressed in this discussion. This summary is based on laws and regulations in effect as of the date hereof and does not take into account possible future amendments which may be under consideration.
You are urged to consult your own tax advisor as to the Israeli and other tax consequences of the purchase, ownership and disposition of our ordinary shares, including, in particular, the effect of any non-Israeli, state or local taxes.
General Corporate Tax Structure in Israel
Israeli resident companies (as defined below), such as the Company, are generally subject to corporate tax at the rate of 23% on their taxable income, as of January 1, 2018 (24% in 2017). However, the effective tax rate payable by a company that derives income from a Preferred Enterprise or a Technology Enterprise, as discussed below, may be considerably less.
Capital gains derived by an Israeli resident company are generally subject to tax at the same rate as the corporate tax rate. Under Israeli tax legislation, a corporation will be considered an “Israeli resident” if it meets one of the following criteria: (i) it was incorporated in Israel; or (ii) the control and management of its business are exercised in Israel.
An Israeli resident company is subject to taxation in Israel for all of its worldwide income.
Law for the Encouragement of Industry (Taxes), 1969
The Law for the Encouragement of Industry (Taxes), 1969, which we refer to as the Industry Encouragement Law, provides several tax benefits for “Industrial Companies”, which are defined as Israeli resident-companies which were incorporated in Israel, of which 90% or more of their income in any tax year, other than income from certain government loans, is derived from “Industrial Enterprises” that it owns and that are located in Israel.
An “Industrial Enterprise” is defined as an enterprise whose principal activity in a given tax year is industrial production.
The following tax benefits, among others, are available to Industrial Companies:
| ● | amortization over an eight-year period of the cost of purchasing a patent, rights to use a patent and rights to know-how, which are used for the development or advancement of the company, commencing in the year in which such rights were first exercised; | |
| ● | under limited conditions, an election to file consolidated tax returns with related Industrial Companies controlled by it; and | |
| ● | deductions of expenses related to a public offering in equal amounts over a three-year period commencing on the year of the offering. |
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We believe that we qualify as an “Industrial Company” within the meaning of the Industry Encouragement Law. There can be no assurance that we will continue to qualify as an Industrial Company in the future or that the benefits described above will be available to us at all.
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 expenditures are approved by the relevant Israeli government ministry, determined by the field of research; | |
| ● | The research and development must be for the promotion of the company; and | |
| ● | The research and development is carried out by or on behalf of the company seeking such tax deduction. |
The amount of such deductible expenses is reduced by the sum of any funds received through government grants for the finance of such scientific research and development projects. No deduction under these research and development deduction rules is allowed if such deduction is related to an expense invested in an asset depreciable under the general depreciation rules of the Ordinance. Expenditures that are qualified under the condition above are deductible in equal amounts over three years.
From time to time we may apply to the Israel Innovation Authority for approval to allow a tax deduction for all or most of 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, 1959
The Law for the Encouragement of Capital Investments, 1959, which we refer to as the Investment Law, provides certain incentives for capital investments in production facilities (or other eligible assets). The Investment Law was significantly amended effective April 1, 2005, further amended as of January 1, 2011, or the 2011 Amendment and, as of January 1, 2017, the 2017 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 2017 Amendment introduces new benefits for Technological Enterprises, alongside the existing tax benefits.
Tax Benefits under the 2011 Amendment
The 2011 Amendment canceled the availability of the benefits granted to Industrial Companies under the Investment Law prior to 2011 and, instead, introduced new benefits for income generated by a “Preferred Company” through its “Preferred Enterprise” (as such terms are defined in the Investment Law) as of January 1, 2011.
The definition of a Preferred Company includes a company incorporated in Israel that is not fully owned by a governmental entity, and that has, among other things, a Preferred Enterprise and is required to be controlled and managed from Israel, and files Israeli tax returns.
Pursuant to the 2011 Amendment, a Preferred Company is entitled to a reduced corporate tax rate of 15% with respect to its income derived by its Preferred Enterprise in 2011 and 2012, unless the Preferred Enterprise is located in a specified development zone, in which case the rate will be 10%. Under the 2011 Amendment, such corporate tax rate was reduced from 15% and 10%, respectively, to 12.5% and 7%, respectively, in 2013, 16% and 9%, respectively, in 2014, 2015 and 2016, and 16% and 7.5%, respectively, in 2017 and thereafter.
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Under the current tax rates set in the Investment Law as of 2019, a Preferred Company may be entitled to a reduced corporate tax rate of 16%; if the Preferred Company owns a Preferred Enterprise located in an area which is defined as a “developing zone A” the corporate tax rate will be 7.5%. Further, income produced by a Preferred Company from a “Special Preferred Enterprise” (as such term is defined in the Investment Law) is entitled, during a benefit period of 10 years, to further reduced tax rates of 8%, or 5% if the Special Preferred Enterprise is located in a certain development zone. As of January 1, 2017, the definition for “Special Preferred Enterprise” includes less stringent conditions.
As of January 1, 2014, dividends paid out of income attributed to a “Preferred Income” as defined in Section 51 of the law, derived from a Preferred Enterprise or to a Special Preferred Enterprise are subject to withholding tax at source at the rate of 20%.
However, dividends paid to an Israeli company, will not subject to any tax withholding.
A distribution of dividends to non-Israeli (individuals or companies) will be subjected to tax withholding at a rate of 20%, or lower rates if provided under an applicable tax treaty (subject to the receipt in advance of a valid certificate from the Israel Tax Authority allowing for a reduced tax rate).
In 2017-2019, dividends paid out of preferred income attributed to a Special Preferred Enterprise, directly to a foreign parent company, are subject to withholding tax at source at the rate of 5% (a temporary provision) according to the law.
New Tax benefits under the 2017 Amendment
The 2017 Amendment was enacted as part of the Economic Efficiency Law that was published on December 29, 2016, and is 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 technology company satisfying certain conditions (group turnover of at least NIS 10 billion) will qualify as 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 Technology Company 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 (referred to as NATI).
The 2017 Amendment further provides that a technology company satisfying certain conditions will qualify as 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 an Israeli company or acquired from a foreign company on or after January 1, 2017, and the sale received prior approval from NATI. 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 10 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 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. In the event that at least 90% of the company shares is held by foreign companies, and other conditions are met, such dividends will be subjected to withholding tax rate will be 4%.
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After examining the impact of the 2017 Amendment, we submitted a request to receive a tax ruling from the Israel Tax Authority to be recognized as a Preferred Technology Enterprise and recently we received a tax ruling from the Israel Tax Authority granting GRD a Preferred Technology Enterprise status, subject to terms and conditions determined in the tax ruling.
Taxation of Our Israeli Individual Shareholders on Receipt of Dividends
Israeli residents who are individuals are generally subject to Israeli income tax for dividends paid on our ordinary shares (other than bonus shares or share dividends) at a rate of 25%, or 30% if the recipient of such dividend is a Substantial Shareholder (as defined below) at the time of distribution or at any time during the preceding 12-month period.
A “Substantial Shareholder” is generally a person who alone, or together with his or her relative or another person who collaborates with him or her on a regular basis, holds, directly or indirectly, at least 10% of any of the “means of control” of a corporation. “Means of control” generally include the right to vote, receive profits, nominate a director or an officer, receive assets upon liquidation or instruct someone who holds any of the aforesaid rights regarding the manner in which he or she is to exercise such right(s), all regardless of the source of such right.
With respect to individuals, the term “Israeli resident” is generally defined under Israeli tax legislation as a person whose center of life is in Israel. The Israeli Tax Ordinance (as amended by Amendment Law No. 132 of 2002), states that in order to determine the center of life of an individual, consideration will be given to the individual’s family, economic and social connections, including: (i) place of permanent residence; (ii) place of residential dwelling of the individual and the individual’s immediate family; (iii) place of the individual’s regular or permanent occupation or the place of his or her permanent employment; (iv) place of the individual’s active and substantial economic interests; (v) place of the individual’s activities in organizations, associations and other institutions. The “center of life” of an individual is presumed to be in Israel in the event that: (i) the individual was present in Israel for 183 days or more in the tax year; or (ii) the individual was present in Israel for 30 days or more in the tax year, and the total period of the individual’s presence in Israel in the reviewed tax year, and the two previous tax years is 425 days or more. It will be noted that these presumptions may be rebutted by either the individual or by the assessing officer.
Payers of dividends on our ordinary shares, held by an Israeli stockbroker effectuating the transaction, or the financial institution through which the securities are held, are generally required, subject to any of the foregoing exemptions, reduced tax rates and the demonstration of a shareholder regarding his, her or its foreign residency, to withhold tax upon the distribution of dividend at the rate of 25%, (whether the recipient is a Substantial Shareholder or not) so long as the shares are registered with a nominee company.
Taxation of Israeli Resident Corporations on Payment of Dividends
Israeli resident companies are generally exempt from Israeli corporate tax with respect to dividends paid to them on their ordinary shares in another Israeli company.
Capital Gains Taxes Applicable to Israeli Resident Shareholders
The income tax rate applicable to real capital gains derived by an Israeli individual resident from the sale of shares that were purchased after January 1, 2012, whether listed on a stock exchange or not, is 25%. However, if such shareholder is considered a Substantial Shareholder at the time of sale or at any time during the preceding 12 month period and/or claims a deduction for interest and linkage differences expenses in connection with the purchase and holding of such shares, such gain will be taxed at the rate of 30%.
Moreover, capital gains derived by an individual shareholder who is a dealer or trader in securities, or to whom such income is otherwise taxable as ordinary business income, are taxed in Israel at their marginal rates applicable to business income (up to 50% in 2017 and 2018, including Wealth Tax as detailed below).
At the sale of securities traded on a stock exchange, a detailed return, including a calculation 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 taxes due were withheld at source according to the applicable provisions of the Israeli Tax Ordinance and regulations promulgated thereunder the aforementioned return is not required to be filed and no advance payment must be paid. Capital gain tax is included in the annual tax return.
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Taxation of Non-Israeli Shareholders on Receipt of Dividends
Non-Israeli residents are generally subject to Israeli income tax on dividends paid on our ordinary shares at a rate of 25% (or 30% for individuals, if such person is a Substantial Shareholder at the time he or she receives the dividend or on any date in the 12 months preceding such date), or at a rate of 20% if the dividend is distributed from income attributed to Preferred Enterprise.
The rates above are applicable unless a lower rate is provided under an applicable tax treaty between Israel and the shareholder’s country of residence, provided that a certificate from the Israel Tax Authority allowing for a reduced withholding tax rate is obtained in advance.
A non-Israeli resident who has dividend income derived from or accrued in Israel, from which the full amount of tax was withheld at source, is generally exempt from filing an Israeli tax return in respect of such income; provided that (i) such income did not derive from a business conducted in Israel by the taxpayer and (ii) the taxpayer has no other taxable sources of income in Israel with respect to which a tax return is required to be filed.
Additionally, a sale of securities by a non-Israeli resident may be exempt from Israeli capital gains tax under the provisions of an applicable tax treaty. For example, under the Convention Between the Government of the United States of America and the Government of the State of Israel with respect to Taxes on Income, as amended (the “United States-Israel Tax Treaty”), the sale, exchange or other disposition of shares by a shareholder who is a United States resident (for purposes of the treaty) holding the shares as a capital asset and is entitled to claim the benefits afforded to such a resident by the U.S.-Israel Tax Treaty (a “Treaty U.S. Resident”) is generally exempt from Israeli capital gains tax unless: (i) the capital gain arising from such sale, exchange or disposition is attributed to real estate located in Israel; (ii) the capital gain arising from such sale, exchange or disposition is attributed to royalties; (iii) the capital gain arising from the such sale, exchange or disposition is attributed to a permanent establishment in Israel, under certain terms; (iv) such Treaty U.S. Resident holds, directly or indirectly, shares representing 10% or more of the voting capital during any part of the 12-month period preceding the disposition, subject to certain conditions; or (v) such Treaty U.S. Resident is an individual and was present in Israel for 183 days or more during the relevant taxable year.
Payers of dividends on our ordinary shares, including the Israeli stockbroker effectuating the transaction, or the financial institution through which the securities are held, are generally required, subject to any of the foregoing exemptions, reduced tax rates and the demonstration of a shareholder regarding his, her or its foreign residency, to withhold tax upon the distribution of dividend at the rate of 25% (whether the recipient is a Substantial Shareholder or not), so long as the shares are registered with a nominee company.
Capital Gains Income Taxes Applicable to Non-Israeli Shareholders
Non-Israeli resident shareholders are generally exempt from Israeli capital gains tax on any gains derived from the sale, exchange or disposition of our ordinary shares, provided that such shareholders did not acquire their shares prior to January 1, 2009 or acquired their shares after the Company was listed for trade on the NASDAQ exchange Market, and such gains were not derived from a permanent business or business activity of such shareholders in Israel.
These provisions dealing with capital gain are not applicable to a person whose gains from selling or otherwise disposing of the shares are deemed to be business income.
However, non-Israeli corporations will not be entitled to the foregoing exemptions if an Israeli resident individual: (i) has a controlling interest of over 10% of the non-Israeli corporation or (ii) is the beneficiary of or is entitled to 25% or more of the revenues or profits of such non-Israeli corporation, whether directly or indirectly.
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In addition, a sale of securities by a non-Israeli resident may be exempt from Israeli capital gains tax under the provisions of an applicable tax treaty. For example, under the U.S.-Israel Tax Treaty, the sale, exchange or disposition of our ordinary shares by a shareholder who is a U.S. resident (for purposes of the U.S.-Israel Tax Treaty) holding the ordinary shares as a capital asset and is entitled to claim the benefits under the U.S.-Israel Tax Treaty, or a U.S. Treaty Resident, is generally exempt from Israeli capital gains tax unless: (i) the Treaty U.S. Resident is an individual who was present in Israel for 183 days or more in the aggregate during the relevant tax year; (ii) such U.S. Treaty Resident holds, directly or indirectly, shares representing 10% or more of our voting power of the Company during any part of the 12 month period preceding such sale, exchange or disposition, subject to certain conditions. In any such case (unless determined otherwise by the Israeli tax legislation regarding exemptions for non-Israeli residents as mentioned above), the sale, exchange or disposition of our ordinary shares would be subject to Israeli tax, at the applicable rate. However, under the U.S.-Israel Tax Treaty, such Treaty U.S. Resident would be permitted to claim tax credit for U.S. federal income tax imposed on any gain from such sale, exchange or disposition, under the circumstances and subject to the limitations specified in the U.S.-Israel Income Tax Treaty.
Regardless of whether shareholders may be liable for Israeli income tax on the sale of our ordinary shares, the payment of the consideration may be subject to withholding of Israeli tax at the source. Accordingly, shareholders may be required to present with proper pre-approval by the Israeli tax Authority that they are exempt from tax on their capital gains in order to avoid withholding at source at the time of sale. More Specifically, in transactions involving a sale of all of the shares of an Israeli resident company, in the form of a merger or otherwise, the Israeli Tax Authority may require from shareholders who are not liable for Israeli tax to declare so or obtain a specific exemption from the Israel Tax Authority to confirm their status as non-Israeli resident, and, in the absence of such declarations or exemptions, they may require the purchaser of the shares to withhold taxes at source in the applicable rates.
United States Federal Income Taxation
The following is a general discussion of certain material U.S. federal income tax consequences of the acquisition, ownership and disposition of our ordinary shares. This description addresses only the U.S. federal income tax considerations that may be relevant to U.S. Holders (as defined below) who hold our ordinary shares as capital assets and does not address any state, local or non-U.S. tax consequences. This summary is based on the U.S. Internal Revenue Code of 1986, as amended, (the “Code”) Treasury regulations promulgated thereunder, judicial and administrative interpretations thereof, and the U.S.-Israel Tax Treaty (the “Treaty”), all as in effect on the date hereof and all of which are subject to change either prospectively or retroactively or to differing interpretations. There can be no assurance that the U.S. Internal Revenue Service (the “IRS”) will not take a different position concerning the tax consequences of the acquisition, ownership and disposition of our ordinary shares or that such a position would not be sustained. This discussion does not address all tax considerations that may be relevant with respect to an investment in our ordinary shares. In addition, this description does not account for the specific circumstances of any particular investor, such as:
| ● | broker-dealers; |
| ● | financial institutions or financial services entities; |
| ● | certain insurance companies; |
| ● | investors liable for alternative minimum tax; |
| ● | regulated investment companies, real estate investment trusts, or grantor trusts; |
| ● | dealers or traders in securities, commodities or currencies; |
| ● | tax-exempt organizations; |
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| ● | retirement plans; |
| ● | S corporations |
| ● | pension funds; |
| ● | certain former citizens or long-term residents of the United States; |
| ● | non-resident aliens of the United States or taxpayers whose functional currency is not the U.S. dollar; |
| ● | persons
who hold ordinary shares through partnerships or other pass-through entities; |
| ● | persons who acquire their ordinary shares through the exercise or cancellation of employee stock options or otherwise as compensation for services; |
| ● | direct, indirect or constructive owners of investors that actually or constructively own at least 10% of the total combined voting power of our shares or at least 10% of our shares by value; or |
| ● | investors holding ordinary shares as part of a straddle, appreciated financial position, a hedging transaction or conversion transaction. |
If an entity or arrangement treated as a partnership for U.S. federal income tax purposes holds ordinary shares, the U.S. federal income tax consequences relating to an investment in the ordinary shares will depend in part upon the status and activities of such entity or arrangement and the particular partner and certain determinations made at the partner level. Any such entity or arrangement should consult its own tax advisor regarding the U.S. federal income tax consequences applicable to it and its partners of the purchase, ownership and disposition of ordinary shares.
This summary does not address the effect of any U.S. federal taxation (such as estate and gift tax) other than U.S. federal income taxation. In addition, this summary does not include any discussion of state, local or non-U.S. taxation.
For purposes of this summary, as used herein, the term “U.S. Holder” means a person that is eligible for the benefits of the Treaty and is a beneficial owner of an ordinary share who is, for U.S. federal income tax purposes:
| ● | an individual who is a citizen or a resident of the United States; |
| ● | a corporation or other entity taxable as a corporation for United States federal income tax purposes, created or organized in or under the laws of the United States or any political subdivision 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 if such trust has validly elected to be treated as a U.S. person for U.S. federal income tax purposes or if (1) a court within the United States is able to exercise primary supervision over its administration and (2) one or more U.S. persons have the authority to control all of the substantial decisions of such trust. |
We believe that we were a “passive foreign investment company” (“PFIC”) for U.S. federal income tax purposes for our 2018 and 2019 taxable years and expect to be a PFIC for our current taxable year. See “—Passive Foreign Investment Companies” below.
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Taxation of Distributions
Subject to the discussion below under the heading “—Passive Foreign Investment Companies,” the gross amount of any distributions received with respect to our ordinary shares, including the amount of any Israeli taxes withheld therefrom, will constitute dividends for U.S. federal income tax purposes when such distribution is actually or constructively received, to the extent such distribution is paid out of our current and accumulated earnings and profits, as determined for U.S. federal income tax purposes. Because we do not expect to maintain calculations of our earnings and profits under U.S. federal income tax principles, it is expected that the entire amount of any distribution will generally be reported as dividend income to you. Dividends are included in gross income as ordinary income unless such dividends meet the requirements of “qualified dividend income” as set forth in more detail below. Distributions in excess of our current and accumulated earnings and profits would be treated as a non-taxable return of capital to the extent of your adjusted tax basis in our ordinary shares and any amount in excess of your tax basis would be treated as gain from the sale of ordinary shares. See “—Sale, Exchange or Other Disposition of Ordinary Shares” below for a discussion of the taxation of capital gains. Our dividends would not qualify for the dividends-received deduction generally available to corporations under section 243 of the Code.
Dividends that we pay in NIS, including the amount of any Israeli taxes withheld therefrom, will be included in your income in a U.S. dollar amount calculated by reference to the exchange rate in effect on the day such dividends are treated as received under your method of accounting, regardless of whether the payment is in fact converted into U.S. dollars. A U.S. Holder who receives payment in NIS and converts NIS into U.S. dollars at an exchange rate other than the rate in effect on such day may have a foreign currency exchange gain or loss that would generally be treated as U.S.-source ordinary income or loss. U.S. Holders should consult their own tax advisors concerning the U.S. tax consequences of acquiring, holding and disposing of NIS.
Subject to complex limitations, some of which vary depending upon the U.S. Holder’s circumstances, any Israeli withholding tax imposed on dividends paid with respect to our ordinary shares, may be a foreign income tax eligible for credit against a U.S. Holder’s U.S. federal income tax liability (or, alternatively, for deduction against income in determining such tax liability). Israeli taxes withheld in excess of the applicable rate allowed by the Treaty (if any) will not be eligible for credit against a U.S. Holder’s federal income tax liability. The limitation on foreign income taxes eligible for credit is calculated separately with respect to specific classes of income. Dividends paid with respect to our ordinary shares generally will be treated as foreign-source passive category income or, in the case of certain U.S. Holders, general category income for U.S. foreign tax credit purposes. Further, there are special rules for computing the foreign tax credit limitation of a taxpayer who receives dividends subject to a reduced tax rate. A U.S. Holder may be denied a foreign tax credit with respect to Israeli income tax withheld from dividends received on our ordinary shares if such U.S. Holder fails to satisfy certain minimum holding period requirements or to the extent such U.S. Holder’s position in ordinary shares is hedged. An election to deduct foreign taxes instead of claiming foreign tax credit applies to all foreign taxes paid or accrued in the taxable year. The rules relating to the determination of the foreign tax credit are complex, and you should consult with your own tax advisors to determine whether and to what extent you would be entitled to this credit.
Subject to certain limitations (possibly including the PFIC rules discussed below), “qualified dividend income” received by a non-corporate U.S. Holder may be subject to tax at the lower long-term capital gain rates (currently, a maximum rate of 20%). Distributions taxable as dividends paid on our ordinary shares should qualify for a reduced rate if we are a “qualified foreign corporation,” as defined in Code section 1(h)(11)(C). We will be a qualified foreign corporation if either: (i) we are entitled to benefits under a comprehensive tax treaty with the United States that the U.S. Secretary of Treasury determines is satisfactory for purposes of this provision and that includes an exchange of information provision, or (ii) our ordinary shares are readily tradable on an established securities market in the United States and certain other requirements are met. We believe that we qualify as a resident of Israel for purposes of, and are eligible for the benefits of, the Treaty, although there can be no assurance in this regard. Further, the IRS has determined that the Treaty is satisfactory for purposes of the qualified dividend rules and that it includes an exchange of information provision. We also believe that our ordinary shares currently are readily tradable on an established securities market in the United States. However, no assurance can be given that our ordinary shares will remain readily tradable. The rate reduction does not apply unless certain holding period requirements are satisfied, nor does it apply to dividends received from a PFIC (see discussion below), in respect of certain risk-reduction transactions, or in certain other situations. U.S. Holders of our ordinary shares should consult their own tax advisors regarding the effect of these rules in their particular circumstances.
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Sale, Exchange or Other Disposition of Ordinary Shares
Subject to the discussion of PFIC rules below, if you sell or otherwise dispose of our ordinary shares (other than with respect to certain non-recognition transactions), you will generally recognize gain or loss for U.S. federal income tax purposes in an amount equal to the difference between the amount realized on the sale or other disposition and your adjusted tax basis in our ordinary shares, in each case determined in U.S. dollars. Such gain or loss will generally be capital gain or loss and will be long-term capital gain or loss if you have held the ordinary shares for more than one year at the time of the sale or other disposition. Long-term capital gain realized by a non-corporate U.S. Holder is generally eligible for a preferential tax rate (currently at a maximum of 20%). In general, any gain that you recognize on the sale or other disposition of ordinary shares will be U.S.-source for purposes of the foreign tax credit limitation; losses will generally be allocated against U.S. source income. Deduction of capital losses is subject to certain limitations under the Code.
In the case of a cash basis U.S. Holder who receives NIS in connection with the sale or disposition of our ordinary shares, the amount realized will be based on the U.S. dollar value of the NIS received with respect to the ordinary shares as determined on the settlement date of such exchange. A cash basis U.S. Holder who receives payment in NIS and converts NIS into U.S. dollars at a conversion rate other than the rate in effect on the settlement date may have a foreign currency exchange gain or loss, based on any appreciation or depreciation in the value of the foreign currency against the U.S. dollar, which would be treated as U.S.- source ordinary income or loss.
An accrual basis U.S. Holder may elect the same treatment required of cash basis taxpayers with respect to a sale or disposition of our ordinary shares that are traded on an established securities market, provided that the election is applied consistently from year to year. Such election may not be changed without the consent of the IRS. In the event that an accrual basis U.S. Holder does not elect to be treated as a cash basis taxpayer (pursuant to the Treasury regulations applicable to foreign currency transactions), such U.S. Holder is required to calculate the value of the proceeds as of the “trade date” and may have a foreign currency gain or loss for U.S. federal income tax purposes in the event of any difference between the U.S. dollar value of NIS prevailing on the trade date and on the settlement date. Any such currency gain or loss generally would be treated as U.S.- source ordinary income or loss and would be subject to tax in addition to the gain or loss, if any, recognized by such U.S. Holder on the sale or disposition of such ordinary shares.
Passive Foreign Investment Companies
If we were to be classified as a PFIC in any taxable year, a U.S. Holder would be subject to special rules generally intended to reduce or eliminate any benefits from the deferral of U.S. federal income tax that a U.S. Holder could derive from investing in a non-U.S. company that does not distribute all of its earnings on a current basis.
A non-U.S. corporation will be classified as a PFIC for federal income tax purposes in any taxable year in which, after applying certain look-through rules with respect to the income and assets of subsidiaries, either:
| ● | at least 75% of its gross income is “passive income” or |
| ● | at least 50% of the average quarterly value of its total gross assets (which may be determined in part by the market value of our shares, which is subject to change) is attributable to assets that produce “passive income” or are held for the production of passive income. |
Passive income for this purpose generally includes dividends, interest, royalties, rents, gains from commodities and securities transactions, the excess of gains over losses from the disposition of assets that produce passive income, and includes amounts derived by reason of the temporary investment of funds raised in offerings of our shares. If a non-U.S. corporation owns at least 25% by value of the stock of another corporation, the non-U.S. corporation is treated for purposes of the PFIC tests as owning its proportionate share of the assets of the other corporation and as receiving directly its proportionate share of the other corporation’s income. If we are classified as a PFIC in any year with respect to which a U.S. Holder owns our ordinary shares, we will generally continue to be treated as a PFIC with respect to such U.S. Holder in all succeeding years during which the U.S. Holder owns our ordinary shares, regardless of whether we continue to meet the threshold requirements for PFIC status. U.S. Holders should consult their tax advisers regarding the potential availability of a “deemed sale” election that would allow them to eliminate this continuing PFIC status under certain circumstances.
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We believe that we were a PFIC for U.S. federal income tax purposes for our 2018 taxable year and we expect to be a PFIC for our 2019 taxable year and current taxable year. We must determine our PFIC status annually based on tests that are factual in nature. Our status in future years will depend on our income, assets and activities in those years. U.S. Holders should be aware of certain tax consequences of investing directly or indirectly in us in any year in which we are a PFIC. A U.S. Holder is subject to different rules depending on whether the U.S. Holder makes a “mark-to-market” election with respect to our ordinary shares (if such election is available).
We do not intend to provide information necessary for U.S. holders to make qualified electing fund elections, known as QEF elections, which, if available, would result in tax treatment different from (and generally less adverse than) the general tax treatment for PFICs described below.
Mark-to-Market Election. If our ordinary shares are treated as “marketable stock,” a U.S. Holder would be allowed to make a “mark-to-market” election with respect to our ordinary shares, provided that the U.S. Holder completes the relevant portions of and files IRS Form 8621 in accordance with the applicable instructions. If that election is made, the U.S. Holder generally would include as ordinary income in each taxable year the excess, if any, of the fair market value of the ordinary shares at the end of the taxable year over such holder’s adjusted tax basis in the ordinary shares. The U.S. Holder would also be permitted an ordinary loss in respect of the excess, if any, of the U.S. Holder’s adjusted tax basis in the ordinary shares over their fair market value at the end of the taxable year, but only to the extent of the net amount previously included in income as a result of the mark-to-market election. A U.S. Holder’s tax basis in the ordinary shares would be adjusted to reflect any such income or loss. Gain realized on the sale, exchange or other disposition of our ordinary shares would be treated as ordinary income, and any loss realized on the sale, exchange or other disposition of the ordinary shares would be treated as ordinary loss to the extent that such loss does not exceed the net mark-to-market gains previously included in income by the U.S. Holder, and any loss in excess of such amount will be treated as capital loss. Amounts treated as ordinary income will not be eligible for the favorable tax rates applicable to qualified dividend income or long-term capital gains.
Generally, our ordinary shares will be considered marketable stock if they are “regularly traded” on a “qualified exchange” within the meaning of applicable Treasury Regulations. Our ordinary shares will be treated as “regularly traded” in any calendar year in which more than a de minimis quantity of the ordinary shares are traded on a qualified exchange on at least 15 days during each calendar quarter. Because a mark-to-market election cannot be made for any lower-tier PFICs that we may own, a U.S. Holder may continue to be subject to the tax and interest charge rules discussed above with respect to such holder’s 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, including stock in any of our company’s subsidiaries that are treated as PFICs. If a U.S. Holder makes a mark-to market election, it will be effective for the taxable year for which the election is made and all subsequent taxable years unless our ordinary shares are no longer regularly traded on a qualified exchange or the IRS consents to the revocation of the election.
Default PFIC Rules. A U.S. Holder who does not make a timely mark-to-market election (or, if available, a timely qualified electing fund election), referred to in this disclosure as a “Non-Electing U.S. Holder,” will be subject to special rules with respect to (a) any “excess distribution” (generally, the portion of any distributions received by the Non-Electing U.S. Holder on the ordinary shares in a taxable year in excess of 125% of the average annual distributions received by the Non-Electing U.S. Holder in the three preceding taxable years, or, if shorter, the Non-Electing U.S. Holder’s holding period for his ordinary shares), and (b) any gain realized on the sale or other disposition of such ordinary shares. Under these rules:
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| ● | the excess distribution or gain would be allocated ratably over the Non-Electing U.S. Holder’s holding period for the ordinary shares; |
| ● | the amount allocated to the current taxable year and any year prior to us becoming a PFIC would be taxed as ordinary income; and |
| ● | the amount allocated to each of the other taxable years would be subject to tax at the highest rate of tax in effect for the applicable class of taxpayer for that year, and an interest charge for the deemed deferral benefit would be imposed with respect to the resulting tax attributable to each such other taxable year. |
If a Non-Electing U.S. Holder who is an individual dies while owning our ordinary shares, the Non-Electing U.S. Holder’s successor would be ineligible to receive a step-up in tax basis of the ordinary shares. Non-Electing U.S. Holders are encouraged to consult their tax advisors regarding the application of the PFIC rules to their specific situation.
To the extent a distribution on our ordinary shares does not constitute an excess distribution to a Non-Electing U.S. Holder, such Non-Electing U.S. Holder generally will be required to include the amount of such distribution in gross income as a dividend to the extent of our current or accumulated earnings and profits (as determined for U.S. federal income tax purposes) that are not allocated to excess distributions. Each U.S. Holder is encouraged to consult its own tax advisor with respect to the appropriate U.S. federal income tax treatment of any distribution on our ordinary shares.
In any year in which we are a PFIC, the general tax treatment for U.S. Holders described in this section would apply to indirect distributions and gains deemed to be realized by U.S. Holders in respect of any of our subsidiaries that also may be determined to be PFICs.
The U.S. federal income tax rules relating to PFICs are complex. U.S. Holders are urged to consult their own tax advisors with respect to the purchase, ownership and disposition of our ordinary shares, any elections available with respect to such ordinary shares and the IRS information reporting obligations with respect to the purchase, ownership and disposition of our ordinary shares.
Additional Tax on Investment Income
In addition to the income taxes described above, U.S. Holders that are individuals, estates or trusts and whose income exceeds certain thresholds may be subject to a 3.8% Medicare contribution tax on net investment income, which includes dividends and capital gains from the sale or exchange of our ordinary shares.
Backup Withholding and Information Reporting
Payments in respect of our ordinary shares may be subject to information reporting to the IRS and to U.S. backup withholding tax at the rate (currently) of 24%. Backup withholding will not apply, however, if you (i) fall within certain exempt categories, and demonstrate the fact when so required, or (ii) furnish a correct taxpayer identification number and make any other required certification.
Backup withholding is not an additional tax. Amounts withheld under the backup withholding rules may be credited against a U.S. Holder’s U.S. tax liability. Alternatively, a U.S. Holder may obtain a refund of any excess amounts withheld under the backup withholding rules by filing the appropriate claim for refund with the IRS.
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U.S. citizens and individuals taxable as resident aliens of the United States that own “specified foreign financial assets” (as defined in Section 6038D of the Code and the regulations thereunder) with an aggregate value in a taxable year in excess of certain thresholds (as determined under rules in Treasury regulations) and that are required to file a U.S. federal income tax return generally will be required to file an information report with respect to those assets with their tax returns. IRS Form 8938 has been issued for that purpose. “Specified foreign financial assets” include any financial accounts maintained by foreign financial institutions, foreign stocks held directly, and interests in foreign estates, foreign pension plans or foreign deferred compensation plans. Under those rules, our ordinary shares, whether owned directly or through a financial institution, estate or pension or deferred compensation plan, would be “specified foreign financial assets.” Under Treasury regulations, the reporting obligation applies to certain U.S. entities that hold, directly or indirectly, specified foreign financial assets. Penalties can apply if there is a failure to satisfy this reporting obligation. In addition, in the event a U.S. Holder that is required to file IRS Form 8938 does not file such form, the statute of limitations on the assessment and collection of U.S. federal income taxes of such U.S. Holder for the related tax year may not close until three years after the date that the required information is filed. A U.S. Holder is urged to consult the U.S. Holder’s tax advisor regarding the reporting obligation.
Any U.S. Holder who acquires more than $100,000 of our ordinary shares or holds 10% or more in vote or value of our ordinary shares may be subject to certain additional U.S. information reporting requirements.
If we are a PFIC for any taxable year in which a U.S. Holder owns our ordinary shares, the U.S. Holder would generally be required to file annual returns with the IRS on Form 8621.
The above description is not intended to constitute a complete analysis of all tax consequences relating to acquisition, ownership and disposition of our ordinary shares. You should consult your tax advisor concerning the tax consequences of your particular situation.
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We have entered into an underwriting agreement, dated , 2020, with Maxim Group LLC and Joseph Gunnar & Co. LLC, acting as the representatives of the several underwriters named below, with respect to the shares subject to this offering. Subject to certain conditions, we have agreed to sell to the underwriters, and the underwriters have severally agreed to purchase, the number of shares of ordinary shares provided below opposite their respective names.
| Underwriter(s) | Number of shares | |||
| Maxim Group LLC | ||||
| Joseph Gunnar & Co., LLC. | ||||
| Total | ||||
The underwriters are offering the ordinary shares subject to their acceptance of the ordinary shares from us and subject to prior sale. The underwriting agreement provides that the obligations of the several underwriters to pay for and accept delivery of the ordinary shares offered by this prospectus are subject to the approval of certain legal matters by their counsel and to certain other conditions. The underwriters are obligated to take and pay for all of the ordinary shares if any such shares are taken.
Discount, Commissions and Expenses
The underwriters have advised us that they propose to offer the ordinary shares to the public at the public offering price set forth on the cover page of this prospectus and to certain dealers at that price less a concession not in excess of $ per ordinary share. The underwriters may allow, and certain dealers may reallow, a discount from the concession not in excess of $ per share to certain brokers and dealers. After this offering, the public offering price, concession and reallowance to dealers may be changed by the representative. No such change shall change the amount of proceeds to be received by us as set forth on the cover page of this prospectus. The ordinary shares are offered by the underwriters as stated herein, subject to receipt and acceptance by them and subject to their right to reject any order in whole or in part. The underwriters have informed us that they do not intend to confirm sales to any accounts over which they exercise discretionary authority. If all the ordinary shares are not sold at the public offering price, the underwriters may change such price and the other selling terms in agreement with our company.
The following table shows the underwriting discounts and commissions that we are to pay to the underwriters in connection with this offering, as well as the proceeds to us, before expenses. These amounts are shown assuming both no exercise and full exercise of the underwriters’ over-allotment option to purchase additional ordinary shares.
| Per share | Without over- allotment option | With over- allotment option | ||||||||||
| Public offering price | $ | $ | $ | |||||||||
| Underwriting discounts and commissions paid (1) (2) | $ | $ | $ | |||||||||
| Proceeds to us, before expenses | $ | $ | $ | |||||||||
| (1) | Excludes a non-accountable expense allowance equal to 1% of the gross proceeds derived from the offering, excluding proceeds from the sale of any shares to the exercise of the underwriters’ over-allotment option. We estimate that the total expenses of the offering payable by us, excluding underwriting discounts and commissions, will be approximately $ . |
| (2) | Underwriting discounts and commissions per ordinary share with respect to the sale of ordinary shares to the public will be 7% and underwriting discounts and commissions per ordinary share with respect to the sale of ordinary shares to certain identified investors will be 3.5%. |
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In addition, we have agreed to reimburse the underwriters for accountable legal expenses incurred by it in connection with this transaction in the amount of $125,000. We have paid an expense deposit of $25,000 to the underwriters for out-of-pocket expenses, which will be applied against the accountable expense allowance and will be returned to the extent not actually incurred. In addition, we have agreed to provide the underwriters a non-accountable expense allowance equal to 1% of the gross proceeds from this offering.
Over-Allotment Option
The underwriters may exercise the option solely to cover overallotments, if any, made in connection with this offering. If any additional ordinary shares are purchased pursuant to the over-allotment option, the underwriters will offer these ordinary shares on the same terms as those on which the other securities are being offered.
Underwriters’ Warrants
We have agreed to grant the underwriters (and/or their designees) warrants to purchase a number of shares equal to five percent (5%) of the total number of ordinary shares sold in this offering at an exercise price equal to one hundred twenty five percent (125%) of the public offering price of the ordinary shares in this offering. The warrants (the “Underwriters’ Warrants”) will contain a cashless exercise feature. The Underwriters’ Warrants are exercisable for ordinary shares on a cash or cashless basis at an exercise price of $ per share (or one hundred twenty five percent (125%) of the public offering price of the ordinary shares sold in this offering). The Underwriters’ Warrants will be non-exercisable for twelve (12) months after the effective date of the registration statement relating to this offering, and will expire five (5) years after such effective date. The Underwriters’ Warrants will provide for unlimited piggyback registration rights at our expense. The number of Underwriters’ Warrants outstanding, and the exercise price of those securities, will be adjusted proportionately, as permitted by FINRA Rule 5110(f)(2)(G). Such Underwriters’ Warrants will be subject to FINRA Rule 5110(g)(1) in that, except as otherwise permitted by FINRA Rule 5110(g)(2), for a period of one hundred eighty (180) days following the effective date of the registration statement, the Underwriters’ Warrants shall not be sold, transferred, assigned, pledged, or hypothecated, or be the subject of any hedging, short sale, derivative, put, or call transaction that would result in the effective economic disposition of the securities by any person.
Indemnification
We have agreed to indemnify the underwriters against certain liabilities, including liabilities under the Securities Act and liabilities arising from breaches of representations and warranties contained in the underwriting agreement, or to contribute to payments that the underwriters may be required to make in respect of those liabilities.
Right of First Refusal
We have granted the underwriters a right of first refusal for a period of twelve (12) months from the closing date of the offering to act as lead managing underwriter or placement agent or sole bookrunner, as the case may be, for all future public or private equity, equity-linked, or debt financings, during such twelve (12)-month period, of the Company, or any successor to or subsidiary of the Company, on terms and conditions customary to the underwriters for such transactions.
Lock-Up Agreements
We and all of our shareholders have agreed, for a period of six (6) months, and our officers and directors have agreed, subject to limited exceptions, for a period of twelve (12) months, after the date of the underwriting agreement, not to offer, sell, contract to sell, pledge, grant any option to purchase, make any short sale or otherwise dispose of, directly or indirectly any ordinary shares or any securities convertible into or exchangeable for our ordinary shares either owned as of the date of the underwriting agreement or thereafter acquired without the prior written consent of the representatives of the underwriters. The representative may, in its sole discretion and at any time or from time to time before the termination of the lock-up period, without notice, release all or any portion of the securities subject to lock-up agreement.
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Electronic Distribution
This prospectus may be made available in electronic format on websites or through other online services maintained by the underwriter or by its affiliates. In those cases, prospective investors may view offering terms online and prospective investors may be allowed to place orders online. Other than this prospectus in electronic format, the information on the underwriters’ websites or our website and any information contained in any other websites maintained by the underwriter or by us is not part of this prospectus or the registration statement of which this prospectus forms a part, has not been approved and/or endorsed by us or by either of the underwriters in each of their capacity as underwriter, and should not be relied upon by investors.
Price Stabilization, Short Positions, and Penalty Bids
In connection with the offering, the underwriters may purchase and sell shares of our ordinary shares in the open market. Purchases and sales in the open market may include short sales, purchases to cover short positions, which may include purchases pursuant to the underwriters’ over-allotment option to purchase additional shares of our ordinary shares, and stabilizing purchases.
| ● | Short sales involve secondary market sales by the underwriters of a greater number of shares of our ordinary shares than it is required to purchase in the offering. |
| ● | “Covered” short sales are sales of ordinary shares in an amount up to the number of ordinary shares represented by the underwriters’ over-allotment option to purchase additional ordinary shares. |
| ● | “Naked” short sales are sales of ordinary shares in an amount in excess of the number of shares of our ordinary shares represented by the underwriters’ over-allotment option to purchase additional ordinary shares. |
| ● | Covering transactions involve purchases of shares of our ordinary shares either pursuant to the underwriters’ over-allotment option to purchase additional shares of our ordinary shares or in the open market in order to cover short positions. |
| ● | To close a naked short position, the underwriters must purchase shares of our ordinary shares in the open market. A naked short position is more likely to be created if the underwriters are concerned that there may be downward pressure on the price of the shares of our ordinary shares in the open market after pricing that could adversely affect investors who purchase in the offering. |
| ● | To close a covered short position, the underwriters must purchase shares in the open market or must exercise their over-allotment option to purchase additional shares of our ordinary shares. in determining the source of shares to close the covered short position, the underwriters will consider, among other things, the price of shares of our ordinary shares available for purchase in the open market as compared to the price at which it may purchase shares of our ordinary shares through the underwriters’ over-allotment option to purchase additional shares of our ordinary shares. |
| ● | Stabilizing transactions involve bids to purchase our ordinary shares so long as the stabilizing bids do not exceed a specified maximum. |
Purchases to cover short positions and stabilizing purchases, as well as other purchases by each of the underwriters for its own account, may have the effect of preventing or retarding a decline in the market price of the ordinary shares. Each of the underwriters may also cause the price of the shares of our ordinary shares to be higher than the price that would otherwise exist in the open market in the absence of these transactions. The underwriter may conduct these transactions on the NASDAQ Capital Market or otherwise. If either of the underwriters commences any of these transactions, it may discontinue them at any time.
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Other Relationships
Each of the underwriters is a full-service financial institution engaged in various activities, which may include securities trading, investment banking, financial advisory, investment management, principal investment, hedging, financing, and brokerage activities. In the ordinary course of its various business activities, each of the underwriters and its affiliates may make or hold a broad array of investments and actively trade debt and equity securities (or related derivative securities) and financial instruments (which may include bank loans and/or credit default swaps) for its own account and for the accounts of its customers and may at any time hold long and short positions in such securities and instruments. Such investments and securities activities may involve securities and/or instruments of ours or our affiliates. Each of the underwriters and its affiliates may also make investment recommendations and/or publish or express independent research views in respect of such securities or financial instruments and may hold, or recommend to clients that it acquires, long and/or short positions in such securities and instruments. Except for services provided in connection with this offering and except as described below, the underwriters have not provided any investment banking or other financial services to us during the 180-day period preceding the date of this prospectus. In connection with the bridge financing of August and December 2019, we paid Joseph Gunnar & Co., LLC a commission of $146,000 and issued Joseph Gunnar & Co., LLC placement agent warrants to purchase a number of shares equal to ten percent (10%) of the total number of shares underlying the convertible notes and warrants sold in the bridge financing. Pursuant to FINRA Rule 5110, the placement agent warrants will be deemed underwriter compensation attributable to this offering.
Passive Market Making
In connection with this offering, each of the underwriters may also engage in passive market making transactions in the shares. Passive market making consists of displaying bids limited by the prices of independent market makers and effecting purchases limited by those prices in response to order flow. Rule 103 of Regulation M promulgated by the SEC limits the amount of net purchases that each passive market maker may make and the displayed size of each bid. Passive market making may stabilize the market price of the shares at a level above that which might otherwise prevail in the open market and, if commenced, may be discontinued at any time.
Determination of Offering Price
Prior to this offering, there was no public market for our ordinary shares. The initial public offering price will be determined by negotiation among us and the representatives of the underwriters. The principal factors to be considered in determining the initial public offering price include:
| ● | the information set forth in this prospectus and otherwise available to the representatives; |
| ● | our history and prospects and the history and prospects for the industry in which we compete; |
| ● | our past and present financial performance; |
| ● | our prospects for future earnings and the present state of our development; |
| ● | the general condition of the securities market at the time of this offering; |
| ● | the recent market prices of, and demand for, publicly traded shares of generally comparable companies; and |
| ● | other factors deemed relevant by the underwriters and us. |
The estimated public offering price range set forth on the cover page of this prospectus is subject to change as a result of market conditions and other factors. Neither we nor the underwriters can assure investors that an active trading market will develop for our ordinary shares or that the ordinary shares will trade in the public market at or above the initial public offering price.
Notice to Prospective Investors in Israel
This document does not constitute a prospectus under the Israeli Securities Law, 5728-1968, or the Securities Law, and has not been filed with or approved by the Israel Securities Authority. In Israel, this prospectus is being distributed only to, and is directed only at, and any offer of the ordinary shares hereunder is directed only at, (i) a limited number of persons in accordance with the Securities Law and (ii) investors listed in the first addendum (the “Addendum”) to the Securities Law, consisting primarily of joint investment in trust funds, provident funds, insurance companies, banks, portfolio managers, investment advisors, members of the Tel Aviv Stock Exchange, underwriters, venture capital funds, entities with equity in excess of NIS 50 million and “qualified individuals,” each as defined in the Addendum (as it may be amended from time to time), collectively referred to as qualified investors (in each case, purchasing for their own account or, where permitted under the Addendum, for the accounts of their clients who are investors listed in the Addendum). Qualified investors are required to submit written confirmation that they fall within the scope of the Addendum, are aware of the meaning of same and agree to it.
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Notice to Prospective Investors in Canada
The ordinary shares may be sold only to purchasers purchasing, or deemed to be purchasing, as principal that are accredited investors, as defined in National Instrument 45-106 Prospectus Exemptions or subsection 73.3(1) of the Securities Act (Ontario), and are permitted clients, as defined in National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations. Any resale of the ordinary shares must be made in accordance with an exemption from, or in a transaction not subject to, the prospectus requirements of applicable securities laws.
Securities legislation in certain provinces or territories of Canada may provide a purchaser with remedies for rescission or damages if this prospectus (including any amendment thereto) contains a misrepresentation, provided that the remedies for rescission or damages are exercised by the purchaser within the time limit prescribed by the securities legislation of the purchaser’s province or territory. The purchaser should refer to any applicable provisions of the securities legislation of the purchaser’s province or territory for particulars of these rights or consult with a legal advisor.
Pursuant to section 3A.3 (or, in the case of securities issued or guaranteed by the government of a non-Canadian jurisdiction, section 3A.4) of National Instrument 33-105 Underwriting Conflicts (NI33-105), the underwriters are not required to comply with the disclosure requirements of NI 33-105 regarding underwriter conflicts of interest in connection with this offering.
EXPENSES RELATED TO THIS OFFERING
The following table sets forth the costs and expenses, other than underwriting commissions, payable in connection with the sale of ordinary shares in this offering. All amounts are estimated except the SEC registration fee, the Nasdaq initial listing fee and the Financial Industry Regulatory Authority, Inc., or FINRA, filing fee. Except as otherwise noted, all the expenses below will be paid by us.
| Amount | ||||
| SEC registration fee | $ | * | ||
| FINRA fee | * | |||
| Nasdaq Capital Market initial listing fee | * | |||
| Legal fees and expenses | * | |||
| Accounting fees and expenses | * | |||
| Printing expenses | * | |||
| Transfer agent and registrar fees and expenses | * | |||
| Miscellaneous | * | |||
| Total | $ | * | ||
| * | To be provided by amendment. |
The validity of the issuance of our ordinary shares offered in this prospectus and certain other matters of Israeli law will be passed upon for us by Doron Tikotzky Kantor Gutman Nass & Amit Gross, Bnei Brak, Israel. Certain matters of U.S. federal law will be passed upon for us by Carter Ledyard& Milburn LLP, New York, New York. Certain legal matters in connection with this offering will be passed upon for the underwriters by Ellenoff Grossman & Schole LLP, New York, New York, with respect to U.S. federal law, and by Meitar Law Offices, Ramat Gan, Israel, with respect to Israeli law.
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ENFORCEABILITY OF CIVIL LIABILITIES
We are incorporated under the laws of the State of Israel. Service of process upon us and upon our directors and officers and the Israeli experts named in this registration statement, substantially all of whom reside outside of the U.S., may be difficult to obtain within the U.S. Furthermore, because substantially all of our assets and substantially all of our directors and officers are located outside of the U.S., any judgment obtained in the U.S. against us or any of our directors and officers may not be collectible within the U.S.
We have irrevocably appointed David Weinstein, our President and Chief Medical Officer, as our agent to receive service of process in any action against us in any U.S. federal or state court arising out of this offering or any purchase or sale of securities in connection with this offering. The address of our agent is 39 Round Hill Road, Dobbs Ferry, New York 10522.
We have been informed by our legal counsel, Doron Tikotzky Kantor Gutman Nass & Amit Gross, that it may be difficult to assert U.S. securities law claims in original actions instituted in Israel. Israeli courts may refuse to hear a claim based on an alleged violation of U.S. securities laws reasoning that Israel is not the most appropriate forum to hear such a claim. In addition, even if an Israeli court agrees to hear a claim, it may determine that Israeli law and not U.S. law is applicable to the claim. If U.S. law is found to be applicable, the content of applicable U.S. law must be proved as a fact by expert witnesses which can be a time-consuming and costly process. Certain matters of procedure may also be governed by Israeli law.
Subject to certain time limitations and legal procedures, Israeli courts may enforce a U.S. judgment in a civil matter which, subject to certain exceptions, is non-appealable, including judgments based upon the civil liability provisions of the Securities Act and the Exchange Act and including a monetary or compensatory judgment in a non-civil matter, provided that:
| ● | the judgment was rendered by a court which was, according to the laws of the state of the court, competent to render the judgment; | |
| ● | the obligation imposed by the judgment is enforceable according to the rules relating to the enforceability of judgments in Israel and the substance of the judgment is not contrary to public policy; and | |
| ● | the judgment is executory in the state in which it was given. |
Even if these conditions are met, an Israeli court will not declare a foreign civil judgment enforceable if:
| ● | the judgment was given in a state whose laws do not provide for the enforcement of judgments of Israeli courts (subject to exceptional cases); | |
| ● | the enforcement of the judgment is likely to prejudice the sovereignty or security of the State of Israel; | |
| ● | the judgment was obtained by fraud; | |
| ● | the opportunity given to the defendant to bring its arguments and evidence before the court was not reasonable in the opinion of the Israeli court; | |
| ● | the judgment was rendered by a court not competent to render it according to the laws of private international law as they apply in Israel; | |
| ● | the judgment is contradictory to another judgment that was given in the same matter between the same parties and that is still valid; or | |
| ● | at the time the action was brought in the foreign court, a lawsuit in the same matter and between the same parties was pending before a court or tribunal in Israel. |
If U.S. law is found to be applicable, the content of applicable U.S. law must be proved as a fact by expert witnesses, which can be a time-consuming and costly process. If proceedings were to be brought in Israel, all procedural matters would be governed by Israeli law.
116
If a foreign judgment is enforced by an Israeli court, it generally will be payable in Israeli currency, which can then be converted into non-Israeli currency and transferred out of Israel. Under existing Israeli law, a foreign judgment payable in foreign currency may be paid in Israeli currency at the rate of exchange in force on the date of the payment. Current Israeli exchange control regulations also permit a judgment debtor to make payment in foreign currency. Pending collection, the amount of the judgment of an Israeli court stated in Israeli currency ordinarily will be linked to the Israeli consumer price index plus interest at the annual statutory rate set by Israeli regulations prevailing at the time. Judgment creditors must bear the risk of unfavorable exchange rates.
The financial statements appearing in this prospectus, have been audited by Brightman Almagor Zohar & Co., a Firm in the Deloitte Global Network, an independent registered public accounting firm, as stated in their report appearing herein. Such financial statements have been included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form F-1 under the Securities Act relating to this offering of our ordinary shares. This prospectus, which is part of the registration statement, does not contain all of the information contained in the registration statement and its exhibits. The rules and regulations of the SEC allow us to omit certain information from this prospectus that is included in the registration statement. Statements made in this prospectus concerning the contents of any contract, agreement, or other document are summaries of all material information about the documents summarized, but are not complete descriptions of all terms of these documents. If we filed any of these documents as an exhibit to the registration statement, you may read the document itself for a complete description of its terms.
The SEC maintains an Internet website (http://www.sec.gov) that contains reports, proxy and information statements and other information regarding issuers, like us, that file electronically with the SEC. Our filings with the SEC are available to the public without charge through this website.
Upon completion of this offering, we will be subject to the information reporting requirements of the Exchange Act that are applicable to foreign private issuers, and under those requirements we will be filing reports with the SEC. Those other reports or other information may be inspected without charge at the locations described above. 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, during any fiscal year that we are subject to the reporting requirements of the Exchange Act, we will 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.
We maintain a corporate website at www.painreform.com. Information contained on, or that can be accessed through, our website does not constitute a part of this prospectus or the registration statement of which this prospectus forms a part, and investors should not rely on such information in making a decision to purchase our ordinary shares in this offering.
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PAINREFORM LTD. FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2019
U.S. DOLLARS IN THOUSANDS
INDEX
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of PainReform Ltd.
Opinion on the Financial Statements
We have audited the accompanying balance sheets of PainReform Ltd. (the “Company”) as of December 31, 2019 and 2018, the related statements of comprehensive loss, changes in shareholders’ deficit and cash flows for each of the two years in the period ended December 31, 2019, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018 and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America.
Going Concern
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1B to the financial statements, the Company’s lack of revenues and accumulated operating losses raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1B. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s 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 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 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 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 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 financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Brightman Almagor Zohar & Co.
Brightman Almagor Zohar & Co.
Certified Public Accountants
A Firm in the Deloitte Global Network
Tel Aviv, Israel
May 12, 2020
We have served as the Company’s auditor since 2008.
F-1
PAINREFORM LTD.
U.S. dollars in thousands (except share and per share data)
| As of December 31, | ||||||||||
| Note | 2019 | 2018 | ||||||||
| Assets | ||||||||||
| Current assets: | ||||||||||
| Cash and cash equivalents | $ | 941 | $ | 40 | ||||||
| Restricted cash | 2e | 6 | 6 | |||||||
| Other current assets | 3 | 25 | 34 | |||||||
| Total current assets | 972 | 80 | ||||||||
| Property and equipment, net | (*) | 1 | ||||||||
| Other non-current assets | 192 | - | ||||||||
| Total assets | $ | 1,164 | $ | 81 | ||||||
| Liabilities and shareholders’ deficit | ||||||||||
| Current liabilities: | ||||||||||
| Trade payables | $ | - | $ | 2 | ||||||
| Other accounts payable | 4 | 166 | 16 | |||||||
| August and December 2019 Convertible notes | 6b | 1,032 | - | |||||||
| Convertible notes | 6a | 5,141 | - | |||||||
| Total current liabilities | 6,339 | 18 | ||||||||
| Non-current liabilities: | ||||||||||
| Derivative warrant liability | 5 | 447 | - | |||||||
| Convertible notes | 6a | - | 4,520 | |||||||
| Total non-current liabilities | 447 | 4,520 | ||||||||
| Commitments and contingencies | 8 | |||||||||
| Temporary equity: | ||||||||||
| Convertible preferred shares, NIS 0.01 par value; Authorized: 18,300,000 shares; Issued and outstanding: 8,862,800 shares; Aggregate liquidation preference of $15,250 and $14,120 as of December 31, 2019 and 2018, respectively | 9 | 6,621 | 6,621 | |||||||
| Shareholders’ deficit: | 10 | |||||||||
| Ordinary shares, NIS 0.01 par value; Authorized: 4,700,000 shares; Issued and outstanding: 1,729,670 shares; | 5 | 5 | ||||||||
| Additional paid-in capital | 180 | 66 | ||||||||
| Accumulated deficit | (12,428 | ) | (11,149 | ) | ||||||
| Total shareholders’ deficit | (12,243 | ) | (11,078 | ) | ||||||
| Total liabilities, temporary equity and shareholders’ deficit | $ | 1,164 | $ | 81 | ||||||
| (*) | Less than $1. |
The accompanying notes are an integral part of the financial statements.
F-2
PAINREFORM LTD.
STATEMENTS OF COMPREHENSIVE LOSS
U.S. dollars in thousands (except share and per share data)
| For the Year Ended December 31, | ||||||||||
| Note | 2019 | 2018 | ||||||||
| Operating expenses: | ||||||||||
| Research and development expenses | 11a | $ | (136 | ) | $ | (223 | ) | |||
| General and administrative expenses | 11b | (553 | ) | (277 | ) | |||||
| Operating loss | (689 | ) | (500 | ) | ||||||
| Financial expense, net | 11c | (590 | ) | (328 | ) | |||||
| Net loss and comprehensive loss | $ | (1,279 | ) | $ | (828 | ) | ||||
| Basic and diluted net loss per share | 2m | $ | (1.39 | ) | $ | (1.08 | ) | |||
| Weighted average number of shares of ordinary share used in computing basic and diluted net loss per share | 1,729,670 | 1,729,670 | ||||||||
The accompanying notes are an integral part of the financial statements.
F-3
PAINREFORM LTD.
STATEMENT OF CHANGES IN SHAREHOLDERS’ DEFICIT
U.S. dollars in thousands (except share data)
| Convertible preferred shares (Temporary equity) | Ordinary shares | Additional paid-in | Accumulated | Total shareholders’ | ||||||||||||||||||||||||
| Number | Amount | Number | Amount | capital | deficit | deficit | ||||||||||||||||||||||
| Balance as of January 1, 2018 | 8,862,800 | $ | 6,621 | 1,729,670 | $ | 5 | $ | 66 | $ | (10,321 | ) | $ | (10,250 | ) | ||||||||||||||
| Share-based compensation | — | — | — | — | (*) | — | (*) | |||||||||||||||||||||
| Net loss and comprehensive loss | — | — | — | — | — | (828 | ) | (828 | ) | |||||||||||||||||||
| Balance as of December 31, 2018 | 8,862,800 | $ | 6,621 | 1,729,670 | $ | 5 | $ | 66 | $ | (11,149 | ) | $ | (11,078 | ) | ||||||||||||||
| Share-based compensation | — | — | — | — | 89 | — | 89 | |||||||||||||||||||||
| Operating lease provided by controlling shareholder | — | — | — | — | 25 | — | 25 | |||||||||||||||||||||
| Net loss and comprehensive loss | — | — | — | — | — | (1,279 | ) | (1,279 | ) | |||||||||||||||||||
| Balance as of December 31, 2019 | 8,862,800 | $ | 6,621 | 1,729,670 | $ | 5 | $ | 180 | $ | (12,428 | ) | $ | (12,243 | ) | ||||||||||||||
| (*) | Represents amount less than $1 |
The accompanying notes are an integral part of the financial statements.
F-4
PAINREFORM LTD.
U.S. dollars in thousands
| For the Year Ended December 31, | ||||||||
| 2019 | 2018 | |||||||
| Cash flows from operating activities | ||||||||
| Net loss | $ | (1,279 | ) | $ | (828 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation | 1 | (*) | ||||||
| Operating lease provided by controlling shareholder | 25 | - | ||||||
| Share-based compensation | 89 | (*) | ||||||
| Interest expense and amortization of discount on convertible notes | 541 | 324 | ||||||
| Issuance costs | 47 | - | ||||||
| Revaluation of derivative warrant liability | 2 | - | ||||||
| Change in: | ||||||||
| Other current and non-current assets | (183 | ) | (14 | ) | ||||
| Trade payables | (2 | ) | (62 | ) | ||||
| Other accounts payable | 150 | (55 | ) | |||||
| Net cash used in operating activities | (609 | ) | (635 | ) | ||||
| Cash flows from investing activities | ||||||||
| Purchase of property and equipment | - | (*) | ||||||
| Net cash used in investing activities | - | (*) | ||||||
| Cash flows from financing activities | ||||||||
| Proceeds from issuance of convertible notes, net | 241 | 488 | ||||||
| Proceeds from issuance of August and December 2019 convertible notes and warrants, net | 1,269 | - | ||||||
| Net cash provided by financing activities | 1,510 | 488 | ||||||
| Change in cash, cash equivalents and restricted cash | 901 | (147 | ) | |||||
| Cash, cash equivalents and restricted cash at the beginning of the year | 46 | 193 | ||||||
| Cash, cash equivalents and restricted cash at the end of the year | $ | 947 | $ | 46 | ||||
| (*) | Represents amount less than $1 |
The accompanying notes are an integral part of the financial statements.
F-5
PAINREFORM LTD.
U.S. dollars in thousands, except share and per share data
| NOTE 1:- | GENERAL |
| a. | The Company was incorporated and started business operations in November 2007. The Company is a clinical stage specialty pharmaceutical company focused on the reformulation of established therapeutics. Company’s proprietary extended release drug-delivery system prolongs the in vivo activity of APIs (active pharmaceutical ingredients), thus increasing the therapeutic window for patient treatment |
| b. | Going concern and management plans |
The accompanying financial statements have been prepared on a going-concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. Since its inception, the Company has devoted substantially all of its efforts to research and development, clinical trials, and raising capital. The Company is still in its development and clinical stage and has not yet generated revenues. The extent of the Company’s future operating losses and the timing of becoming profitable are uncertain. The Company has incurred losses of $1,279 and $828 for the years ended December 31, 2019 and 2018, respectively. As of December 31, 2019, the Company’s accumulated deficit was $12,428. The Company has funded its operations to date primarily through equity financing and the issuance of convertible notes.
Additional funding will be required to complete the Company’s research and development and clinical trials, to attain regulatory approvals, to begin the commercialization efforts of the Company’s product and to achieve a level of sales adequate to support the Company’s cost structure.
Management’s plans include, but are not limited to, an initial public offering (“IPO”) in the US market, in which case the August and December 2019 convertible notes will be automatically converted into ordinary shares of the Company (refer to Note 6b). Additionally, the holders of the convertible notes (refer to Note 6a) agreed to convert their respective notes into Series A Preferred Shares upon consummation of the IPO. While the Company has been successful in raising financing in the past, there can be no assurance that it will be able to successfully consummate an IPO or obtain additional financing on a timely basis on terms acceptable to the Company, or at all.
Management expects that the Company will continue to generate losses from the development, clinical development and regulatory activities of its product, which will result in negative cash flow from operating activity. This has led management to conclude that substantial doubt about the Company’s ability to continue as a going concern exists in the event that the planned IPO or alternative funding does not occur. In the event the Company is unable to have its convertible notes converted as planned or their repayment date deferred, the Company will not have sufficient cash flows and liquidity to finance its business operations as currently contemplated. If such sufficient financing or payment deferral is not received timely, the Company would then need to pursue a plan to license or sell its assets, seek to be acquired by another entity, cease operations and/or seek bankruptcy protection. The Company’s financial statements do not reflect any adjustments that might result from the outcome of this uncertainty.
F-6
PAINREFORM LTD.
NOTES TO FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
| NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES |
| a. | Basis of presentation: |
The financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”).
| b. | Use of estimate in preparation of financial statements: |
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates, judgments and assumptions that affect the amounts reported in the financial statements and accompanying notes. The Company evaluates on an ongoing basis its assumptions. The Company’s management believes that the estimates, judgments and assumptions used are reasonable based upon information available at the time they are made. These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements, and the reported amounts of expenses during the reporting periods. Actual results could differ from those estimates.
| c. | Financial statements in United States dollars: |
The Company’s functional currency is the U.S. dollar (“dollar” or “$”) since the dollar is the currency of the primary economic environment in which the Company has operated and expects to continue to operate in the foreseeable future. Transactions and balances denominated in dollars are presented at their original amounts. Transactions and balances denominated in currencies other than dollars have been re-measured to dollars. All transaction gains and losses from re-measurement of monetary balance sheet items denominated in currencies other than dollars are reflected in the statements of comprehensive loss as financial expenses, net.
| d. | Cash and cash equivalents: |
Cash equivalents are short-term highly liquid investments that are readily convertible to cash with original maturities of three months or less at acquisition.
| e. | Restricted cash: |
Restricted cash include bank deposits with maturities of more than three months and up to one year. The restricted bank deposit was presented at its cost, including accrued interest and represents cash which is used as collateral for the Company’s credit card.
F-7
PAINREFORM LTD.
NOTES TO FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
| NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
| f. | Fair Value Measurements: |
The carrying values of Company’s financial assets and liabilities, including cash and cash equivalents, restricted cash, other current assets, trade payables, other accounts payable approximate their fair value due to the short-term maturity of these instruments. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the reporting date. Assets and liabilities recorded at fair value in the financial statements are categorized based upon the level of judgment associated with the inputs used to measure their fair value. Hierarchical levels are directly related to the amount of subjectivity with the inputs to the valuation of these assets or liabilities as follows:
Level 1 - Observable inputs such as unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date;
Level 2 - Inputs (other than quoted prices included in Level 1) are either directly or indirectly observable inputs for similar assets or liabilities. These include quoted prices for identical or similar assets or liabilities in active markets and quoted prices for identical or similar assets of liabilities in markets that are not active;
Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
The Company’s derivative warrant liability is classified within Level 3 of the fair value hierarchy because their fair values are estimated by utilizing valuation models and significant unobservable inputs.
| g. | Property and equipment, net: |
Property and equipment are stated at cost, net of accumulated depreciation. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets at the following rates:
| % | ||||
| Computers and electronic equipment | 33 | |||
| Furniture and office equipment | 7 | |||
| h. | Research and development expenses: |
Research and development expenses are charged to the statements of comprehensive loss as incurred.
F-8
PAINREFORM LTD.
NOTES TO FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
| NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
| i. | Income taxes: |
The Company accounts for income taxes in accordance with ASC 740, “Income Taxes”. ASC 740 prescribes the use of the liability method whereby deferred tax assets and liability account balances are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Valuation allowances in respect of deferred tax assets are provided for, if necessary, to reduce deferred tax assets to amounts more likely than not to be realized. As of December 31, 2019, and 2018, the Company had a full valuation allowance on its deferred tax assets.
The Company implements a two-step approach to recognize and measure uncertain tax positions. The first step is to evaluate the tax position taken or expected to be taken in a tax return by determining if the weight of available evidence indicates that it is more likely than not that, on an evaluation of the technical merits, the tax position will be sustained on audit, including resolution of any related appeals or litigation processes. The second step is to measure the tax benefit as the largest amount that is more than 50% (cumulative basis) likely to be realized upon ultimate settlement. As of December 31, 2019, and 2018, no liability for unrecognized tax positions has been recognized.
| j. | Concentrations of credit risk: |
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash, cash equivalents and restricted cash. Cash and cash equivalents and restricted cash are invested in a major bank in Israel.
Management believes that the banks that hold the Company’s cash, cash equivalent and restricted cash are financially sound and, accordingly, minimal credit risk exists with respect to these cash, cash equivalent and restricted cash.
The Company has no off-balance-sheet concentration of credit risk such as foreign exchange contracts, option contracts or other foreign hedging arrangements.
| k. | Convertible notes: |
Proceeds from the sale of notes with a conversion feature are allocated to equity based on the intrinsic value of such conversion feature (if any) in accordance with ASC 470-20 “Debt with Conversion and Other Options”, with a corresponding discount on the notes recorded in liabilities which is amortized in finance expense over the term of the notes. Convertible notes with convertible features that are determined to not be beneficial are allocated entirely to liabilities.
| l. | Derivative warrant liability |
Financial equity instruments that do not meet the US GAAP criteria for equity classification are classified as liability at fair value and are adjusted to fair value at each reporting period. Changes in fair value are recognized in the Company’s statements of comprehensive loss, in accordance with ASC 815, Accounting for Derivative Financial Instruments.
| m. | Basic and diluted loss per share: |
Basic loss per share is computed by dividing the loss for the period applicable to ordinary shareholders by the weighted average number of ordinary shares outstanding during the period.
F-9
PAINREFORM LTD.
NOTES TO FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
| NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
For the years ended December 31, 2019 and 2018, all outstanding share options, convertible notes, and warrants have been excluded from the calculation of the diluted net loss per share as all such securities are anti-dilutive for all years presented.
The loss and the weighted average number of shares used in computing basic and diluted net loss per share is as follows:
| Year ended December 31, | ||||||||
| 2019 | 2018 | |||||||
| Numerator: | ||||||||
| Net loss applicable to shareholders of ordinary shares | $ | (1,279 | ) | $ | (828 | ) | ||
| Interest accrued on preferred shares | (1,130 | ) | (1,046 | ) | ||||
| Total loss attributed to ordinary shares | (2,409 | ) | (1,874 | ) | ||||
| Denominator: | ||||||||
| Shares of ordinary share used in computing basic and diluted net loss per share | 1,729,670 | 1,729,670 | ||||||
| Net loss per share of ordinary share, basic and diluted | $ | (1.39 | ) | $ | (1.08 | ) | ||
| n. | Share-based compensation: |
Share-based compensation to employeesis accounted for in accordance with ASC 718, “Compensation - Share Compensation” (“ASC 718”), which requires estimation of the fair value of share-based payment awards on the date of grant. The value of the portion of the award that is ultimately expected to vest is recognized as an expense over the requisite service period using the graded vesting method. The Company has elected to recognize forfeitures, as incurred.
The fair value of share options granted was estimated using the Black & Scholes model, which requires a number of assumptions, of which the most significant are the expected share price, volatility, and the expected option term. Expected volatility was calculated based on comparable public companies in the same industry. The expected share option term is calculated for share options granted using the “simplified” method. The risk-free interest rate is based on the yield from U.S. treasury bonds with an equivalent term.
F-10
PAINREFORM LTD.
NOTES TO FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
| NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
The expected dividend yield assumption is based on Company’s historical experience and expectation of no future dividend payouts. The Company has historically not paid cash dividends and has no foreseeable plans to pay cash dividends in the future.
| o. | Deferred offering costs |
The Company capitalizes certain legal and other third-party fees that are directly related to the Company’s in-process equity financings until such financings are consummated, including the Company’s Initial Public Offering (“IPO”). After the consummation of the equity financing, these costs will be recorded as a reduction of the gross proceeds. Should a planned equity financing be abandoned, terminated or significantly delayed, the deferred offering costs will immediately be written off to operating expenses. As of December 31, 2019, there were $192 of deferred offering costs included in other non-current assets on the balance sheet. There were no deferred offering costs capitalized as of December 31, 2018.
| p. | Disclosure of new accounting standards |
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) (“ASU 2016-02”). ASU 2016-02 requires lessees to recognize their leases contracts as assets and liabilities in the financial statements. Furthermore, the ASU requires the Company to continue recognizing expenses but recognize expenses on their income statements in a manner similar to current lease accounting. The amendments in this ASU are effective January 1, 2019. In July 2018, the FASB issued ASU 2018-11, Leases - Targeted Improvements, to allow a company to elect an optional modified retrospective transition method that applies the new lease requirements through a cumulative-effect adjustment in the period of adoption.
Effective January 1, 2019, the Company adopted the new lease accounting standard using the modified retrospective transition option of applying the new standard at the adoption date. The Company elected to apply the practical expedients permitted under the transition guidance within the new standard, and the Company also elected not to apply the recognition requirements in the lease standard to short-term leases as of the adoption date. As such, there was no impact on the Company’s financial statements as a result of adopting ASU 2016-02.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement - Disclosure Framework (Topic 820). The updated guidance improves the disclosure requirements on fair value measurements. The updated guidance if effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The implementation of the updated guidance will not have significant effect on Company’s financial statements.
F-11
PAINREFORM LTD.
NOTES TO FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
| NOTE 3:- | OTHER CURRENT ASSETS |
| December 31, | ||||||||
| 2019 | 2018 | |||||||
| Receivables from governmental authorities | $ | 22 | $ | 28 | ||||
| Prepaid expenses | 3 | 6 | ||||||
| $ | 25 | $ | 34 | |||||
| NOTE 4:- | OTHER ACCOUNT PAYABLES |
| December 31, | ||||||||
| 2019 | 2018 | |||||||
| Employees and related | $ | 15 | $ | - | ||||
| Other payables | 151 | 16 | ||||||
| $ | 166 | $ | 16 | |||||
| NOTE 5:- | FAIR VALUE MEASUREMENTS |
During the year ended December 31, 2019, the Company issued warrants related to its convertible notes (refer to Note 6(b)). As the warrants do not meet the US GAAP criteria for equity classification, they were classified as liabilities and measured at fair value on the issuance date and as of December 31, 2019 with changes in fair value recognized as finance expenses in the statements of comprehensive loss.
A summary of significant unobservable inputs (Level 3 inputs) used in measuring warrants issued during the year ended December 31, 2019 is as follows:
| Exercise price | $0.85-$1.58 | |||
| Expected volatility | 72.29% | |||
| Risk free rate | 1.5%-1.67% | |||
| Expected life (years) | 4.65-5 | |||
| Dividend yield | 0% |
F-12
PAINREFORM LTD.
NOTES TO FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
| NOTE 5:- | FAIR VALUE MEASUREMENTS (Cont.) |
The following table presents changes in the fair value of the derivative warrant liability recorded in respect of the warrants:
| Balance as of December 31, 2018 | $ | - | ||
| Issuance of warrants in connection with convertible notes (Note 6 (b)) | 445 | |||
| Changes in fair value | 2 | |||
| Balance as of December 31, 2019 | $ | 447 |
| NOTE 6:- | CONVERTIBLE NOTES |
| a. | From 2014 until 2017, the Company issued convertible notes in the amount of $3,200 to existing shareholders. During the years ended December 31, 2019 and 2018, the Company issued convertible notes in the amount of $241 and $488, respectively, to existing shareholders and recorded interest expense amounting to $379 and $324 for the years ended December 31, 2019, and 2018, respectively. |
As of December 31, 2019 and 2018, the total principal amount of convertible notes was $3,929 and $3,688 respectively.
As of December 31, 2019 and 2018, the total balance of convertible notes was $5,141 and $4,520, respectively, inclusive of accrued interest.
The convertible notes bear interest at a rate of 8%, compounded on the basis of 365-day year.
The notes may be converted into Series A Preferred Shares of the Company or repaid as follows:
| i. | Automatic Conversion Upon Occurrence of a Qualified Investment – upon the closing of a qualified investment (issuance of preferred securities if at least US$ 3,000 from a third party), the notes shall be automatically converted into securities of the Company on the same terms and conditions as in such qualified investment. The conversation shall be on the same terms and conditions and bearing the same rights, subject to a conversion price per share equal to the lowest price per share paid under the qualified investment less agreed upon percentage equal to 3% multiplied by the number of months from the grant date of the applicable note and up to a maximum of 54%. |
| ii. | Optional Conversion – each note holder, at its sole discretion, shall be entitled, by a written notice, to convert the note held by it into Series A Preferred Shares at a conversion price equal to US $0.747 (subject to adjustments in accordance with the Company Articles of Association. |
| iii. | Deemed Liquidation Event Repayment – in the event of a Deemed Liquidation Event (generally meaning consolidation or merger of the Company or sale of all or substantially all of the Company assets or issued share capital resulting that a third party will hold more than 50% of the voting power or the right to appoint more than 50% of the board members) then immediately prior to the consummation of such event, the Company shall pay each note holder (which was not earlier converted) a sum equal to the principal amount of the note multiplied by three, plus the interest accrued up to the date of repayment. |
In the event that the notes were not earlier converted or paid, then, the Company shall pay the accrued amount by the end of the note term, currently December 31, 2020.
The Company concluded the conversion feature is not a beneficial conversion feature pursuant to the provisions of ASC 470-20, “Debt with Conversion and Other Options.” Accordingly, the proceeds were recorded in liabilities in their entirety at the date of issuance.
F-13
PAINREFORM LTD.
NOTES TO FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
| NOTE 6:- | CONVERTIBLE NOTES (Cont.) |
| b. | In August and December 2019, the Company issued 14.2 units consisting of convertible notes (“August and December 2019 convertible notes”) and warrants for a total consideration of $1,420 (representing a consideration of $100 per unit), after giving effect to a 10% discount. |
The August and December 2019 convertible notes have a principal amount of $110 per unit, bear interest at a rate of 5%, and have a maturity date of one year from the date of issuance. The notes are automatically convertible into shares (or other units) to be issued in an initial public offering (“IPO”), at a conversion price representing a 30% discount on the price of shares (or other units) sold in such IPO. The conversion price will not exceed an amount representing a 30% discount of an IPO share price representing a company valuation, on a fully diluted basis, of $30,000 (excluding funds issued in consideration of these units). Such $30,000 valuation is subject to certain adjustments at the reasonable discretion of the underwriters in such IPO.
The number of shares (or other units) to be issued upon conversion is determined by dividing the principal amount of $110 per unit, including accrued interest, by the conversion price of the notes.
The notes may not be converted if an IPO does not occur.
The warrants have a term of 5 years from the date of issuance, and are exercisable into a number of ordinary shares determined by dividing $110 (per unit) by $0.8475 (subject to certain adjustments), at an exercise price of $0.8475 per share (subject to certain adjustments).
In the event an IPO occurs within one year of the date of issuance, the warrants are exercisable into a number of ordinary shares (or units of ordinary shares and warrants in certain circumstances), determined by dividing $110 (per unit) by the conversion price of the notes, at an exercise price equal to 120% of the conversion price of the notes.
The proceeds were first allocated to the warrant liability (Refer to Note 5) based on the fair value at the issuance date with the remaining amount allocated to the discount recorded on the August and December 2019 convertible notes. As the conversion feature of the notes is contingent upon a future event (IPO), the Company concluded the conversion feature is not a beneficial conversion feature pursuant to the provisions of ASC 470-20, “Debt with Conversion and Other Options”.
The aggregate discount to the convertible notes will be amortized to finance expense over the term of the notes.
F-14
PAINREFORM LTD.
NOTES TO FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
| NOTE 7:- | TAXES ON INCOME |
| a. | Tax rates applicable to the Company: |
Taxable income of the Company is subject to the Israeli Corporate tax rate which was 23% for the years ended December 31, 2019 and 2018.
The Company has not recorded an income tax provision due to its history of operating losses. |
| b. | Net operating loss carry forward: |
As of December 31, 2019 and 2018, the Company had net operating loss carry forwards for Israeli income tax purposes of approximately $13,007 and $10,967, respectively. Net operating loss carry forwards in Israel may be carried forward indefinitely and offset against future taxable income.
| c. | As of December 31, 2019, the Company had final tax assessments for tax years prior to and including the tax year ended December 31, 2014. |
| d. | Deferred income taxes: |
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets are as follows:
| December 31, | ||||||||
| 2019 | 2018 | |||||||
| Deferred tax assets: | ||||||||
| Net operating loss carry forward | $ | 2,992 | $ | 2,522 | ||||
| Deferred tax asset before valuation allowance | 2,992 | 2,522 | ||||||
| Valuation allowance | (2,992 | ) | (2,522 | ) | ||||
| Net deferred tax asset | $ | - | $ | - | ||||
In assessing the realization of deferred tax assets, management considers whether it is more likely than not that all or some portion of the deferred tax assets will not be realized.
The ultimate realization of the deferred tax assets is dependent upon the generation of future taxable income during the periods in which temporary differences are deductible and net operating losses are utilized. Based on consideration of these factors, the Company recorded a full valuation allowance at December 31, 2019 and 2018.
| NOTE 8:- | COMMITMENTS AND CONTINGENCIES |
During the years ended December 31, 2018 and 2019, the Company rented its office space from a related party for an annual rental fee of $33. The Company can terminate the agreement at any time. In addition, the Company received management services from a related party in consideration for quarterly management fees of $ 20 until April 2018. Refer to Note 12 for further information.
F-15
PAINREFORM LTD.
NOTES TO FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
| NOTE 9:- | TEMPORARY EQUITY |
Convertible Preferred Shares:
Convertible preferred shares consist of the following:
| Convertible Preferred Shares - Series A | ||||||||||||||||
| Shares Authorized | Shares Issued and Outstanding | Carrying Value | Liquidation Preference | |||||||||||||
| As of December 31, 2019 | 18,300,000 | 8,862,800 | $ | 6,621 | $ | 15,250 | ||||||||||
| As of December 31, 2018 | 18,300,000 | 8,862,800 | $ | 6,621 | $ | 14,120 | ||||||||||
The preferred shares shall confer upon their holders all rights accruing to holders of ordinary shares (as detailed below in this Note) in the Company, and, in addition, the rights, preferences and privileges granted to the preferred shares as follows:
| A. | Priority on Receipt of Dividends and/or Bonus Shares |
The holders of preferred shares shall be entitled to receive, when and if declared by the board of directors of the Company, noncumulative dividends and/or bonus shares, on the amount calculated on the basis of the number of ordinary shares into which such preferred share could then be converted, in accordance with the Liquidation Preference provisions detailed below. Such distributions are payable in preference to the payment of any dividends or bonus shares on ordinary shares declared by the board of directors. No dividends or bonus shares have been declared to date.
| B. | Conversion Rights |
Each preferred share is convertible, at the option of the holder at any time, and without the payment of additional consideration by the holder thereof, into the number of ordinary shares as is determined by dividing the original issue price for such series of preferred share by the conversion price that is in effect at the time of conversion. The initial conversion price is the original issue price for such series of preferred share. The original issue price was $0.747 per share (“Original Issue Price”). The applicable conversion price of each is subject to adjustment upon any future stock splits or combinations, dividends and distributions, recapitalizations, or upon the issuance of any new securities as a price per share lower than the applicable conversion price of the preferred shares in effect immediately prior to such issuance.
| C. | Automatic and Mandatory Conversion |
All outstanding preferred shares will automatically be converted into fully paid and nonassessable ordinary shares, at the respective Conversion Price at the time in effect for such preferred shares, upon the earlier of: (i) the date specified in a written notice received by the Company from the holders of a at least majority of the preferred shares holders (“Preferred Majority”), or (ii) the consummation of a firmly underwritten public offering of ordinary shares (“Public Offering”) reflecting, unless waived by the holders of a at least a Preferred Majority, a Company’s pre-money valuation of $100,000 or more, and netting to the Company proceeds of at least $30,000 (“Qualified Public Offering” or “Qualified IPO”).
| D. | Voting Rights |
Each holder of the Series A convertible preferred share is entitled to one vote for each ordinary share into which such Series A convertible preferred share could be converted.
F-16
PAINREFORM LTD.
NOTES TO FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
| NOTE 9:- | TEMPORARY EQUITY (Cont.) |
| E. | Anti-dilution Protection |
If the Company issues, or is deemed to have issued Additional Shares without consideration or for a consideration per share less than $0.747, subject to adjustments (“Conversion Price”), for any series of preferred shares in effect immediately prior to such issue, then, and in each such case, such Conversion Price shall be reduced, concurrently with such issue, for no consideration, to a price (calculated to the nearest cent with half a cent being rounded up) determined by multiplying such Conversion Price by a fraction (A) the numerator of which shall be (1) the number of Ordinary Shares issued and outstanding immediately prior to such issuance of Additional Shares (treating for this purpose as outstanding all ordinary shares issuable upon exercise, exchange or conversion of all Options and Convertible Securities outstanding immediately prior to such issue), plus (2) the number of ordinary shares which the aggregate consideration received by the Company for the total number of Additional Shares so issued would purchase at such Conversion Price in effect immediately prior to such issuance of Additional Shares, and (B) the denominator of which shall be (1) the number of ordinary shares issued and outstanding immediately prior to such issuance of Additional Shares (treating for this purpose as outstanding all ordinary shares issuable upon exercise, exchange or conversion of all options and convertible securities outstanding immediately prior to such issue), plus (2) the number of such Additional Shares so issued, as detailed in the Company’s Articles of Association (“AoA”).
For the purpose hereof “Additional Shares” shall mean all ordinary shares issued (or deemed, by the express provisions of the AoA to be issued) by the Company after the Series A Preferred Shares original issue date, other than (1) the following ordinary shares and (2) ordinary shares deemed issued pursuant to the following options and convertible securities (clauses (1) and (2), collectively, “Exempted Securities”): (1) ordinary shares, Options or Convertible Securities issued or issuable as a dividend or distribution on the Preferred A Shares; (2) ordinary shares issued or issuable by reason of a dividend, share split, split-up or other distribution on ordinary shares that is covered by AoA; (3) ordinary shares (or Options with respect thereto) issued or issuable to officers, directors or employees of, or consultants or service providers to, the Company or its subsidiaries (if any) pursuant to an employee share option plan, agreement or arrangement approved by the Board; (4) ordinary shares or convertible securities actually issued upon the exercise of Options or ordinary shares actually issued upon the conversion or exchange of Convertible Securities, in each case provided such issuance is pursuant to the terms of such Option or Convertible Security; or (5) ordinary shares, Options or Convertible Securities issued or issuable with respect to which the Company receives written notice from the holders of at least a Preferred Majority agreeing that such ordinary shares shall not constitute Additional Shares.
| F. | Veto Rights to certain Preferred Shares Holders |
The Company shall not without first obtaining the approval (by vote or written consent, as provided by law) of the holders of a majority of the outstanding preferred shares held by Ofer Hi-Tech Investments Ltd./ D Partners Group Investors and the holders of a majority of the outstanding preferred shares held by the Medica Group Investors, amend, alter, modify, repeal or terminate, any provision of the Articles of Association of the Company in a manner adversely affecting the express preferences, rights, powers or privileges of the preferred shares.
| G. | Liquidation Preference |
In the event of liquidation, dissolution or winding up of the Company subject to applicable law, in the event of a Deemed Liquidation Event (as defined below), and in the event of any declaration and distribution of dividends Distribution, all the assets of the Company whether capital, surplus, earnings, securities or assets of any kind available for distribution among the holders of the Company’s shares (“Distributable Assets”) shall be distributed first to the holders of preferred shares who shall be entitled to receive, prior and in preference to any distribution to the holders of Ordinary Shares, an amount per each preferred share held by such holder equal to (i) $0.747, subject to adjustments per each preferred share ( “Original Issue Price”); plus (ii) interest at the rate of 8% per annum on such Original Issue Price, compounded annually from the date of issuance of such preferred share to the date of actual distribution, plus (iii) any previously declared but unpaid dividend on such shares, minus (iv) the aggregate amount previously paid with respect to such Preferred Share (the “Preferential Amount”). In the event that the Distributable Assets are insufficient for the distribution in full of the Preferential Amount with respect to all preferred shares then outstanding, all of such Distributable Assets shall be distributed among the holders of the preferred shares in proportion to the full respective Preferential Amount such holders would otherwise be entitled to receive.
Although the convertible preferred shares are not redeemable, in the event of certain “Deemed Liquidation Event” that are not solely within the Company’s control (including merger, acquisition, or sale of all or substantially all of the Company’s assets), the holders of the convertible preferred shares would be entitled to preference amounts paid before distribution to other shareholders (as explained in the previous paragraph) and, hence, effectively redeeming the preference amount. The convertible preferred shares are classified outside of shareholders’ deficit as a result of these in-substance contingent redemption rights.
As of December 31, 2019 and 2018, the Company did not adjust the carrying values of the convertible preferred shares to the deemed liquidation values of such shares since a liquidation event was not probable of occurring.
F-17
PAINREFORM LTD.
NOTES TO FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
| NOTE 10:- | SHAREHOLDERS’ DEFICIT |
Ordinary Shares:
The ordinary share confers upon their holders the right to participate and vote in general shareholder meetings of the Company and to share in the distribution of dividends, if any, declared by the Company, and rights to receive a distribution of assets upon liquidation.
Shares developments:
| a. | In July 2008, the Company signed an agreement with investors, pursuant to which 1,500,000 ordinary shares and 1,703,410 preferred A shares were issued in consideration for $1,700. |
| b. | During November 2008, the Company signed an agreement with investors according to which the Company issued 3,072,650 preferred A shares in consideration for $2,295 to the new investors and 572,365 preferred A shares to existing investors free of charge. |
| c. | On July 1, 2008, the Company entered into an agreement with Stephen A. Cooper LLC, a consultant in the field of analgesic development, for consulting services (hereinafter- the “consultant”). In exchange for services and, in addition to a yearly service fee, the Company issued ordinary shares at 2.5% without dilution. As of December 31, 2011, the contract with the consultant ended and 229,670 ordinary shares were issued to the consultant. |
| d. | During 2008, 2009 and 2011, the Company issued 77,860, 92,950 and 58,860 ordinary shares, respectively, to one of its consultants. |
Share-based compensation:
The 2008 Plan
On August 7, 2008, the Board of Directors approved the adoption of the 2008 Share Option Plan (the “2008 Plan”). Under the 2008 Plan, the Company may grant its officers, directors, employees and consultants, share options of the Company. Each share option granted is exercisable at such times and terms and conditions as the Board of Directors may specify in the applicable share option agreement, provided that no share option will be granted with a term in excess of 10 years.
Upon the adoption of the 2008 Plan the Company reserved for issuance 503,608 ordinary shares and, on November 20, 2008, the Board of Directors increased the reserved amount for issuance by an additional 674,651 options convertible into ordinary shares, so the total share option pool will be 1,178,331. As of December 31, 2019 and 2018, 461,645 options were outstanding and no share options were available for future grant under the 2008 Plan.
F-18
PAINREFORM LTD.
NOTES TO FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
| NOTE 10:- | SHAREHOLDERS’ DEFICIT (Cont.) |
On July 2, 2019, the Board of Directors approved the adoption of the 2019 Share Option Plan (the “2019 Plan”). Under the 2019 Plan, the Company may grant its officers, directors, employees and consultants, share options, of the Company. Each share option granted shall be exercisable at such times and terms and conditions as the Board of Directors may specify in the applicable share option agreement, provided that no share option will be granted with a term in excess of 10 years.
Upon the adoption of the 2019 Plan, the Company reserved for issuance 658,369 options to purchase 658,369 ordinary shares. As of December 31, 2019, 658,369 options were outstanding.
On June 12, 2019, the Company issued 351,375 options to its Chief Executive Officer (“CEO”). The CEO will be entitled to purchase 351,375 ordinary shares at an exercise price of $1.11. 37.5% of the share options vested on the grant date and the remainder will vest monthly over a period of 8 months commencing June 2019. The total grant date fair value of share options granted was $63, which will be recognized as share-based compensation expense over the vesting period. The Company recognized $61 during the year ended December 31, 2019 as share-based compensation expense which was included in general and administrative expenses.
The fair value of the Company’s share options granted to the CEO was estimated using the Black-Scholes option pricing model using the following assumptions (level 3 measurement):
| June 12, 2019 | ||||
| Risk-free interest rate | 2.13 | % | ||
| Expected volatility | 82.29 | % | ||
| Dividend yield | 0 | |||
| Expected term | 10 | |||
| Exercise price | 1.11 | |||
On September 5, 2019, the Company issued 153,497 fully vested share options to its Chief Operating Officer (“COO”) as a replacement award for existing, fully-vested share options that were cancelled. The Company accounted for this transaction as a modification of the terms of the original award. The incremental share-based compensation expense recognized as a result of the transaction was approximately $2. The COO will be entitled to purchase 153,497 ordinary shares at an exercise price of $0.08.
In addition, also on September 5, 2019, the Company issued 153,497 options to the COO. The COO will be entitled to purchase 153,497 ordinary shares at an exercise price of $1.113. 12.5% of the share options will vest quarterly over a period of 8 quarters commencing September 2019.The total grant date fair value of the share options granted to the COO was $34, which will be recorded over the vesting period. The Company recognized $14 during the year ended December 31, 2019 as share-based compensation expense which was included in general and administrative expenses.
F-19
PAINREFORM LTD.
NOTES TO FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
| NOTE 10:- | SHAREHOLDERS’ DEFICIT (Cont.) |
The fair value of the Company’s share options granted to the COO was estimated using the Black-Scholes option pricing model using the following assumptions (level 3 measurement):
| September
5, 2019 |
||||
| Risk-free interest rate | 1.43% - 1.49 | % | ||
| Expected volatility | 82.82% – 85.56 | % | ||
| Dividend yield | 0 | |||
| Expected term | 5.75 | |||
| Exercise price | $ | 0.08 – $1.113 | ||
Share options outstanding and exercisable to employees and directors under the 2008 Plan during the years ended December 31, 2019 and 2018 were as follows:
| Number of options | Weighted average exercise price | Weighted average remaining contractual life | ||||||||||
| Options outstanding as of December 31, 2018 | 461,645 | $ | 0.08 | 5.25 | ||||||||
| Options outstanding as of December 31, 2019 | 461,645 | $ | 0.08 | 4.25 | ||||||||
| Options exercisable as of December 31, 2019 and 2018 | 461,645 | $ | 0.08 | 4.25 | ||||||||
The intrinsic value of share options outstanding and exercisable at December 31, 2019 and 2018 was $275. And $0, respectively.
Share options outstanding and exercisable to employees and directors under the 2019 Plan during the year ended December 31, 2019, were as follows:
| As of December 31, 2019 | ||||||||||||
| Number of options | Weighted average exercise price | Weighted average remaining contractual life | ||||||||||
| Granted | 658,369 | $ | 0.754 | 10 | ||||||||
| Options outstanding as of December 31, 2019 | 658,369 | $ | 0.754 | 9.56 | ||||||||
| Options exercisable as of December 31, 2019 | 441,706 | $ | 0.754 | 9.56 | ||||||||
The intrinsic value of share options outstanding and exercisable at December 31, 2019 was $91.
F-20
PAINREFORM LTD.
NOTES TO FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
| NOTE 11:- | SELECTED STATEMENTS OF OPERATIONS DATA |
| a. | Research and development expenses: |
| Year ended December 31, | ||||||||
| 2019 | 2018 | |||||||
| Subcontractors and consultants | $ | 21 | $ | 171 | ||||
| Payroll and related expenses | 59 | - | ||||||
| Share-based compensation expense | 14 | - | ||||||
| Patent | 42 | 52 | ||||||
| $ | 136 | $ | 223 | |||||
| b. | General and administrative expenses: |
| Year ended December 31, | ||||||||
| 2019 | 2018 | |||||||
| Professional services | $ | 342 | $ | 218 | ||||
| Payroll and related expenses | 60 | - | ||||||
| Rent and office maintenance | 33 | 34 | ||||||
| Share-based compensation expense | 75 | (*) | ||||||
| Others | 43 | 25 | ||||||
| $ | 553 | $ | 277 | |||||
| c. | Financial expenses, net: |
| Year ended December 31, | ||||||||
| 2019 | 2018 | |||||||
| Interest expense and amortization of discount on convertible notes | 541 | 324 | ||||||
| Issuance expenses | 47 | - | ||||||
| Bank fees | 2 | 1 | ||||||
| Change in fair value of derivative warrant liability | 2 | |||||||
| Exchange rate differences | (2 | ) | 3 | |||||
| Total financial expenses, net | $ | 590 | $ | 328 | ||||
F-21
PAINREFORM LTD.
NOTES TO FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
| NOTE 12:- | RELATED PARTIES BALANCES AND TRANSACTIONS |
| A. | During the years ended December 31, 2019 and 2018, the Company issued convertible notes in the amount of $95 and $279, respectively, to existing shareholders. As described under Note 4 above, the notes bear interest at a rate of 8%, compounded on the basis of 365-day year and may be converted into convertible preferred shares of the Company. Refer to Note 6. |
| B. | Starting in January 2014, the Company sub-leased office space and received management services from Zori Medica 2010 Ltd., a private company affiliated with Medica Venture Partners, the controlling shareholder of the Company. The Company was subject to an annual rental fee of US$ 33 for office space and US$ 20 as quarterly management fee. The management services continued until the end of March 2018. |
The sublease ceased as of August 2019, and since then the Company was provided with an office space at no cost by Medica Venture Partners the Company recorded an amount of $25 as a lease expense and a corresponding increase in additional paid in capital, representing a contribution from its controlling shareholder
| C. | On April 1, 2018, the Company signed a consultancy agreement with Prof. Hazum, a director of the Company, under which Prof. Hazum shall serve as chief executive officer of the Company on a 3 days per week basis, in consideration for a monthly fee of $ 12. The agreement may be terminated upon 60 days prior written notice by either party. |
| D. | Refer to Note 13 for the Board of Director’s approval of certain payments to the Chairman of the Board of Directors. |
| a. | Balances with related parties: |
| December 31, | ||||||||
| 2019 | 2018 | |||||||
| Convertible notes | $ | 4,746 | $ | 4,300 | ||||
| b. | Transactions with related parties: |
| Year ended December 31, | ||||||||
| 2019 | 2018 | |||||||
| Amounts charged to: | ||||||||
| General and administrative expenses | $ | 210 | $ | 168 | ||||
| Interest expense on convertible notes | $ | 351 | $ | 313 | ||||
F-22
PAINREFORM LTD.
NOTES TO FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
| NOTE 13:- | SUBSEQUENT EVENTS |
The Company evaluated subsequent events through May 12, 2020, the date these consolidated financial statements were available to be issued.
On January 26, 2020, the Company’s Board of Directors approved a one-time immediate payment of $150 and a payment of $37.5 on a quarterly basis (for such time as the service engagement continues) to the Chairman of the Board of Directors contingent upon shareholder approval and successful completion of Company’s IPO.
On January 31, 2020, the Company signed an amendment to the letter of engagement with Joseph Gunnar & Co., LLC, relating to the company’s IPO and bridge financing under which, as of the execution of the amendment, Maxim Group LLC was made a party to the agreement and will act as underwriter and managing book runner with respect to the Company’s proposed IPO and Joseph Gunnar shall act as co-underwriter and co-book runner (Maxim and Gunnar together “Underwriters”). The Underwriters are entitled to receive an underwriting discount or spread of 7.0% of the IPO price, except in relation to participation by certain strategic investors, in which case the underwriting discount or spread will be equal to 3.5% of the public offering price.
In addition, the Underwriters will be entitled to non-accountable expenses allowance equal to 1% of the amount raised in the IPO, but not exceeding US$125.
Furthermore, the Underwriters will be entitled to the issuance of warrants to acquire shares of the Company, the number of which will equal 5% of the amount of shares issued in the offering, such warrants to be exercisable within 4 years of their issuance for an exercise price equal to 125% of the IPO price.
F-23
PAINREFORM LTD.
[________] Ordinary Shares
The date of this prospectus is , 2020.
 |
 |
| Joint Book-Runner | Joint Book-Runner |
Dealer Prospectus Delivery Obligation
Until and including ____, 2020 (25 days after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers’ obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 6. Indemnification of Directors and Officers
Under the Israeli Companies Law, 5759-1999, or the Companies Law, a company may not exculpate an office holder from liability for a breach of the duty of loyalty. An Israeli company may exculpate an office holder in advance from liability to the company, in whole or in part, for damages caused to the company as a result of a breach of the 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 out 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, or undertake in advance to indemnify, an office holder for the following liabilities and expenses, imposed on office holder or incurred by office holder due to acts performed by him or her as an office holder, provided its articles of association include a provision authorizing such indemnification:
| ● | monetary liability incurred by or imposed on him or her in favor of another person pursuant to a judgment, including a settlement or arbitrator’s award approved by a court. However, if an undertaking to indemnify an office holder with respect to such liability is provided in advance, then such an undertaking must be limited to certain 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 foreseen events and amount or criteria; |
| ● | reasonable litigation expenses, including reasonable attorneys’ fees, incurred by the office holder as (1) a result of an investigation or proceeding instituted against him or her by an authority authorized to conduct such investigation or proceeding, provided that (i) no indictment was filed against such office holder as a result of such investigation or proceeding; and (ii) no financial liability was imposed upon him or her as a substitute for the criminal proceeding as a result of such investigation or proceeding or, if such financial liability was imposed, it was imposed with respect to an offense that does not require proof of criminal intent or (2) in connection with a monetary sanction; |
| ● | a monetary liability imposed on him or her in favor of an injured party at an Administrative Procedure (as defined below) pursuant to Section 52(54)(a)(1)(a) of the Securities Law; |
| ● | expenses incurred by an office holder in connection with an Administrative Procedure under the Securities Law, including reasonable litigation expenses and reasonable attorneys’ fees; and |
| ● | reasonable litigation expenses, including attorneys’ fees, incurred by the office holder or imposed by a court in proceedings instituted against him or her by the company, on its behalf, or by a third-party, or in connection with criminal proceedings in which the office holder was acquitted or as a result of a conviction for an offense that does not require proof of criminal intent. |
An “Administrative Procedure” is defined as a procedure pursuant to chapters H3 (Monetary Sanction by the Israeli Securities Authority), H4 (Administrative Enforcement Procedures of the Administrative Enforcement Committee) or I1 (Arrangement to prevent Procedures or Interruption of procedures subject to conditions) to the Securities Law.
Under the Companies Law and the Securities Law, a company may insure an office holder against the following liabilities incurred for acts performed by him or her as an office holder if and to the extent provided in the company’s articles of association:
| ● | a breach of the duty of 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. |
II-1
Under the Companies Law, a company may not indemnify, exculpate or insure an office holder against any of the following:
| ● | a breach of the duty of loyalty, except for indemnification and insurance for a breach of the duty of loyalty to the company to the extent that the office holder acted in good faith and had a reasonable basis to believe that the act would not prejudice the company; |
| ● | a breach of the duty of care committed intentionally or recklessly, excluding a breach arising out of the negligent conduct of the office holder; |
| ● | an act or omission committed with intent to derive unlawful 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 certain office holders or under certain circumstances, also by the shareholders, as described under “Management— Exculpation, Insurance and Indemnification of Office Holders” above.
Our amended and restated articles of association permit us to exculpate, indemnify and insure our office holders to the fullest extent permitted by the Companies Law and Securities Law. Each of our office holders have entered into an indemnification agreement exculpating them, to the fullest extent permitted by Israeli law, from liability to us for damages caused to us as a result of a breach of the duty of care and undertaking to indemnify them to the fullest extent permitted by Israeli law, including with respect to liabilities resulting from certain acts performed by such office holders in their capacity as an office holder of the Company, our subsidiaries or our affiliates. The indemnification is limited both in terms of amount and coverage.
In the opinion of the SEC, indemnification of directors and office holders for liabilities arising under the Securities Act, however, is against public policy and therefore unenforceable.
Item 7. Recent Sales of Unregistered Securities
The following sets forth information as to all securities we have sold after January 1, 2017, which were not registered under the Securities Act:
| (a) | In 2017, we issued $698,995 of convertible notes to three investors. The loans are subject to the same terms of the original convertible loan. |
| (b) | In 2018, we issued $349,500 of convertible notes to four investors. The loans are subject to the same terms of the original convertible loan. |
| (c) | In August and December 2019, we sold units consisting of $1,560,000 of convertible notes and [] warrants to purchase ordinary shares to 9 investors. Each unit consisted of (i) a 5% Senior Secured Convertible Promissory Note in the principal amount of $110,000, of the Company that matures one year after issuance, and (ii) a five-year warrant to purchase a number of the Company’s Ordinary Shares. |
| (d) | In connection with the bridge financing of August and December 2019, we paid Joseph Gunnar & Co., LLC a commission of $146,000 and issued Joseph Gunnar & Co., LLC placement agent warrants to purchase a number of shares equal to ten percent (10%) of the total number of shares underlying the convertible notes and warrants sold in the bridge financing. |
We believe that the offers, sales and issuances of the securities described in the preceding paragraph were exempt from registration either (a) under Section 4(a)(2) of the Securities Act and the rules and regulations promulgated thereunder, in that the transactions were between an issuer and sophisticated investors or members of its senior executive management and did not involve any public offering within the meaning of Section 4(a)(2), (b) under Regulation S promulgated under the Securities Act in that offers, sales and issuances were not made to persons in the United States and no directed selling efforts were made in the United States.
II-2
(b) Grants of Stock Options
In June 2019, we granted options to purchase 351,375 of our ordinary shares at an exercise price of $1.113 per share to an executive officer, and on September 2019 we granted options to purchase an aggregate 306,994 of our ordinary shares at an exercise price of $0.08 with respect to 153,497 options and $1.113 with respect to 153,497 options to an executive officer, all in connection with services provided or to be provided to us by such persons.
The options and the ordinary shares issuable upon the exercise of such options were issued pursuant to written compensatory plans or arrangements with our employees, consultants and directors, in reliance on the exemption from the registration requirements of the Securities Act provided by Rule 701 promulgated under the Securities Act or the exemption set forth in Section 4(a)(2) under the Securities Act and Regulation D promulgated thereunder relative to transactions by an issuer not involving any public offering. All recipients either received adequate information about us or had access, through employment or other relationships, to such information.
All of the foregoing securities are deemed restricted securities for purposes of the Securities Act. All certificates representing the issued shares described in this Item 7 included appropriate legends setting forth that the securities had not been registered and the applicable restrictions on transfer.
Item 8. Exhibits and Financial Statement Schedules
The exhibit index attached hereto is incorporated herein by reference.
Financial statement schedules not listed above have been omitted because the information required to be set forth therein is not applicable or is shown in the financial statements or notes thereto.
Item 9. Undertakings
The undersigned registrant hereby undertakes to provide to the underwriter at the closing specified in the underwriting agreements, certificates in such denominations and registered in such names as required by the underwriter to permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the SEC such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b) (1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.
II-3
EXHIBIT INDEX
| Exhibit Number |
Exhibit Description | |
| 1.1 | Form of Underwriting Agreement* | |
| 3.1 | Articles of Association, as amended, as currently in effect | |
| 3.2 | Form of Articles of Association to be effective upon the effectiveness of the registration statement | |
| 4.1 | Form of Share Certificate* | |
| 5.1 | Opinion of Doron Tikotzky Kantor Gutman Nass & Amit Gross* | |
| 5.2 | Opinion of Carter Ledyard & Milburn LLP* | |
| 10.1 | 2019 Option Plan | |
| 10.2 | Form of Indemnification Agreement* | |
| 10.3 | Consultancy Agreement* | |
| 10.4 | Employment Agreement* | |
| 10.7 | Form of Option Award | |
| 10.8 | Amended and Restated Investors’ Rights Agreement dated November 26, 2008 | |
| 10.9 | Compensation Policy* | |
| 23.1 | Consent of Brightman Almagor Zohar & Co. | |
| 23.2 | Consent of Doron Tikotzky Kantor Gutman Nass & Amit Gross (included in Exhibit 5.1)* | |
| 23.3 | Consent of Carter Ledyard & Milburn LLP (included in Exhibit 5.2)* | |
| 24.1 | Power of Attorney (included in signature page) |
| * | To be filed by Amendment. |
II-4
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form F-1 and has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Herzliya, Israel on June 30, 2020.
| PAINREFORM LTD. | ||
| By: | /s/ Eli Hazum | |
| Name: Eli Hazum | ||
| Title: Acting Chief Executive Officer | ||
The undersigned officers and directors of PainReform Ltd. hereby constitute and appoint Ehud Geller and Eli Hazum, and each of them singly, with full power of substitution, our true and lawful attorneys-in-fact and agents to take any actions to enable the Company to comply with the Securities Act, and any rules, regulations, and requirements of the SEC, in connection with this registration statement on Form F-1, including the power and authority to sign for us in our names in the capacities indicated below any and all further amendments to this registration statement and any other registration statement filed pursuant to the provisions of Rule 462 under the Securities Act.
Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities and on the dates indicated.
| Signatures | Title | Date | ||
| /s/ Eli Hazum | June 30, 2020 | |||
| Prof. Eli Hazum | Acting Chief Executive Officer and Director (Principal Executive Officer) | |||
| /s/ Ehud Geller | June 30 2020 | |||
| Ehud Geller | Acting Chief Financial Officer and Executive Chairman (Principal Financial and Accounting Officer) | |||
| Director | June 30, 2020 | |||
Efi Cohen-Arazi
|
||||
| /s/ Assif Stoffman | Director | June 30, 2020 | ||
| Assif Stoffman |
II-5
SIGNATURE OF AUTHORIZED REPRESENTATIVE IN THE UNITED STATES
Pursuant to the Securities Act of 1933, as amended, the undersigned, the duly authorized representative in the United States of PainReform Ltd., has signed this registration statement on June 30, 2020.
| By: | /s/ David E. Weinstein | |
| Name: David E. Weinstein, MD, PhD President |
II-6
Exhibit 3.1
Amended and Restated Articles of Association
Of
PainReform Ltd.
In Hebrew: פיינרפורם בע”מ
Private Company # 51-405659-7
General
| 1. | Definition and Interpretation |
1.1. The following terms in these Articles of Association shall have the respective meanings ascribed to them below:
| “Additional Shares” | As defined in Article 7.7(d)(iv) below. | |
| “Articles” |
The Articles of Association of the Company, as set forth herein or as amended expressly or pursuant to the Law. | |
|
“As Converted Basis”
|
Assuming the conversion of the Preferred Shares then outstanding into Ordinary Shares, at the Conversion Price (as defined below) applicable to such Preferred Shares at the time of the relevant calculation. | |
| “Board or Board of Directors” |
The board of directors of the Company. | |
| “Business Day” |
Sunday to Thursday, inclusive, with the exception of holidays and official days of rest in the State of Israel. | |
| “Companies Law” |
The Companies Law, 1999, as may be amended from time to time. | |
| “Companies Regulations” |
Regulations promulgated under the Companies Law. | |
|
“Company” |
PainReform Ltd. |
פיינרפורם בע”מ |
| “Control” | The holding of more than 50% of the equity or voting rights in an entity or the right to appoint a majority of its board of directors or other equivalent body, whether directly or indirectly through voting agreements or otherwise. |
| “Convertible Securities” | As defined in Article 7.7(d)(iv) below. |
| “Director” | A Director of the Company in accordance with the definition under the Companies Law. |
| “Director Register” | Register of Directors that is to be kept pursuant to the Companies Law’s provisions. |
| “Dollar” or “$” |
United States Dollars. |
| “D-Partners Group” | D Partners II (Cayman), L.P. and D Partners 2 (Israel), L.P, D Partners 2 (Israel) Annex Fund, L.P., D Partners II (Cayman) Annex Fund, L.P. and their Permitted Transferees. |
| “Fully Diluted Basis” |
The number of Ordinary Shares issued and outstanding as of the time of applicable calculation, treating for this purpose as outstanding the maximum number of Ordinary Shares issuable upon exercise, exchange or conversion of all Options and Convertible Securities outstanding as of such time (or, in the case of Convertible Securities and Options therefor, upon conversion or exchange of such Convertible Securities), as set forth in the instrument relating to such Options and Convertible Securities (assuming the satisfaction of any conditions to exercisability, convertibility or exchangeability but without regard to any provision contained therein for a subsequent adjustment of such number). |
| “General Meeting” |
An annual or special meeting of the Shareholders of the Company in accordance with the Companies Law. |
| “Law” |
The provisions of any law (“din”) as defined in the Interpretation Law, 1981. |
| “Major Shareholders” |
Any holder of 5% or more of the voting power represented by the Company’s issued and outstanding share capital on an As-Converted Basis. |
| “Medica Group” |
Medica III Investments (International) L.P., Medica III Investments (Israel) L.P., Medica III Investments (S.F.) L.P., Medica III Investments (P.F.) L.P., Medica III Investments (Israel) (B) L.P., Poalim Medica III Investments L.P., and their Permitted Transferees. |
2
| “NIS” |
New Israeli Shekels. |
| “Ofer Hi-Tech Group” | (1) Ofer Hi-Tech Ltd., Ofer Hi-Tech Investments Ltd. (“Ofer Hi-Tech”), Ofer (Ships Holding) Ltd., Ofer Holdings Group Ltd., Lyn-Or Investments Ltd., LYN OR (Communication) Ltd., Orlin Technologies Ltd., Naiot Technological incubator Ltd., Ofer Brothers (Management) Ltd. and Ofer Media Ltd.; (2) each of Sammy Ofer, Eyal Ofer, Idan Ofer and/or Ehud Angel and their family members, the descendants, ancestors and spouse of each of the foregoing, and/or any corporate entity which is controlled by any of the foregoing or of which any of the foregoing is the main beneficiary(ies); and (iii) the Permitted Transferees of any of the foregoing. |
| “Ordinary Majority” |
Sixty six percent (66%) (or, from and after the occurrence the Triggering Event, if occurs – more than fifty percent (50%)) of the voting power underlying the shares held by all of the Shareholders who are entitled to vote and who voted in a General Meeting in person or by means of a proxy. |
| “Option” | As defined in Article 7.7(d)(iv) below. |
| “Ordinary Shares” |
The Ordinary Shares of the Company, nominal value NIS 0.01 each. |
| “Original Issue Price” |
With respect to the Series A Preferred Shares - US$0.747, subject to proportional adjustment for any Recapitalization Event. |
| “Permitted Transferee” | All of the following:
(A) With respect to any Shareholder - (i) such Shareholder’s spouse, sibling, lineal descendant or antecedent; (ii) an entity wholly owned by such shareholder, provided that such entity remains wholly owned by such shareholder and that such shareholder undertakes in writing to the Company not to Transfer its ownership, shares or rights in such entity to any third party, and further provided that such entity may only Transfer the shares of the Company transferred to it back to the original holder of such shares; (iii) such Shareholder’s transferee by operation of law or by will; |
3
|
(B) With respect to any Shareholder which is a limited partnership or a corporate entity: (i) any corporate entity which controls, is controlled by, or is under common control with, in each case, either directly or indirectly, such Shareholder; (ii) in the case of a Shareholder which is a partnership – its partners; (iii) in the case of a Shareholder which is a limited liability company - its shareholders and officers; (iv) the surviving entity in the merger of such Shareholder with another company or the entity succeeding to all or substantially all of the assets of such Shareholder; (v) in a Transfer resulting from the liquidation of a Shareholder - the successors in interest to such liquidated Shareholder; (vi) the limited and general partners of such Shareholder and the limited and general partners of, and any person or entity controlling (either directly or through an entity controlled by such person or entity), such limited or general partners, or (vii) any entity over which such Shareholder or its affiliates exercises investment discretion or act as a principal investment advisor, (viii) any affiliate of any of the above managed by the same management company or managing general partner or by an entity which controls, is controlled by, or is under common control with such management company or managing general partner, or any shareholder, partner or member of such affiliate.
(C) Without derogating from the aforesaid, (i) with respect to any Shareholder who is a holder of Preferred Shares – any other holder of Preferred Shares; (ii) with respect to any Shareholder who is a member of the Ofer Hi-Tech Group – any other member of the Ofer Hi-Tech Group; and (iii) with respect to a Shareholder who is a trustee – the person for the benefit of whom the shares or other securities were held in trust as disclosed to the Company; | |
| “Preferred Majority” |
Sixty six percent (66%) (or, from and after the occurrence the Triggering Event, if occurs – more than fifty percent (50%)) of the voting power represented by the Preferred Shares issued and outstanding from time to time (treated as a single class, on an As-Converted Basis), provided however that for purposes of this definition, all Ordinary Shares held by Shareholders who are included within the D-Partners Group and by Shareholders who are included within the Ofer Hi-Tech Group shall be deemed to be Preferred Shares (each convertible into one Ordinary Shares). |
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|
“Preferred Shares” |
Series A Preferred Shares. |
|
“Person”
|
An individual, corporation, partnership, joint venture, trust, and any other body corporate or unincorporated organization. |
| “Qualified Public Offering” |
A firmly underwritten public offering of Ordinary Shares (“Public Offering”) reflecting, unless waived by the holders of a at least a Preferred Majority, a Company’s pre-money valuation of US$ One Hundred Million ($100,000,000) or more, and netting to the Company proceeds of at least US$ Thirty Million ($30,000,000). |
| “Recapitalization Event” |
Any split or reverse split of the applicable shares, distribution of share dividend or bonus shares, with respect thereto, or any other recapitalization, reclassification or similar event resulting in a change of such shares into a different number of shares of the same class or any other class or classes of shares. |
| “Series A Preferred Shares” |
Series A Preferred Shares of the Company, nominal value NIS 0.01 each. |
| “Series A SPA” |
That certain Series A Preferred Shares Purchase Agreement dated November 20, 2008 by and among the Company and the Investors listed therein. |
| “ Shareholder” |
Any Person registered in the Shareholder Register of the Company as a holder of Ordinary Share(s) or Preferred Share(s). |
| “Shareholder Register” |
Register of Shareholders that is to be kept pursuant to the Companies Law’s provisions. |
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| “Triggering Event” |
(a) The consummation of the Additional Closing (as defined in the November 2008 SPA) pursuant to Section 1.2.2 of the November 2008 SPA but only if (i) the OHT/DP Group Investors (as defined therein) participating thereat shall have purchased all of the Additional Closing Shares underlying all of the Additional Closing Options, and (ii) by such time the Additional Closing under Section 1.2.1 of the November 2008 SPA if shall have either (A) not been consummated or (B) been consummated but the Medica Group Investors (as defined therein) participating thereat shall have purchased less than all of the Medica Group Additional Closing Shares set forth in the aforesaid Section 1.2.1 (in which case, as of such Triggering Event, the OHT/DP Group Investors participating in the aforesaid Additional Closing shall be referred to herein as the “Participating Investors Group”); or
(b) the latest date designated for the Additional Closing under Section 1.2.2 of the November 2008 SPA but only if (i) by such time such Additional Closing shall have either (A) not been consummated or (B) been consummated but the OHT/DP Group Investors participating thereat shall have purchased less than all of the Additional Closing Shares underlying all of the Additional Closing Options and (ii) by such time the Additional Closing under Section 1.2.1 of the November 2008 SPA shall have been consummated and the Medica Group Investors participating thereat shall have purchased all of the Medica Group Additional Closing Shares set forth in the aforesaid Section 1.2.1 (in which case, as of such Triggering Event, the Medica Group Investors participating in the aforesaid Additional Closing shall be referred to herein as the “Participating Investors Group”);
(c) The consummation of the Future Funding Closing (as defined in the November 2008 SPA) but only if (i) the Medica Group Investors participating thereat shall have purchased less than all of the Future Funding Shares underlying all of the Medica Group Investors’ Future Funding Options, and the OHT/DP Group Investors participating thereat shall have purchased all of the Future Funding Shares underlying all of the OHT/DP Group Investors’ Future Funding Options (in which case the OHT/DP Group Investors participating in such Future Funding Closing shall be referred to herein as the “Participating Investors Group”) or (ii) the OHT/DP Group Investors participating thereat shall have purchased less than all of the Future Funding Shares underlying all of the OHT/DP Group Investors’ Future Funding Options, and the Medica Group Investors participating thereat shall have purchased all of the Future Funding Shares underlying all of the Medica Group Investors’ Future Funding Options (in which case the Medica Group Investors participating in such Future Funding Closing shall be referred to herein as the “Participating Investors Group”). |
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1.2. The specific provisions of these Articles shall supersede the provisions of the Companies Law to the extent permitted under the Companies Law. Unless the subject or the context otherwise requires, each word and expression used but not specifically defined herein and defined in the Companies Law as in effect on the date when these Articles first became effective, shall have the same meaning ascribed to them therein, and to the extent that no meaning is attached to it in the Companies Law, the meaning ascribed to it in the Companies Regulations, and if no meaning is ascribed thereto in the Companies Regulations, the meaning ascribed to it in the Securities Law, 1968 or the regulations promulgated thereunder.
1.3. Words and expressions importing the singular shall include the plural and vice versa, words and expressions importing the masculine gender shall include the feminine gender and words and expressions importing persons shall include corporate entities.
1.4. The captions in these Articles are for convenience only and shall not be deemed a part hereof or affect the construction of any provision hereof.
1.5. All shares held (beneficially or of record), at the time of applicable calculation, by Shareholders who are Permitted Transferees of each other, shall be aggregated together for the purpose of determining the availability to such holders of any rights under these Articles, and such rights – to the extent they are determined to be available at such time - may be exercised (up to the maximum extent so determined to be available in the aggregate to all such Shareholders) by any, some or all of such Shareholders who are Permitted Transferees of each other.
| 2. | Private Company |
The Company is a private company, as defined in the Companies Law.
Furthermore:
2.1. The number of Shareholders for the time being of the Company (exclusive of persons who are in the employment of the Company and of persons who having been formerly in the employment of the Company were, while in such employment, and have continued after termination of such employment to be, Shareholders of the Company), shall not exceed fifty (50), but where two or more persons jointly own one or more shares in the Company, they shall, for the purposes of this Article, be treated as a single Shareholder;
2.2. Any invitation to the public to subscribe for any shares or debentures of the Company is hereby prohibited; and
2.3. The right to transfer shares in the Company shall be restricted as hereinafter provided.
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| 3. | The Purpose of the Company |
The purpose of the Company is to operate in accordance with business considerations to generate profits; provided, however, that the Company may donate reasonable amounts to worthy causes, as the Board may determine in its discretion, even if such donations are not within the framework of business considerations.
| 4. | The Objectives of the Company |
The Company shall engage in any lawful business.
| 5. | Limited Liability |
The liability of the Shareholders of the Company is limited, each one up to the unpaid portion, if any, of the full amount he undertook to pay for the shares of the Company allotted to him.
Share Capital
| 6. | Share Capital |
6.1. The authorized and registered share capital of the Company is NIS 230,000, divided into 4,700,000 Ordinary Shares and 18,300,000 Series A Preferred Shares.
6.2. The Ordinary Shares shall confer upon the holders thereof all the rights attached to the Ordinary Shares in these Articles, including, without limitation, the rights to receive notices of, and to attend, all General Meetings, to vote thereat with each Ordinary Share held entitling the holder thereof to one vote, to participate and share equally, on a per share basis, in distribution of dividends (subject to the provisions of Articles 79A) (Dividend), and to participate and share equally, on a per share basis, in distribution of surplus assets and funds in the Company (subject to the provisions of Articles 96) (Liquidation) in the event of a winding up, liquidation, dissolution or Deemed Liquidation Event (as defined in Article 96.3 below), and no other rights except as may be expressly provided for herein or under the Companies Law.
6.3. All the Ordinary Shares rank pari passu amongst themselves for all intents and purposes, including, without limitation, in relation to (i) the amounts of capital paid or credited as paid on their nominal value, (ii) participation in the distribution of dividends, bonus shares and any other distribution as may be declared by the Board out of funds and assets legally available therefor, return of the capital and distribution of the Company’s surplus assets upon the voluntary or involuntary dissolution, liquidation or winding up thereof.
6.4. The Preferred Shares shall confer upon the holders thereof all rights accruing to holders of Ordinary Shares in the Company, and, in addition, the rights, preferences and privileges granted to the Preferred Shares in these Articles.
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| 7. | Conversion of Preferred Shares. |
7.1. Right to Convert. Each Preferred Share shall be convertible, at the option of the respective holder(s) thereof, at any time or from time to time, and without the payment of additional consideration by the holder thereof, into such number of fully paid and nonassessable Ordinary Shares as is determined by dividing the Original Issue Price of such share by the Conversion Price (as defined below) of such share at the time of conversion.
7.2. Mandatory Conversion. All outstanding Preferred Shares shall automatically be converted into fully paid and nonassessable Ordinary Shares, at the respective Conversion Price at the time in effect for such Preferred Shares, upon the earlier of: (i) the date specified in a written notice received by the Company from the holders of a at least a Preferred Majority, or (ii) the consummation of a Qualified Public Offering.
7.3. Reserved.
7.4. Reserved.
7.5. Conversion Price. The respective conversion price per share for each Preferred Share shall initially be the respective Original Issue Price thereof, subject to adjustment pursuant only to the provisions of Article 7.7. The respective conversion price of the Preferred Shares, as in effect from time to time, is referred to as the “Conversion Price”.
7.6. (A) Mechanics of Conversion. Each holder that desires to convert Preferred Shares into Ordinary Shares pursuant to Article 7.1 shall surrender the certificate or certificates therefor, duly endorsed, at the office of the Company, and shall give notice to the Company at such office that such holder elects to convert the same and shall state therein the number of Preferred Shares, being converted. Thereupon the Company shall promptly issue and deliver at such office to such holder certificates for the number of Ordinary Shares to which such holder is entitled upon conversion. Such conversion shall be deemed to have been made immediately prior to the close of business on the date of such surrender of the certificate representing the Preferred Shares, to be converted, and at that time the rights of such Preferred Shares shall cease, and the Person entitled to receive the Ordinary Shares issuable upon such conversion shall be treated for all purposes as the record holder of such Ordinary Shares on such time. In the event of any conversion of Preferred Shares pursuant to Article 7.2, then the holders of Preferred Shares shall be deemed to have surrendered their certificates as aforesaid, and the certificates representing such Preferred Shares shall thereupon represent solely the right to receive the Ordinary Shares into which the Preferred Shares represented by such certificates shall have been converted upon the tender (or deemed tender) of such certificates to the Company, and the record holder of such Preferred Shares shall be treated for all purposes as the record holder of such Ordinary Shares effective upon the date of such conversion. Upon the occurrence of such conversion of the Preferred Shares, the holders thereof shall surrender the certificates representing such shares at the office of the Company. Thereupon, there shall be issued and delivered to such holder promptly at such office and in its name as shown on such surrendered certificate or certificates, certificates for the number of shares of Ordinary Shares into which the Preferred Shares surrendered were convertible on the date of such conversion.
(B) Effect of Conversion. All Preferred Shares which shall have been surrendered (or deemed surrendered) for conversion as herein provided shall no longer be deemed to be outstanding and all rights with respect to such shares, including the rights, if any, to receive notices and to vote, shall immediately cease and terminate at the Conversion Time, except only the right of the holders thereof to receive Ordinary Shares in exchange therefor and to receive payment of any dividends declared but unpaid thereon.
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(C) Taxes. The Company shall pay any and all issue and other similar taxes that may be payable in respect of any issuance or delivery of Ordinary Shares upon conversion of Preferred Shares pursuant to this Article 7.6. The Company shall not, however, be required to pay any tax which may be payable in respect of any Transfer involved in the issuance and delivery of Ordinary Shares in a name other than that in which the Preferred Shares so converted were registered, and no such issuance or delivery shall be made unless and until the person or entity requesting such issuance has paid to the Company the amount of any such tax or has established, to the satisfaction of the Company, that such tax has been paid.
7.7. Adjustments. The Conversion Price and the number of Ordinary Shares issuable upon conversion of the Preferred Shares shall be subject to adjustment as follows:
(a) Adjustment for Share Splits and Combinations.
(A) If the Company shall, at any time or from time to time after the Series A Original Issue Date (i) effect a subdivision of the outstanding Ordinary Shares without a comparable subdivision of the all Preferred Shares, or (ii) combine the outstanding any series of Preferred Shares without a comparable combination of the Ordinary Shares, then the applicable Conversion Price of any series of Preferred Shares not comparably subdivided in the case of Article 7.7(A)(i) or not comparably combined in the case of Article 7.7(A)(ii) then in effect immediately before that subdivision or combination shall be proportionately decreased in the case of Article 7.7(A)(i) so that the number of Ordinary Shares issuable on conversion of each share of such series of Preferred Shares shall be increased in proportion to such increase in the aggregate number of Ordinary Shares outstanding, or shall be proportionately increased in reversed proportion to such decrease in the aggregate number of shares of such applicable series of Preferred Shares outstanding in the case of Article 7.7(a)(ii).
(B) If the Company shall, at any time or from time to time after the Series A Original Issue Date (iii) combine the outstanding Ordinary Shares without a comparable combination of the shares of all series of Preferred Shares, or (iv) effect a subdivision of the outstanding shares of any series of Preferred Shares without a comparable subdivision of the Ordinary Shares, then the applicable Conversion Price of any series of Preferred Shares not comparably combined in the case of Article 7.7(a)(iii) or not comparably subdivided in the case of Article 7.7(a)(iv) then in effect immediately before such combination or subdivision shall be proportionately increased in the case of Article 7.7(a)(iii) so that the number of Ordinary Shares issuable on conversion of each share of such series of Preferred Shares shall be decreased in proportion to such decrease in the aggregate number of Ordinary Shares outstanding, or shall be proportionately decreased in reversed proportion to such increase in the aggregate number of shares of such series of Preferred Shares in the case of Article 7.7(a)(iv).
(C) If the Company shall, at any time or from time to time after the Series A Original Issue Date, effect a subdivision of the outstanding Ordinary Shares with a comparable subdivision of the shares of any series of Preferred Shares, or combine the outstanding shares of any series of Preferred Shares with a comparable combination of the Ordinary Shares, then the applicable Conversion Price of such series of Preferred Shares in effect immediately before that subdivision or combination shall be proportionately adjusted so that the number of Ordinary Shares issuable on conversion of each share of such series of Preferred Shares shall not be changed as a result of such increase or decrease, as the case may be, in the aggregate numbers of Ordinary Shares and shares of such applicable series of Preferred Shares outstanding. Any adjustment under this subsection (a) shall become effective at the close of business on the date the subdivision or combination becomes effective.
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(b) Adjustments for Dividends and Distributions
(A) Adjustment for Certain Dividends and Distributions. In the event the Company, at any time or from time to time after the Series A Original Issue Date, shall make or issue, or fix a record date for the determination of holders of Ordinary Shares entitled to receive, a dividend or other distribution payable in additional Ordinary Shares, then and in each such event each Conversion Price then in effect immediately before such event shall be decreased as of the time of such issuance or, in the event such a record date shall have been fixed, as of the close of business on such record date, by multiplying such Conversion Price then in effect by a fraction:
(1) the numerator of which shall be the total number of Ordinary Shares issued and outstanding immediately prior to the time of such issuance or the close of business on such record date, and
(2) the denominator of which shall be the total number of Ordinary Shares issued and outstanding immediately prior to the time of such issuance or the close of business on such record date plus the number of Ordinary Shares issuable in payment of such dividend or distribution;
provided, however, if such record date shall have been fixed and such dividend is not fully paid or if such distribution is not fully made on the date fixed therefor, such Conversion Price shall be recomputed accordingly as of the close of business on such record date and thereafter such Conversion Price shall be adjusted pursuant to this paragraph as of the time of actual payment of such dividends or distributions; and provided further, however, that no such adjustment shall be made if the holders of the applicable series of Preferred Shares simultaneously receive a dividend or other distribution of Ordinary Shares in a number equal to the number of Ordinary Shares as they would have received if all outstanding shares of such Preferred Shares had been converted into Ordinary Shares on the date of such event.
(B) Adjustments for Other Dividends and Distributions. In the event the Company, at any time or from time to time after the Series A Original Issue Date, shall make or issue, or fix a record date for the determination of holders of Ordinary Shares entitled to receive, a dividend or other distribution payable in securities of the Company (other than distribution of Ordinary Shares or Preferred Shares covered by other provisions of these Articles) or in cash or other property (other than distribution of cash out of earnings or earned surplus, determined in accordance with generally accepted accounting principles, covered by other provisions of these Articles), then and in each such event provision shall be made so that the holders of Preferred Shares shall receive upon conversion thereof in addition to the number of Ordinary Shares receivable thereupon, the amount of securities of the Company that they would have received had such Preferred Shares been converted into Ordinary Shares on the date of such event and had they thereafter, during the period from the date of such event to and including the conversion date, retained such securities receivable by them as aforesaid during such period, giving application to all adjustments called for during such period under this paragraph with respect to the rights of the holders of such Preferred Shares; provided, however, that no such provision shall be made with respect to any series of Preferred Shares if the holders of such series of Preferred Shares simultaneously receive a dividend or other distribution of such securities in an amount equal to the amount of such securities as they would have received if all outstanding shares of such series of Preferred Shares had been converted into Ordinary Shares on the date of such event.
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(c) Adjustment for Merger or Reorganization, etc. Subject to the provisions of Article 96, if there shall occur any reorganization, recapitalization, reclassification, consolidation or merger involving the Company in which the Ordinary Shares (but not the Preferred Shares) are converted into or exchanged for securities, cash or other property (other than a transaction covered by Article 7.7(b) or 7.7(d)), then, following any such reorganization, recapitalization, reclassification, consolidation or merger, each such Preferred Share shall thereafter be convertible in lieu of the Ordinary Shares into which it was convertible prior to such event into the kind and amount of securities, cash or other property which a holder of the number of Ordinary Shares issuable upon conversion of one such Preferred Share immediately prior to such reorganization, recapitalization, reclassification, consolidation or merger would have been entitled to receive pursuant to such transaction; and, in such case, appropriate adjustment (as determined in good faith by the Board of Directors) shall be made in the application of the provisions in this Article 7 with respect to the rights and interests thereafter of the holders of such Preferred Shares to the end that the provisions set forth in this Article 7 (including provisions with respect to changes in and other adjustments of the Conversion Price of such Preferred Shares) shall thereafter be applicable, as nearly as reasonably may be, in relation to any securities or other property thereafter deliverable upon the conversion of such Preferred Shares.
(d) Sale of Shares Below Share Conversion Price (Anti-dilution Protection).
(i) Preferred Shares - If the Company issues, or is deemed by the express provisions of this Article 7.7(d) to have issued Additional Shares (as hereinafter defined) without consideration or for a consideration per share less than the Conversion Price of any series of Preferred Shares in effect immediately prior to such issue, then, and in each such case, such Conversion Price shall be reduced, concurrently with such issue, for no consideration, to a price (calculated to the nearest cent with half a cent being rounded up) determined by multiplying such Conversion Price by a fraction (A) the numerator of which shall be (1) the number of Ordinary Shares issued and outstanding immediately prior to such issuance of Additional Shares (treating for this purpose as outstanding all Ordinary Shares issuable upon exercise, exchange or conversion of all Options and Convertible Securities outstanding immediately prior to such issue), plus (2) the number of Ordinary Shares which the aggregate consideration received by the Company for the total number of Additional Shares so issued would purchase at such Conversion Price in effect immediately prior to such issuance of Additional Shares, and (B) the denominator of which shall be (1) the number of Ordinary Shares issued and outstanding immediately prior to such issuance of Additional Shares (treating for this purpose as outstanding all Ordinary Shares issuable upon exercise, exchange or conversion of all Options and Convertible Securities outstanding immediately prior to such issue), plus (2) the number of such Additional Shares so issued.
For the foregoing case set forth in this Article 7.7(d)(i), the formula can be expressed algebraically as follows:
where:
| P = | Conversion Price of such Preferred Shares in effect immediately prior to such issuance of Additional Shares. |
| P’ = | New adjusted Conversion Price of such Preferred Shares in effect after such issuance of Additional Shares. |
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| N = | Total number of Ordinary Shares outstanding immediately prior to such issuance of Additional Shares (treating for this purpose as outstanding all Ordinary Shares issuable upon exercise, exchange or conversion of all Options and Convertible Securities outstanding immediately prior to such issue). |
| n = | Number of Additional Shares issued. |
| C = | Total amount of consideration received by the Company for the Additional Shares. |
(ii) Determination of Consideration. For the purpose of this Article 7.7(d), the consideration received or receivable by the Company for any issue or sale of Additional Shares shall be computed as follows:
(A) Cash and Property: Such consideration shall (1) to the extent it consists of cash, be computed at the gross amount of cash received or receivable by the Company in consideration for such issuance or sale, (B) to the extent it consists of property other than cash, be computed at the fair value of that property as reasonably determined in good faith by the Board, and (C) if Additional Shares are issued or sold together with other shares or securities or other assets of the Company for a consideration which covers both, be computed as the portion of the consideration so received or receivable, computed as provided in clauses (1) and (2) above, that may be reasonably determined in good faith by the Board to be allocable to such Additional Shares.
(B) Options and Convertible Securities. The consideration per share received by the Company for Additional Shares deemed to have been issued pursuant to Article 7.7(d)(iii), relating to Options and Convertible Securities, shall be determined by dividing
(x) the total amount, if any, received or receivable by the Company as consideration for the issue of such Options or Convertible Securities, plus the minimum aggregate amount of additional consideration (as set forth in the instruments relating thereto, assuming the satisfaction of any conditions to exercisability, convertibility or exchangeability but without regard to any provision contained therein for a subsequent adjustment of such consideration) payable to the Company upon the exercise of such Options or the conversion or exchange of such Convertible Securities, or in the case of Options for Convertible Securities, the exercise of such Options for Convertible Securities and the conversion or exchange of such Convertible Securities, by
(y) the maximum number of Ordinary Shares (as set forth in the instruments relating thereto, assuming the satisfaction of any conditions to exercisability, convertibility or exchangeability but without regard to any provision contained therein for a subsequent adjustment of such number) issuable upon the exercise of such Options or the conversion or exchange of such Convertible Securities, or in the case of Options for Convertible Securities, the exercise of such Options for Convertible Securities and the conversion or exchange of such Convertible Securities.
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(iii) Deemed Issue of Additional Shares..
(A) If the Company, at any time or from time to time after the Series A Original Issue Date, shall issue any Options or Convertible Securities (excluding Options or Convertible Securities which are themselves Exempted Securities) or shall fix a record date for the determination of holders of any class of securities entitled to receive any such Options or Convertible Securities, then the maximum number of Ordinary Shares (as set forth in the instrument relating thereto, assuming the satisfaction of any conditions to exercisability, convertibility or exchangeability but without regard to any provision contained therein for a subsequent adjustment of such number) issuable upon the exercise of such Options or, in the case of Convertible Securities and Options therefor, the conversion or exchange of such Convertible Securities, shall be deemed to be Additional Shares issued as of the time of such issue or, in case such a record date shall have been fixed, as of the close of business on such record date.
(B) If the terms of any Option or Convertible Security, the issuance of which resulted in an adjustment to the Conversion Price of any series of Preferred Shares pursuant to the terms of Article 7.7(d)(i) above, are revised as a result of an amendment to such terms or any other adjustment pursuant to the provisions of such Option or Convertible Security (but excluding automatic adjustments to such terms pursuant to anti-dilution or similar provisions of such Option or Convertible Security) to provide for either (1) any increase or decrease in the number of Ordinary Shares issuable upon the exercise, conversion and/or exchange of any such Option or Convertible Security or (2) any increase or decrease in the consideration payable to the Company upon such exercise, conversion and/or exchange, then, effective upon such increase or decrease becoming effective, then such Conversion Price computed upon the original issue of such Option or Convertible Security (or upon the occurrence of a record date with respect thereto) shall be readjusted to such Conversion Price as would have obtained had such revised terms been in effect upon the original date of issuance of such Option or Convertible Security. Notwithstanding the foregoing, no readjustment pursuant to this clause (B) shall have the effect of increasing such Conversion Price to an amount which exceeds the lower of (i) the Conversion Price in effect immediately prior to the original adjustment made as a result of the issuance of such Option or Convertible Security, or (ii) the Conversion Price that would have resulted from any issuances of Additional Shares (other than deemed issuances of Additional Shares as a result of the issuance of such Option or Convertible Security) between the original adjustment date and such readjustment date.
(C) If the terms of any Option or Convertible Security (excluding Options or Convertible Securities which are themselves Exempted Securities), the issuance of which did not result in an adjustment to the Conversion Price of any series of Preferred Shares pursuant to the terms of Article 7.7(d)(i) above (either because the consideration per share (determined pursuant to Article 7.7(d)(iii)) of the Additional Shares subject thereto was equal to or greater than such Conversion Price then in effect, or because such Option or Convertible Security was issued before the Series A Original Issue Date), are revised after the Series A Original Issue Date as a result of an amendment to such terms or any other adjustment pursuant to the provisions of such Option or Convertible Security (but excluding automatic adjustments to such terms pursuant to anti-dilution or similar provisions of such Option or Convertible Security) to provide for either (1) any increase in the number of Ordinary Shares issuable upon the exercise, conversion or exchange of any such Option or Convertible Security or (2) any decrease in the consideration payable to the Company upon such exercise, conversion or exchange, then such Option or Convertible Security, as so amended or adjusted, and the Additional Shares subject thereto (determined in the manner provided in Article 7.7(d)(iii)(A)) shall be deemed to have been issued effective upon such increase or decrease becoming effective.
(D) Upon the expiration or termination of any unexercised Option or unconverted or unexchanged Convertible Security (or portion thereof) which resulted (either upon its original issuance or upon a revision of its terms) in an adjustment to the Conversion Price of any series of Preferred Shares pursuant to the terms of Article 7.7(d)(i), such Conversion Price shall be readjusted to such Conversion Price as would have obtained had such Option or Convertible Security (or portion thereof) never been issued.
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(E) If the number of Ordinary Shares issuable upon the exercise, conversion and/or exchange of any Option or Convertible Security, or the consideration payable to the Corporation upon such exercise, conversion and/or exchange, is calculable at the time such Option or Convertible Security is issued or amended but is subject to adjustment based upon subsequent events, any adjustment to the Conversion Price of any series of the Preferred Shares, if and as applicable, provided for in this Article 7.7(d)(iii) shall be effected at the time of such issuance or amendment based on such number of shares or amount of consideration without regard to any provisions for subsequent adjustments (and any subsequent adjustments shall be treated as provided in clauses (B) and (C) of this Article 7.7(d)(iii)). If the number of Ordinary Shares issuable upon the exercise, conversion and/or exchange of any Option or Convertible Security, or the consideration payable to the Corporation upon such exercise, conversion and/or exchange, cannot be calculated at all at the time such Option or Convertible Security is issued or amended, any adjustment to the Conversion Price of the Preferred Shares that would result under the terms of this Article 7.7(d)(iii) at the time of such issuance or amendment shall instead be effected at the time such number of shares and/or amount of consideration is first calculable (even if subject to subsequent adjustments), assuming for purposes of calculating such adjustment to the Conversion Price that such issuance or amendment took place at the time such calculation can first be made.
(iv) Certain Definitions. For purposes of these Articles, the following definitions shall apply:
(A) “Option” shall mean rights, options or warrants to subscribe for, purchase or otherwise acquire Ordinary Shares or Convertible Securities.
(B) “Convertible Securities” shall mean any evidences of indebtedness, shares or other securities directly or indirectly convertible into or exchangeable for Ordinary Shares, but excluding Options.
(C) “Series A Original Issue Date” shall mean the date on which the first Series A Preferred Share was issued.
(D) “Additional Shares” shall mean all Ordinary Shares issued (or deemed, by the express provisions of this Article 7.7(d)(iii) above, to be issued) by the Company after the Series A Original Issue Date, other than (1) the following Ordinary Shares and (2) Ordinary Shares deemed issued pursuant to the following Options and Convertible Securities (clauses (1) and (2), collectively, “Exempted Securities”):
(1) Ordinary Shares, Options or Convertible Securities issued or issuable as a dividend or distribution on the Preferred Shares;
(2) Ordinary Shares issued or issuable by reason of a dividend, share split, split-up or other distribution on Ordinary Shares that is covered by Articles 7.7(a), 7.7(b) or 7.7(c) hereof;
(3) Ordinary Shares (or Options with respect thereto) issued or issuable to officers, directors or employees of, or consultants or service providers to, the Company or its subsidiaries (if any) pursuant to an employee share option plan, agreement or arrangement approved by the Board;
(4) Ordinary Shares or Convertible Securities actually issued upon the exercise of Options or Ordinary Shares actually issued upon the conversion or exchange of Convertible Securities, in each case provided such issuance is pursuant to the terms of such Option or Convertible Security; or
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(5) Ordinary Shares, Options or Convertible Securities issued or issuable with respect to which the Company receives written notice from the holders of at least a Preferred Majority agreeing that such Ordinary Shares shall not constitute Additional Shares for purpose of these Articles.
For purposes of the definition of “Additional Shares”, the sale or other disposition of any shares or other securities of the Company theretofore held in its treasury shall be deemed to be an issuance thereof.
(e) Certificate of Adjustment. In each case of an adjustment or readjustment of any Conversion Price or the number of Ordinary Shares or other securities issuable upon conversion of the Preferred Shares, the Company, at its expense, upon the request of any holder of Preferred Shares, shall compute such adjustment or readjustment in accordance with the provisions hereof and prepare a certificate showing such adjustment or readjustment, executed by the Company’s Chief Financial Officer (or other executive officer), and shall send such certificate to such registered holder of Preferred Shares. The certificate shall set forth such adjustment or readjustment, showing in detail the facts upon which such adjustment or readjustment is based, including a statement of (1) the consideration received or deemed to be received by the Company for any Additional Shares issued or sold or deemed to have been issued or sold, (2) the Conversion Price at the time in effect, (3) the number of Additional Shares and (4) the type and amount, if any, of other property which at the time would be received upon conversion of such Preferred Shares.
(f) Reservation of Shares Issuable. The Company shall at all times reserve and keep available out of its authorized but unissued Preferred Shares and Ordinary Shares, solely for the purpose of effecting the exercise of warrants and options issued to holders of Preferred Shares and for conversion of the Preferred Shares, such number of Preferred Shares and Ordinary Shares as shall from time to time be sufficient to effect the exercise of all warrants and options issued to holders of Preferred Shares and for the conversion of all outstanding Preferred Shares; and if at any time the number of authorized but unissued Preferred Shares and Ordinary Shares, as applicable, shall not be sufficient to effect the exercise of all warrants and options issued to holders of Preferred Shares and for conversion of all then outstanding Preferred Shares, the Company shall take such corporate action as may, in the opinion of its counsel, be necessary to increase its authorized but unissued Preferred Shares and/or Ordinary Shares, as applicable, to such number of shares as shall be sufficient for such purpose.
(g) Rounding of Calculations; Minimum Adjustment. Any provision of this Article 7 to the contrary notwithstanding, no adjustment in the Conversion Price shall be made if the amount of such adjustment would be less than $0.01, but any such amount shall be carried forward and an adjustment with respect thereto shall be made at the time of and together with any such subsequent adjustment which, together with such amount and any other amount or amounts so carried forward, shall aggregate $0.01 or more.
(h) Adjustments Cumulative. Each of the adjustments pursuant to this Article 7 shall be applied individually and cumulatively upon the occurrence of any of the events specified therein, and shall apply from and after the date of these Articles of Association to all authorized Preferred Shares.
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(i) Impairment. Subject to the Company’s power and authority to amend the Articles, restructure its capital, merge or enter into sale of assets transactions, dissolve itself or issue securities, the Company will not, by amendment of these Articles or through any reorganization, recapitalization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder in this Article 7 by the Company, but will at all times in good faith assist in the carrying out of all the provisions of this Article 7 and in taking of all such action as may be necessary or appropriate in order to protect the conversion rights of the holders of the Preferred Shares against impairment.
(j) Fractional Shares. No fractional share shall be issued upon the conversion of any Preferred Shares. All Ordinary Shares (including fractions thereof) issuable upon conversion of more than one Preferred Share by a holder thereof shall be aggregated for purposes of determining whether the conversion would result in the issuance of any fractional share. If, after the aforementioned aggregation, the conversion would result in the issuance of a fraction of a Ordinary Shares, the Company shall, subject to the Law, in lieu of issuing any fractional share, pay the holder otherwise entitled to such fraction a sum in cash equal to the fair market valued of such fraction on the date of conversion (as determined in good faith by the Board).
| 8. | Increase of Share Capital |
8.1. The Company may, from time to time, by a resolution of the General Meeting adopted by an Ordinary Majority, whether or not all the shares then authorized and registered have been issued, and whether or not all the shares theretofore issued have been called up for payment, increase its share capital by the creation of new shares. Any such increase shall be in such amount and shall be divided into shares of such nominal amounts, and such shares shall confer such rights and preferences, and shall be subject to such restrictions, as such resolution of the General Meeting shall provide.
8.2. Except to the extent otherwise provided in such resolution of the General Meeting, such new shares shall be subject to all the provisions applicable to the shares of the original capital.
| 9. | Special Rights; Modifications of Rights |
9.1. Without prejudice to any special rights previously conferred upon the holders of existing shares in the Company, the Company may, from time to time, by a resolution of the General Meeting adopted by an Ordinary Majority, authorize and/or issue shares with such having the same rights as existing shares or having preferred or deferred rights or rights of redemption or restricted rights or any other special rights and/or such restrictions, whether with respect to liquidation, dividends, voting, conversion, repayment of share capital or otherwise, as may be stipulated in such resolution.
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9.2. If at any time the share capital is divided into different classes of shares, the rights attached to any class may be modified or abrogated by the Company, unless otherwise provided by these Articles, by a resolution of the General Meeting adopted by an Ordinary Majority, provided that any modification that would directly adversely alter the rights attached to such class shall require the consent in writing of the holders of sixty six percent (66%) or more (or, from and after the occurrence the Triggering Event, if occurs – more than fifty percent (50%)) of the issued shares of such class (including shares held by Shareholders holding, in addition, shares of other classes in the Company) or the sanction of a resolution of a separate General Meeting of the holders of the shares of such class (in accordance with Article 30 hereof) adopted by the holders of sixty six percent (66%) or more (or, from and after the occurrence the Triggering Event, if occurs – more than fifty percent (50%)) of the issued shares of such class (including shares held by Shareholders holding, in addition, shares of other classes in the Company). Any resolution required to be adopted pursuant to these Articles by a separate General Meeting of a certain class of shares, shall be voted upon and adopted by the holders of such class entitled to vote thereon and no holder of a certain class shall be banned from participating and voting in a separate General Meeting of such class by virtue of being a holder of more than one class of shares of the Company, irrespective of any conflicting interests that may exist between such different classes of shares. For illustration purposes, in the event that a certain Shareholder is the holder of Series A Preferred Shares and Series B Preferred Shares whilst another shareholder is the holder of Series A Preferred Shares only, the Shareholder holding two classes of shares shall not be banned from voting on a resolution which adversely affects the rights of the Series A Preferred Shares Series, irrespective of the affect such change shall have on the Series B Preferred Shares. Anything contained herein to the contrary notwithstanding, subject to any applicable law, a Shareholder shall not be required to refrain from participating in the discussion or voting on any resolution concerning the modification or abrogation of the rights attached to any class of shares held by such Shareholder, due to the fact that such Shareholder may benefit in one way or another from the outcome of such resolution; e.g. a Shareholder shall be entitled to vote on the modification of rights attached to shares held by such Shareholder in a way that may benefit such holder either directly or indirectly (such as in the case of an increased financial value gained by virtue of such change).
9.3. To the maximum extent permitted under applicable law, and unless otherwise explicitly provided by these Articles, all shareholders of the Company shall vote together as a single class, on an As-Converted Basis, on any matter presented to the shareholders and all matters shall require an approval by Ordinary Majority, including, without limitation, any amendment to these Articles, any issuance of securities of the Company, or any transaction under Sections 341, 342 or 350 of the Israeli Companies Law. Without derogating from the foregoing, unless otherwise provided by these Articles, it is hereby clarified that:
(a) The increase of the registered number of shares of an existing class of shares, or the issuance of additional shares thereof, or the creation of a new class of shares identical to an existing class of shares in all respects, except for the price per share paid for such shares, shall not be deemed, for purposes of this Article 9, to adversely alter the rights attached to the previously issued shares of such class or of any other class;
(b) The authorization or the issuance of additional shares or other securities of the Company having certain rights, preferences or privileges over or relative to all other shares or securities of the Company (e.g. the Series A Preferred Shares and the Ordinary Shares), shall not be deemed, for purposes of this Article 9, to be modifying or abrogating the rights, powers and privileges attached to the previously issued shares of any existing class, provided that the rights, preferences or privileges attached to such additional shares or other securities apply in the same manner vis-a-vis all other existing series or classes of shares, without a different application to different classes, even though the result of such equal application may be different with respect to different shareholders due to the number of shares held by them and/or even though such an issuance will change the economic value of the existing shares (but not the legal rights of such shares, as illustrated by the example set forth in sub-Article (c) below), and shall not be subject to the approval of a separate class vote of the holders of the shares of any particular class; and
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(c) The authorization of a new series of shares or class of shares, or the issuance of such shares, shall not be deemed, for any purpose hereunder, to modify or abrogate the rights attached to an existing class of shares if the rights attached to the new class of shares apply in the same manner vis-a-vis all other existing series or classes of shares, without a different application to different classes, even though the result of such equal application may be different with respect to different shareholders due to the number of shares held by them and/or even though such an issuance will change the economic value of the existing shares (but not the legal rights of such shares – for example, if (i) the holders of the Ordinary Shares are entitled to appoint one Director; (ii) the Board of Directors consists of 2 members; and (iii) the Company issues a new class of shares (Preferred B Shares) which are entitled to appoint a Director, and to enable such an appointment, the Articles are amended to provide that the Board of Directors may consist of 3 members, then, in such an event, such an act will not be deemed to change, modify or abrogate the rights and powers attached to the Ordinary Shares (as the holders thereof will continue to hold the power to appoint one Director), even if one may argue that the economic value of the Ordinary Shares was decreased by such an act (the holders can then appoint one out of 3 members to the Board).
| 9A. | Restructure of Share Capital |
(a) If at any time, a restructure of the Company’s issued or unissued share capital is effectuated (a “Recapitalization”), and as a result of such Recapitalization the rights attached to one or more classes of shares is modified or abrogated, then, such Recapitalization shall require the consent of the holders of 66% or more (or, from and after the occurrence the Triggering Event, if occurs – more than fifty percent (50%)) of the issued and outstanding shares of such affected class (or classes as the case may be), which shall be obtained at a separate Special Meeting of such class (in addition to such other approvals requires under these Articles or applicable law). The provisions concerning separate General Meetings set forth in Article 9 shall apply to any separate General Meeting convened in connection with such Recapitalization.
(b) In the event that such Recapitalization can be consummated in more than one manner (such as by means of arrangement proceedings approved by a court of law, or alternatively by means of amendment of the Company’s corporate documents), the sole and absolute discretion in determining the manner by which such Recapitalization shall be consummated shall vest in the Company’s Board of Directors.
| 10. | Consolidation, Subdivision, Cancellation and Reduction of Share Capital |
10.1. The Company may, from time to time, by a resolution of the General Meeting adopted by an Ordinary Majority (subject, however, to the provisions of Article 9.2 and to the Companies Law):
(a) Consolidate and divide all or any of its issued or unissued share capital into shares of larger nominal value than its existing shares;
(b) Subdivide its shares (issued or unissued) or any of them, into shares of smaller nominal value than is fixed by these Articles (subject to the provisions of the Companies Law), and the resolution whereby any share is subdivided may determine that, as among the holders of the shares resulting from such subdivision, one or more of the shares may, as compared with the others, have any such preferred or deferred rights or rights of redemption or other special rights, or be subject to any such restrictions, as the Company has power to attach to unissued or new shares.
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(c) Cancel any shares which, at the date of the adoption of such resolution of the General Meeting, have not been allotted, so long as the Company is not under an obligation to allot these shares, and diminish the amount of its share capital by the amount of the shares so cancelled; or
(d) Reduce its share capital in any manner, and with and subject to any incident authorized, and consent required, by Law.
10.2. With respect to any consolidation of issued shares into shares of larger nominal value, and with respect to any other action which may result in fractional shares, including upon conversion of any Preferred Shares, the Board may settle any difficulty which may arise with regard thereto, as it deems appropriate, including, inter alia, resort to one or more of the following actions:
(a) Determine, as to the holder of shares so consolidated, which issued shares shall be consolidated into each share of larger nominal value;
(b) Allot, in contemplation of or subsequent to such consolidation or other action, such shares or fractional shares sufficient to preclude or remove fractional share holdings;
(c) Redeem, in the case of redeemable shares, and subject to applicable Law, such shares or fractional shares sufficient to preclude or remove fractional share holdings;
(d) Cause the transfer of fractional shares by certain Shareholders to other Shareholders thereof so as to most expediently preclude or remove any fractional shareholdings, and cause the transferees to pay the transferors the fair value of fractional shares so transferred, and the Board is hereby authorized to act as agent for the transferors and transferees with power of substitution for purposes of implementing the provisions of this Article 10.2, without regard to any restriction or limitation that may apply to the transfer of such shares, as may be provided herein.
Shares
| 11. | Issuance of Share Certificates; Replacement of Lost Certificates; Bearer Certificates |
11.1. The Company shall maintain a Shareholder Register, to be administered by the corporate secretary of the Company, subject to the oversight of the Board.
11.2. Share certificates shall bear the signatures of one Director and the corporate secretary, or of two Directors, or of any other person or persons authorized thereto by the Board, provided, however, that in the event the Board consists of one Director, the share certificate shall bear the signature of such Director or of any other person or persons authorized thereto by the Board. Every certificate shall bear the Company’s name in printed, stamped or sealed form (if the latter exists in accordance with Article 100.2).
11.3. Each Shareholder shall be entitled to one numbered certificate for all the shares of any class registered in his name, and if the Board so approves, to several certificates, each for one or more of such shares. Each certificate may specify the serial numbers of the shares represented thereby and may also specify the amount paid up thereon.
11.4. A share certificate registered in the names of two or more persons shall be delivered to the person first named in the Shareholder Register in respect of such co-ownership.
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11.5. If a share certificate is defaced, lost or destroyed, it may be replaced, upon payment of such fee, and upon the furnishing of such evidence of ownership and such indemnity, as the Board may deem appropriate.
11.6. The Company shall not issue bearer share certificates that grant the bearer rights in the shares specified therein.
| 12. | Registered Holder |
Except as otherwise provided in these Articles, the Company shall be entitled to treat the registered holder of any share as the absolute owner thereof, and, shall be entitled to treat the holder of any share in trust as a Shareholder and to issue to him a share certificate, provided that the trustee notify the Company of the identity of the beneficiary, and, accordingly, the Company shall not, except as ordered by a court of competent jurisdiction, or as required by Law, be bound to recognize any equitable or other claim to, or interest in, such share on the part of any other person.
| 13. | Issuance of Shares and other Securities |
13.1. The Board may issue shares and other securities of the Company, up to the limit of the Company’s registered share capital. If the Company’s share capital includes a number of classes of shares and securities, shares and securities exceeding the limit of the registered share capital of such class shall not be issued. In such regard, securities convertible or exercisable into shares shall be deemed to have been converted or exercised on the date of their issue.
13.2. The issuance of shares and other securities, in accordance with Article 13.1, from time to time, shall be under the control of the Board, who shall have the power to allot shares and other securities or otherwise dispose of them to such persons, on such terms and conditions (including inter alia terms relating to calls as set forth in Article 16 hereof), and either at nominal value or at a premium, or, subject to the provisions of the Companies Law, at a discount, and at such times, as the Board may deem appropriate, and the power to give to any person the option to acquire from the Company any shares, either at nominal value or at a premium, or, subject as aforesaid, at a discount, during such time and for such consideration as the Board may deem appropriate.
13.3. The Board may determine to issue a series of bonds or other debt securities, as part of its authority to take a loan on behalf of the Company, and within the limits of such authority. The foregoing does not negate the authority of the General Manager or someone authorized by him to take a loan on behalf of the Company, to issue debentures, promissory notes and bills of exchange, within the limits prescribed by the Board.
13.4. Subject to applicable Law, the Company is entitled to pay a commission, including underwriting fees, to any person, as determined by the Board. Payments, as stated in this Article 13.4, may be paid in cash or in securities of the Company, or in a combination thereof.
13.5. The Company shall not issue a share, all or part of the consideration of which is not to be paid in cash, unless the consideration for the share was specified in a written document.
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| 14. | Preemptive Rights on Company Share Issuance. |
14.1. Until the closing of a Qualified Public Offering each Major Shareholder (each, an “Eligible Shareholder”), shall have the right to purchase its pro rata share of New Securities (as defined in Article 14.2) that the Company may, from time to time, propose to sell and issue. Such pro rata share, for purposes of this preemptive right, is the ratio of (X) the total number of Ordinary Shares which - immediately prior to such issuances of New Securities – are held beneficially or of record by such Eligible Shareholder or issuable upon the conversion of the Preferred Shares then held beneficially or of record by such Eligible Shareholder, to (Y) the total number of Ordinary Shares which - immediately prior to such issuances of New Securities – are held beneficially or of record by all Eligible Shareholders or issuable upon the conversion of the Preferred Shares then held beneficially or of record by all Eligible Shareholders.
14.2. “New Securities” shall mean all Ordinary Shares issued (or deemed, by the express provisions of Article 7.7(d)(iii) above, to be issued) by the Company other than Exempted Securities (as defined in Article 7.7(d)(iii) above).
14.3. In the event that the Company proposes to undertake an issuance of New Securities, it shall give each Eligible Shareholder written notice of its intention, describing the type of New Securities, the price, and the general terms upon which the Company proposes to issue the same. Each Eligible Shareholder shall have fourteen (14) days after receipt of such notice to agree to purchase all or any part of its pro rata share of such New Securities at the price and upon the terms specified in the notice by giving written notice to the Company and stating therein the quantity of New Securities to be purchased.
14.4. In the event that by the end of the aforesaid fourteen (14) day period specified above, not all of the New Securities have been subscribed for by Eligible Shareholders, the Company shall have ninety (90) days thereafter to sell (or enter into an agreement for the sale of New Securities) all or part of the remaining New Securities respecting which the rights of the Eligible Shareholders were not exercised, at a price not lower and upon terms no more favorable to the purchasers thereof than specified in the Company’s notice. In the event the Company has not sold the New Securities within such ninety (90) day period the Company shall not thereafter issue or sell any New Securities, without first offering such New Securities to the Eligible Shareholders and in the manner provided above.
| 15. | Payment in Installments |
If by the terms of issuance of any share, the whole or any part of the price thereof shall be payable in installments, every such installment shall, when due, be paid to the Company by the then registered holder(s) of the share or the person(s) entitled thereto.
| 16. | Calls on Shares |
16.1. The Board may, from time to time, make such calls as it may deem appropriate upon Shareholders in respect of any sum unpaid in respect of shares held by such Shareholders which is not, by the terms of allotment thereof or otherwise, payable at a fixed time, and each Shareholder shall pay the amount of every call so made upon him (and of each installment thereof if the same is payable in installments), to the person(s) and at the time(s) and place(s) designated by the Board, as any such time(s) may be thereafter extended and/or such person(s) or place(s) changed. Unless otherwise stipulated in the resolution of the Board (and in the notice referred to in Article 16.2), each payment in response to a call shall be deemed to constitute a pro rata payment on account of all shares in respect of which such call was made.
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16.2. Notice of any call shall be given in writing to the applicable Shareholder(s) not less than fourteen (14) days prior to the time of payment, specifying the time and place of payment, and designating the person to whom and the place where such payment shall be made; provided, however, that before the time for any such payment, the Board may, by notice in writing to such Shareholder(s), revoke such call in whole or in part, extend such time, or alter such designated person and/or place. In the event of a call payable in installments, only one notice thereof need be given.
16.3. If, by the terms of allotment of any share or otherwise, any amount is made payable at any fixed time, every such amount shall be payable at such time as if it were a call duly made by the Board and of which due notice had been given, and all the provisions herein contained with respect to calls shall apply to each such amount.
16.4. The joint holders of a share shall be jointly and severally liable to pay all calls in respect thereof and all interest payable thereon.
16.5. Any amount unpaid in respect of a call shall bear interest from the date on which it is payable until actual payment thereof, at such rate (not exceeding the then prevailing debitory rate charged by leading commercial banks in Israel), and at such time(s) as the Board may prescribe.
16.6. A Shareholder shall not be entitled to his rights as shareholder, including dividend, unless he has paid all the amounts detailed in the calls made on him, together with interest and expenses, if any, unless otherwise prescribed by the Board.
16.7. Upon the allotment of shares, the Board may provide for differences among the allottees of such shares as to the amount of calls and/or the times of payment thereof.
| 17. | Prepayment |
With the approval of the Board, any Shareholder may prepay to the Company any amount not yet payable in respect of his shares. Nothing in this Article 17 shall derogate from the right of the Board of Directors to make any call before or after receipt by the Company of any such prepayment.
| 18. | Forfeiture and Surrender |
18.1. If any Shareholder fails to pay any amount payable in respect of a call, or interest thereon as provided herein, on or before the day fixed for payment of the same, the Company, by resolution of the Board, may at any time thereafter, so long as such amount or interest remains unpaid, forfeit all or any of the shares in respect of which such call had been made. Any expense incurred by the Company in attempting to collect any such amount or interest, including, inter alia, attorneys’ fees and costs of suit, shall be added to, and shall, for all purposes (including the accrual of interest thereon), constitute a part of the amount payable to the Company in respect of such call.
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18.2. Upon the adoption of a resolution of forfeiture, the Board shall cause notice thereof to be given to the Shareholder whose shares are the subject of such forfeiture, which notice shall state that, in the event of the failure to pay the entire amount so payable within a period stipulated in the notice (which period shall not be less than fourteen (14) days and which may be extended by the Board), such shares shall be ipso facto forfeited, provided, however, that, prior to the expiration of such period, the Board may nullify such resolution of forfeiture, but no such nullification shall estop the Board from adopting a further resolution of forfeiture in respect of the non-payment of such amount.
18.3. Whenever shares are forfeited as herein provided, all distributions theretofore declared in respect thereof and not actually paid or distributed shall be deemed to have been forfeited at the same time.
18.4. The Company, by resolution of the Board, may accept the voluntary surrender of any share.
18.5. Any share forfeited or surrendered as provided herein shall become the property of the Company, and the same, subject to the provisions of these Articles, may be sold, re-allotted or otherwise disposed of, as the Board deems appropriate. Any such share not cancelled shall become a dormant share, shall not confer any rights, and shall not be considered part of the Company’s issued and outstanding share capital for purpose of any calculation of a quorum or majority required under these Articles, so long as it is held by the Company.
18.6. Any Shareholder whose shares have been forfeited or surrendered shall cease to be a Shareholder in respect of the forfeited or surrendered shares, but shall, notwithstanding, be liable to pay, and shall forthwith pay, to the Company, all calls, interest and expenses owing upon or in respect of such shares at the time of forfeiture or surrender, together with interest thereon from the time of forfeiture or surrender until actual payment, at the rate prescribed in Article 16.5 above, and the Board, in its discretion, may enforce the payment of such moneys, or any part thereof, but shall not be under any obligation to do so. In the event of such forfeiture or surrender, the Company, by resolution of the Board, may accelerate the date(s) of payment of any or all amounts then owing by the Shareholder in question (but not yet due) in respect of all shares owned by such Shareholder, solely or jointly with another.
18.7. The Board may at any time, before any share so forfeited or surrendered shall have been sold, re-allotted or otherwise disposed of, nullify the forfeiture or surrender on such conditions as it deems appropriate, but no such nullification shall estop the Board from re-exercising its powers of forfeiture pursuant to this Article 18.
| 19. | Lien |
19.1. Except to the extent the same may be waived or subordinated in writing, the Company shall have a first and paramount lien upon all the shares registered in the name of each Shareholder which are not fully paid up (without regard to any equitable or other claim or interest in such shares on the part of any other Person), and upon the proceeds of the sale thereof, for his debts, liabilities and engagements arising from the failure to pay for such shares, solely or jointly with another, to or with the Company, whether the period for the payment, fulfillment or discharge thereof shall have actually arrived or not. Such lien shall extend to all dividends and other distributions from time to time declared in respect of such shares. Unless otherwise provided, the registration by the Company of a transfer of shares shall be deemed to be a waiver on the part of the Company of any lien existing on such shares immediately prior to such transfer.
19.2. The Board may cause the Company to sell any shares subject to such lien when any such debt, liability or engagement has matured, in such manner as the Board may deem appropriate, but no such sale shall be made unless such debt, liability or engagement has not been satisfied within fourteen (14) days after written notice of the Company’s intention to sell shall have been served on such Shareholder, his executors or administrators.
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19.3. The net proceeds of any such sale, after payment of the costs thereof, shall be applied in or toward satisfaction of the debts, liabilities or engagements of such Shareholder (whether or not the same have matured), or any specific part of the same (as the Board may determine), and the balance, if any, shall be paid to the Shareholder, his executors, administrators or assigns.
| 20. | Sale after Forfeiture or Surrender or in Enforcement of Lien |
Upon any sale of shares after forfeiture or surrender or for enforcing a lien, the Board may appoint a person to execute an instrument of transfer of the shares so sold and cause the purchaser’s name to be entered in the Shareholder Register in respect of such shares, and the purchaser shall not be bound to see to the regularity of the proceedings, or to the application of the purchase money, and after his name has been entered in the Shareholder Register in respect of such shares, the validity of the sale shall not be impeached by any person, and the remedy of any person aggrieved by the sale shall be in damages only and against the Company exclusively.
| 21. | Redeemable Securities |
The Board may not issue redeemable shares.
Transfer of Shares
| 22. | Transfer of Shares - General |
22.1. No sale, assignment, conveyance, pledge, grant of any security interest or gift, or any other disposition or transfer (each, a “Transfer”) of shares shall be effective unless the Transfer has been approved by the Board, which consent shall not be unreasonably withheld or delayed, and such Transfer is effected in compliance with the provisions of Articles 23, 24 and 26. Any Transfer of shares shall be conditioned upon an undertaking in writing by the transferee to assume and be bound by all obligations of the transferor under any instrument and agreement involving the transferor and the Company and applicable to such transferred shares, signed by the transferee. The Board may refuse to register a Transfer of shares, inter alia, in the event that such a Transfer is to a competitor of the Company, in the event that such a Transfer would result in the Company having more than fifty (50) shareholders (calculated in accordance with the provisions of Article 2.1 above) or if it constitutes a public offering or public distribution of the Company’s shares. The Board shall refuse to register a Transfer of shares in the event that such a Transfer is in violation of these Articles and/or if the transferee does not agree, in writing, prior to such Transfer, to assume and be bound by all obligations of the transferor under any instrument and agreement involving the transferor and the Company and applicable to such transferred shares.
Prior to the registration of a Transfer of shares, the Board may require proof of compliance with the provisions of these Articles in respect of such Transfer. If the Board makes use of its powers under this Article 22 and refuses to register a Transfer of shares, it must provide written notice to the contemplated transferee of such refusal within fourteen (14) days from the date the deed of transfer was furnished to the Company.
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Notwithstanding the above, any Transfer of shares by a Shareholder to any of such Shareholder’s Permitted Transferees (as confirmed in writing to the Company by transferor and transferee) shall not require the approval of the Board, provided that any such Permitted Transferee undertakes in writing towards the Company and the Shareholders to assume and be bound by all obligations of the transferor under any instrument and agreement involving the transferor (in its capacity as Shareholder) and the Company and provided, further, that such Permitted Transferee is not a competitor of the Company and that such a Transfer does not result in the Company having more than fifty (50) shareholders (calculated in accordance with the provisions of Article 2.1 above) or that it constitutes a public offering or public distribution of the Company’s shares.
22.2. No Transfer of shares shall be registered unless the Company receives a deed of transfer or other proper instrument of transfer (in form and substance satisfactory to the Board or the corporate secretary of the Company), together with the share certificate(s) and such other evidence of title as the Board or the corporate secretary of the Company may reasonably require. Until the transferee has been registered in the Shareholder Register in respect of the shares so transferred, the Company may continue to regard the transferor as the owner thereof. The Board may, from time to time, prescribe a fee for the registration of a Transfer. A deed of transfer shall be in the following form or in any substantially similar form, including any such form as is acceptable to the transfer agent for the Company’s shares, or in any form otherwise approved by the Board or the corporate secretary of the Company.
Deed of Transfer
I, _________, (hereinafter: the “Transferor”) of ________________, do hereby transfer, in consideration for ____________, to ______________ (hereinafter: the “Transferee”), ______________share(s) NIS __ nominal value each of PainReform Ltd. (hereinafter: the “Company”) to be held by the Transferee and/or his executors, administrators and assigns, subject to the same terms and conditions under which I held the same at the time of execution hereof; and the Transferee, do hereby agree to take the said share(s) subject to the conditions aforesaid.
In witness whereof we hereby execute this Deed of Transfer, this ___day of ______, 20__.
The Transferor The Transferee
| Name: | Name: | |||
| Signature: | Signature: |
22.3. Upon the death of a Shareholder, the Company shall recognize the custodian or administrator of the estate or executor of the will, and in the absence of such, the lawful heirs of the Shareholder, as the only holders of the right for the shares of the deceased Shareholder, after receipt of evidence to the entitlement thereto, as determined by the Board.
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22.4. The Company may recognize the receiver or liquidator of any corporate Shareholder in liquidation or dissolution, or the receiver or trustee in bankruptcy of any Shareholder, as being entitled to the shares registered in the name of such Shareholder, after receipt of evidence to the entitlement thereto, as determined by the Board.
22.5. A person acquiring a right in shares as a result of being a custodian, administrator of the estate, executor of a will or the heir of a Shareholder, or a receiver, liquidator or a trustee in a bankruptcy of a Shareholder or according to another provision of Law, is entitled, after providing evidence of his right to the satisfaction of the Board, to be registered as the Shareholder or to transfer such shares to another person, subject to the provisions of this Article 22.
22.6. The Board may suspend the registration of Transfers during the fourteen (14) day immediately preceding the Annual Meeting (as defined below) of each year.
22.7. Unless otherwise provided elsewhere, the provisions of this Article 22 shall also apply to other shares or other securities issued by the Company, mutatis mutandis.
22.8. Any attempted Transfer of shares or rights in breach of the provisions of Articles 22 through 26 of these Articles shall be null and void.
| 23. | Rights of First Refusal. |
23.1. Any Shareholder proposing to Transfer all or any of his shares in the Company other than to a Permitted Transferee (the “Offeror”) shall first request the Company, by written notice (which shall contain all the information necessary to enable the Company so to do), to offer such shares (the “Offered Shares”) to each Major Shareholder (each, an “Offeree”). The Company shall comply with such request by sending the Offerees a written notice stating the identity of the purchaser, the proposed price and terms of sale of the Offered Shares and the pro rata share of the Offeree (in proportion to the respective holdings of Ordinary Shares of the other Offerees (beneficially or of record), on As As-Converted Basis) with respect to the Offered Shares (the “Offer”). Any Offeree may accept such offer in respect of all or any of the Offered Shares by giving the Offeror (with a copy to the Company) notice to that effect within twenty one (21)days after receiving the Offer. Failure to timely accept the Offered Shares, in whole or in part, shall be deemed as a decision not to purchase any of the Offered Shares.
23.2. If the acceptances, in the aggregate, are in respect of all of, or more than, the Offered Shares, then the accepting Offerees shall be entitled to acquire the Offered Shares, on the terms aforementioned, in proportion to their respective holdings of shares, provided that no Offeree shall be entitled to acquire under the provisions of this Article 23 more than the number of Offered Shares initially accepted by such Offeree, and upon the allocation to him of the full number of shares so accepted, he shall be disregarded in any subsequent computations and allocations hereunder. Any shares remaining after the computation of such respective entitlements shall be re-allocated among the Offerees (other than those to be disregarded as aforesaid), in the same manner, until one hundred percent (100%) of the Offered Shares have been allocated as aforesaid.
23.3. If the acceptances by Offerees, in the aggregate, are in respect of less than one hundred percent (100%) of the Offered Shares, then the accepting Offerees shall not be entitled to acquire any Offered Shares, and the Offeror, at the expiration of the aforementioned twenty one (21) day period, shall be entitled, subject to compliance with the provisions of Articles 22, 24 and 26, to transfer the Offered Shares at a price not lower and on terms no more favorable to the buyer(s) than those stated in the Offer, and provided further that if the Offered Shares are not transferred within ninety (90) days after the expiration of such twenty one (21) -day period, any subsequent sale shall again be subject to the provisions of this Article 23.
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23.4. The right of first refusal granted under this Article 23 shall expire immediately prior to consummation of a Qualified Public Offering and shall not apply to Transfers of shares of the Company by Shareholders in the framework of a Deemed Liquidation Event (whether effected in accordance with the provisions of Section 341 of the Companies Law, Article 24 below or otherwise).
| 24. | Bring Along. |
24.1. Until the Qualified Public Offering, and subject to the provisions of Articles 79A and 96 below, in the event that Shareholders holding at least the Preferred Majority (“Sale Approval Threshold” and the “Selling Shareholders”, respectively) accept and/or approve an offer from a potential buyer (the “Buyer”) to effect a Deemed Liquidation Event (as defined below) (“Proposed Transaction”), then such decision shall be binding upon the Company and all of the Shareholders, notwithstanding any no sale restriction, first refusal rights or other rights to which such Shareholders may be entitled or by which they may be bound, and the Shareholders will:
(a) vote all shares of the Company then held or controlled by such Shareholders or over which such Shareholders then hold voting power (in person, by proxy or by action by written consent, as applicable): (A) in favor of or to approve such Proposed Transaction and any matter that could reasonably be expected to facilitate such Proposed Transaction, and (B) against any proposal for any recapitalization, merger, sale of shares or assets or other business combination (other than the Proposed Transaction) between the Company and any person or entity (other than the Buyer) or any other action or agreement that would result in a breach of any covenant, representation or warranty or any other obligation or agreement of the Company or any of the Shareholders under the definitive agreement(s) related to such Proposed Transaction, or which could result in any of the conditions to the Company’s obligations under such agreement(s) not being fulfilled, or that would otherwise impair the ability of the Company to properly and timely consummate such Proposed Transaction; and
(b) execute the relevant documents (including without limitation any instruments of conveyance and transfer, purchase agreements, merger agreements, escrow agreements, indemnification agreements, etc.) in connection with, and shall otherwise take all actions necessary and reasonable to effect, such Proposed Transaction as requested by the Company and/or the Selling Shareholders.
24.2. If the Proposed Transaction is conditioned upon the sale of all of the shares of the Company to the Buyer (a “Sale of Shares Transaction”), then all Shareholders shall be also required to sell their shares in the Sale of Shares Transaction, free and clear of any liens, claims or encumbrances, on the same terms and conditions as applicable to the Selling Shareholders; provided that the proceeds received in the Sale of Shares Transaction shall be distributed in accordance with the provisions of Article 96 below.
24.3. Notwithstanding the provisions of Section 341 of the Companies Law (“Section 341”), the aforesaid Sale Approval Threshold is hereby determined as the majority threshold applicable also for the purpose of Section 341, such that the provisions of Section 341 concerning shareholders who object to a sale of shares shall apply to shareholders who do not comply with the provisions hereof.
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24.4. Notwithstanding the provisions of applicable Law (including, without limitation, Section 341) to the extent permitted, the price, terms and conditions of a Proposed Transaction shall be considered to apply in the same manner as to all Shareholders, if the application of such price, terms and conditions to the respective shares of the Company held by each Shareholder is made based upon and in accordance with the rights, preferences and privileges conferred upon such shares under these Articles (e.g., if each such share receives the respective portion of the proceeds of such Proposed Transaction as determined pursuant to the provisions of Article 96 below). For the purpose of Section 341, the application of the distribution preference provisions, if any, set forth herein shall not be deemed to mean that Shareholders were offered different treatment or terms in the Proposed Transaction. Moreover, any bonus, retention payment, monetary incentive, management compensation and/or any similar payment or arrangement, payable or offered in connection with the Proposed Transaction by either the Company or the Buyer to any Shareholder separately from any payment or distribution to which such Shareholder is entitled by virtue of his ownership of shares in the Company, shall not be deemed contrary to the provisions of Section 341 and Shareholders not receiving any such separate payment shall not be deemed, for purposes of Section 341, to be treated unequally compared to any Shareholders receiving such payment.
24.5. In the event that a Shareholder is obligated to sell its shares in accordance with this Article, and such Shareholder fails to surrender its certificate(s) representing such shares or other securities in connection with the consummation of said transaction, such certificate(s) shall be deemed cancelled and such shares in the possession of such Shareholder shall cease to be outstanding for any purpose other than evidencing such Shareholder’s right to receive consideration for its shares in accordance with the terms of the Proposed Transaction. Further, the Company shall be authorized to issue a new certificate representing said shares in the name of the Buyer and the Board shall be authorized to establish an escrow account, for the benefit of such Shareholder, as applicable, into which the consideration for such securities represented by such cancelled certificate shall be deposited and to appoint a trustee to administer such account.
24.6. Notwithstanding anything in these Articles or the Law to the contrary, but to the extent permitted by the Law, the approval of a Proposed Transaction shall not be subject to the approval of a separate class vote or interest vote of the holders of the shares of any particular class of shares.
24.7. Anything in these Articles to the contrary notwithstanding, in accordance with Section 50(a) of the Companies Law, the General Meeting shall, if requested by the Selling Shareholders, assume the power and authority of the Board to discuss and approve, for all intents and purposes, the Proposed Transaction on behalf of the Company, effective as of the time on which the written consent of the Proposed Shareholders shall have been received by the Company.
24.8. In the event that the Sale Approval Threshold is met, any sale or other Transfer of shares by the Shareholders, other than pursuant to the Proposed Transaction, shall be absolutely prohibited.
24.9. Each Shareholder recognizes and accepts that the powers granted to the Company and/or the Board as set forth in this Article 24 are granted in order to ensure and protect the rights of the other Shareholders and that therefore, such powers, upon the use thereof shall be irrevocable with respect to such matter or action with respect to which the Board has exercised such powers.
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24.10. The provisions of this Article 24, to the extent they apply to a Proposed Transaction that is structured as a Sale of Shares Transaction, are in addition to (but may not be acted upon simultaneously with) the provisions of Section 341 and not in substitution of such provisions, and the Proposing Shareholders at their sole discretion may elect whether to act upon the provisions of this Article 24 or of Section 341, in each case, subject to the provisions of Articles 79A and 96 below and without derogating from the provisions of Article 24.3 above. No Shareholder shall be entitled to request the Company, the other Shareholders or any other party to the Proposed Transaction (e.g. the Buyer) to act upon the provisions of Section 341 and to object to the execution and delivery of any transaction documentation pertaining to the Proposed Transaction.
| 25. | Reserved. |
| 26. | Right of Co-Sale |
26.1. Subject to compliance with the provisions of Article 22 (‘Transfer of Shares – General’) and 23 (‘Right of First Refusal’), if, at any time prior to a Public Offering or a Deemed Liquidation Event, any Shareholder (the “Seller”) desires to Transfer any shares of the Company held by it pursuant to the terms of a bona fide offer received from any party (the “Buyer”) or otherwise, then each Major Shareholder (other than the Seller, to the extent it is a Major Shareholder) (the “Co-Sale Offerees”) shall have the right within the notice period set forth in Articles 23 above, to require, in lieu of exercising its right of first refusal set forth in Article 23 above, as a condition to such Transfer described therein, that the Buyer shall purchase from such Co-Sale Offerees (any Co-Sale Offeree who exercises such right is referred to herein as a “Participant”) at the same price per share and on the same terms and conditions as involved in such Transfer by the Seller, that number of the shares of the Company (or a portion thereof) expressed by multiplying (i) that number of shares of the Company (regardless of whether the shares consist of Preferred Shares or Ordinary Shares, and calculated on an As Converted Basis) proposed to be acquired by the Buyer (the “Transaction Shares”) by (ii) a fraction, the numerator of which is the number of shares of the Company then held by such Participant, on an As Converted Basis, and the denominator of which is the sum of (A) the aggregate number of shares of the Company then held by all Participants, on an As Converted Basis, and (B) the aggregate number of shares of the Company then held by the Seller, on an As Converted Basis, prior to such Transfer (such portion with respect to each such Participant shall be referred to as the “Participant’s Co-Sale Pro Rata Portion”).
26.2. In the event that one or more of the Participants shall elect to participate in such Transfer, each such Participant shall communicate in writing such election to the Seller (with a copy to the Company) within the aforesaid period of time, and, if the Transfer to the Buyer is consummated, such Participant shall be entitled to Transfer to the Buyer as part thereof, and no Transfer of any shares of the Company by the Seller shall be completed unless simultaneously with such Transfer the Buyer purchases, the Participant’s Co-Sale Pro Rata Portion of the Transaction Shares (and if more than one Participant so notified the Seller, all such portions of the Transaction Shares), at the same price per share and on the same terms and conditions as set forth in the notice provided to the C-Sale Offerees (the “Co-Sale Offer”). If a Participant did not respond to a Co-Sale Offer within the aforesaid time period, it shall be deemed to be refusing to participate in such Transfer.
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26.3. If none of the Participants elected to participate in such Transfer, or if some of them did elect to so participate, then the Seller shall be entitled to sell or Transfer all, or the appropriate pro rata portion (together with the participating Participants’ Co-Sale Pro Rata Portions), as applicable, of the Transaction Shares, to the Buyer at any time within ninety (90) day period set forth in Article 23.3. Any such Transfer shall be at not less favorable terms and conditions to the Seller than those specified in the Co-Sale Offer. Any of the Seller’s shares in the Company not sold within such ninety (90)-day period shall continue to be subject to the requirements of this Article 26.
26.4. The rights of co-sale under this Article 26 shall not apply to a Transfer of any shares or other securities of the Company by the Seller to its Permitted Transferee.
26.5. For the avoidance of doubt, the right of the Participants hereunder does not in any way or manner limit their right under Article 23 and each of the Participants shall have the right to exercise its rights under Article 23 or under this Article 26 in its sole discretion.
General Meetings
| 27. | The Authority of the General Meeting |
27.1. The following matters shall require the approval of the General Meeting:
(a) Amendment of the Articles.
(b) The exercise by the General Meeting of the authority of the Board, subject to the provisions of the Companies Law, if it is resolved by the General Meeting that the Board is incapable of exercising its authority, and that the exercise of such authority is essential to the orderly management of the Company.
(c) The appointment or reappointment of the Company’s Auditor (however, the terms of such appointment, including, inter alia, the consideration payable therefor, shall be determined by the Board who shall report same to the Annual Meeting), and the termination or non-renewal of his service.
(d) To the extent required by the provisions of the Companies Law, the approval of actions and transactions with interested parties and the approval of an action or a transaction of an Office Holder (as defined in Article 91 below) which might constitute a breach of the duty of loyalty.
(e) Changes in the share capital of the Company, as set forth in Articles 8 and 9 hereof.
(f) A merger of the Company, as defined in the Companies Law.
(g) A liquidation of the Company.
(h) Entry into a Proposed Transaction in the event set forth in Article 24 below.
(i) Any other matters which the Companies Law requires to be dealt with at the General Meeting of the Company, or any matters that were given to the General Meeting in these Articles.
27.2. The General Meeting shall not transfer to another organ of the Company any of its authorities detailed in Article 27.1 above.
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27.3. The General Meeting, by a resolution adopted by an Ordinary Majority, may assume the authority which is given to another organ of the Company; provided however, that such taking of authorities shall be with regard to a specific issue or for a specific period of time, all as stated in the resolution of the General Meeting regarding such taking of authorities.
| 28. | Annual Meeting |
28.1. An annual General Meeting may be held by the Company, and, at the request of any Shareholder or Director or if necessary for the appointment of an independent Auditor, shall be held, once in every calendar year at such time within a period of not more than fifteen (15) months after the last preceding annual General Meeting and at such place either within or outside the State of Israel as may be determined by the Board. These General Meetings shall be referred to as “Annual Meetings.”
28.2. In the event an Annual Meeting was not held by the Company, the Company shall send to each Shareholder of the Company registered in the Shareholder Register, prior to the date on which the Annual Meeting would have been held and not more than once in every fiscal year, the financial statements of the Company.
28.3. The agenda of an Annual Meeting shall include a discussion of the following issues:
(a) The financial statements of the Company, as of the end of the fiscal year preceding the year of the Annual Meeting, and the report of the Board with respect thereto and
(b) The report of the Board with respect to the fee paid to the Company’s Auditor.
28.4. The agenda at an Annual Meeting may include the following issues, in addition to those referred to in Article 28.3:
(a) The appointment of an Auditor or the renewal of his office; and
(b) Any other issue, which was detailed in the agenda for the Annual Meeting.
28.5. Subject to the Companies Law and unless otherwise resolved by the Board or undertaken by the Company, the Company shall not be required to send copies of its financial statements to the Shareholders prior to the Annual General Meeting.
| 29. | Special Meetings |
29.1. All General Meetings other than Annual Meetings shall be referred to as “Special Meetings.” A Special Meeting shall discuss and decide in all matters for which the Special Meeting was convened.
29.2. The Board may, whenever it deems appropriate, convene a Special Meeting at such time and place, within or outside the State of Israel, as may be determined by the Board, and shall be obliged to do so upon the demand of one of the following:
(a) Any Director; or
(b) Any one or more Shareholders, holding alone or together at least ten percent (10%) of the issued share capital of the Company and at least one percent (1%) of the voting rights in the Company or one or more Shareholders holding at least ten percent (10%) of the voting rights in the Company.
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29.3. The Board, upon demand to convene a Special Meeting in accordance with Article 29.2 above, shall announce the convening of the General Meeting within twenty one (21) days from the receipt of a demand in that respect.
29.4. If the Board does not convene a Special Meeting as aforesaid, the person requisitioning the meeting, and where Shareholders are involved - also some of them, who have more than half the voting rights in the Company, may convene the meeting themselves, provided that it is not held more than three months after the date the requisition was made, and it shall be convened, insofar as possible, in the same way in which meetings are convened by the Board. Where a general meeting is convened as aforesaid, the Company shall cover the reasonable expenses incurred by the person requisitioning it.
| 30. | Class Meetings |
The provisions of these Articles with respect to General Meetings shall apply, mutatis mutandis, to meetings of the holders of a class of shares of the Company (hereinafter: “Class Meetings”), subject to the provisions of Article 34 below concerning specific special quorum requirements at Class Meetings.
| 31. | Notice of General Meetings |
31.1. Unless a shorter period is permitted by Law, a notice of a General Meeting shall be sent to each Shareholder of the Company registered in the Shareholder Register and entitled to attend and vote at such meeting, at least seven (7) days prior to the date fixed for the General Meeting (such 7 days not to include the day on which the notice is deemed received by a Shareholder in accordance with Article 101 below, but may include the day fixed for the General Meeting); provided however that such notice shall not be sent more than forty five (45) days from the date fixed for the General Meeting. Subject to the provisions of any Law, each such notice shall specify the place, the day and hour of the meeting, the agenda of the meeting and a concise description of the items for discussion; provided however, that: (i) in the event that the agenda includes a proposal to amend the Articles, the notice shall include the text of the proposed amendment(s); and (ii) with respect to a notice of an Annual Meeting, then, notwithstanding the provisions of Section 173(e) of the Companies Law, a copy of the annual financial statements of the Company which are to be discussed in such an Annual Meeting shall be delivered, together with the notice of such Annual Meeting, to any Shareholder entitled to vote at such Annual Meeting. Anything herein to the contrary notwithstanding, with the written consent of all Shareholders entitled to vote thereon, a resolution may be proposed and passed at such meeting although a shorter notice than hereinabove prescribed has been given. A waiver by a Shareholder can also be made in writing after the fact and even after the convening of the General Meeting.
31.2. The Board’s authority to determine the time and the place for the convening of the General Meeting shall include the power to change such time and/or place, prior to the convening of the General Meeting and subject to the provisions of these Articles and any Law, including with regard to the sending of a new notice to the Shareholders.
31.3. Any accidental omission with respect to the giving of a notice of a General Meeting to any Shareholder or the non-receipt of a notice with respect to a meeting or any other notice on the part of any Shareholder shall not cause the cancellation of a resolution adopted at that meeting, or the cancellation of acts based on such notice.
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| 32. | The Agenda of General Meetings |
32.1. The agenda of General Meetings shall be determined by the Board and shall also include issues for which a Special Meeting is being convened in accordance with Article 29 above, or as may be required upon the request of Shareholders in accordance with the provisions of the Companies Law.
32.2. The General Meeting shall only adopt resolutions on issues, which are on its agenda.
32.3. The General Meeting is entitled to accept or reject a proposed resolution, which is on the agenda of the General Meeting. Subject to applicable Law, the General Meeting may adopt a resolution, which is different from the description thereof included in the notice of the General Meeting, provided that such resolution is not materially different from the proposed resolution.
| 33. | Entitlement to participate in a General Meeting and to vote thereat |
33.1. Subject to the provisions of the Companies Law, the Shareholders who are entitled to participate in and vote at a General Meeting shall be the Shareholders on the date of the General Meeting.
33.2. An objection to the right of a Shareholder to participate in and vote at a General Meeting must be raised at such meeting and any vote not disqualified thereat shall be deemed valid for any purpose. The Chairman of the meeting shall decide whether to accept or reject any objection raised at the appointed time with regard to the participation and vote of a Shareholder and his decision shall be final.
| 34. | Quorum |
34.1. No business shall be transacted at a General Meeting, or at any adjournment thereof, unless a lawful quorum is present when the meeting proceeds to business.
34.2. Subject to the requirements of the Companies Law and the provisions of these Articles, any two or more Shareholders (not in default in payment of any sum referred to in Article 16 hereof), present in person or by proxy (“Present Shareholders”), and who hold or represent in the aggregate at least fifty percent (50%) of the voting power of the Company (on an As-Converted Basis), shall constitute a lawful quorum at General Meetings. A Shareholder or his proxy, who also serves as a proxy for other Shareholder(s), shall be regarded as two or more Shareholders, in accordance with the number of Shareholders he is representing.
34.3. If within half an hour from the time appointed for the General Meeting a quorum is not present, the meeting shall stand adjourned to the fourth Business Day thereafter (including the day of original General Meeting), at the same time and place, or to such later day and at such time and place as the Chairman may determine with the consent of the holders of a majority of the voting power represented at the meeting in person or by proxy and voting on the question of adjournment and notice of such adjourned meeting shall be delivered by email in accordance with Article 36 below. No business shall be transacted at any adjourned meeting except business, which might lawfully have been transacted at the meeting as originally called. The provisions of Section 79 of the Companies Law shall apply to such adjourned meeting.
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| 35. | Chairman |
The Chairman of the Board shall preside as Chairman at every General Meeting. If there is no such Chairman, or if the Chairman is not present within fifteen (15) minutes after the time fixed for holding such meeting or is unwilling to act as Chairman, the Shareholders present shall choose someone of their number or any other person to be Chairman. The position of Chairman shall not, by itself, entitle the holder thereof to vote at any General Meeting nor shall it entitle such holder to a second or casting vote (without derogating, however, from the rights of such Chairman to vote as a Shareholder or proxy of a Shareholder if, in fact, he is also a Shareholder or proxy, respectively).
| 36. | Adjourned Meeting |
A General Meeting at which a lawful quorum is present (hereinafter: the “Original General Meeting”), may resolve by an Ordinary Majority to adjourn the General Meeting, from time to time, to another time and/or place (hereinafter: an “Adjourned Meeting”). In any event of an Adjourned Meeting, the Company will, as soon as practicable following the respective Original General Meeting (but in any event by the end of the next Business Day thereafter), send an email to each Shareholder of the Company registered in the Shareholder Register and entitled to attend and vote at such meeting notifying such Shareholder of the Adjourned Meeting (specifying the time and place thereof), which notice shall be sent (and be deemed properly given), notwithstanding the provisions of Article 101 below to the contrary, only by means of an email to the Address (as defined therein) of such Shareholder. With the exception of the aforesaid, a Shareholder shall not be entitled to receive a notice of an Adjourned Meeting or of the issues which are to be discussed in the Adjourned Meeting. The Adjourned Meeting shall only discuss issues that could have been discussed at the Original General Meeting, and with respect to which no resolution was adopted.
| 37. | Adoption of Resolutions at General Meetings |
37.1. All resolutions of the General Meeting shall be adopted by an Ordinary Majority, except for any matters with respect to which a greater or different majority is required by these Articles or by the Companies Law.
37.2. Every matter submitted to a General Meeting shall be decided by a show of hands, but if a written ballot is demanded by any Shareholder, present in person or by proxy and entitled to vote at the meeting, the same shall be decided by such ballot. A written ballot may be demanded before the proposed resolution is voted upon or immediately after the declaration by the Chairman of the results of the vote by a show of hands. If a vote by written ballot is taken after such declaration, the results of the vote by a show of hands shall be of no effect, and the proposed resolution shall be decided by such written ballot. The demand for a written ballot may be withdrawn at any time before the same is conducted, in which event another Shareholder may then demand such written ballot. The demand for a written ballot shall not prevent the continuance of the meeting for the transaction of business other than the question on which the written ballot has been demanded.
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37.3. A declaration by the Chairman of the meeting that a resolution has been adopted unanimously, or adopted by a particular majority, or rejected, and an entry to that effect in the minute book of the Company, shall be prima facie evidence of the fact without proof of the number or proportion of the votes recorded in favor of or against such resolution.
| 38. | Resolutions in Writing |
A resolution in writing signed by all Shareholders of the Company then entitled to attend and vote at General Meetings or to which all such Shareholders have given their written consent (by letter, facsimile, telegram, telex, e-mail or otherwise), or their oral consent by telephone (provided that a written summary thereof has been approved and signed by the Chairman of the Board) shall be deemed to have been unanimously adopted by a General Meeting duly convened and held. Such resolution could be stated in several counterparts of the same document, each of them signed by one Shareholder or by several Shareholders.
| 39. | Conducting a General Meeting Through Means of Communication |
The Company may conduct a General Meeting telephonically or through the use of any other means of communication, provided all of the participating Shareholders can hear each other simultaneously. A resolution approved by use of means of communications as aforesaid, shall be deemed to be a resolution lawfully adopted at a General Meeting.
| 40. | Voting Power |
Subject to the provisions of Article 41.1 and subject to any provision hereof conferring special rights as to voting, or restricting the right to vote, every Shareholder shall have one vote for each share held by him of record (calculated on an As Converted Basis), on every resolution, without regard to whether the vote thereon is conducted in person, by proxy, by a show of hands, by written ballot or by any other means.
| 41. | Voting Rights |
41.1. No Shareholder shall be entitled to vote at any General Meeting (or be counted as a part of the lawful quorum thereat), unless all calls and other sums then payable by him in respect of his shares in the Company have been paid, unless the shares’ issue conditions otherwise provide.
41.2. A company or other corporate entity being a Shareholder of the Company may, by resolution of its directors or any other managing body thereof, authorize any person to be its representative at any General Meeting. Any person so authorized shall be entitled to exercise on behalf of such Shareholder all the power, which the latter could have exercised if it were an individual shareholder. Upon the request of the Chairman of the General Meeting, written evidence of such authorization (in form acceptable to the Chairman) shall be delivered to him.
41.3. Any Shareholder entitled to vote may vote either personally (or, if the Shareholder is a company or other corporate entity, by a representative authorized pursuant to Article 41.2) or by proxy (subject to Article 45 below).
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41.4. If two or more persons are registered as joint holders of any share, the vote of the senior who tenders a vote, in person or by proxy, shall be accepted to the exclusion of the vote(s) of the other joint holder(s), and for this purpose seniority shall be determined by the order in which the names stand in the Shareholder Register.
| 42. | Preferred Shares Voting Rights. |
Without derogating from or limiting the provisions of Article 40, and in addition and without limitation to the general voting rights of the Preferred Shares or as otherwise required by law, each holder of Preferred Shares shall be entitled to vote, together with the holders of the Ordinary Shares as one class, on all matters submitted to a vote of the Shareholders of the Company, and shall be entitled to the number of votes equal to the number of shares of Ordinary Shares that would be issuable to such holder if all Preferred Shares held by such holder were converted into the number of shares of Ordinary Shares issuable pursuant to Article 7 hereof immediately prior to the record date for the determination of the shareholders entitled to vote on such matters or, if no such record date is established, as of the date such vote is taken or any written consent of shareholders is first executed.
| 42A. | Major Decisions (Veto Rights) |
Anything to the contrary in these Articles notwithstanding, until the Qualified IPO and in addition to any action or resolution required by applicable law, so long as any Series A Preferred Share are outstanding, the Company shall not without first obtaining the approval (by vote or written consent, as provided by law) of the holders of a majority of the outstanding Series A Preferred Shares held by the OHT/DP Group Investors (as defined in the November 2008 SPA) and the holders of a majority of the outstanding Series A Preferred Shares held by the Medica Group Investors (as defined in the November 2008 SPA), amend, alter, modify, repeal or terminate, any provision of the Articles of Association of the Company in a manner adversely affecting the express preferences, rights, powers or privileges of the Series A Preferred Shares set forth in Articles 7 or 96 of these Articles (it is clarified that in no event shall the authorization or the issuance of additional shares or other securities of the Company having rights, preferences or privileges superior to or in parity with the preferences, rights, powers or privileges of the Series A Preferred Shares be deemed, for purposes of this Article 42A(i) to be adversely affecting the express preferences, rights, powers or privileges of the Series A Preferred Shares ).
| 43. | Personal Interest in Resolution |
43.1. A Shareholder seeking to vote with respect to a resolution which requires that the majority for its adoption include at least a certain percentage of the votes of all those not having a personal interest (as defined in the Companies Law) in the resolution, shall notify the Company prior to the date of the General Meeting, whether or not he has a personal interest in the resolution, as a condition for his right to vote and be counted with respect to such resolution.
43.2. A Shareholder voting on a resolution, as aforesaid, by means of a deed of authorization of a proxy, may include his notice with respect to his personal interest on the deed of authorization.
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| 44. | Validity of Acts Despite Defects |
Subject to the provisions of the Companies Law, a defect in convening or conducting the General Meeting, including a defect deriving from the non-fulfillment of any provision or condition laid down in the Law or these Articles, including with regard to the manner of convening or conducting the General Meeting, shall not disqualify any resolution passed at the General Meeting and shall not affect the discussions which took place thereat.
| 45. | Voting by Means of a Proxy |
45.1. A Shareholder registered in the Shareholder Register is entitled to appoint by deed of authorization a proxy (who is not required to be a Shareholder of the Company) to participate and vote in his stead, whether at a certain General Meeting or generally at General Meetings of the Company.
45.2. In the event that the deed of authorization is not limited to a certain General Meeting, then the deed of authorization, which was deposited prior to a certain General Meeting, shall also be good for other General Meetings thereafter. This Article 45 shall also apply to a Shareholder that is a company, appointing a person to participate and vote in a General Meeting in its stead.
| 46. | A Deed of Authorization |
46.1. The deed of authorization of a proxy shall be in writing and shall be substantially in the form specified below, or in any usual or common form or in such other form as may be approved by the Board or the corporate secretary of the Company. It shall be duly signed by the appointer or his duly authorized attorney or, if such appointer is a company or other corporate entity, under its common seal or stamp or the hand of its duly authorized agent(s) or attorney(s). The Company may demand that it be given written confirmation to its satisfaction of the authority of those signing to bind such company.
Deed of Authorization
To: PainReform Ltd. (the “Company”)
Attn: Corporate Secretary
I _____________________ of __________________________________
(Name of Shareholder) (I.D. of Shareholder)
being a registered holder of __________ (*) Ordinary Shares having a nominal value of NIS __ each, of the Company, hereby appoint
________________________ I.D. no. ____________________________ and/or
(Name of Proxy) (I.D. of Proxy) (**)
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________________________ I.D. no. ____________________________
(Name of Proxy) (I.D. of Proxy)
as my proxy to participate and vote for me and in my stead and on my behalf at [mark one]:
| ☐ | The General Meeting of the Company to be held on the _____ day of ___________, 20__ and at any adjournment(s) thereof. |
I direct that my vote(s) be cast on the resolutions as indicated by a ✓ in the appropriate space.
| Resolutions | For | Against | Abstain | |||
| (***) | ☐ | ☐ | ☐ |
On the receipt of this form duly signed but without any specific direction on a particular matter, my proxy will vote or abstain at his/her discretion.
[Optional – mark one:]
| ☐ | I hereby notify the Company that I do not have a personal interest in any of the resolutions to be voted on in the meeting. |
| ☐ | I hereby notify the Company that I have a personal interest in resolutions no. ____________ to be voted on in the meeting. |
| ☐ | At any General Meeting of the Company, until I shall otherwise notify you. |
Signed this ______ day of ____________, 20__.
| (Signature of Appointer) |
(*) A registered shareholder may grant a number of proxy appointment instruments, each in relation to another quantity of the Company’s shares held by him, provided that he does not grant proxy appointment instruments for a quantity of shares larger than the quantity held by him.
(**) Where the proxy does not have an Israeli identity document, the passport number and the country, which issued the passport, may be stated.
(***) Fill in the resolutions set forth in the agenda of the meeting and mark your vote with respect to each resolution.
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46.2. The Company shall only accept an original proxy appointment instrument or a copy thereof.
46.3. The deed of authorization of a proxy (and the power of attorney or other authority, if any, under which such instrument has been signed) shall be delivered to the Company (at its registered office or at such place as the Board may specify) before the time fixed for the meeting at which the person named in the deed of authorization proposes to vote, or presented to the Chairman at such meeting.
| 47. | Effect of Death of Appointer or Revocation of Appointment |
A vote cast pursuant to a deed of authorization of a proxy shall be valid notwithstanding the previous death, incapacity or bankruptcy, or if a company or other corporate entity, the liquidation, of the appointing Shareholder (or of his attorney-in-fact, if any, who signed such instrument), or the revocation of the appointment or the transfer of the share in respect of which the vote is cast, provided no written notice of any such event shall have been received by the Company or by the Chairman of the General Meeting before such vote is cast and provided, further, that the appointing Shareholder, if present in person at said General Meeting, may revoke the appointment by means of a writing, oral notification to the Chairman, or otherwise.
| 48. | Disqualification of Deeds of Authorization |
Subject to the provisions of applicable Law, the corporate secretary of the Company may, in his discretion, disqualify a deed of authorization and so notify the Shareholder who submitted the deed of authorization in the following cases:
48.1. If there is a reasonable suspicion that it is forged or falsified;
48.2. If it is not duly executed or completed;
48.3. If there is a reasonable suspicion that it is given with respect to shares for which one or more deeds of authorization have been given and not withdrawn; or
48.4. If more than one choice is marked for the same resolution; or
48.5. With respect to resolutions, which require that the majority for their adoption include a certain percentage of those not having a personal interest in the approval of the resolution, where it was not marked, or otherwise notified to the Company, whether or not the relevant Shareholder has a personal interest.
| 49. | Board Recommendation |
The Board may, in its sole discretion, send to the Shareholders a recommendation in order to persuade them with respect to any matter, which is on the agenda of the General Meeting. Such recommendation shall be delivered at the expense of the Company.
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50. Notwithstanding Section 20(c) of the Companies Law, other than as specifically provided in Articles 9 and 9A, no right to a class vote shall be accorded to, and no requirement shall exist for the class consent of the holders of Ordinary Shares or Preferred Shares (or any series thereof, when more than one series thereof exist) with respect to any action or resolution of the Company, to the extent permitted by the Companies Law.
Board Of Directors
| 51. | The Authority of the Board |
51.1. The authority of the Board is as specified in the Companies Law and in the provisions of these Articles.
51.2. The Board may exercise any authority of the Company that is not, by the Companies Law or by these Articles, required to be exercised by another organ of the Company.
51.3. Without derogating from the generality of Articles 51.1 and 51.2 above, the Board’s authority shall include the following:
(a) The Board may, from time to time, in its discretion, cause the Company to borrow or secure the payment of any sum or sums of money for the purposes of the Company, and may secure or provide for the repayment of such sum or sums in such manner, at such times and upon such terms and conditions in all respects as it deems appropriate, including, without limitation, by the issuance of bonds, perpetual or redeemable debentures or other securities, or any mortgages, charges, or other liens on the undertaking or the whole or any part of the property of the Company, both present and future, including its uncalled or called but unpaid capital.
(b) The Board may, from time to time, set aside any amount(s) out of the profits of the Company as a reserve or reserves for any purpose(s) which the Board, in its sole discretion, shall deem appropriate, and may invest any sum so set aside in any manner and from time to time deal with and vary such investments, and dispose of all or any part thereof, and employ any such reserve or any part thereof in the business of the Company without being bound to keep the same separate from other assets of the Company, and may subdivide or re-designate any reserve or cancel the same or apply the funds therein for another purpose, all as the Board may from time to time deem appropriate.
(c) Subject to the provisions of any Law, the Board may, from time to time, authorize any person to be the representative of the Company with respect to those objectives and subject to those conditions and for that time period, as the Board deems appropriate, and may also grant any such representative the authority to delegate any or all of the authorities, powers and discretion given to him by the Board.
(d) The Board shall have exclusive authority to discuss and act upon each of the following matters related to the business of the Company:
| (i) | The process for identification and evaluation of product candidates; |
| (ii) | Selection of product candidates for in-licensing; |
| (iii) | Approval of development programs and budgets for in-licensed products; |
| (iv) | Go/No-Go decisions upon achievement of milestones for products in development; and |
| (v) | Corporate strategy especially as it relates to selling of product assets versus marketing them within a Company franchise. |
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| 52. | Convening Meetings of the Board |
52.1. The Chairman of the Board, and in the event that a Chairman has not been appointed, any Director, may convene a meeting of the Board at any time; provided that a meeting of the Board be convened at least once during every calendar quarter.
52.2. The Chairman of the Board shall convene a meeting of the Board at any time or in any event that such meeting is required by the provisions of the Companies Law, including:
(a) The Chairman of the Board shall convene the Board on a specified matter on the demand of a Director.
(b) The Chairman of the Board shall act without delay to call a meeting of the Board within 10 days of being notified by a Director of the Company that he has learned of a matter of the Company in which a breach of the Law or impairment to proper business procedure has prima facie been discovered or of the date on which the Company’s Auditor reports to him that he has learned of material deficiencies in the audit of the Company’s accounts.
(c) If a notice or report of the General Manager obliges action by the Board, the Chairman of the Board shall, without delay and within ten (10) days of the notice or report, call a meeting of the Board.
| 53. | Notice of a Meeting of the Board |
53.1. Any notice with respect to meeting of the Board may be given to all Directors incumbent at the time the notice is sent, orally or in writing, so long as the notice is given at least forty eight (48) hours prior to the date fixed for the meeting, unless all members of the Board or their Alternate Directors (as defined in Article 63.1) or their Representatives (as defined in Article 63.3) agree on a shorter time period. Such notice shall be delivered personally, by mail, or transmitted via facsimile or e-mail or through another means of communication, to the address, facsimile number or to the e-mail address or to an address where messages can be delivered through other means of communication, as the case may be, as the Director informed the Company in advance.
53.2. A notice with respect to a meeting of the Board shall include the place, date and time of the meeting of the Board, the issues on its agenda and any other material that the Chairman of the Board, or the Director who convened the meeting, requests to be included in the notice with respect to the meeting.
| 54. | The Agenda of Board Meetings |
The agenda of any meeting of the Board shall be as determined by the Chairman of the Board, and if there is no Chairman, by a resolution of the director convening the meeting, and shall include the following matters:
54.1. Matters for which the meeting is required to be convened in accordance with the Companies Law;
54.2. Any matter requested by a Director or by the General Manager to be included in the meeting within a reasonable time (taking into account the nature of the matter) prior to the date of the meeting;
54.3. Any other matter determined by the Chairman of the Board, or if there is no Chairman, by the Director convening the meeting.
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| 55. | Quorum |
55.1. Unless otherwise unanimously decided by the Board, a quorum at a meeting of the Board shall be constituted by the presence of a majority of the Directors then in office who are lawfully entitled to participate in the meeting.
55.2. If within half an hour from the time appointed for the meeting a quorum is not present, the meeting shall stand adjourned to the second Business Day at the same time and place, or to such later day and at such time and place as the Chairman may determine with the consent of the majority of the Directors present. In any event of a meeting adjourned as aforesaid, the Company will, as soon as practicable following the respective original meeting (but in any event within twenty four (24) hours thereafter), notify all then incumbent Directors of the adjourned meeting (specifying the time and place thereof), which notice shall be sent (and be deemed properly given), notwithstanding the provisions of Article 101 below to the contrary, by means of an email to the Address (as defined therein) of such Director. With the exception of the aforesaid, a Director shall not be entitled to receive a notice of an adjourned meeting or of the issues which are to be discussed in the adjourned meeting. No business shall be transacted at any adjourned meeting except business, which might lawfully have been transacted at the meeting as originally called. At such adjourned meeting, any two Directors present shall constitute a lawful quorum.
| 56. | Conducting a Meeting Through Means of Communication |
The Board may conduct a meeting of the Board telephonically or through the use of any other means of communication, provided all of the participating Directors can hear each other simultaneously. A resolution approved by use of means of communications as aforesaid, shall be deemed to be a resolution lawfully adopted at a meeting of the Board.
| 57. | Voting in the Board |
Unless otherwise provided by these Articles, issues presented at meetings of the Board shall be decided upon by a majority of the votes of Directors present (or participating, in the case of a vote through a permitted means of communications) and lawfully entitled to vote thereon. Each Director shall have a single vote; provided however, that until occurrence of the Triggering Event, if occurs, such majority must also include at least one of the Existing Shareholders Directors and one of the Medica Directors.
| 58. | Adoption of Resolutions Without Convening |
The Board may adopt resolutions without actual physical convening with the written consent (given by letter, facsimile, e-mail or otherwise) of all the Directors then in office and lawfully entitled (as conclusively determined by the Chairman of the Board) to participate and to vote thereon. Subject to compliance with the provisions of Article 51, matters presented in accordance with this Article 58 shall be decided upon by a majority of the votes of such Directors. Resolutions adopted pursuant to this Article 58 shall be deemed to have been duly adopted by a meeting of the Board duly convened and held. Minutes of such resolutions shall be approved and signed by the Chairman of the Board.
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| 59. | Written Resolution |
A resolution in writing signed by all Directors then in office and lawfully entitled to vote thereon or to which all such Directors have given their consent (by letter, telegram, telex, facsimile, e-mail or otherwise), shall be deemed to have been unanimously adopted by a meeting of the Board duly convened and held.
| 60. | The Number of Directors |
The Board shall consist of up to six (6) Directors.
| 61. | Directors Generally |
61.1. Subject to the provisions of the Companies Law, a Director may hold another position in the Company.
61.2. A company or other corporate entity may serve as a Director in the Company, subject to the provisions of Article 63 below.
| 62. | The Election of Directors |
62.1. The Directors of the Company (and of any subsidiaries of the Company) shall not be elected by the General Meeting of the Shareholders, but instead shall be appointed as follows:
(a) Shareholders holding a majority of the voting power represented by the then issued and outstanding shares of the Company held by Ofer Hi-Tech and the D-Partners Group shall have the right to appoint two (2) Directors, so long as such Shareholders hold, together, at least 20% of the voting power represented by the then issued and outstanding shares of the Company (one of whom shall be designated by the D-Partners Group so long as it holds at least 7% of the voting power represented by the then issued and outstanding shares of the Company); provided that as of such time on which the Shareholders holding a majority of the voting power represented by the then issued and outstanding shares of the Company held by the Ofer Hi-Tech and the D-Partners Group hold, together, less than 20% (but not less than 10%) of the voting power represented by the then issued and outstanding shares of the Company, Shareholders holding a majority of the voting power represented by the then issued and outstanding shares of the Company held by Ofer Hi-Tech and the D-Partners Group shall have the right to appoint only one (1) Director (the director(s) appointed pursuant to this Article 62.1(a) – the “Existing Shareholders Directors”);
(b) The Medica Group shall have the right to appoint two (2) Directors, so long as it holds at least 20% of the voting power represented by the then issued and outstanding shares of the Company; provided that as of such time on which the Medica Group holds less than 20% (but not less than 10%) of the voting power represented by the then issued and outstanding shares of the Company, Medica Group shall have the right to appoint only one (1) Director (director(s) appointed pursuant to this Article 62.1(b) – the “Medica Directors”);
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(c) Two (2) Directors shall be external non-executive industry experts who shall be appointed by the majority of the other Directors appointed in accordance with Articles 62.1(a) and 62.1(b); and
(d) Only in the event that the Triggering Event occurs, then thereafter the Shareholders holding a majority of the voting power represented by the then issued and outstanding shares of the Company held by the Participating Investors Group shall have the right to appoint one (1) Director, so long as the Participating Investors Group holds, together, at least 20% of the voting power represented by the then issued and outstanding shares of the Company.
62.2. Any vacancy on the Board shall be filled by the party or parties who had appointed such director.
62.3. Any appointment, dismissal or replacement of any Director, shall be made by written notice given to the Company by the appointing parties.
62.4. All voting power held by Shareholders entitled to appoint Directors under any of sub-Articles 62.1(a) through (d) above, shall be taken into account in determining whether or not such Shareholders shall have met the voting power threshold set forth in such sub-Article for the exercise of such rights, regardless of whether or not such voting power shall have been taken into account in determining the right of any of such Shareholders to appoint a Director under any of the other sub-Articles 62.1(a) through (d) above.
| 63. | Alternate Directors and Representative of a Director that is a Company |
63.1. Subject to the provisions of the Companies Law, any Director may, by written notice to the Company, appoint an alternate for himself (in these Articles, an “Alternate Director”), dismiss such Alternate Director and appoint another Alternate Director in place of any Alternate Director appointed by him whose office has been vacated for any reason whatsoever, whether for a certain meeting or a certain period of time or generally. Any notice given to the Company pursuant to this Article shall be in writing, delivered to the Company and signed by the appointing or dismissing Director, and shall become effective on the date fixed therein, or upon the delivery thereof to the Company, whichever is later.
63.2. Anyone who is not qualified to be appointed as a Director and/or anyone serving as a Director or as an existing Alternate Director may not be appointed and may not serve as an Alternate Director.
63.3. A Director that is a company or other corporate entity shall appoint an individual, qualified to be appointed as a Director in the Company, in order to serve on its behalf, either for a certain meeting or for a certain period of time or generally and such company or other entity may also dismiss that individual and appoint another in his stead (hereinafter: “Director’s Representatives”). Any notice given to the Company pursuant to this Article shall be in writing, delivered to the Company and signed by the appointing or dismissing body, and shall become effective on the date fixed therein, or upon the delivery thereof to the Company, whichever is later.
63.4. Reserved.
63.5. Each of an Alternate Director and a Director’s Representative shall have all the authority of the Director who appointed him (except that neither an Alternate Director nor a director’s Representative may appoint an alternate for himself, unless the instrument appointing him otherwise expressly provides), provided, however, that an Alternate Director shall have no standing at any meeting of the Board or any committee thereof while the Director who appointed him is present.
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63.6. The office of an Alternate Director or a Director’s Representative shall be vacated under the circumstances, mutatis mutandis, set forth in Article 64, and such office shall ipso facto be vacated if the Director who appointed such Alternate Director or Director’s Representative ceases to be a Director.
| 64. | Termination of the Term of a Director |
The term of a Director shall terminate in any of the following cases:
64.1. If he resigned from his office by way of a signed letter, filed with the corporate secretary at the Company’s office;
64.2. If he is declared bankrupt;
64.3. If he is declared by an appropriate court to be incapacitated;
64.4. Upon his death and, in the event of a company or other corporate entity, upon the adoption of a resolution for its voluntary liquidation or the issuance of a liquidation order;
64.5. If he is removed from his office by way of a written notice to the Company of the termination of his appointment by the persons or entities that appointed him;
64.6. If he is convicted of a crime requiring his termination pursuant the Companies Law; or
64.7. If his term of office is terminated by the Board pursuant to the provisions of the Companies Law.
| 65. | Continuing Directors in the Event of Vacancies |
In the event of one or more vacancies in the Board, the continuing Directors may continue to act in every matter in accordance with these Articles and applicable law.
| 66. | Compensation of Directors |
66.1. Directors who do not hold other positions in the Company shall not receive any compensation from the Company, unless such compensation and its amount are approved by the Compensation Committee and by the General Meeting, or if such committee does not exist then by the Board and by the General Meeting, subject to applicable Law.
66.2. The compensation of the Directors may be fixed, as an all-inclusive payment or as payment for participation in meetings or as any combination thereof.
The Company may reimburse expenses incurred by a Director in connection with the performance of his duties as a Director, to the extent provided in a resolution of the Board. The Company shall reimburse all reasonable out-of-pocket expenses (including air travel) incurred by the directors for attending the Board and committees meetings and performing their duties as directors.
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| 67. | Personal Interest of a Director |
Subject to compliance with the provisions of the Companies Law, the Company may enter into any contract or otherwise transact any business with any Director and may enter into any contract or otherwise transact any business with any third party in which contract or business a Director has a personal interest, directly or indirectly.
| 68. | Committees of the Board of Directors |
68.1. Subject to the provisions of the Companies Law and these Articles, the Board may delegate its authorities or any part of them to committees as it deems appropriate, and it may from time to time cancel the delegation of any such authority. Any such committee, while utilizing an authority as stated, is obligated to fulfill all of the instructions given to it from time to time by the Board. The Board may adopt a charter, or guidelines, for any such committee and amend the same from time to time. Each such committee shall consist of at least one of the Existing Shareholders Directors (if any such Director is then incumbent) and one of the Medica Directors (if any such Director is then incumbent).
68.2. Without limiting the generality of the aforesaid, the Board of Directors will appoint a committee to guide and direct the Company’s product development program (including budgets and timelines) within the context of the strategy outlined by the Board. This committee will report to the Board of Directors, which shall retain all of its authorities with respect to such matters. The committee will be chaired by a Medica Director, and will include four additional members as follows: (i) the Chief Executive Officer of the Company, (ii) Mr. Stephen A. Cooper, (iii) one representative appointed by the Shareholders holding a majority of the voting power represented by the shares of the Company then held by the Ofer Hi-Tech Group and the D-Partners Group, and (iv) a development consultant (until the Company has hired a fulltime development manager) to be selected by the Shareholders included within the Medica Group and approved by the Company. Anything herein to the contrary notwithstanding, none of the powers and authorities of the Board of Directors nor any other executive authority shall vest in the aforesaid committee, and such a committee shall only be entitled to recommend to the Board of Directors to take certain actions on the matters specified above, which recommendations may or may not be approved (and actions may or may not be taken) by the Board of Directors in its sole and absolute discretion (to the extent permitted by applicable law).
68.3. The provisions of these Articles with respect to meetings of the Board shall apply, mutatis mutandis, to the meetings and discussions of each committee of the Board, provided that no other terms are set by the Board in this matter, and provided that the lawful quorum for the meetings of the committee, as stated, shall be at least a majority of the members of the committee, unless otherwise required by Law.
| 69. | Chairman of the Board |
69.1. The Board may from time to time choose one of its members to serve as the Chairman of the Board, remove such Chairman from office and choose another in its place.
69.2. The Chairman of the Board shall preside at every meeting of the Board, but if there is no such Chairman, or if at any meeting he is not present within fifteen (15) minutes of the time fixed for the meeting, or if he is unwilling to take the chair, the Board shall appoint one of the Directors present to preside at the meeting.
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69.3. The Chairman of the Board shall preside over meetings of the Board and shall sign the minutes of the meetings.
69.4. In the event of deadlock vote, the Chairman of the Board shall not have an additional or casting vote.
69.5. The Chairman of the Board, or if there is only one Director in the Board, such Director, is entitled, at all times, at his initiative or pursuant to a resolution of the Board, to require reports from the General Manager in matters pertaining to the business affairs of the Company.
| 70. | Validity of Acts Despite Defects |
Subject to the provisions of the Companies Law, all acts done bona fide at any meeting of the Board, or of a committee of the Board, or by any person(s) acting as Director(s), shall, notwithstanding that it may afterwards be discovered that there was some defect in the appointment of the participants in such meetings or any of them or any person(s) acting as aforesaid, or that they or any of them were disqualified, be as valid as if there was no such defect or disqualification.
Officers; Auditor
| 71. | The General Manager |
The Board may appoint a General Manager, and may appoint more than one General Manager. The General Manager may be a Director. Such appointment(s) may be either for a fixed term or without any limitation of time, and the Board may from time to time (subject to the provisions of the Companies Law and of any contract between any such person and the Company) fix his or their salaries and emoluments, remove or dismiss him or them from office and appoint another or others in his or their place.
| 72. | The Authority of the General Manager |
72.1. The General Manager is responsible for the day-to-day management of the affairs of the Company within the framework of the policies set by the Board and subject to its instructions.
72.2. The General Manager shall have all managerial and operational authorities, which were not conferred by Law or pursuant to these Articles to any other organ of the Company, and he shall be under the supervision of the Board.
72.3. In the event the Board appoints more than one General Manager, the Board may determine the respective positions and functions of the General Managers and allocate their authorities, as the Board may deem appropriate.
72.4. The Board may assume the authority granted to the General Manager, either with respect to a certain issue or for a certain period of time.
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72.5. The Board may instruct the General Manager how to act in a particular matter; if the General Manager does not obey the instruction, the Board may exercise the power required to implement the instruction in his stead.
72.6. In the event that the General Manager is unable to exercise his authority, the Board may exercise such authority in his stead, or authorize another to exercise such authority.
72.7. The General Manager, with the approval of the Board, may delegate to his subordinates any of his authorities.
72.8. Subject to the provisions of the Companies Law, the Board may delegate to the General Manager powers which the Board has pursuant to these Articles, as it deems fit, and it may delegate these powers, or any of them, for such period and objects, on such conditions and with such restrictions as it deems fit. The Board may alter or cancel any delegation of powers as aforesaid.
72.9. In the event that the Company did not appoint a General Manager, the Board shall have all the authorities of the General Manager as detailed in this Article 72.
| 73. | The General Manager’s reporting duties |
73.1. The General Manager must notify the Chairman of the Board of any exceptional matter, which is material to the Company, or of any material deviation of the Company from the policy prescribed by the Board. If the Company does not have a Chairman of the Board, for any reason, the General Manager shall notify all the Board members as aforesaid.
73.2. The General Manager shall submit reports to the Board on the matters, at the times and on the scale prescribed by the Board.
73.3. The General Manager shall report to the Chairman of the Board, on his demand, on matters relating to the Company’s business and the proper management thereof.
| 74. | Corporate Secretary |
74.1. The Board may appoint a corporate secretary for the Company, on such terms as it deems fit, and may appoint a deputy secretary and determine their duties and powers.
74.2. If a corporate secretary is not appointed for the Company, the General Manager, or someone authorized by him for such purpose and in the absence of a General Manager someone authorized for such purpose by the Board, shall perform the duties prescribed for the corporate secretary pursuant to the Law, these Articles and the Board’s resolution.
74.3. The Company’s corporate secretary shall be responsible for all the documents kept at the Company’s registered office and shall keep the registers to be kept by the Company pursuant to the Law.
| 75. | Other Officers of the Company |
The Board may appoint, in addition to the General Manager, other officers, define their positions and authorities, and set their compensation and terms of employment. The Board may authorize the General Manager to exercise any or all of its authorities stated in this Article.
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| 76. | The Auditor |
76.1. The Shareholders at the Annual Meeting shall appoint an Auditor for a period until the completion of the performance of one audit, or for a longer period not to extend beyond the completion of the performance of three audits. Where the Auditor is appointed for such a period, the Annual Meeting shall not discuss the appointment of an Auditor during the said period, unless a resolution is passed to terminate his office. Subject to the provisions of the Companies Law, the General Meeting is entitled at any time to terminate the service of the Auditor.
76.2. The Board shall fix the compensation of the Auditor of the Company for his auditing activities, and shall also fix the compensation of the Auditor for additional services, if any, which are not auditing activities, and, in each case, shall report thereon to the Annual Meeting.
Distributions
| 77. | Permitted Distribution |
The Company may effect a distribution to its Shareholders to the extent permitted by the Companies Law.
| 78. | Right to Dividend or Bonus Shares |
78.1. A Shareholder shall be entitled to receive dividends or bonus shares, upon the resolution of the Company in accordance with Article 79 below, consistent with the rights attached to the shares held by such Shareholder.
78.2. Subject to the provisions of Article 16.6 above, the Shareholders entitled to receive dividends or bonus shares shall be those who are registered in the Shareholder Register on the date of the resolution approving the distribution or allotment, or on such later date, as may be determined in such resolution.
78.3. In the event the Company pays a dividend or distributes bonus shares, then, in each such case, the holders of Preferred Shares shall be entitled to receive such distribution, pari passu with the Ordinary Shares, subject to compliance with the provisions of Article 79A. In any such event, the amount of dividends each Preferred Share shall be entitled to receive shall be calculated on the basis of the number of Ordinary Shares into which such Preferred Share could then be converted.
| 79. | Resolution of the Company with Respect to a Dividend or Bonus Shares |
Subject to compliance with the provisions of Article 78.3, the resolution of the Company with respect to the distribution of a dividend or bonus shares shall be adopted by the Board.
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| 79A. | Dividend Preference |
Prior to a Qualified Public Offering, upon any declaration and distribution of dividend by the Company (in cash, cash equivalents, or, if applicable, securities, except for share dividend distributed pro-rata on An As-Converted Basis with respect to all Company’s shares), or a repurchase by the Company of its shares (except for repurchase of shares from directors or employees of, or consultants or service providers to, the Company or its subsidiaries (if any) pursuant to an employee share option plan, arrangement or agreement approved by the Board and any repurchase pursuant to the Series A SPA) (each, a “Distribution”), the distributable assets and proceeds pursuant to such event shall be distributed to the Shareholder in accordance with the provisions of Article 96 below.
| 80. | Specific Dividend |
A dividend may be paid, in whole or in part, by the distribution of specific assets of the Company or by distribution of paid up shares, debentures or other securities of the Company or of any other companies, or in any combination thereof, the fair value of which shall be determined by the Board.
| 81. | Deductions from Dividends |
The Board may deduct from any distribution or other moneys payable to any Shareholder in respect of a share any and all sums of money then payable by him to the Company on account of calls or otherwise in respect of shares of the Company and/or on account of any other debt permitted to be setoff in accordance with applicable Law.
| 82. | Retention of Dividends |
82.1. The Board may retain any dividend, bonus shares or other moneys payable or property distributable in respect of a share on which the Company has a lien, and may apply the same in or toward satisfaction of the debts, liabilities, or engagements in respect of which the lien exists.
82.2. The Board may retain any dividend, bonus shares or other moneys payable or property distributable in respect of a share in respect of which any person is, under Article 22.5, entitled to become a Shareholder, or which any person is, under said Article, entitled to transfer, until such person shall become a Shareholder in respect of such share or shall transfer the same.
| 83. | Mechanics of Payment |
Any dividend or other moneys payable in cash in respect of a share, less the tax required pursuant to the Law, may be paid by check sent by registered mail to, or left at, the registered address of the person entitled thereto or by transfer to a bank account specified by such person (or, if two or more persons are registered as joint holders of such share or are entitled jointly thereto as a result of the death or bankruptcy of the holder or otherwise, to any one of such persons or to his bank account), or to such person and at such address as the person entitled thereto may direct in writing. Every such check shall be made payable to the order of the person to whom it is sent, or to such person as the person entitled thereto as aforesaid may direct, and payment of the check by the banker upon whom it is drawn shall be a good discharge to the Company. Every such check shall be sent at the risk of the person entitled to the money represented thereby.
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| 84. | An Unclaimed Dividend |
All unclaimed dividends or other moneys payable in respect of a share may be invested or otherwise made use of by the Board for the benefit of the Company until claimed. The payment by the Board of any unclaimed dividend or such other moneys into a separate account shall not constitute the Company a trustee in respect thereof, and any dividend unclaimed after a period of seven (7) years from the date of declaration of such dividend, and any such other moneys unclaimed after a like period from the date the same were payable, shall be forfeited and shall revert to the Company; provided, however, that the Board may, at its discretion, cause the Company to pay any such dividend or such other moneys, or any part thereof, to a person who would have been entitled thereto had the same not reverted to the Company. The Company shall not be liable to pay interest or linkage for unclaimed dividend.
| 85. | Receipt from a Joint Holder |
If two or more persons are registered as joint holders of any share, or are entitled jointly thereto as a result of the death or bankruptcy of the holder or otherwise, any one of them may give effectual receipts for any dividend, bonus shares or other moneys payable or property distributable in respect of such share.
| 86. | Funds |
The Board may, in its discretion, make provisions to special funds of any amount from the Company’s profits, or from a revaluation of its assets, or its proportional part in the revaluation of the assets of its affiliates, and determine the purpose of these funds.
| 87. | Manner of Capitalization of Profits and the Distribution of Bonus Shares |
Upon the recommendation of the Board approved by a resolution of the General Meeting adopted by an Ordinary Majority, subject to compliance with the provisions of Article 78.3, the Company may cause any moneys, investments, or other assets forming part of the undivided profits of the Company, standing to the credit of a reserve fund, or to the credit of a reserve fund for the redemption of capital, or in the hands of the Company and available for distribution, or representing premiums received on the issuance of shares and standing to the credit of the share premium account, to be capitalized and distributed as capital among such of the Shareholders as would be entitled to receive the same if distributed by way of dividend and in the same proportion, or may cause any part of such capitalized fund to be applied on behalf of such Shareholders in paying up in full, either at nominal value or at such premium as the resolution may provide, any unissued shares or debentures or other securities of the Company which shall be distributed accordingly, in payment, in full or in part, of the uncalled liability on any issued shares or debentures or other securities, and may cause such distribution or payment to be accepted by such Shareholders in full satisfaction of their interest in such capitalized sum.
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| 88. | Settlement by the Board |
The Board may settle, as it deems fit, any difficulty arising with regard to the distribution of bonus shares, distributions referred to in Article 80 hereof or otherwise, and in particular, to issue certificates for fractions of shares and sell such fractions of shares in order to pay their consideration to those entitled thereto, to set the value for the distribution of certain assets and to determine that cash payments shall be paid to the Shareholders on the basis of such value, or that fractions whose value is less than NIS 1.00 shall not be taken into account. The Board may pay cash or convey these certain assets to a trustee in favor of those people, who are entitled to a dividend or to a capitalized fund, as the Board shall deem appropriate.
| 89. | Allotment for a consideration lower than the nominal value |
Where the Company resolves to allot shares, which have a nominal value for a consideration lower than their nominal value, including bonus shares, it must convert into share capital part of its profits, from premium on shares or from any other source included in its equity, which are mentioned in its last financial statements, in an amount equal to the difference between the nominal value and the consideration. Notwithstanding the foregoing, the Company may, with the court’s approval, allot shares for a consideration lower than their nominal value.
| 90. | Acquisition of Shares |
90.1. The Company is entitled to acquire or to finance an acquisition, directly or indirectly, of shares of the Company or other securities convertible or exercisable into shares of the Company, including incurring an obligation to take any of these actions, subject to the provisions of the Companies Law. In the event that the Company so acquired any of its shares, any such share that was not cancelled by the Company, shall become a dormant share, and shall not confer any rights, so long as it is held by the Company.
90.2. A subsidiary or another company controlled by the Company is entitled to acquire or finance an acquisition, directly or indirectly, of shares of the Company or other securities convertible or exercisable into shares of the Company, or incur an obligation with respect thereto, to the same extent that the Company may make a distribution, subject to the terms of, and in accordance with the Companies Law. In the event a subsidiary or such controlled company so acquired any of the Company’s shares, any such share shall not confer any voting rights, so long as it is held by such subsidiary or controlled company.
Insurance, Indemnification And Release Of Office Holders
| 91. | Office Holder |
For purposes of Articles 92, 93 and 94 below, the term “Office Holder” shall have the meaning ascribed to such term in the Companies Law.
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| 92. | Insurance of Office Holders |
The Company may, to the extent permitted by the Companies Law, enter into a contract for the insurance of the liability of an Office Holder of the Company, in respect of a liability imposed on him as a result of an act done by him in his capacity as an Office Holder of the Company, in any of the following:
92.1. a breach of his duty of care to the Company or to another person;
92.2. a breach of his duty of loyalty to the Company, provided that the Office Holder acted in good faith and had reasonable grounds to assume that such act would not harm the Company;
92.3. a financial liability imposed on him in favor of another person.
| 93. | Indemnification of Office Holders |
93.1. The Company may, to the extent permitted by the Companies Law, indemnify an Office Holder of the Company for liability or expense he incurs as a result of an act done by him in his capacity as an Office Holder of the Company, as follows:
(a) any financial obligation imposed on such Office Holders in favor of another person (excluding the Company or a subsidiary of the Company, directly or by way of a derivative action) by a court judgment, including a settlement or an arbitrator’s award approved by court, in respect of any act or omission (“action”) taken or made by such Office Holders in their capacity as directors and/or officers of the Company, including without limitation, but subject to Section 93.2 below, any amount reasonably incurred or suffered by such Office Holders in connection with such an action; or
(b) all reasonable litigation expenses, including attorneys’ fees, actually expended by such Office Holders or charged to such Office Holders by a court, in a proceeding instituted against such Office Holders by the Company or on its behalf or by another person, or in any criminal proceedings in which such Office Holders are acquitted, or in any criminal proceedings in which such Office Holders are convicted of a crime which does not require proof of mens rea (criminal thought), all in respect of actions taken by such Office Holders in their capacity as directors and/or officers of the Company; or
(c) all reasonable litigation expenses, including attorneys’ fees, actually incurred by such Office Holders in connection with an investigation or proceeding held against such Office Holders by a competent governmental authority, which has been Terminated Without the Filing of an Indictment (as such term is defined in the Companies Law-1999) and without the Imposition on such Office Holders of a Monetary Obligation in Lieu of a Criminal Prosecution (as such term is defined in the Companies Law-1999), or which has been Terminated Without the Filing of an Indictment (as such term is defined in the Companies Law-1999) and with the Imposition on such Office Holders of a Monetary Obligation in Lieu of a Criminal Prosecution (as such term is defined in the Companies Law-1999) of a crime which does not require proof of mens rea (criminal thought).
93.2. The Company may indemnify an Office Holder of the Company pursuant to this Article 93 retrospectively, and may also undertake in advance to indemnify an Office Holder of the Company (i) for those liabilities and expenses described in Sub-Article 93.1, provided the undertaking is limited to events that in the opinion of the Board are foreseeable in view of the Company’s activity at the time of such undertaking, and limited in an amount or standard that the Board determines is reasonable under the circumstances and (ii) for those liabilities and expenses described in Sub-Articles 92.2 and 92.3.
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| 94. | Release of Office Holders |
The Company may, to the extent permitted by the Companies Law, release an Office Holder of the Company, in advance, from his liability, in whole or in part, for damages resulting from the breach of his duty of care to the Company.
| 95. | General |
The provisions of Articles 92, 93 and 94 above are not intended, and shall not be interpreted, to restrict the Company in any manner in respect of the procurement of insurance and/or in respect of indemnification and/or release from liability in connection with any person who is not an Office Holder, including, without limitation, any employee, agent, consultant or contractor of the Company who is not an Office Holder, or in connection with any Office Holder to the extent that such insurance and/or indemnification and/or release from liability is permitted under the Law.
Liquidation
| 96. | Liquidation Preference. |
96.1. In the event of liquidation, dissolution or winding up of the Company subject to applicable law, in the event of a Deemed Liquidation Event (as defined below), and in the event of any Distribution (as defined in Article 79A above), all the assets of the Company whether capital, surplus, earnings, securities or assets of any kind available for distribution among the holders of the Company’s shares (“Distributable Assets”) shall be distributed to them in the following order and preference:
(a) First, the holders of Series A Preferred Shares shall be entitled to receive, prior and in preference to any distribution to the holders of Ordinary Shares, an amount per each Series A Preferred Share held by such holder equal to (i) the Original Issue Price of such Series A Preferred Share; plus (ii) interest at the rate of 8% per annum on such Original Issue Price, compounded annually from the date of issuance of such Series A Preferred Share to the date of actual distribution, plus (iii) any previously declared but unpaid dividend on such shares, minus (iv) the aggregate amount previously paid pursuant to this Article 96.1(a) with respect to such Series A Preferred Share (the “Series A Preferential Amount”). In the event that the Distributable Assets are insufficient for the distribution in full of the Series A Preferential Amount with respect to all Series A Preferred Shares then outstanding, all of such Distributable Assets shall be distributed among the holders of the Series A Preferred Shares in proportion to the full respective Series A Preferential Amount such holders would otherwise be entitled to receive hereunder pursuant to this Article 96.1(a).
(b) After payment of the full Series A Preferential Amounts pursuant to Article 96.1(a) above, any remaining Distributable Assets, if any, shall be distributed pro-rata (treating the Preferred Shares on an As-Converted Basis) among the holders of the Preferred Shares and Ordinary Shares.
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96.2. The provisions of Article 96.1 above to the contrary notwithstanding, the provisions of Article 96.1(a) shall not apply with respect to any Preferred Share in the event that a distribution of the Distributable Proceeds in accordance with Article 96.1 would yield to the holder of such Preferred Share, when combined with the aggregate amounts previously paid with respect to such share pursuant to this Article 96.1(a), an aggregate amount exceeding 5 times the Original Issue Price of such Preferred Share (“Cap Amount”); provided however that in no event shall the non-application of the provisions of such Article 96.1(a) result in the holder of such Preferred Share receiving an amount per such Preferred Share (or an aggregate amount per all of the Ordinary Shares into which such Preferred Share has been converted or is convertible into assuming the prior conversion of such Preferred Share), when combined with the aggregate amounts previously paid with respect to such share pursuant to Article 96.1(a), is less than the Cap Amount of such Preferred Share. In the event that the provisions of Article 96.1(a) do not apply with respect to any Preferred Share pursuant to the foregoing, all Distributable Assets (or, if pursuant to the immediately preceding provisions, such provisions of Article 96.1(a) still apply to some of the Preferred Shares – all of the Distributable Assets remaining after the application of the provisions of Article 96.1(a) to such Preferred Shares), will be distributed pro rata among the holders of Preferred Shares and Ordinary Shares, pari passu, on an As-Converted Basis.
96.3. As used herein, the term “Deemed Liquidation Event” shall mean: (a) a consolidation, merger or reorganization of the Company with or into, or a sale of all or substantially all of the Company’s assets, or substantially all of the Company’s issued and outstanding share capital, or a transfer or grant of an exclusive license to all or substantially all the of Company’s intellectual property not in the ordinary course of business, to, any other company, or any other entity or person, other than a wholly-owned subsidiary of the Company, excluding a transaction in which shareholders of the Company prior to the transaction will maintain voting control of the resulting entity after the transaction (provided, however, that shares of the surviving entity held by shareholders of this Company acquired by means other than the exchange or conversion of the shares of this Company shall not be used in determining if the stockholders of this Company own more than fifty percent (50%) of the voting power of the surviving entity (or its parent), but shall be used for determining the total outstanding voting power of the surviving entity); or (b) a transaction or series of transactions, other than an IPO or fundraisings by the Company, a person or entity acquires fifty percent (50%) or more of the voting power represented by the then issued and outstanding shares of the Company or the right to appoint or elect at least fifty percent (50%) or more of the members of the Board of Directors.
96.4. Notwithstanding anything to the contrary contained in these Articles, a Preferred Majority may waive the treatment of a transaction as a liquidation event or a Deemed Liquidation Event or a Distribution, provided that if such transaction results in a distribution of cash, shares, or other assets to the Company’s shareholders then such waiver shall be deemed revoked and the provisions of Article 96.1 shall apply. In addition, the holders of a Preferred Majority may waive treatment of a liquidation event or a Deemed Liquidation Event or a Distribution in accordance with Article 96.1(a), in which case only Article 96.1(b) shall apply to the distribution of the Distributable Assets of such liquidation event or a Deemed Liquidation Event or Distribution among the Shareholders.
96.5. Notwithstanding anything to the contrary in these Articles but subject to the provisions of Article 96.4, the proceeds of any Deemed Liquidation Event shall be allocated and distributed among the Shareholders in accordance with this Article 96, whether by way of dividend or otherwise, such that at the closing of the Deemed Liquidation Event, or as soon as permitted by applicable law thereafter, the holders of the Preferred Shares shall be paid in cash, securities or a combination thereof, an amount equal to the amount per share which would be payable to such holders, respectively, pursuant to Article 96.
56
Miscellaneous
| 97. | Minutes |
97.1. Minutes of each General Meeting and of each meeting of the Board shall be recorded and duly entered in books provided for that purpose. Such minutes shall set forth all resolutions adopted at the meeting and, with respect to minutes of a meeting of the Board, the names of the persons present at the meeting.
97.2. Any minutes as aforesaid, if purporting to be signed by the Chairman of the meeting or by the Chairman of the next succeeding meeting (or, in the case of Board meetings where there is only one Director on the Board, by such Director), shall constitute prima facie evidence of the matters recorded therein.
| 98. | Books of Account |
The Board shall cause accurate books of account to be kept in accordance with the provisions of the Companies Law and of any other applicable Law. Such books of account shall be kept at the registered office of the Company or at such other place or places as the Board may deem appropriate, and they shall always be open to inspection by all Directors. Any Shareholder shall be entitled to receive a copy of the audited financial statements of any fiscal year with the opinion of the Company’s Auditor with respect to such financial statements.
| 99. | Audit |
Without derogating from the requirements of any applicable Law, at least once in every fiscal year the accounts of the Company shall be audited and the accuracy of the profit and loss account and balance sheet certified by one or more duly qualified auditors.
| 100. | Rights of Signature, Stamp and Seal |
100.1. The Board shall be entitled to authorize any person or persons (who need not be Directors) to act and sign on behalf of the Company, and the acts and signature of such person(s) on behalf of the Company shall bind the Company insofar as such person(s) acted and signed within the scope of his or their authority. The Board may determine separate signatory rights in respect of different matters of the Company and in respect of the amounts in respect of which such persons are authorized to sign.
100.2. The Board may provide for an official stamp and/or seal. If the Board provides for a seal, it shall also provide for the safe custody thereof. Such seal shall not be used except by the authority of the Board and in the presence of the person(s) authorized to sign on behalf of the Company, who shall sign every instrument to which such seal is affixed.
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| 101. | Notices |
101.1. Any notice or other communication or document served by the Company upon any Shareholder or served by a Shareholder upon the Company (in each case, in such Shareholder’s capacity as such), whether pursuant to these Articles or otherwise (unless other notice provisions are specifically applicable to such a notice or communication), shall be in writing and shall be conclusively deemed to have been duly given to the receiving party: (i) in the case of hand delivery or a delivery by an internationally recognized overnight courier, freight prepaid, to the Address (as hereinafter defined), on the next Business Day after delivery; (ii) in the case of prepaid registered mail (airmail if sent to a place outside Israel) to the Address, (iii) in the case of facsimile transmission to the Address, on the next Business Day after delivery, if facsimile transmission is electronically or otherwise confirmed; or (iv) in the case of an email transmission to the Address, on the next Business Day after transmission, except where a notice is received stating that such mail has not been successfully delivered. In the event that notices are given pursuant to one of the methods listed in Sub-Articles (i) through (iii) above, a copy of this notice should also be sent by email transmission. If a notice is, in fact, received by the addressee, it shall be deemed to have been duly served, when received, notwithstanding that it was defectively addressed or failed, in some respect, to comply with the provisions of this Article 101. Unless otherwise provided in these Articles, the provisions of this Article 101 shall also apply to notices and other communications permitted or required to be given by the Company to any Director or by any Director to the Company (in each case, in such Director’s capacity as such).
101.2. The term “Address” means, (i) with respect to each Shareholder or Director - such Shareholder’s or Director’s mail address, facsimile number or email address, as the case may be, as specified in the Shareholder Register or in the Directors Register, as applicable, or such other (or additional) address, facsimile numbers and email addresses as such a Shareholder or Director may have designated in writing to the Company in accordance with the notice provisions hereof for the purpose of this Article 101; and (ii) with respect to the Company – the address of the principal office or registered office of the Company (to the attention of the Chief Executive Officer thereof).
101.3. All notices to be given to the Shareholders shall, with respect to any share held by persons jointly, be given to whichever of such persons is named first in the Shareholder Register, and any notice so given shall be sufficient notice to the holders of such share.
101.4. Any Shareholder or Director whose address is not described in the Shareholder Register or Director Register (as applicable), and who shall not have designated in writing an address for the receipt of notices, shall not be entitled to receive any notice from the Company.
101.5. Any Shareholder and any Director may waive his right to receive notices generally or during a specific time period and he may consent that a General Meeting of the Company or a meeting of the Board, as the case may be, shall be convened and held notwithstanding the fact that he did not receive a notice with respect thereto, or notwithstanding the fact that the notice was not received by him within the required time, in each case subject to the provisions of any Law prohibiting any such waiver or consent.
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| 102. | Waivers |
102.1. Except as otherwise expressly provided herein and subject to any provisions hereof requiring the consent of the holders of a different majority of the shares of any class or classes, to the extent that in accordance with these Articles or applicable law, any action of the Company is subject to the approval of a separate class vote of the holders of the shares of any particular class, then with the written consent of the holders of a majority of 66% of the outstanding shares of such class, the obligations of the Company to, and the rights of, the holders of such class under any provision of these Articles may be waived (either generally or in a particular instance, either retroactively or prospectively and either for a specified period of time or indefinitely).
102.2. Upon the effectuation of each such waiver referred to in Article 102.1 above, the Company shall promptly give written notice thereof to the holders of the shares of such class who have not previously consented thereto in writing; provided, however, that any such waiver that would similarly adversely affect more than one class of shares shall require only the consent of the holders of a majority of 66% of the outstanding shares of the classes similarly affected acting together as a single class on an As Converted Basis; and provided, further, that in the event that any waiver, by its nature, does not affect all the holders of shares of a particular class (“Affected Class”) in a substantially identical manner (relative to the respective stakes of the holders of such Affected Class within such Affected Class), each group within such Affected Class who is affected by such waiver in a manner which is not substantially identical as aforesaid (due to the fact that (i) certain holders of such Affected Class are the holders of more than one class of shares of the Company, and (ii) certain conflicting interests exist between such Affected Class and any such other classes of shares held by such certain holders) shall not be deemed to be a separate class for purposes of this Article 102 or any other Articles hereof.
102.3. Any waiver affected in accordance with this Article 102 shall be binding upon all of the holders of the applicable class or classes of shares, each transferee of such shares and each future holder of such class of shares.
* * *
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Exhibit 3.2
PUBLIC COMPANY
COMPANIES LAW, 5759 – 1999
A COMPANY LIMITED IN SHARES
ARTICLES OF ASSOCIATION
OF
PAINREFORM LTD
(C.N 51-405659-7)
1
Index
| Part no. | Article no. | Subject | Page | |||
| Part One | Preamble | |||||
| 1. | Name of the company | 4 | ||||
| 2. | Objectives of the company | 4 | ||||
| 3. | Liability of shareholders | 4 | ||||
| 4. | The Capital | 4 | ||||
| Part Two | General Provisions | |||||
| 5. | Definitions and interpretations | 5 | ||||
| 6. | Change of articles | 6 | ||||
| Part Three | Capital of the Company | |||||
| 7. | Ordinary shares | 7 | ||||
| 8. | Redeemable securities | 7 | ||||
| 9. | Company capital, increase of Registered capital and revocation | 7 | ||||
| 10. | Issuance of securities | 9 | ||||
| Part Four | Shareholders | |||||
| 11. | Shareholders and share certificates | 10 | ||||
| 12. | Calls for payment | 11 | ||||
| 13. | Forfeiture | 12 | ||||
| Part Five | Transfer of shares | |||||
| 14. | Transfer of shares | 14 | ||||
| 15. | Share transfer deed | 15 | ||||
| 16. | Assignment of shares by law | 16 | ||||
| 17. | Registration of share transfer | 16 | ||||
| Part Six | General Meetings | |||||
| 18. | Annual General Meetings | 17 | ||||
| 19. | Convening special meetings | 17 | ||||
| 20. | Agenda | 18 | ||||
| 21. | Notice of meeting | 19 | ||||
| 22. | Quorum | 20 | ||||
| 23. | Chairman of general meeting | 20 | ||||
| 24. | Voting in a general meeting | 20 | ||||
| 25. | Vote count and secret ballot | 21 | ||||
| 26. | Vote by proxy; vote by corporation Partners | 21 | ||||
| 27. | Voting instrument | 23 | ||||
| 28. | Protocols | 24 |
2
| Part Seven | The Board of Directors | |||||
| 30. | Members of the Board | 24 | ||||
| 31. | Restrictions on appointment Of directors | 25 | ||||
| 32. | An outside director | 26 | ||||
| 33. | A corporation as director | 26 | ||||
| 34. | An alternate director and power Of attorney | 26 | ||||
| 35. | Vacancy of office of director | 27 | ||||
| 36. | Authorities of the Board | 29 | ||||
| 37. | Assumption of authorities of the board | 31 | ||||
| 38. | Rights of a director | 32 | ||||
| 39. | Chairman of the Board | 32 | ||||
| 40. | Convening a meeting of the Board | 32 | ||||
| 41. | Agenda | 33 | ||||
| 42. | Notice of meetings of the Board | 34 | ||||
| 43. | Quorum | 34 | ||||
| 44. | Voting in the Board of Directors | 35 | ||||
| 45. | Protocols in meetings of the Board | 36 | ||||
| 46. | Defects in convening the meeting | 36 | ||||
| 47. | Committees of the Board | 37 | ||||
| Part Eight | Audit Committee | |||||
| 48. | Appointment of members of Audit committee | 38 | ||||
| 49. | Positions and work procedures of The Audit Committee | 38 | ||||
| Part Nine | Exemption, indemnification and liability insurance | |||||
| 50. | Exemption and indemnification | 39 | ||||
| 51. | Liability insurance | 41 | ||||
| Part Ten | General Manager | |||||
| 52. | General Manager | 41 | ||||
| 53. | Removal of Authorities of the general manager | 42 | ||||
| Part Eleven | Management of the company | |||||
| 54. | Registered office | 42 | ||||
| 55. | Shareholder register and Material shareholder register | 43 | ||||
| 56. | Auditor | 43 | ||||
| 57. | Expiration of service of auditor | 44 | ||||
| 58. | Wages of auditor | 44 | ||||
| 59. | Authorities, obligations and Responsibility of auditor | 45 | ||||
| 60. | Internal auditor | 45 | ||||
| Part Twelve | Financial statements, accounts and signature | |||||
| 61. | Financial statements | 46 | ||||
| 62. | Stamp and signatory rights | 46 | ||||
| Part Thirteen | Dividends and bonus shares | |||||
| 63. | Dividends and bonus shares | 46 | ||||
| Part Fourteen | Notices and Dissolution | |||||
| 64. | Notices | 48 | ||||
| 65. | Dissolution | 49 |
3
Part One: Preamble
| 1. | Name of the Company: | In Hebrew: פיינרפורם בע”מ |
| In English: PainReform Ltd. |
| 2. | Objectives of the Company |
| (a) | To engage in any lawful business. |
| (b) | The Company may donate from time to time reasonable sums for appropriate causes, even if the donations are not within the framework of the business considerations of the Company. |
| 3. | Liability of the shareholders |
| (a) | The liability of a shareholder for the debts of the Company is limited to the payment of the unpaid portion which he undertook to pay for the share held by him in accordance with the terms of issuance of said share. |
| 4. | The capital |
The registered share capital of the Company is 500,000 (five hundred thousand) ordinary shares with NIS 0.03 nominal value each (hereinafter: “Ordinary Share”).
4
Part Two: General Provisions
| 5. | Definitions and interpretations |
| “Written”: | In writing or any other term with the same meaning including handwritten, engraved, printed, typewritten, photocopied, or copied in any other manner that is visible, including telex, fax, telegraph, by cable or any other duplication method through electronic means. | |
| “Shareholder”: | Under its definition in Article 11 herein. | |
| “The Board of Directors”: | The Board of Directors of the Company who was duly elected in accordance with the provisions of these articles. | |
| “The Company”: | PainReform Ltd., or any other name which it will be called, if its name is changed. | |
| “Law”: | Companies Law, the Companies Ordinance or any other Israeli law, which is valid, as warranted, from time to time including the provisions of any stock exchange that applies to the Company. | |
| “Regular Resolution”: | A resolution adopted by a regular majority of shareholders, voting in the general meeting by a voting instrument (on topics for which according to these articles can be adopted through a voting instrument) on their own or though proxies. | |
| “The Office”: | The registered office of the Company at such time in Israel about which the Company notified the Companies Registrar. | |
| “The Articles”: | The articles of association of the Company, as they will be amended from time to time by the general meeting. | |
| “Companies Law”: | Companies Law, 5759 – 1999, as amended from time to time, and any regulations that are promulgated thereunder. | |
| “Securities Law”: | Securities Law, 5728 – 1968, as amended from time to time, and any regulations that are promulgated thereunder. | |
| “Vote count”: | Vote count of those voters, in accordance with the voting rights established for the shares by virtue of which the shareholders participating in the general meeting are voting. In the count of all the votes of shareholders, abstentions shall not be taken into account. |
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| “Shareholder Register”: | A shareholder register that must be kept in accordance with section 127 of the Companies Law. | |
| “Register of Material Shareholders”: | A register of material shareholders that must be kept in accordance with section 128 of the Companies Law. | |
| “Office holder”: | As the term “senior office holder” is defined in Part 6 of the Securities Law. | |
| “Companies Ordinance”: | The Companies Ordinance [New Version], 5743 – 1983, as amended from time to time, and all the regulations that are promulgated thereunder. |
| (b) | Interpretation |
| (1) | Each term in these articles that is not defined above, shall be attributed the meaning that is afforded it by law unless the context dictates otherwise. |
| (2) | References made in the singular shall include the plural and vice versa. Reference made in the masculine gender shall include the feminine (and vice versa), and words that connote persons shall include also corporations, unless the context dictates another interpretation. |
| (3) | The headings of the sections in these articles are for the purpose of convenience only and shall not be used as an accessory to interpret or for the interpretation of these articles. |
| (4) | The articles which may be stipulated in the Companies Law shall apply to the Company, insofar as there is no contradiction between them and the provisions of these articles. |
| (5) | In the case of a contradiction between the provisions of the law which may not be stipulated in bylaws and any of the provisions of these articles – the provisions of the law shall prevail in such case, without impairing from the remainder of the provisions of the articles. |
| (6) | These articles are the same as a contract between the Company and its shareholders and between the shareholders and themselves. |
| 6. | Change of articles |
Subject to the provisions of relevant law, the Company may change these articles by a regular resolution adopted in the general meeting of the Company.
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Part Three: Capital of the Company
| 7. | Ordinary shares |
| (a) | All the ordinary shares shall have equal rights among them and each regular share shall confer upon its holder the following rights: |
| (1) | The right to receive invitations or notices about all general meetings of the Company, to participate in the meetings and to vote in them on any matter that is raised in the meeting, where each ordinary share confers on its holder one vote on every vote on a resolution; |
| (2) | The right to participate in any distribution that the Company makes to its shareholders, and to receive dividends and/or bonus shares, if they are distributed in accordance with the provisions of these articles and the provisions of the Companies Law, proportionate to the number of the shares allocated and the rate that they are paid up by the shareholders, if they are not are not fully paid up; and |
| (3) | The right to participate in the dissolution of the Company, in the distribution of the assets of the Company, that remain to be distributed, after the Company meets all of its obligations and payment of all its debts in any case, proportionate to the number of the shares allocated and the rate that such shares are paid up by the shareholders, if they are not fully paid up, and subject to the provisions of these articles and without prejudicing existing rights of all the shareholders in the Company of any kind or class. |
| (b) | The Company may pay a person a commission for signing or underwriting, or agreement to sign or underwrite securities of the Company, conditional or otherwise, provided that the amount or the sum of the commission does not exceed the sum of the commission permitted by relevant law at the time of payment. |
| 8. | Redeemable securities |
The Company is entitled, taking into account the provisions of relevant law, to issue redeemable shares and to redeem them. At the time of the redemption of the shares the Company will act in accordance with the provisions of the law.
| 9. | Capital of the Company, increase of capital and its cancellation |
| (a) | The Company may have shares, bonds, or other securities, each with different rights. |
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| (b) | The Company will not issue bearer shares or stock that state that their holder is a holder of bearer stock. |
| (c) | The Company is entitled from time to time by a regular resolution adopted in a general meeting: |
| (1) | To increase the registered share capital of the Company by classes of shares, as determined; |
| (2) | To cancel registered share capital that has not yet been allocated, provided that there is no commitment by the Company, including a conditional commitment, to allocate the shares; |
| (3) | To consolidate and redistribute its share capital into shares of a nominal value; |
| And |
| (5) | To convert, from time to time, part of the allocated shares into shares with other rights. |
| (d) | Unless established otherwise in a resolution approving the change of share capital, the new shares shall be subject to the provisions of these articles regarding calls for payment, forfeiture, transfer, delivery etc., applicable to the shares of the original share capital. |
| (e) | Without derogating from the generality of the authority of the Board of Directors, if as a result of a consolidation or division of shares the shareholders are left with fractional shares, the Board may in its discretion, act as follows: |
| (1) | Allocate to each shareholder, whom the consolidation and/or division left him with a fractional share, shares of the class of shares that exists in the capital of the Company prior to the consolidation, in such number, that together with the fractional share will create one consolidated, complete share, and said allocation shall be considered as valid immediately prior to the consolidation or distribution, as warranted; |
| (2) | Determine that holders of fractional shares shall not be entitled to receive a consolidated share for the fraction of a consolidated share. |
| (3) | Allocate additional shares in the same number that would prevent the creation of fractional shares for consideration, as established by the Board of Directors; and |
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| (4) | Cause a transfer of shares between the shareholders for a fair price in order to efficiently prevent fractional shares. The Board is authorized to appoint a trustee to conduct such share transfer among the shareholders. |
| 10. | Issuance of securities |
| (a) | The Board may issue or allocate shares or other securities, that are convertible or may be exercised into shares (including bonds and warrants), until a limit of the registered share capital of the Company, under the terms, dates and for a specific sum or for a sum that is established according to an accepted formula; for this purpose convertible securities or securities which may be exercised into shares shall be deemed as if they were converted or exercised on the date of their issuance. |
| (b) | The authority of the Board as set forth in article 10(a) may be delegated as enumerated in articles 10(b)(1) or 10(b)(2) herein: |
| (1) | To a committee of the Board – by an issuance or allocation of securities as part of a workers compensation plan or employment agreements or wage agreements between the Company and its employees, or between the Company and the employees of an affiliated Company to which its Board agreed in advance, provided that the issuance or allocation is according to a plan that includes detailed criteria, that is delineated and approved by the Board; |
| (2) | To a committee of the Board, to the general manager, to the secretary of the Company or a deputy of such position, or to another person whom the general manager recommends – in an allocation of shares following an exercise or conversion of securities of the Company. |
| (c) | The Board of Directors may decide to issue a series of bonds as part of its authority to borrow on behalf of the Company, within the limits set by said authority. |
| (d) | The provision of article 10(c) above does not negate the authority of the general manager or someone who is so authorized, to borrow on behalf of the Company, to issue individual bonds, promissory notes and bills of exchange, within the limits set by said authority. |
| (e) | The Company shall not allocate a share the consideration of which, in full or in part, is not paid in cash, unless the consideration for the share is specified in a written document. |
| (f) | If the Company decides to allocate shares with a nominal value insofar as there will be shares with a nominal value as part of the capital of the Company, for a lower amount than the nominal value, including bonus shares, it must change part of its profits into share capital (under such meaning in section 302(b) of the Companies Law), from a premium on shares, or from any other source included in its equity capital, that are listed in its last financial statements, for a sum equal to the differential between the nominal value and the amount. |
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Part Four: Shareholders
| 11. | Shareholder and share certificates |
| (a) | A shareholder of the Company is any one of the following: |
| (1) | A person in whose benefit a share is registered with a member of the stock exchange and said share is included among the shares registered in the shareholder register by the relevant nominee Company; and/or |
| (2) | A person who is registered as a shareholder in the shareholder register. |
| (b) | Other than as stated in article 11(a) above, a person or legal entity shall not be recognized by the Company as having any right to a share, and the Company shall not be bound or recognize any benefit in equity or trust relationships or chose in action, planned or partial, but only the right of a shareholder, to a complete share, and all – unless a competent court of the law orders otherwise. |
| (c) | If two or more holders are registered as joint owners of a share: |
| (1) | In respect to a vote, giving proxies, and notices, the shareholder who is registered first in the shareholder register shall be considered as the sole shareholder, unless all the holders of the joint share give written notice to the Company that another person should be referred as sole shareholder. |
| (2) | Each of the holders may give a valid receipt in respect to all the joint holders for each dividend, other money or property that is received from the Company for the share or in respect thereto, and the Company is entitled to pay a dividend, the other money or the property for the share to one or more shareholder of the joint holders of the share, as it chooses to do. |
| (d) | Subject to the provisions of relevant law, a shareholder who is a trustee shall be registered in the shareholder register, as a shareholder, with a statement concerning his trusteeship status. Without derogating from the foregoing, the Company will recognize the trustee as a shareholder, for all intents and purposes, and will not recognize another person, including the beneficiary, as holding any right to the share. |
| (e) | A shareholder registered in the shareholder register is entitled to receive from the Company one share certificate testifying to his ownership of the share. |
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A shareholder registered in the shareholder register, shall be entitled to receive one share certificate for the shares registered in his name and fully paid up, or, if the Board approves (after payment of the amount that the Board establishes from time to time), a number of share certificates, for one or more of the shares. Each share certificate shall state the number of the shares for which it is issued.
| (f) | Share certificates shall be issued with the stamp of the Company and with the signatures of two directors of the Company or in any other manner determined by the Board of Directors of the Company. |
| (g) | A share certificate in the name of two or more persons in the name of two or more persons, shall be delivered to the person whose name appears first in the shareholder register among the names of the joint holders. |
| (h) | A new share certificate may be issued in place of a share certificate that was destroyed, lost or ruined, for the payment and under the terms regarding evidence, indemnification, guarantee against damages and/or issuance of an affidavit, as determined by the Board of Directors in its sole discretion from time to time. |
| (i) | The Company shall keep a register of material shareholders in addition to the shareholder register. The material shareholder register shall contain reports that the Company received pursuant to the Securities Law about the holdings of the material shareholders in Company shares. |
| 12. | Calls for payment |
| (a) | A shareholder shall not be entitled to a dividend or participate in the allocation of bonus shares or exercise any right of a shareholder in the Company, unless he has paid up all the sums and calls for payment that he owes the Company until said time in respect to his shares in the Company. |
| (b) | The Board of Directors may, from time to time, in its discretion, make calls for payment on shareholders for any sums that have not been paid up in respect to shares held by each of the shareholders, and for which pursuant to the terms of the allocation of the shares are not payable at a fixed time, and each shareholder shall pay the amount of the call made upon him, at the time and place designated by the Board of Directors. The Board of Directors may instruct that a call for payment be made in installments. |
| (c) | Notice of a call for payment shall be given and shall specify the amount of payment (no less than 14 days from the date of the notice) and the place for payment provided that prior to the time of payment for the call for payment, the Board of Directors may, by written notice to the shareholders, cancel the call or extend the time for payment or payment for any part thereof. |
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| (d) | Joint holders of a share shall be jointly and severally liable to pay all amounts and calls for payment in respect to such share held jointly. Without derogating from the aforesaid generality, a call for payment delivered to one of the holders shall be deemed as having been delivered to all the owners. |
| (e) | If pursuant to the terms of the issuance of a share or otherwise, an amount is made payable at a fixed time or in installments at fixed times, whether on account of the share capital or by way of premium, such amount or installment shall be payable at such time as if it were payable by virtue of a call duly made by the Board of Directors for which notice was duly given, and all the provisions of these Articles in respect to calls for payment shall be applicable to such amount or installment. |
| (f) | If a call for payment or an installment is not paid on the due date or prior to such time, then the person who at such time is the holder of the share for which the call for payment was made, or for which the installment is due, shall pay interest on such sum at the maximum amount practiced at such time in Bank Leumi of Israel Ltd for unauthorized overdrafts, or at a lower rate that the Board will determine from time to time, from the date designated for its payment until the actual payment thereof, however the Board may waive the payment of interest, in whole or in part. |
The provisions of this article do not detract or impair from the remedies and relief available to the Company by these articles or by any relevant law or agreement.
| (g) | The Board of Directors may decide to accept money from a shareholder who wishes to advance payments, in whole or in part, on account of shares which have not been fully paid up and in respect to which the time for their payment has not yet matured, and to pay interest on such sums for a period not to exceed the period between the date of payment and the date on which this sum was designated to be paid, at the rate agreed by the Board of Directors and the shareholder. |
| 13. | Forfeiture |
| (a) | A shareholder who has not fully paid up a sum for which a call has been made by the designated date, may be furnished with a written notice by the Board of Directors demanding that he pay the unpaid sum with interest and any expenses which the Company incurs due to the default in payment on the designated date for payment. |
| (b) | The notice shall specify another date for payment, which shall not be earlier than seven days after the notice, and it shall state that if the amount is not paid up by this date the share for which such notice is given may be forfeited. |
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| (c) | If the demands in the notice are not satisfied, the Board of Directors may, so long as the sum is not paid up, including the interest and expenses, decide to forfeit the share. The forfeiture shall also apply to any dividends announced in respect to the forfeited shares (insofar as they are eligible for dividends) which were not actually paid out prior to the forfeiture. |
| (d) | A share that has been forfeited shall be deemed the property of the Company, and the Board of Directors may, taking into account the provisions of these articles, sell or transfer it or reallocate it in another manner, under such terms and manner as decided by the directors. A share so forfeited so long as it has not been sold, transferred or allocated again as stated, shall become a dormant share under such meaning in section 308 of the Companies Law which shall not confer any rights at all so long as it is owned by the Company. |
| (e) | Insofar as nothing has been done with the forfeited share, the Board of Directors may cancel the forfeiture under the terms that it establishes. |
| (f) | A shareholder whose shares have been forfeited: |
| (1) | Shall cease being a shareholder in respect to the shares that were forfeited and upon the forfeiture all of his rights and obligations for the forfeited shares shall be revoked and any action and/or demand against the Company regarding the forfeited shares shall be cancelled, other than those rights and obligations which are excepted from this rule by these articles and/or which are imposed on the former shareholder by law; however |
| (2) | He shall continue to be obligated to pay the Company and will pay the Company, without delay, all the calls for payment, payment installments, interest and expenses owed on account of the forfeited shares or for them at the time of the forfeiture, together with interest on those sums from the date of the forfeiture until the date of actual payment, at the maximum rate permitted at that time by law, provided that if the shares that were forfeited are sold, transferred or reissued, the shareholder’s debt will be reduced by the sum actually received by the Company (after the expenses of the sale), from their sale, transfer or reissuance, as warranted. |
| (g) | The provisions in these articles regarding forfeiture shall apply to the default of payment of any sum that is to be paid on a designated date according to the terms of issuance of the share, whether on account of the share or in the form of a premium, as if it was a sum that was meant to be defrayed by virtue of a call for payment and a duly delivered notice. |
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| (h) | In the case of a sale after forfeiture, the Board of Directors may appoint a person to sign a transfer instrument of the share that was sold and to arrange (subject to the provisions of relevant law) so that the buyer will be registered in the shareholder register as the owner of the shares that were sold or which will be received by him in any other manner. The recipient of the share that was sold, transferred, allocated or sent shall not be responsible for how the consideration for the sale is used, if received, his right to the share shall not be harmed due to a defect or a disqualification in the forfeiture, sale, allocation or transfer process, and after he is registered in the register (subject to the provisions of relevant law) or he receives the share into his possession in any other manner, no such claim shall be raised, and the validity of the sale or the transfer shall not be appealed. |
| (i) | An affidavit duly made by a director of the Company that a certain share of the Company has been duly forfeited on the date specified in the affidavit shall serve as conclusive proof of its content against any person who asserts a claim to the share. The affidavit with a Company receipt for the consideration, if given, for the share, in its sale or transfer, shall confer a right to the share on the transferee. |
| (j) | The net proceeds of any sale following a forfeiture after the discharge of the sale expenses, shall be applied in discharging the debts and the fulfillment of the obligations of such shareholder (including the debts, obligations and agreements for which the date of discharge or maturity have not yet come due), and the balance (if any) shall be paid to him or to whoever is conferred a right to the shares following the death, bankruptcy or dissolution of the shareholder. |
| (k) | The provisions of this article shall not be construed as derogating from any other relief available to the Company against the debtor shareholder. |
Part five: Transfer of shares in the shareholder register
| 14. | Transfer of shares |
| (a) | Subject to the provisions of relevant law, the Board of Directors may stop the registration in the register of transfers of shares for a specific period of time, that will not exceed 30 days per year, provided that it will not do so during the 14 days prior to the determining date for ownership of a share to establish eligibility to the rights for the share (such as the determining date for eligibility to vote in a general meeting or to receive a dividend or other distribution from the Company). |
| (b) | Part of a share may not be transferred, but a share which is jointly held by a number of owners, each may transfer their right to the share. |
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| (c) | In the case of a transfer of shares, the transferee shareholder shall have all the rights that were attached to the transferred shares and all the obligations related to them according to these articles, unless otherwise agreed in writing, between the transferor shareholder and the transferee shareholder. |
| 15. | Share transfer deed |
| (a) | A transfer of shares shall not be registered in the shareholder register unless a transfer instrument is delivered to the office. A share transfer deed in the Company shall be signed by the transferor and the transferee, and the transferor will be deemed the owner of the share until the name of the transferee is registered in the shareholder register in respect to the transferred share. |
| (b) | The instrument of transfer of a share shall be in the following form or as near thereto as possible, or in the usual or common form as the Board of Directors may approve: |
| \ | Share transfer deed |
I, ___________________ of ____________ (hereinafter: “the Transferor”) do hereby transfer to ___________________ of _______________ (hereinafter: “the Transferee”), in consideration of the amount of NIS _____________________ (in words ____________ new shekels) paid to me - _________________ shares of PainReform Ltd. (Company no. _________), and they shall belong to the transferee, the administrators of his estate and representatives, subject to the terms by which I/we held the same immediately before the execution of this deed; and I/we, the transferee(s), do hereby agree to accept the shares subject to these terms.
In witness whereof we set our hand this ______day of ___________ month _________ year ________.
Signature of transferor___________ Signature of transferee__________
Witness to signature ____________ Witness to signature ____________
| (c) | A transfer deed shall be submitted to the office for registration, along with the share certificates that are being transferred (if there are certificates) and/or any other evidence required by the Board regarding the proprietary right of the transferor or in respect to his right to transfer the shares. Transfer deeds that are registered shall remain with the Company but any transfer deed in respect to which the Board refuses to register, shall be returned upon request, to the person who so delivered them, together with the share certificate (if delivered). |
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| 16. | Assignment of shares by law |
| (a) | The Board of Directors may, at any time and subject to the provisions of relevant law, register as a shareholder a person who is entitled to a share by law, including an heir, executor of an estate, liquidator or a trustee in a bankruptcy, after the Company is presented with a probate order, a succession order or any other sufficient evidence, as the Board deems fit, demonstrating the right to the shares. An eligible person who is so registered as a shareholder in the Company, is entitled, subject to the provisions of these articles dealing with the transfer of shares and the provisions of relevant law, to transfer these shares to another. Without derogating from the above, the Board may refuse to perform such registration or may delay it, as it is entitled to do, as if the registered owner himself transferred the share, prior to the assignment of the right. |
| (b) | Subject to the provisions of the Companies Law and these articles: |
| (1) | The executors of an estate of a shareholder who died, or in the absence of an executor of estate or administrator of an estate, persons who have a right by virtue of being heirs of the shareholder who died, shall be the only ones to be recognized by the Company as right holders to the share. A share registered in the name of two or more persons and one died, the Company shall recognize only the shareholders who are alive as the persons with rights to the share or benefits to it. Nonetheless the aforesaid shall not be construed as releasing the estate of the joint shareholder who died from all the obligations for the shares. |
| (2) | A person who is entitled to a share by law but has yet to be registered in the shareholder register is not entitled: (1) to receive dividends or any other money and/or property paid for said share as if he was the registered owner of the share; and (2) by virtue of said share to benefit from all rights of a shareholder regarding notices about general meetings, to be present at them or to vote in them, or class meetings, as the case warrants, of the Company or to make use of any other right of shareholders. |
| 17. | Registration of transfer of shares |
| (a) | Subject to the provisions of relevant law, the Company shall change the registration of ownership in the shareholder register if each of the following is present: |
| (1) | The Company is delivered a transfer deed of the share with the signatures of the transferor and the transferee as stated in article 15 above, and the requirements of these articles are satisfied; |
| (2) | The Company is delivered a court order to amend the register; |
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| (3) | It is proven to the Company that the conditions in the law to assign the right have been satisfied; or |
| (4) | Another condition is satisfied which according to these articles is sufficient to that the change can be registered in the shareholder register. |
| (b) | The transferor of the shares shall be considered the shareholder until the registration of the share transfer in the shareholder register in the name of the transferee in respect to the transferred share. |
| (c) | The Company will keep all the registration in the shareholder register as stated in this article 17. The Company may destroy share transfer instruments and share certificates that were cancelled after the expiration of 7 years from the date of registration of the revision in the shareholder register, where there will be an absolute presumption that the destroyed documents as stated above were binding and valid and that the transfers, the revocations and the registrations, as warranted, were lawfully made. |
Part Six: General Meetings
| 18. | Annual general meetings |
| (a) | The Company shall convene an annual meeting each year but no later than 15 months after the previous annual meeting. |
| (b) | The agenda at the annual meeting shall include deliberation of the financial statements of the Company and may include appointment of directors, appointment of an auditor, or any other matter that is scheduled for the agenda as set forth in article 20 herein. |
| 19. | Convening special meetings |
| (a) | The Board of Directors must convene a special meeting by a resolution of the Board and must convene a special meeting upon the demand of each of the following: |
| (1) | Two directors or a quarter of the directors then serving; |
| (2) | One or more shareholders, who hold at least five percent (5%) of the issued capital and at least one percent of the voting rights in the Company or one or more shareholders who hold at least five percent (5%) of the voting rights in the Company. |
| (b) | A Board of Directors that is requested to convene a special meeting will convene such a meeting within twenty one (21) days from the date that it received the demand to convene, and the provisions of section 63(c) of the Companies Law shall apply. |
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| (c) | If the Board of Directors omits to convene a special meeting as stated, the person demanding said meeting, and if shareholders – even some of them who have more than half of the voting rights, convene the meeting on his own, provided that it is not convened more than three months from the date such demand was submitted, and it shall be convened, insofar as possible, in the same manner that meetings are convened by the Board of Directors. |
| (d) | Annual general meetings of shareholders shall be called “annual meetings” and all other meetings of the Company shall be called “special meetings”. |
| (e) | A flaw in the convening of a general meeting or in the management thereof, including a flaw resulting from the non-satisfaction of a provision or term that was fixed by the Companies Law or in these articles, shall not invalidate any resolution adopted by the general meeting and shall not render defective the discussions that took place in it. |
| (f) | The general meeting of the Company shall be convened in Israel, at a location to be established in the notice of the meeting. |
| 20. | Agenda |
| (a) | The agenda in a general meeting shall be set by the Board of Directors and shall include also topics for which a special meeting was demanded to be convened pursuant to article 29 above as well as any subject that is required as set forth in article 20(b) herein. |
| (b) | The general meeting shall adopt resolutions on subjects that are specified on the agenda only. Notwithstanding the above, it is understood that the general meeting, may, inter alia, adopt resolutions related to other subjects that were not included on the original agenda of the general meeting in respect to matters: |
| (1) | Which the law permits to be raised even if they are not included on the original agenda of the general meeting; and – |
| (2) | Which in light of the circumstances for which the general meeting is convened, the chairman of the general meeting believes is proper and correct to be discussed; or |
| (3) | Which a shareholder as stated in article 19(a)(2) above, asked in writing, at least seven (7) days prior to the meeting, to raise and attached the language of the resolution, provided that the subject is appropriate to be discussed in a shareholder meeting. |
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| 21. | Notice of a meeting |
| (a) | Prior notice of at least 14 days or, if required by law, at least 35 days (as warranted by the circumstances), other than the day on which the notice is delivered and inclusive of the day for which the notice is delivered, about the convening of a general meeting, shall be given in the manner set forth in section 69 of the Companies Law and shall include the details as stated in the provisions of the aforesaid section or the provisions of any other relevant law. |
| (b) | The notice shall be publicized in at least two daily newspapers with a broad readership, which are published in the Hebrew language. Other than such notice (and without derogating from the duty of reporting applicable to a company as a public company pursuant to the Securities Law), a notice or invitation to a meeting shall not be delivered to each of the shareholders of the Company, whether registered or not. |
| (c) | A shareholder who is interested in voting in a general meeting will prove to the Company that he owns the share in accordance with the Companies Law. |
Subject to the provisions of the law, shareholders who are eligible to participate and vote in the general meeting are those who are holders of shares at the time of the resolution to convene a general meeting, or by virtue thereof, provided that this date is not more than twenty one (21) days prior to the date of the general meeting, and is not less than four (4) days prior to the meeting, and in a general meeting where a vote can be made by a voting instrument, the determining date will not be more than forty (40) days prior to the date of the general meeting and no less than twenty eight (28) days prior to the meeting.
| (d) | A general meeting with a quorum present may decide to adjourn the meeting, the discussion or adoption of a resolution on a topic that is on the agenda to another time or place that it determines; at the adjourned meeting no subject shall be discussed other than a subject that was on the agenda and which was not resolved. |
If a general meeting is adjourned for over twenty one (21) days, notices and invitations shall be delivered for the adjourned meeting as set forth in this article 21.
A general meeting that was adjourned to a date that is less than twenty one (21) days, an immediate report will be published regarding the new date, as soon as possible, but no later than seventy two (72) hours prior to the time of the adjourned general meeting.
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| 22. | Quorum |
| (a) | Proceedings in the general meeting shall not commence until a quorum is present at the start of the proceedings. |
| (b) | A quorum shall be the presence of at least two (2) shareholders who hold at least twenty five percent (25%) of the voting rights (including through a proxy or voting instrument) within one half hour from the time the meeting was designated to start. |
| (c) | If a quorum is not present after one half hour from the time the general meeting was designated to start, the meeting shall be adjourned for one week, to the same day, same time and place or to a later date if specified in the invitation to the general meeting or to another day and/or place as will be determined by the Board of Directors in a notice to shareholders who are eligible to vote. |
| (d) | If a quorum is not present at the adjourned meeting as set forth in article 22(c) above, after a half hour from the time designated for its start, the meeting shall take place with any number of participants, even if the general meeting was convened at the demand of shareholders as set forth article 19 above. |
| (e) | “Presence” – means the presence of the shareholder himself, through a voting instrument or proxy or a representative as set forth in article 26 herein. |
| 23. | Chairman of the general meeting |
| (a) | The chairman of the Board of Directors shall serve as chairman of each general meeting. |
| (b) | If the chairman of the Board of Directors is absent from the meeting within 15 minutes from the time designated for the meeting or if he refuses to sit as chair of the general meeting, the general meeting shall elect one of the shareholders present, to serve as chairman of the meeting. |
| (c) | The chairman of the general meeting shall conduct the general meeting. |
| 24. | Voting in the general meeting |
| (a) | Subject to the provisions of relevant law and unless established otherwise in these articles, a resolution shall be considered adopted by a regular majority of votes of shareholders present at the meeting and voting on the resolution. |
A shareholder shall not be entitled to vote in the general meeting prior to paying all of the sums and calls for payment owed from him at such time to the Company for his shares in the Company.
| (b) | The chairman of the general meeting shall not have an additional or conclusive vote. |
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| (c) | A declaration by the chairman of the general meeting that a resolution was unanimously adopted or adopted by a specific majority, or that it was adjourned shall be conclusive evidence of the accuracy of the declaration and there will be no need to prove the number of votes or the votes that were given for or against the resolution. |
| 25. | Vote count or secret ballot |
| (a) | Any resolution put to a vote in a general meeting shall be decided by counting votes, unless at least one shareholder present on his own or through a proxy and who holds at least five percent (5%) of the voting rights in the Company, demands, a secret ballot. |
| (b) | If a demand is made for a secret ballot, the vote will take place in the same manner, time and place as the chairman of the general meeting instructs, whether immediately or after a recess or adjournment or in another manner and the results of the secret ballot shall be considered a resolution of the general meeting in which the secret ballot was demanded. Those demanding a secret ballot may cancel the demand at any time prior to the secret ballot. |
A secret ballot regarding the selection of a chairman and adjournment of the general meeting shall take place without delay.
| (c) | A demand for a secret ballot shall not prevent the continuation of the general meeting and discussion on any issue other than the one in respect to which the secret ballot was demanded. |
| 26. | Vote by proxy; vote of a corporation; partners |
| (a) | A shareholder may vote personally or by proxy, through an instrument appointing the proxy as set forth below, or in the case of a corporation – by a representative through an instrument of appointment as set forth below. Likewise a shareholder may vote by a voting instrument, as set forth in article 27 herein. A representative or proxy does not need to be a shareholder of the Company. |
| (b) | A corporation being a shareholder of the Company may, by a resolution of its Board of Directors, directors, or any other managing body competent under the bylaws of the corporation or in accordance with a resolution of its Board of Directors, give an instrument of appointment to a representative and empower such person whom it finds suitable to be its representative at every meeting of the Company. |
A representative of the corporation as stated above shall be entitled to exercise on behalf of the corporation that he represents those powers that the corporation itself could have used if it was a shareholder of the Company who is not a corporation.
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| (c) | The instrument appointing a proxy shall be signed by the principal or his agent who is so authorized by a duly written instrument, and if the principal is a corporation – by the signature of the person authorized to issue an instrument of appointment for the corporation as set forth in article 26(b) above or by the signature of an authorized signatory of the corporation. An instrument of appointment of a representative or proxy in effect for a non-specified period, shall expire following 12 months from the date of the last signature on it. |
| (d) | The instrument to appoint a proxy or a copy certified by an attorney or certified in another manner to the satisfaction of the Company, and confirmation of the ownership of a share as set forth in section 71 of the Companies Law, shall be deposited in the office or in another location as the Board will establish from time to time in a general manner or for a specific case, no less than forty eight (48) hours prior to the date designated for the meeting or the adjourned meeting for which the instrument of proxy is written, or on a date established by the Board in its discretion, provided that it is received in the Company prior to the time set for the general meeting or the adjourned meeting in which the person mentioned in this document intends to vote. If it is not so deposited, the instrument shall not be valid for said general meeting or an adjourned general meeting. |
| (e) | Any document appointing a proxy for a particular meeting, or for a specific time frame, shall be written in the format below insofar as possible or in another format approved by the Company: |
I ________ bearer of identity card no/company no./public company no. __________ from ___________ a shareholder in PainReform Ltd (public company ___________ hereby appoint ________ Mr./Ms. ____________ of ___________ as my proxy (and in the case of a corporation – as my representative) to vote as my proxy to vote in my name and on my behalf in a general (annual / special) meeting of the Company to be held on the date of ______ month of _______ year _________ and in any adjourned meeting.
In witness I set my hand on this day of __________ month ______ year ___
______________
Signature
| (f) | If the statement of appointment does not specify the number of shares for which it is given or it specifies a number of shares that is higher than the number of shares registered in the name of the shareholder (in the register or title certificate), the instrument of appointment shall be considered as if it was given for all of the shares registered in the name of the shareholder. If the instrument of appointment is given for a number of shares that are lower than the number of shares registered in the name of the shareholder, the shareholder shall be considered as abstaining from being present at the vote for the remainder of the shares which are registered in the name of the shareholder, and the instrument of appointment will be valid only for the number of the shares listed in it. |
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| (g) | A vote in accordance with an instrument of appointment shall be lawful even if the instrument has a defect that is not immediately apparent and/or if prior to said vote the principal died or became legally incompetent and/or the instrument of appointment was revoked or the power of attorney by which the instrument was signed was revoked and/or the share in respect to which the instrument was given was transferred, unless a written notice was received in the office and/or by the chairman of the general meeting prior to the meeting of the defect, the death, disqualification, revocation or transfer. |
| (h) | Without derogating from the aforesaid, a shareholder holding more than one share shall be entitled to appoint more than one proxy or representative, subject to the following provisions: |
| (1) | Each instrument of appointment will specify the class of the shares and the number of shares for which it is given. |
| (2) | If the total number of shares of any class listed in the instrument of appointment is greater than the number of shares of said class registered in the name of said shareholder, the entire instrument of appointment will be null in respect to the shares of said class that was given by the shareholder. |
| (3) | A shareholder or proxy or representative for the vote, nay vote by virtue of some of the shares that are in his possession or for which he is serving as a proxy or representative, and he may vote by virtue of these shares in one manner and by virtue of some shares in another manner. |
| (i) | In a vote by joint holders of a share an instrument of appointment to a proxy shall be signed by the person who is authorized to vote as set forth in article 11(c)(1) above. |
| (j) | A shareholder who is incompetent may vote through his lawful guardians or another person appointed by a court, and they may vote for him through proxies or instruments of appointment as stated in the provisions of these articles. |
| 27. | Voting instrument |
| (a) | A shareholder may vote in the general meeting and in meetings of a class of shares through a voting instrument in which the shareholder will specify the manner of his vote, on resolutions on topics that the law permits voting on them through a voting instrument, and for any other subject with the Board of Directors decides that a vote in the general meeting on a specific subject may also be adopted by way of a voting instrument. |
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| (b) | A voting instrument in which a shareholder indicates the manner of his vote and which he completes as required, which reaches the Company by the final time established for such in the invitation to the general meeting, shall be considered as a presence in the general meeting for purposes of a quorum as set forth in article 22 above and for the purpose of counting the votes. |
| (c) | A voting instrument that is received by the Company as set forth in article 27(b) above, for a specific matter for which a vote was not taken in the general meeting, shall be considered as abstaining on the vote in that general meeting on the resolution for an adjourned meeting pursuant to the provisions of section 74 of the Companies Law, and it will be counted in the adjourned meeting that will be held pursuant to the provisions of 74 or 79 of the Companies Law. |
| 28. | Protocols |
| (a) | The Company shall keep protocols of the proceedings in the general meeting, and shall keep them in the office, for a period of at least seven years from the date of the general meeting. |
| (b) | A protocol signed by the chairman of the general meeting, constitutes conclusive proof of the contents therein. |
| 29. | Meetings of a class |
The provisions of articles 18 – 28 above shall apply, mutatis mutandis, on a meeting of shareholders of a class of shares, insofar as the Company must hold them.
Part Seven: The Board of Directors
| 30. | Members of the Board |
| (a) | The number of directors in the Company, shall be determined from time to time by a resolution of the annual general meeting, provided that the number of directors (including outside directors) shall not be less than five (5) directors and no more than eight (8) directors. |
| (b) | The directors, other than outside directors and until their maximum number as set forth in subsection (a) above, shall be elected by a regular resolution of the general meeting, and shall function in their capacity until his office is vacated or another director is chosen in his stead. A member of the Board whose term of office has ended, may be reelected. |
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| (c) | In addition to the outside director with accounting and financial expertise, directors with accounting and financial expertise in such number as determined by the Board of Directors of the Company from time to time. |
| (d) | The office of a director shall begin from the date of his appointment or a later date if the resolution of his appointment establishes such. |
| (e) | The Board of Directors is entitled at any time and from time to time to appoint any person as a director, provided that the number of directors does not exceed at any time the maximum number as specified above. A director who is so appointed, shall serve insofar as his office is not vacated in accordance with the provisions of article 35 herein. |
| (f) | The Company will maintain in the office a register of directors and their alternates, if they have alternates pursuant to the provisions of article 34 herein, which will be open for inspection by any person. |
| (g) | Subject to the provisions of relevant law, all the activities and resolutions of the Board, a committee of the Board or a director who is acting by virtue of his office, as well as any act that is taken according to their instructions, shall be valid, even if it is discovered afterwards that there was a defect in the appointment of a director/directors or if all or one of them were unfit from serving as directors, as if each of them was appointed lawfully and as if they all had the necessary qualifications to be a member of the Board or committee. |
| 31. | Restrictions on the appointment of directors |
| (a) | A candidate for director must disclose to his appointer if he was convicted in a judgment of an offense as described below, and five years have not yet passed since the judgment of conviction was issued or – in respect to sub article (3) herein – the period that was established by the court according to that sub article: |
| (1) | Offenses according to sections 290 to 297, 392, 415, 418 to 420 and 422 to 428, of the Penal Law, 5737 – 1977, and according to sections 52c, 52d, 53(a) and 54 of the Securities Law; |
| (2) | A conviction in a foreign court for the offenses of bribery, fraud, corporate administrative offenses or insider trading; or |
| (3) | A conviction for another offense which the court holds that due to its nature, severity or circumstances, he is not fit to serve as a director in a public company, for the period that the court determines which shall not exceed five years from the date of the judgment. |
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| (b) | A candidate for director in the Company will disclose if the administrative enforcement Board imposed on him any enforcement measures that prevent him from serving as a director of a public company or a private company which is a bonds company, and the period established by the administrative enforcement board in its decision has not yet passed. |
| (c) | A person convicted by a judgment of an offense enumerated in article 31(a) above shall not be appointed as a director, unless the period stated in said article passed (unless a court establishes otherwise as stated in section 226(b) of the Companies Law), and a person shall not be appointed as director if the administrative enforcement board imposed on him enforcement measures prohibiting him from serving as a director in a company, for a period determined by the Board. |
| (d) | A director shall not be appointed if he is a minor, legally incompetent, or declared bankrupt so long as he has not been absolved. |
| (e) | A candidate for director who is one of the above in sub article (d) shall disclose this to the Company. |
| 32. | External director |
| (a) | Two external directors shall serve in the Company, who satisfy the conditions set forth in the Companies Law, who will be appointed by the general meeting in accordance with the provisions of the Companies Law. |
| (b) | At least one external director shall serve in each committee that is entitled to exercise one of the authorities of a director. |
| (c) | The terms of office of external director shall be three years, and the Company may appoint him for two additional terms of three years each. |
| (d) | External director shall not be removed and his term of office shall not be stopped except according to the provisions of the Companies Law. |
| 33. | Revoked. |
| 34. | Alternate director |
| (a) | Subject to the provisions of the Companies Law, each director may appoint another as an alternate director and may revoke his appointment. |
| (b) | An appointment of an alternate director and the revocation of his appointment shall be done by written notice to the Company by the appointing director or in another manner as decided by the Board of Directors. The appointment will enter into effect upon receipt of the notice by the Company or a later date as stated in the notice. |
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| (c) | An alternate director is the same as a director. |
| (d) | The appointment of an alternate does not negate the liability of the director for whom he is serving as alternate, and it will apply taking into account the circumstances of the situation, including the appointment of the alternate director and the term of his office. |
| (e) | The alternate director shall have all the authorities belonging to the director for whom is serving as the alternate. It is understood that the authorities of the alternate director shall not prejudice his authorities as director. |
| (f) | An alternate director shall not be entitled to participate and vote in a meeting of the Board in which the director who appointed him participates. |
| (g) | An alternate director may be appointed as a member of the Board of Directors, who is already a director, provided that the candidate for alternate director for a member of a committee, does not serve on that same committee of the Board and if he is an alternate director for an outside director, the candidate must be an outside director with accounting and financial expertise or with professional ability, in accordance with the qualifications of the director for whom he is serving as an alternate. |
| (h) | The office of an alternate director or an attorney shall be vacated: |
| (1) | Automatically if the office of the director, for whom he is serving as the alternate, is vacated for any reason; |
| (2) | If the alternate director experiences any of the instances enumerated in article 35 herein or if for another reason established in the Companies Law he is not fit to serve as an alternate director; or |
| (3) | His appointment as an alternate director is cancelled by the person who so appointed him. |
| 35. | Dismissal of a director |
| (a) | The office of director shall be automatically vacated upon the occurrence of each of the following instances: |
| (1) | Upon his death; |
| (2) | He is found to be legally or mentally incompetent or mentally ill. |
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| (3) | He is declared to be bankrupt; |
| (4) | If he resigns by written notice to the Company as stated in article 35(b) herein; |
| (5) | If he is dismissed by a resolution of the general meeting as set forth in article 35(c) herein or is dismissed as stated in article 35(d) herein; |
| (6) | On the date of the issuance of the notice of a conviction for an offense as set forth in article 35(e) herein; |
| (7) | According to a decision by a court pursuant to the provisions of section 233 of the Companies Law; |
| (8) | On the date of the notice about the imposition of enforcement measures by an administrative enforcement Board prohibiting him to serve as director of a public company or in the Company, as set forth in section 232a of the Companies Law; or |
| (9) | A condition needed pursuant to the Companies Law no longer exists in regard to the director in order for him to serve as director or a cause for the expiration of his term as director exists. |
| (b) | A director or an alternate director may resign by delivery of written notice to the Board of Directors, the chairman of the Board or the Company and his resignation shall enter into effect on the date the notice is delivered, unless another date is specified in the letter. A director or alternate director shall state the reasons for his resignation. |
A notice received of the resignation of a director or an alternate director, shall be brought before the Board and the protocol of the first meeting convened after the resignation, shall record the fact of the resignation and the reasons given for it.
| (c) | The general meeting may at any time dismiss a director, by a regular resolution, provided that the director is given a reasonable opportunity to bring his position before the general meeting. |
| (d) | If the Company becomes aware that a director or an alternate director was appointed contrary to the provisions of article 31(d) above (namely section 227(a) of the Companies Law) or contrary to the provisions of article 31(c) above (namely sections 226(a) and (a1) and 226a of the Companies Law), or that the director violated the provisions of article 31(a) above (namely section 225 of the Companies Law), article 31(e) above (namely section 227(b) of the Companies Law), or the provisions of article 35€ herein (namely section 232 of the Companies Law), the Board must decide in the meeting of the Board convened right after it becomes aware of such, to end the service of said director, if it finds, that the stated conditions are present, and from the date of the resolution the service shall expire. |
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| (e) | A director who is convicted of an offense as stated in articles 31(a) above shall notify the Company of such and his service will end on the date of the delivery of the notice, and he may not be re-appointed as director, unless the period in which the director may not serve has passed, as stated in article 31(c) above (namely section 226(a) and (a1) of the Companies Law). If the administrative enforcement Board decides to impose on a person enforcement measures which prohibit him to serve as director in any public company or the Company, he will notify the Company and his term will expire on the date of the delivery of the notice, and he may not be reappointed as director, unless the period of the prohibition has passed as set forth in article 31(c) above (namely section 226a of the Companies Law). |
| (f) | A director (including an outside director) who no longer meets a requirements pursuant to the Companies Law in order to serve as a director (including an outside director) or if a reason for his service as director to expire exists, he will notify of such immediately to the Company, and his service shall expire on the date of the delivery of said notice. |
| (f) | A director who violates the duty of disclosure pursuant to article 31(a) above (namely section 225 of the Companies Law), article 31(f) above (namely sections 227a and 245a of the Companies Law), article 31(e) above (namely section 227(b) of the Companies Law), or article 35(e) above (namely sections 232 and 232a of the Companies Law), shall be considered as someone who violated his fiduciary duty to the Company. |
| 36. | Authorities of the Board of Directors |
| (a) | The Board shall delineate the policy of the Company and supervise the performance of the general manager and his activities, including the authorities listed in section 92(a) of the Companies Law. |
| (b) | The authorities of the Board of Directors pursuant to article 36(a) above may not be delegated to the general manager other than as set forth in article 10(b) above. |
| (c) | Without derogating from the authorities conferred on the Board of Directors pursuant to article 36(a) above and the rest of the authorities conferred on it by these articles, and without restricting or reducing in any manner these or any of the authorities, the Board of Directors shall have the following authorities: |
| (1) | To appoint a person or persons (incorporated or otherwise), to receive and hold in trust for the Company any property belonging to the Company or in which the Company has an interest, or for any other purpose, and to do or perform any activity, act or things needed in respect to any such trust, and to act to pay the salaries of the trustee or trustees; |
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| (2) | To establish the authorized signatories of the Company for bills of exchange, promissory notes, receipts, endorsements, checks, dividend certificates, releases, contracts and other documents of any kind; |
| (3) | To appoint, and in its discretion, to remove or suspend a general manager, manager, secretary, clerk, employee or agent, whether if they are employed on a permanent or interim basis or for special services, as the Board of Directors sees fit from time to time, and to define their authorities and obligations and to set their salaries and wages and to demand guarantees, in the cases and in the amounts that the Board deems fit; |
| (4) | To establish local management for the management of any of the businesses of the Company in a specific place in Israel or abroad, and to appoint any persons to be local managers and to determine their wages or to dismiss any of these people from their service, and from time to time and at any time delegate to any person who is so appointed any powers or authorities or discretion that is conferred at such time on the Board, and to authorize the members at that time in any local committee, all or some, to fill any vacancy in it and to act notwithstanding the vacancies; |
Any such appointment or delegation may be done under the same terms and subject to the same conditions that the Board deems proper in accordance with the Companies Law, and the Board may at any time cancel any appointment or delegation or change them. The Board may authorize the persons to whom powers, authorities or discretion were delegated and which are conferred on them at such time, to delegate them, all of some, with a secondary delegation;
| (5) | Subject to the provisions of relevant law, to appoint by power of attorney any person or persons to be the attorney or attorneys of the Company for the purposes and with the powers, authorities and discretion (which shall not exceed those given or conferred for use by the Board according to these articles or by law) for a period of time and subject to the same terms as the Board deems proper from time to time, and any such appointment may be given (if the Board sees fit to do so) to any local manager, or any Company or its members, its directors, agents or managers of any Company or firm or a person who is established by any Company or firm. Any such power of attorney may contain in it authorities for the protection or convenience of persons who come into contact or these attorneys as the Board deems fit; |
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| (6) | To open, manager, defend, compromise, or neglect any legal proceedings on behalf of or against the Company or against its officials or related in another manner to its affairs and to compromise or extend the time for payment or defrayal of any debt owed or actions or demands by the Company or against it; |
| (7) | To deliver for arbitration any action or demand of the Company or against it; |
| (8) | To appoint on behalf of the Company an attorney or attorneys in Israel or abroad to represent the Company before any court, legal and quasi legal bodies, government offices or bodies, municipal or otherwise in Israel or abroad and to confer on such attorney the authorities that the Board feels proper to give, including the authority to delegate his authorities, in whole or in part, to another or others; |
| (9) | Subject to the provisions of the law (including section 113 of the Companies Law) and these articles, to delegate to any person, firm, Company or group of persons as stated, the powers, authorities and discretion conferred on the Board of Directors; |
| (10) | The Board is entitled to exercise any authority of the Company which was not conferred by law or these articles to another organ of the Company. |
| 37. | Assumption of authorities of the Board |
| (a) | The general meeting may assume authorities given to the Board for a specific matter, or for a specific time frame, that does not exceed the time required under the circumstances. The assumption of authorities shall be done after the Company adopts a resolution about the assumption in the general meeting. |
| (b) | If the Board cannot exercise its authorities and the exercise of any of its authorities is essential for the proper management of the Company, the general meeting may exercise it in its stead, so long as the Board is prevented from doing so, provided that the general meeting establishes, that in fact the Board cannot do so and that the exercise of the authority is essential as stated. |
| (c) | If the general meeting assumes authorities conferred by law on the Board, the shareholders shall have the rights, duties and liability applicable to the directors for the matter of the exercise of those authorities, mutatis mutandis, and, the provisions of chapters three, four and five of the Sixth Part of the Companies Law shall apply to them, taking into account their holdings in the Company, their participation in the meeting and the manner of their vote. |
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| 38. | The rights of a director |
Subject to relevant law and the issuance of the required approvals, a director shall not be disqualified, because of his office, from holding another office in the Company or in any other company in which the Company is a shareholder, or in which it has another benefit or from entering into a contract with the Company, whether as a vendor or buyer or in another manner.
| 39. | Chairman of the Board |
| (a) | The Board of Directors will choose, dismiss, with a normal majority of votes, one of the members of the Board to serve as chairman of the Board, and the provisions in articles 39(b) – (f) below will apply to him. |
| (b) | The term of service of the chairman of the Board shall be until a resolution of the Board of the termination of his service and appointment of another chairman in his stead. However, it is understood, that an outgoing chairman may be re-appointed as chairman. |
| (c) | If the service of a director is vacated for one of the instances listed in these articles and said director is the chairman of the Board, his appointment as chairman shall automatically expire, and another chairman shall be chosen in his stead. |
| (d) | The chairman of the Board shall set the agenda as set forth in article 41 herein and will preside over the meetings of the Board. |
| (e) | If the chairman of the Board of Directors is absent from a meeting 15 minutes from the designated time for the meeting or if he is unwilling to preside over the meeting, the Board of Directors shall elect one of its members to preside over the meeting and sign the protocol of the meeting. The chairman of the Board in such instance shall not have an extra or casting vote in any vote by the Board of Directors in the event of a tie vote. |
| (f) | The chairman of the Board may serve as the CEO of the Company, or exercise his authorities for periods that do not exceed three years each from the date of the resolution, subject to and in accordance with the provisions of section 121(c) of the Companies Law. |
| 40. | Convening a meeting of the Board |
| (a) | The Board of Directors will convene for meetings pursuant to the needs of the Company and at least once every three months. |
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| (b) | The Board will be convened according to one of the following methods: |
| (1) | The chairman is entitled to convene a meeting at any time. |
| (2) | In the following instances, the chairman of the Board will convene the Board without delay: |
| 1. | A notice or report by the general manager to the chairman of the Board about any irregular matter that is material for the Company that requires an act by the Board; and |
| 2. | Notice by the auditor of the Company to the chairman of the Board that he became aware during the audit of material deficiencies in the accounting audit of the Company. |
| (2) | The chairman of the Board will convene the Board, at the demand of any of the directors at any time, including if a director becomes aware of a matter of the Company in which there may be an apparent violation of the law or may harm proper corporate governance, whereby he will act without delay to convene a meeting of the Board. |
| (c) | If a meeting of the Board is not convened within seven days from the date of the notice or report by the general manager or the auditor as stated in article 40(b)(2) above or from the date of the demand as set forth in article 40(b)(2) above, each of those listed above, may convene a meeting of the Board to discuss the subject specified in the demand, notice or report, as the case warrants, within at least two business days prior to the date of the meeting. |
| (d) | The Board may hold meetings through the use of any communications devices, provided that all the directors participating can hear each other simultaneously. |
| (e) | The Board may adopt resolutions even without an actual meeting (such as in writing, fax or email), provided that all the directors who are entitled to participate in the meeting and vote on the matter brought for a resolution agree to do so. |
| (f) | Resolutions adopted in the manner specified in subsection (e), shall be formalized in a protocol, including the resolution not to convene a meeting, and the protocol shall be signed by the chairman of the Board. |
| 41. | Agenda |
The agenda of Board meetings shall be set by the chairman of the Board and shall include:
| (a) | Subjects set by the chairman of the Board; |
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| (b) | Subjects that were set as set forth in article 40 above; and |
| (c) | Any subject that a director, the general manager and/or the auditor asks of the chairman of the Board, a reasonable time prior to the meeting, to include on the agenda. |
| 42. | Notice of a meeting of the Board of Directors |
| (a) | Notice of a meeting of the Board shall be delivered to all the directors at least seventy two (72) hours prior to the date designated for the meeting, unless all the directors gave prior written consent to convene the meeting within a shorter time frame, or in urgent cases – and with the consent of a majority of the directors – even without such notice. |
| (b) | Notice pursuant to article 42(a) above shall be delivered to the address of the director in Israel that was previously delivered to the Company by the director in writing and which shall state the date of the meeting and the location, and a reasonable description of all the subjects on the agenda. It is understood that the dispatch of such notice covers the liability of the Company and the director is solely responsible to update the Company about a change of his address for the purpose of the sending of such notices. A change of address of the director shall be done by him in writing provided that it is delivered a reasonable time prior to the date designated for a meeting of the Board of Directors. |
| 43. | Quorum |
| (a) | A quorum for discussion in meetings of the Board shall be determined, from time to time, by the general meeting and until decided otherwise it shall be at least the presence of half of the directors, who serve at the time of the meeting, on their own or through alternates. The quorum shall be established at the start of each meeting of the Board and shall constitute a quorum for the entire duration of the meeting, for all the resolutions that are on the agenda, even in the case or cases where a quorum is not present during the continuation of the meeting. |
| (b) | If a half hour passes from the time designated for the start of the meeting of the Board and a quorum is not present, the meeting shall be adjourned for twenty four (24) hours exactly (after the original time designated for the meeting) or to another time set by the chairman of the Board (but in any case no earlier than twenty four (24) hours). The quorum at an adjourned meeting shall be the presence of at least two directors, who are serving at the time of the meeting, on their own or through an alternate. If the Board cannot act due to the absence of a quorum at the adjourned meeting, the general meeting may exercise the authorities of the Board for the purpose/s for which the meeting of the Board was convened and the provisions of article 37 above will apply. |
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| (c) | Each duly convened meeting of the Board of Directors, in which a quorum is present, shall have all the authorities, powers of attorney and discretion given to it at such time, according to the provisions of the Company, to the Board of Directors or those exercised by it in general. |
| (d) | If a specific member is not appointed to the Board or if the office of a director is vacated, the remaining directors may operate for all matters, so long as their number is not less than the minimum fixed in article 30(a) above. If the number is less than the minimum, they may not exercise their authorities according to these articles, except to convene a general meeting with an agenda to appoint additional directors or to establish a lower minimum of directors or to appoint additional directors themselves. The general meeting may decide not to approve acts of the directors when their number falls below the minimum number and to exercise on its own the authorities of the Board, until the number of directors again reaches the minimum as set forth in article 30(a) above. |
| 44. | Voting on the Board |
| (a) | Each director shall have one vote in each vote on a resolution. |
| (b) | Resolutions of the Board shall be adopted by a regular majority of those present participating in the vote. |
| (c) | If the votes are tied in a Board meeting, the proposed resolution shall be considered as rejected. |
| (d) | Notwithstanding the aforesaid, resolutions on the subjects listed below shall not be adopted unless the subjects were on the agenda of the meeting that was duly convened, and there was no objection to the resolution by two or more of the members of the Board who participated in the meeting: |
| (1) | Entering into new fields of activity and the expansion of the geographical field of activity of the Company; |
| (2) | Investments in the field of activity of the Company (namely, not including investments in equipment) and the exercise of such investments; |
| (3) | The transfer of any of the subjects mentioned in sections (1) and (2) to the authority of committees of the Board; |
| (4) | Acquisition of Company shares, as defined in section 1 of the Companies Law, in a manner in which following the acquisition the Company will no longer be a public company, insofar as this resolution is brought for approval of the Board of the Company in accordance with the provisions of relevant law. |
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This majority shall apply also for resolutions on those subjects by committees of the Board and resolutions in subsidiaries of the Company, and resolutions in the committees of the Board and subsidiaries (1) shall be sent for a resolution of the Board; or (2) will be adopted only if the composition of the committee of the Board of Directors of the subsidiary is identical to the composition of the Board of Directors.
| (e) | A director (or alternate director) is entitled to vote on his own, in writing (inclusive of by fax or email) or verbally if the meeting takes place through means of communication where the directors who are participating can hear each other simultaneously. |
| 45. | Protocols in a meeting of the Board |
| (a) | The Company will keep protocols of the proceedings in meetings of the Board and its committees and will keep them and the resolutions adopted without actual meetings of the Board, in the office for a period of seven years from the date of the meeting or adoption of the resolution, as the case warrants. |
| (b) | A protocol approved and signed by the director who presided over the meeting, shall serve as prima facie proof of its contents. |
| (c) | An announcement by the chairman of the Board, that a resolution was adopted unanimously or by a specific majority, or was rejected and a notation recorded in this matter in the protocol of the meeting of the Board, shall serve as prima facie proof of the authenticity of its contents, and it is not necessary to prove how many votes there were or how many were for or against the resolution. |
| 46. | Defects in the convening of a meeting |
| (a) | A resolution adopted in a meeting of the Board that was convened without the prior conditions satisfied for its convening (hereinafter – “Defect in the Convening”) may be revoked at the demand of each of the following: |
| (1) | A director who was present at the meeting, provided that he demanded that a resolution for which the defect was present not be adopted, prior to the adoption of the resolution; or |
| (2) | A director who was entitled to be invited to a meeting but was not present, within a reasonable time after he was informed about the adoption of the resolution and no later than the first Board meeting that was held after he was informed of the resolution; |
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It is understood that if there was a defect in the convening of the meeting related to the notice about the location of the meeting or its time, a director who came to the meeting may not, notwithstanding said defect, demand the revocation of the resolution.
| (b) | The provisions of article 46(a) above shall not impair from the validity of an act done for the Company which was retroactively approved by the Board or if the party with whom the act was done did not know or could not have known about the irregularity or lack of authorization. |
| 47. | Committees of the Board |
| (a) | Subject to the provisions of section 112 of the Companies Law which prohibits the delegation of authorities and the provisions of these articles (including article 44(d) above), the Board may establish committees of the Board and appoint members from among the Board only to them (hereinafter: “Board Committee”) and delegate all or some of its authorities to a Board committee. The Board may from time to time cancel the delegation of said authority, |
Each committee that is so established must, when exercising its authorities, comply with all the regulations that are established by the Board of Directors.
| (b) | A Board committee will report to the Board on a regular basis about its decisions or recommendations. Decisions or recommendations of a Board committee which requires the approval of the Board, will be brought to the attention of the directors a reasonable time prior to the deliberations on the Board. |
| (c) | The meetings of a Board committee and its management shall be in accordance with the provisions of procedures and management of meetings of the Board, as set forth in the provisions of these articles, mutatis mutandis, so long as they are appropriate and if they do not replace the instructions that are given by the Board according to this section. |
| (d) | A committee of the Board whose job is to provide counsel or recommendations to the Board can be comprised of a person who is not a member of the Board. |
| (e) | A resolution that is adopted or an act that is done by a committee of the Board, according to an authority that was delegated to it from the authorities of the Board, shall be the same as a resolution adopted or an act that was done by the Board. However, the Board may evoke any decision of a committee that it appointed, but such cancellation shall not harm the validity of a decision of a committee where the Company acted in accordance thereto with another person, who was not aware of the revocation. |
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Part Eight: Audit Committee
| 48. | Appointment of an audit committee |
| (a) | The Board of the Company shall appoint among its members an audit committee. The number of members of the audit committee shall be determined by the Board, from time to time provided that it shall not be less than three members and that all the outside directors will be members of the committee. The chairman of the Board and any director who is employed by the Company or by a controlling holder or by a corporation under the control of a controlling holder, a director who provides services, on a regular basis, to the Company, to a controlling holder in it or to a corporation under the control of a controlling holder, as well as a director whose main income is on the controlling holder, shall not be members of the audit committee. Likewise, a controlling holder or a relative thereof shall not be members of the audit committee. |
| (b) | The audit committee shall choose one of its members who is an outside director to serve as chairman of the audit committee, by a resolution adopted by a regular majority of the audit committee present at such meeting. |
| (c) | The term of office of the chairman of the audit committee shall be until a resolution of the audit committee about the termination of his term and the appointment of a chairman for the audit committee in his stead. However, it is understood that a chairman of the audit committee who ended his term of service may be reappointed. |
| 49. | Positions and work procedures of the audit committee |
| (a) | Subject to relevant law, the positions of the audit committee shall be as described in section 117 of the Companies Law. |
| (b) | The internal auditor of the Company shall receive notices about meetings of the audit committee and may participate in them. The internal auditor may ask the chairman of the audit committee to convene the committee to discuss a subject that he describes in his request, and the chairman of the audit committee will convene the meeting within a reasonable time from the request, if he sees a reason to do so. |
| (c) | A notice of a meeting of the audit committee, in which a subject related to the audit of the financial statements is raised, shall be delivered to the internal auditor who is entitled to participate in it. |
| (d) | Subject to the provisions of the Companies Law (including section 116a dealing with a quorum to deliberate and adopt resolutions in the audit committee and section 115(e) dealing with presence in meetings of the audit committee), the procedures of the meetings and activities of the audit committee and its management shall be in accordance with the provisions of the procedures and management of meetings of the Board of Directors, as described in these articles, mutatis mutandis, insofar as they are appropriate and insofar as they do not replace instructions given by the Board pursuant to this section. |
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Part Nine: Exemption, indemnification and liability insurance
| 50. | Exemption and indemnification |
| (a) | The Company is entitled to exempt in advance an office holder from his liability, in whole or in part, for damage due to a breach of the duty of care to the Company, other than a breach of the duty of care in a distribution. |
| (b) | The Company may indemnify an office holder for an obligation or expense as described in paragraphs (1) – (6) herein, imposed on him following an act that he did by virtue of his being an office holder: |
| (1) | A monetary duty imposed on him or expended in favor of another person by a court judgment, including a judgment issued as a settlement or a ruling of an arbitrator that is ratified by a court; |
| (2) | Reasonable litigation costs, including legal fees, expended by the office holder following an investigation or proceeding that was conducted against him by the competent authority to carry out an investigation or proceeding, and which concluded without the filing of an indictment against him and without having imposed on him a monetary obligation as an alternative to a criminal proceeding, or which ended without an indictment against him but with the imposition of a monetary obligation as an alternative to a criminal proceeding for an offense that does not require proof of criminal intent or in connection to a monetary sanction; |
The terms “conclusion of a proceeding without the filing of an indictment in a matter in which a criminal investigation was opened” and – “monetary obligation as an alternative to a criminal proceeding”, in this article shall be attributed the meaning given to them by section 260(a)(1a) of the Companies Law.
| (3) | Reasonable litigation costs, including legal fees that the officer expended or which he was charged to pay by a court, in a proceeding filed against him by the Company or on its behalf or by another person, or in a criminal indictment for which he was acquitted, or an indictment for which he was convicted of a crime that does not require proof of criminal intent. |
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| (4) | Other expenses expended in respect to an administrative proceeding that was conducted on his case, including reasonable litigation costs, including legal fees. |
For this purpose “an Administrative Proceeding” - a proceeding pursuant to Parts 8(3) (Imposition of a monetary sanction by the Securities Authority), 8(4) (Imposition of administrative enforcement measures by the Administrative Enforcement Committee), or 9(1) (An Arrangement to prevent proceedings or to halt proceedings that is predicated on conditions) of the Securities Law, as amended from time to time, and a proceeding according to Section D’ of Chapter Four in Part Nine of the Companies Law and subject to any relevant law, any similar proceeding to these, by whatever name it is called.
| (5) | Payment to a person injured by a violation as stated in section 52(54)(a)(1)(a) of the Securities Law. |
| (6) | Any other obligation or expense imposed on him or expended, following an act that he did by virtue of his being an officer in it, for which indemnification can be made according to the provisions of relevant law. |
| (c) | The Company may give indemnification in one of the following ways: |
| (1) | By giving an undertaking in advance to indemnify an office holder of the Company in each of the following (hereinafter: “Undertaking to Indemnify”): |
| (a) | As set forth in article 50(b)(1) above, provided that the undertaking for indemnification for a monetary obligation is limited to events which according to the Board of Directors are foreseeable in light of the Company’s actual activity at the time of the giving of the undertaking for indemnification and for a sum or criteria that the Board of Directors establishes is reasonable under the circumstances, and where the undertaking for indemnification will state the events which the Board of Directors feel are foreseeable in light of the Company’s actual activity at the time of the giving of the undertaking as well as the sum or the criteria which the Board establishes are reasonable under the circumstances. |
| (b) | As set forth in Articles 50(b)(2), 50(b)(3), 50(b)(4), 50(b)(5), and 50(b)(6). |
| (2) | To indemnify the office holder of the Company retroactively. |
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| 51. | Liability insurance |
| (a) | The Company may enter into a contract for liability insurance for an officer of the Company for a liability that will be imposed on said officer for an act taken by virtue of his being an officer in the Company, for each of the following: |
| (1) | A breach of the duty of care towards the Company or another person; |
| (2) | Breach of a fiduciary duty against the Company provided that the officer acted in good faith and had reasonable grounds to assume that the action would not harm the welfare of the Company; |
| (3) | A monetary obligation that is imposed on him in favor of another person; |
| (4) | Other expenses expended by the office holder in respect to an administrative proceeding conducted in his case, including reasonable litigation expenses, including legal fees; |
For this matter “Administrative Proceeding” – as defined in article 50(b)(4) above;
| (5) | Payment to a victim of a breach as contemplated by section 52(54)(a)(1)(a) of the Securities Law; |
| (6) | Any additional obligation that may be insured by law. |
| (b) | In any case where the insurance contract will have coverage for the Company itself, the office holder shall have the preemptive right instead of the Company in receiving insurance compensation. |
Part Ten: General Manager
| 52. | General Manager |
| (a) | A general manager of the Company will be appointed and dismissed according to a resolution adopted by the Board of Directors of the Company, and it may appoint more than one general manager, for a fixed period of time or without any time limitation, and it may from time to time dismiss or release him or them from their office and appoint another or others in his or their stead. |
| (b) | Subject to the provisions of an employment agreement between the general manager and the Company, the general manager is responsible for the ongoing management of the affairs of the Company as part of the policy set by the Board and subject to its instructions. |
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Subject to the provisions of the agreement between the general manager and the Company, the general manager will have all the authorities of management and implementation that were not conferred by law or these articles to another body of the Company, and he may be supervised by the Board, provided that if the general meeting enacts a new regulation it shall not be in his power to cancel or revoke the lawful validity of a deed done prior to such by the general meeting or in accordance with its instructions, which would have been valid if not for the new regulation that was enacted.
| (d) | Subject to the provisions of the law and articles 36(a) and 36(b) above, the Board of Directors may from time to time deliver and confer on the general manager at such time, some of those authorities by which it acts according to these articles, as it deems fit to manage the ordinary business of the Company and it may confer authorities for a period of time, and for certain purposes and needs for those times and under such conditions and restrictions as it deems fit as stated above. |
| (e) | The general manager must notify the chairman of the Board of Directors about any irregular matter that is material to the Company; if the Company does not have a chairman of the Board or if he is prevented from serving in such capacity, the general manager will notify all the directors. |
| (f) | Office holders of the Company, other than directors and the general manager (namely, a chief business manager, deputy to the general manager, legal advisor, any replacement as stated in the Company even if his title is different, and another manager subject directly to the general manager) shall be appointed and dismissed by the general manager, without derogating from the provisions of the Companies Law dealing with the approval of the terms of service and employment of an office holder. |
| 53. | Removal of authorities from the general manager |
The Board of Directors may instruct the general manager how to act for a specific matter; if the general manager does not satisfy the provision and/or the general manager is prevented from exercising his authorities, the Board of Directors may exercise the required authority to implement the instruction and/or to exercise his authorities in his stead.
Part Eleven: Management of the Company
| 54. | Registered office |
| (a) | The Company will maintain an office in Israel, to which any notice to the Company can be sent. Without derogating from the provisions of any law, the Company will keep in its registered office documents as set forth in section 124 of the Companies Law. |
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| (b) | Delivery of a document to the Company shall be to the office as it is registered with the Companies Registrar at the time it is sent to the Company by mail. |
| (c) | A person who is entitled to inspect documents, is entitled to receive a copy of them for a fee that the Board or the general manager establishes. |
| 55. | Register of shareholders and register of material shareholders |
| (a) | The Company shall keep a register of shareholders and a register of material shareholders and will update the changes to them as soon as possible after it becomes aware of them. |
| (b) | The shareholder register and the material shareholder register shall be open for inspection by any person. |
| (c) | The details enumerated in section 130(a) of the Companies Law shall be recorded in the shareholder register. |
| (d) | The material shareholder register shall contain reports that the Company received pursuant to the Securities Law about the holdings of the material shareholders in Company shares. |
| (e) | The Company will keep all the records that are recorded in the shareholder register as set forth in article 55(c) above. |
| (f) | The shareholder register will be prima facie proof of the contents recorded in it. |
| (g) | In the case of a contradiction between the shareholder register and a share certificate, the shareholder register shall have more evidentiary value than that of the share certificate. |
| 56. | Auditor |
| (a) | The Company will appoint an auditor who will audit the annual financial statements of the Company and give his opinion about them (hereinafter: “Audit Activity”). |
| (b) | An auditor will be appointed at each annual meeting and shall serve in his capacity until the end of the following annual meeting; however, the general meeting may appoint an auditor who will serve in his position for a longer period of time, that shall not be longer than the end of the third annual meeting after the one in which he is appointed. |
| (c) | The Company may appoint a number of auditors to carry out the audit activity together. |
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| (d) | If the office of the auditor is vacated and the Company does not have another auditor, the Board will convene a special meeting, as soon as possible, with the agenda of appointing an auditor. |
| 57. | Expiration of the term of the auditor |
| (a) | The general meeting may terminate the service of the auditor. |
If the agenda of the Company includes the termination of the service of the auditor or the non-renewal of his service, the audit committee will bring its position before the general meeting, after affording the auditor a reasonable opportunity to bring his position before it.
| (b) | If the Board becomes aware that there are dependent relationships pursuant to the provisions of section 160 of the Companies Law, it will notify the auditor without delay that he must act to cease such dependency immediately; if the dependency continues, the Board will convene a special meeting within a reasonable time period, with the agenda to terminate the service of the auditor. |
| (c) | The general meeting that is convened as set forth in article 57(b) above, shall decide on the termination of the service of the auditor; however, the general meeting may, after the auditor brings his position before it, decide not to accept the recommendation of the Board to end his service, if it finds that the auditor has no dependency in the Company. |
| (d) | The Board of Directors will give the auditor a reasonable opportunity to bring his position before the general meeting with the agenda of ending or not renewing his service, and for this purpose the auditor will be invited to participate in the general meeting. |
| (e) | If the auditor resigns for reasons that involve an interest for shareholders in the Company, the Board will notify the Company of such. |
| (f) | Without derogating from the provisions of relevant law, the Board of Directors will notify the shareholders about the reasons for the resignation of the auditor as it deems fit, and it may also give notice about its position in the matter. |
| 58. | Wages of the auditor |
| (a) | The salary of the auditor for the audit activity and for additional services, shall be set by the Board of Directors, in accordance with the extent of the work, the duration of his employment and any additional relevant term related to his employment. |
The Board will notify the general meeting about the wages of the auditor, and all matters related to his salary for additional services – also about the terms of contract with the auditor, including payments and undertakings of the Company towards the auditor.
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For the purpose of this section – an accountant auditor – including a partner, employee or relative of the accountant and including a corporation under his control.
| (b) | The Company will not stipulate the payment of the fee of the auditor on terms that limit the manner of his performance of the audit activity or which make a connection between the results of the audit and his fees. |
| (c) | The Company or anyone on its behalf shall not indemnify, directly or indirectly, the auditor, for an obligation imposed on him due to a breach of his professional responsibility in providing services that must be provided by an accountant auditor by law, or following the violation of another duty imposed on him by law. |
| 59. | Authorities, duties and responsibility of the accountant auditor |
| (a) | The auditor may at any time inspect documents of the Company required by him to perform his job and receive explanations about them. |
| (b) | The auditor may participate in any general meeting in which financial statements are submitted for which he conducted audit activity and any meeting of the Board which deliberates the approval of the financial statements, in meetings of the committee to inspect the financial statements and in meetings of the Board convened pursuant to article 40(b)(2)2 above; the Board of Directors will notify the auditor of the place and time of the general meeting or the Board or committee meeting for the examination of the financial statements. |
| (c) | If the auditor becomes aware during his audit activity about material defects in the accounting audit of the Company, he will notify the chairman of the Board of such. |
| 60. | Internal auditor |
| (a) | The Board of Directors of the Company will appoint an internal auditor; the internal auditor will be appointed in accordance with the recommendation of the audit committee. |
An internal auditor shall not be an interested party in the Company, an officer in the Company, a relative of any of the above, or the auditing accountant or his representative
| (b) | The organizational supervisor over the internal auditor shall be the chairman of the Board, or whoever the Board of the Company determines from time to time. |
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| (c) | The internal auditor will check, inter alia, the validity of the activities of the Company in respect to compliance with the law and proper corporate governance. |
| (d) | The term of service of the internal auditor shall not be terminated without his consent and he shall not be suspended, unless the Board decides on such after obtaining the position of the audit committee, and after giving the internal auditor a reasonable opportunity to state his position before the Board and before the audit committee. |
For this purpose, the quorum for the opening of a meeting of the Board shall not be less than a majority of the directors.
Part Twelve: Financial statements and signature
| 61. | Financial statements |
The Company will keep accounts, and likewise will keep financial statements pursuant to the Securities Law.
| 62. | Stamp and signatory right |
| (a) | The Company may establish a stamp or rubber stamps for sealing documents. |
| (b) | The Board will determine the person or persons (even if they are not directors) who are authorized to sign on behalf of the Company, and their signatures together with the stamp of the Company or its printed name shall bind the Company, provided that he or they acted and signed within their authority or authorities. |
Part Thirteen: Dividends and Bonus Shares
| 63. | Dividends and bonus shares |
| (a) | A resolution by the Company to distribute dividends or allocate bonus shares shall be adopted by the Board of Directors of the Company. The Board of the Company shall decide on the date for payment of the dividend. |
| (b) | In addition, the Board may, prior to offering a dividend, allocate from the profits of the Company, amounts, as it deems fit, as a reserve fund or funds as they establish, in the sole discretion of the Board of Directors, for unforeseeable needs or to equalize dividends with special dividends to correct, to improve or to maintain any property of the Company, and for many other types of purposes, as the Board, according to their absolute discretion, believes is beneficial for the affairs of the Company, and it may invest these allocated sums in investments that they feel are proper (other than in shares of the Company), and from time to time manage these investments or change them and use all or some of them for the benefit of the Company, and it may divide the reserve fund into special funds, as it deems fit, and use the fund or any part of it for the Company’s business, without having to keep the monies separate from the rest of the assets of the Company. |
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| (c) | A Board of Directors which announces the distribution of dividends may decide that this dividend be paid in full or in part by distribution of certain assets, in particular by the distribution of fully paid up shares, bonds or a series of bonds of any other company, or in one or more of these methods. |
| (d) | In order to validate a resolution of the Board (including according to article 63(c) above), the Board may: |
| (1) | Resolve any difficulty that may arise in respect to the distribution of a dividend and/or allocation of bonus shares as it deems fit; |
| (2) | Issue partial certificates, including certificates for fractional shares or decide not to count fractions under a certain amount, or sell fractions and transfer their consideration to those eligible to receive them; |
| (3) | To establish for the distribution of a dividend and/or allocation of bonus shares the value of any specific asset; |
| (4) | To decide that payment in cash will be done for shareholders on the basis of the value that will be so established, or that parts the value of which are less than one shekel will not be taken into account in order to adjust the rights of all the parties; |
| (5) | To deposit such monies or specific assets with trustees against securities, for persons eligible to receive dividends and/or bonus shares or to a fund that was converted into capital; |
| (6) | If required, a proper contract will be drawn up and the Board may appoint a person to sign such contract on behalf of those eligible to receive dividends, bonus shares and/or fund converted into capital and such appointment will be valid; and/or |
| (7) | To make any other arrangement (in respect to the distribution of dividends and/or allocation of bonus shares), as the Board of Directors deems fit according to its sole discretion. |
| (e) | The Board of Directors may deduct and offset from any dividend, bonus or other monies that are due to be paid for shares held by a shareholder, whether or not he is the sole owner or holds the share jointly with others, all sums of money owed from him which he must defray on his own or jointly with any other person to the Company on account of calls for payment etc. |
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| (f) | A shareholder shall not be entitled to a dividend if he has not delivered by the date designated for such, a bank account into which the relevant sums are to be transferred. Further, a shareholder is not entitled to change the bank account number a reasonable time (to be set by the Board) prior to the date for the actual distribution of the dividend by the Company. |
| (g) | The Board may invest each dividend that is not claimed within one year from the announcement of its distribution or to use it in another manner for the benefit of the Company until it is claimed. The Company is not obligated to pay interest or linkage for an unclaimed dividend. |
| (h) | Shareholders entitled to a dividend, are shareholders as of the designated date for the distribution of the dividend as established in the resolution of the Board of Directors or by virtue thereof, and subject to the provisions of relevant law. |
Part Fourteen: Notices and Dissolution
| 64. | Notices |
Subject to the provisions of article 21 above (to wit notice of a meeting), the arrangement set forth in article 21 above shall apply:
| (a) | The Company is entitled to deliver notice to any shareholder by personal delivery, by fax, by email or by dispatch by mail in a letter, prepaid envelope or packaging intended for the shareholder, to the address as delivered to the Company at the time of the allocation of the shares or transfer of the shares, unless said shareholder gave written notice of a change of his address (hereinafter: “Registered Address”). |
| (b) | A shareholder shoes registered address is outside of Israel may, from time to time, give written notice to the Company about an address in Israel, and that address will be considered as his address for the delivery of notices – as stated above. |
| (c) | All notices regarding shares, to which persons are jointly entitled, shall be delivered to the person who appears first in the shareholder register, unless they deliver other instructions, and a notice sent as stated shall serve as sufficient notice to all these shareholders. |
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| (d) | Any notice sent to a shareholder to his registered address, by Israel post to an address in Israel shall be considered as having been delivered three (3) business days from the day dispatch of the letter or envelope or other packaging containing the letter was delivered to the post office properly bearing the registered address of the recipient and delivered to the post office. A written certificate signed by the secretary or manager or other official of the Company that the letter, envelope or packaging containing the notice with the registered address was delivered to the post office as stated, shall serve as prima facie proof of the fact. Any notice sent by fax shall be considered as having been delivered one (1) day from the day it was sent, provided that confirmation of the dispatch of the fax is presented, and if hand delivered – at the time of delivery. |
| (e) | A person who becomes eligible to a share by virtue of the law, a transfer or in any other manner, shall be copied on every notice for such share, that was duly delivered to the registered address of the shareholder (from whom the right to the share is derived) registered in the shareholder register. |
| (f) | Any notice or document sent by post to a shareholder or left at his registered address, then notwithstanding the fact that said shareholder died – and it does not matter if the Company knew of the death or not – shall be seen as having been duly delivered in respect to all the shares registered, whether if they were held by the same shareholder separately or jointly with other persons, until the other person will be registered in his place as the owner or the joint owner of the shares, and such delivery will be seen, for the purposes of these articles, as sufficient delivery of the notice or the document to the personal representative, or all persons, if any, jointly interested in the same shares. Without derogating from the foregoing generality, a notice to a shareholder shall be delivered also to persons who have a right to a share due to the death or bankruptcy of a shareholder or if the shareholder is a corporation – in the event of its receivership or dissolution, after the receiver or liquidator, as warranted, is registered as the shareholder in the shareholder register. |
| 65. | Dissolution |
| (a) | Without derogating from the authority of the liquidator pursuant to section 334 of the Companies Ordinance and subject to special conditions, benefits and restrictions attached to shares of the Company, shares of the Company shall have equal rights regarding the return of the capital and participation in the distribution of surplus assets of the Company whether if the Company winds up voluntarily or whether in any other manner, after defrayal of all the obligations of the Company, its assets shall be distributed, among all the shareholders, proportionate to the nominal value of their shares without taking into account any premium paid on them. |
| (b) | For the purpose of article 65(a) above, a person who is entitled to shares but have not yet been allocated the shares, shall be considered as if the shares to which he is entitled were allocated to him prior to the dissolution, and that the amount paid on account of the nominal value of the shares has been paid up. In this case one who is entitled to the shares, is entitled to payment of an equal sum to the amount that he would have received in a dissolution if he would have held the shares of the Company on the eve of the adoption of the resolution of the dissolution, with a deduction of the price of the exercise that he would have had to pay if he would have exercised his right to the shares of the Company on the eve of the resolution of the dissolution. |
| (c) | If the Company winds up and the property of the Company that is to be distributed among the members is not enough to return all the paid up capital, these assets will be distributed inasmuch as possible in a proportionate manner to the paid up capital, or which is considered paid up at the start of the dissolution, of the shares held by each of the members. |
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Exhibit 10.1
PainReform Ltd.
2019 Option Plan
1. Name. This plan, as adopted by the Board of Directors of PainReform Ltd., (the “Company”) on July 2, 2019, and as amended from time to time, shall be known as the “PainReform Ltd. 2019 Option Plan” (the “Plan”).
2. Purpose of the Plan. The purposes of this Plan are to attract and retain the best available individuals for positions of substantial responsibility, and to promote the success of the Company’s and Affiliate’s business by aligning the financial interests of individuals providing services to the Company and Affiliates with long-term shareholder value.
3. Headings and Definitions
3.1. The section headings are intended solely for the reader’s convenience and in no event shall they constitute a basis for the interpretation of the Plan.
3.2. In this Plan, the following terms shall have the meanings set forth beside them:
| “Affiliate” |
Corporate entities who are related to the Company by way of common ownership or control, either partially or entirely, including but not limited to any “employing company” as defined in Section 102(a) of the Ordinance;
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| “Applicable Law” |
The legal requirements applicable to the administration of option and share award plans, any Stock Exchange rules or regulations and the applicable laws, rules and regulations of any country or jurisdiction where Options are granted under the Plan, as such laws, rules, regulations and requirements shall be in place from time to time;
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| “Approved Option” |
An Option granted under Section 102, in accordance with the “capital gain route”, and other rights granted with respect to such Option;
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| “Board” |
The Company’s Board of Directors, or, subject to applicable law and the Company’s Articles of Association, any committee empowered by the Board for the purpose of implementation of this Plan (or any aspect thereof);
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| “Cause” |
Any of the following-
(a) A material breach of the employment or engagement agreement between the Company or an Affiliate and a Participant, including but not limited to, a breach of any confidentiality duty of a Participant (including in regards to the confidentiality of this Plan and any grant made there-under), inappropriate use of confidential information of the Company or an Affiliate or an event of breach of trust or breach of any non-competition obligation of a Participant; |
(b) Any act which constitutes a breach of a Participant’s fiduciary duty towards the Company or an Affiliate, including without limitation disclosure of confidential information of the Company or an Affiliate and acceptance or solicitation to receive unauthorized or undisclosed benefits, irrespective of their nature, or funds or promises to receive either, from individuals, Consultants or corporate entities that the Company or an Affiliate does business with;
(c) Any act of fraud by a Participant or embezzlement of funds of the Company or an Affiliate;
(d) Any conduct or omission by, or state of affairs related to, the Participant reasonably determined by the Board to be materially detrimental to, or against the interests of, the Company or an Affiliate;
(e) Any conviction of any felony involving moral turpitude or affecting the Company or an Affiliate;
(f) Circumstances justifying the revocation and/or reduction of a Participant’s entitlement to severance pay pursuant to Sections 16 or 17 of the Severance Pay Law, 1963; or (g) Any other reason which is be defined as Cause in the Participant’s personal employment contract. | |
| “Company” | PainReform Ltd., company number 51-405659-7, a company incorporated under the laws of Israel or any Successor Company;
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| “Consultant” | Shall mean any person, except an Employee, engaged by the Company or an Affiliate, in order to render services to such company, including as an advisor or officer;
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| “Controlling Shareholder” | A controlling shareholder of the Company as defined in section 32(9) of the Ordinance;
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| “Employee” | Shall mean any person, who is a common law employee of the Company or an Affiliate, and who is on the payroll of such the Company or an Affiliate, or , in respect of Approved Options, any officer of such company all in accordance with Section 102;
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| “Exercise Price” | Shall mean the consideration required to be paid by a Participant in order to exercise one Option;
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| “Expiration Date” | With respect to an Option, the earlier of (i) the time such Option is fully exercised, or (ii) ten (10) years from the Grant Date of such Option, or (ii) the time on which such Option expires in accordance with Sections 9 and 12 below; |
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“Fair Market Value”
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Shall mean, as of any date, the value of an ordinary share of the Company determined as follows:
(i) If the ordinary shares are listed on any established Stock Exchange, the Fair Market Value shall be the closing sales price for such ordinary shares (or the closing bid, if no sales were reported), as quoted on such Stock Exchange for the last market trading day prior to the time of determination;
(ii) If the ordinary shares are regularly quoted by a recognized securities dealer but selling prices are not reported, the Fair Market Value shall be the mean between the high bid and low asked prices for the ordinary shares on the last market trading day prior to the day of determination, or;
(iii) In the absence of any of the above, the Fair Market Value thereof shall be determined in good faith by the Board of Directors of the Company.
For the avoidance of doubt, the above definition of Fair Market Value shall not apply for the purpose of determining the tax liability pursuant to Section 102(b)(3) of the Ordinance;
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| “Grant Date” | The date on which an Option is granted to a Participant, as set forth in the resolution of the Board granting such Option;
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| “Holding Period” | the holding period provided under Section 102 in respect of the “capital gain route” or under a tax ruling by the Israeli Tax Authority;
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| “Ordinance” | The Israeli Income Tax Ordinance [New Version], 1961, as amended from time to time;
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| “Option” | An option to purchase one Share, granted to a Participant, subject to the provisions of this Plan and the applicable Option Agreement;
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| “Option Agreement” | A written agreement between the Company and a Participant setting forth the terms under which Options are granted to a Participant;
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| “Participant” | Shall mean an Employee of or Consultant of the Company or an Affiliate to which an Option was granted;
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| “Plan” | Shall mean this PainReform Ltd. 2019 Option Plan, including any amendments thereto;
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| “Section 102” | Section 102 of the Ordinance and the Israeli Income Tax Rules (Tax Relief in Issuance of Shares to Employees) 2003, as amended from time to time;
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| “Share” | An ordinary share of the Company, nominal value NIS 0.01, which is issued or issuable to a Participant upon exercise of an Option; |
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“Stock Exchange”
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Any stock exchange, on which ordinary shares of the Company are listed, or such other market or a national market system, on which the Company’s ordinary shares’ prices are regularly quoted;
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| “Structural Change” | Any Deemed Liquidation Event, as defined in and determined pursuant to the Company’s Articles of Association in effect from time to time.
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| “Successor Company” | Shall mean any entity with or into which the Company merged, or to which certain operations or certain assets of the Company were transferred, or which purchased substantially all the Company’s assets or ordinary shares, provided that the Company is not the surviving entity;
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| “Tax” | Any applicable tax and other compulsory payments such as social security and health tax contributions under any applicable law;
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“Termination”
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For an Employee, the termination of employment as an Employee, and for a Consultant, the interruption, expiration, or termination of such person’s consulting or advisory relationship with the Company or an Affiliate, or the occurrence of any termination event as set forth in such person’s Option Agreement;
For the purpose of this plan, any temporary interruption in such person’s availability to provide services to the Company or an Affiliate, which has been authorized in writing by the Board prior to its commencement, shall not be considered as Termination;
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| “Termination Date” | With regard to any Employ, the first date following the Date of Grant on which there are no longer employment relations between such Employee and the Company or an Affiliate, for any reason whatsoever; however for the purpose of Termination for Cause, the Termination Date is the date on which a notice regarding such termination was sent by the Company or an Affiliate to the Employee;
With regard to any Consultant, the earlier of (i) the date of termination of the agreement between the Consultant and the Company or an Affiliate; or (ii) the date on which a notice regarding such termination of agreement was sent by the Company or an Affiliate, or by the Consultant, to the other party;
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| “Transfer” | With respect of any Option or Share – the sale, assignment, transfer, pledge, mortgage or other disposition thereof or the grant of any right to a third party thereto; |
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| “Trustee” | Any trustee appointed by the Company in accordance with Section 102 and approved by the Israeli Tax Authority;
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“Non-Approved 102 Option”
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An Option which does not qualify as an Approved Option; |
| “Vesting Date” | The date upon which the Option becomes exercisable, as determined in accordance with this Plan and set forth in the Option Agreement. |
4. Administration of the Plan
4.1. The Board shall have the power to administer the Plan.
4.2. Subject to the provisions of the Plan, the Board shall have the authority, at its discretion: (i) to grant Options to Participants; (ii) to determine the terms and provisions of each Option granted (which need not be identical), including, but not limited to, the number of Options to be granted to each Participant, provisions concerning the time and the extent to which the Options may be exercised, the underlying Shares sold and the nature and duration of restrictions as to the Transferability of Options and/or Shares; (iii) to amend, modify or supplement (with the consent of the applicable Participant, if such amendments adversely affect the terms of his Options) the terms of each outstanding Option; (iv) to interpret the Plan; (v) to prescribe, amend, and rescind rules and regulations relating to the Plan, including the form of Option Agreements; (vi) to authorize conversion or substitution under the Plan of any or all Options or Shares and to cancel or suspend Options, as necessary, provided the interests of the Participants are not harmed; (vii) to accelerate or defer (with the consent of the Participant) the right of a Participant to exercise in whole or in part, any previously granted Options; (viii) to authorize any person to execute on behalf of the Company any instrument required to effectuate the grant of an Option previously granted by the Board; and (ix) to make all other determinations deemed necessary or advisable for the administration of the Plan.
4.3. This Plan shall apply to grants of Options made following the adoption of this Plan by the Board.
4.4. All decisions, determinations, and interpretations of the Board shall be final and binding on all Participants unless otherwise determined by the Board.
5. Eligibility. Options may be granted to Participants and to persons who have signed an employment or consultancy agreement with the Company or an Affiliate; An Approved Option may only be granted to Israeli Employees of the Company or an Affiliate as stated in Section 102, who at the time of grant, or as a consequence of the grant are not a Controlling Shareholder of the Company.
6. Shares Reserved for the Plan
6.1. Subject to Section 12.1 of the Plan, the maximum aggregate number of Shares that may be subject to awards under the Plan and any other share and option plans which may be adopted by the Company in the future, unless otherwise approved by the Board, and subject to any adjustment made to the share capital of the Company by way of share split, reverse share split, distribution of share dividend or similar recapitalization events, at any time hereafter, is 658,369 ordinary shares of the Company, nominal value NIS 0.01 each. The Shares may be authorized but unissued ordinary shares, or reacquired ordinary shares of the Company. If an Option should expire or become un-exercisable for any reason without having been exercised in full Shares that were subject thereto shall, unless the Plan shall have been terminated, become available for future grant under the Plan. In addition, any Shares which are retained by the Company upon exercise of an Option in order to satisfy the Exercise Price for such Option or any withholding taxes due with respect to such Exercise shall be treated as not issued and shall continue to be available under the Plan. Shares issued under the Plan and later repurchased by the Company pursuant to any repurchase right which the Company may have, shall be available for future grant under the Plan.
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6.2. The Company during the term of this Plan will at all times reserve and keep available such number of Shares as shall be sufficient to satisfy the requirements of the Plan.
6.3. The Shares constitute part of the ordinary shares of the Company, and they shall have equal rights for all intents and purposes as the rights attached to the ordinary shares of the Company, subject to the provisions of this Plan and an Option Agreement. Any change of the Company’s Articles of Association, which may change the rights attached to the Company’s ordinary shares, shall also apply to the Shares, and the provisions hereof shall apply with the necessary modifications arising from any such change.
6.4. The grant of Options under this Plan shall not restrict the Company in any way regarding future creation of additional and/or other classes of shares, including classes of shares, which may in any manner be preferred over the currently existing ordinary shares which are offered to Participants under this Plan. The grant of Options under this Plan shall not entitle any Participant to receive any compensation (other than adjustments as provided herein) in the event of any change of the Company’s capital.
7. Options
7.1. Grant
7.1.1. The Board may grant from time to time to Participants, Options on a personal basis. The Options granted pursuant to the Plan, shall be evidenced by a written Option Agreement between the Company and the Participant, in such form as the Board shall from time to time approve. Each Option Agreement shall state, among other matters, the number of Options granted, the Vesting Dates, the Exercise Price, the tax route and such other terms and conditions as the Board at its discretion may prescribe, provided that they are consistent with this Plan.
7.1.2. Options which are Approved Options, as determined in the Option Agreement, and any Shares issued in respect of such Approved Option shall be subject to the Trustee’s trusteeship, as provided in Section 11 below. Any grant of an Approved Option shall be subject to compliance with the conditions of Section 102 including and shall be granted only after the submission of the Plan for approval by the Israeli Tax Authority.
7.2. Vesting. The Board shall set vesting criteria in its discretion, which, depending on the extent to which the criteria are met, will determine the number of Options that will vest and become exercisable. The Board may set vesting criteria based upon the achievement of Company-wide, business unit, or individual goals (including, but not limited to, continued employment), or any other basis determined by the Board in its discretion. The vesting conditions and schedule shall be set in the applicable Option Agreement. No Option shall be exercised after the Expiration Date. The vesting provisions of individual Options may vary.
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7.3. An Option may be subject to such other terms and conditions, not inconsistent with the Plan, on the time or times when it may be exercised as the Board may deem appropriate.
7.4. Exercise of Options
7.4.1. An Option shall be exercised by submission to the Company of a notice of exercise, in a form set by the Company. The exercise of an Option shall occur on such time on which a notice of exercise has been received by the Company accompanied by payment in full of the Exercise Price payable therefor, and as soon as practicable thereafter the Company will issue the Share(s) underlying such exercised Option, provided that the Shares so issued shall not be delivered to the Participant or any third party (other than the Trustee, if applicable) unless and until all applicable Tax was paid to the Trustee’s (if applicable) and the Company’s full satisfaction and subject to compliance with Applicable Law.
7.4.2. Except as otherwise provided in the Plan or in an Option Agreement, an Option may be exercised in full or in part, provided it is not exercised for a fraction of a Share.
7.4.3. Notices of exercise of Options, which are submitted after the Expiration Date, or which relate to Options that have not yet vested, or which do not contain all of the details required by the exercise form, shall not be accepted and shall have no force whatsoever.
7.4.4. The Participant shall sign any document required under any Applicable Law or by the Company or the Trustee for the purposes of issuance of the Shares.
7.5. Consideration. The Exercise Price shall be paid in cash or check at the time the Option is exercised. Should the Company’s ordinary shares be listed for trade on a Stock Exchange the Board may consider allowing a cashless exercise, subject to the provisions of Applicable Law. If, as of the date of exercise of an Option the Company is then permitting cashless exercises, the Participants will be able to engage in a “same-day sale” cashless brokered exercise program, involving one or more brokers, through such a program that complies with the Applicable Laws and that ensures prompt delivery to the Company of the amount required to pay the Exercise Price and any Tax.
7.6. The Exercise Price shall be denominated in the currency of the primary economic environment of, at the Company’s discretion, either the Company or the Participant (that is the functional currency of the Company or the currency in which the Participant is paid).
8. Terms and Conditions of the Options. Options granted under the Plan shall be evidenced by the related Option Agreement and shall be subject to the following terms and conditions and to such other terms and conditions included in the Option Agreement not inconsistent therewith, as the Board shall determine:
8.1. Non Transferability of Option. Unless otherwise determined by the Board, an Option shall not be Transferable by the Participant other than by will or by the laws of descent. Options or rights arising therefrom shall not be subject to mortgage, attachment or other willful encumbrance, and no power of attorney shall be issued in respect thereof, whether such enter into force immediately or at a future date.
8.2. One Time Benefit. The Options and underlying Shares are extraordinary, one-time benefits granted to the Participants, and are not and shall not be deemed a salary component for any purpose whatsoever, including in connection with calculating severance compensation under any Applicable Law.
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8.3. Fractions. An Option may not be converted into a fraction of a Share. In lieu of issuing fractional Shares, on the vesting of a fraction of an Option, the Company shall convert any such fraction of an Option, which represents a right to receive 0.5 or more of a Share, to one Share and shall extinguish any such fraction of an Option, which represents a right to receive less than 0.5 of a Share without issuing any Shares.
8.4. Term. No full or partial exercise of an Option shall be carried out following the Expiration Date of such Option.
9. Termination of Employment or Engagement.
9.1. Unvested Options. Unless otherwise determined by the Board, in the case of Termination, any Option or portion thereof that was not vested as of the Termination Date shall immediately expire on the Termination Date.
9.2. Vested Options
9.2.1. Termination other than for Cause.
9.2.1.1. Unless otherwise determined by the Board, in the case of Termination other than for Cause, any Option or portion thereof that is vested as of the Termination Date may be exercised but only within such period of time ending on the earlier of (i) ninety (90) days following the Termination Date, or (ii) the Expiration Date, but only to the extent to which such Option was exercisable at the time of the Termination Date. If, after the Termination Date, the Participant does not exercise his or her Option within the time specified above or in the Option Agreement, the Option shall expire.
9.2.1.2. In the event of (i) Termination as a result of the Participant’s death or disability or (ii) the Participant dies within the period (if any) specified in the Option Agreement after the Termination Date, then the Option may be exercised (to the extent exercisable as of the date of death) by the Participant’s estate, by a person who acquired the right to exercise the Option by bequest or inheritance or by a person designated to exercise the Option upon the Participant’s death, but only within the period ending on the earlier of (1) the date twelve (12) months following the date of death or the Termination Date due to disability (as the case may be) (or such longer or shorter period specified in the Option Agreement) or (2) the Expiration Date. If, after death or termination due to disability (as the case may be), the Option is not exercised within the time specified herein, the Option shall expire.
9.2.1.3. If the exercise of an Option following the Termination Date would be prohibited at any time solely because the issuance of Shares would violate requirements of any Applicable Law, then the Option shall expire at the end of a period of ninety (90) days after the Termination Date, or twelve (12) months after the date of death, as applicable, during which the exercise of the Option would not be in violation of such requirements.
9.2.1.4. It is clarified that during such periods following the Termination Date the Participant’s entitlement to Options shall not continue to vest.
9.2.1.5. The Board shall have the sole authority to extend the exercise periods detailed in sections 9.2.1.1 – 9.2.1.3 above at its sole discretion.
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9.2.2. Termination for Cause. If a Participant’s employment or engagement with the Company is terminated for Cause, any Option or portion thereof that has not been exercised as of the Termination Date shall immediately expire on the Termination Date.
9.3. No Participant shall be entitled to claim against the Company that he or she was prevented from continuing to vest Options as of the Termination Date. Such Participant shall not be entitled to any compensation in respect of the Options which would have vested in his favor had such Participant’s employment or engagement with the Company not been terminated.
10. No Right to Employment, Service or Shares. The grant of an Option or a Share under the Plan shall impose no obligation on the Company or an Affiliate to continue the employment of any Employee or the engagement with any Consultant and shall not lessen or affect the Company’s or an Affiliate’s right to terminate the employment or service relationship of such Participant at any time and/or for any or no reason with or without Cause. No Participant or other person shall have any claim to be granted any Options, and there is no obligation for uniformity of treatment of Participants, or holders or beneficiaries of Options. The terms and conditions of Options and the Board’s determinations and interpretations with respect thereto need not be the same with respect to each Participant (whether or not such Participants are similarly situated).
Nothing contained in the Plan shall prevent the Company from adopting, adjusting or continuing in effect compensation arrangements, which may, but need not, provide for the grant of Options or Shares.
11. Trust
11.1. Unless provided otherwise by the Board, Approved Options and any Shares issued in connection with such Approved Options, shall be held by the Trustee for the benefit of the Participant, in accordance with the provisions of Section 102 in the “capital gain route”. Any exercise of an Option or sale of a Share shall be notified to the Trustee.
11.2. The validity of any order given to the Trustee by a Participant shall be subject to approval of such order by the Company. The Company does not undertake to approve orders given by any Participant to the Trustee within any period of time.
11.3. Subject to the provisions of this Plan, the Approved Options and any Shares issued in connection with such Approved Options shall not be released from the control of the Trustee nor shall they be Transferred unless the Company and the Trustee are satisfied that the full amounts of Tax due by the applicable Participant have been paid or will be paid.
11.4. Subject to the provisions of Section 102, a Participant shall not Transfer or release from the control of the Trustee any Approved Option or any Share issued in connection with such Approved Options, until the lapse of the Holding Period. Notwithstanding the above, if any such sale, release or Transfer occurs during the Holding Period, the sanctions under Section 102 shall apply to and shall be borne by such Participant.
11.5. As long as the Approved Options and any Shares issued in connection with such Approved Options are held by the Trustee for the benefit of the Participant, all rights of the Participant over the Approved Options and Shares cannot be Transferred other than by will or laws of descent and distribution.
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11.6. Without derogating from the aforementioned, the Board shall have the authority to determine the specific procedures and conditions of the trusteeship with the Trustee in a separate agreement between the Company and the Trustee, all subject to Section 102.
11.7. Should the Approved Options or any Shares issued in connection with such Approved Options be transferred by power of a last will or under laws of decent, the provisions of Section 102 shall apply to the heirs or transferees of the deceased Participant.
11.8. Approved Options that do not comply with the requirements of Section 102 shall be considered Non-Approved 102 Options.
12. Adjustments to the Shares subject to the Plan
12.1. Adjustment Due to Change in Capital. If the ordinary shares of the Company shall at any time be changed or exchanged by declaration of a share dividend (bonus shares), share split, combination or exchange of shares, recapitalization, or any other like event by or of the Company, and as often as the same shall occur, then the number and class of the Shares underlying the Options subject to the Plan and the Exercise Price of the Options shall be appropriately and equitably adjusted so as to maintain the proportionate equity portion represented by the Option, provided, however, that no adjustment shall be made by reason of the distribution of subscription rights (rights offering) on outstanding ordinary shares or other issuance of shares by the Company. Upon happening of any of the foregoing, the class and aggregate number of Shares underlying the Options, issuable pursuant to the Plan under section 6 above, shall be appropriately adjusted by the Board, whose determination in that respect shall be final, binding, and conclusive. Except as expressly provided herein, no issuance by the Company of shares of any class, or securities convertible into shares of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of Shares underlying an Option. Any adjustment according to this section shall be subject to the receipt of a tax ruling or approval from the tax authorities, as necessary.
12.2. Structural Change. Without derogating from the Board’s general power under the Plan, in the event of any Structural Change, the Board shall be entitled (but not obliged), at its sole discretion, to determine any of the following: (i) provide for an assumption or exchange of Options and/or Shares for options and/or shares and/or other securities or rights of the Successor Company; and/or (ii) provide for an exchange of Options or Shares for a monetary compensation; and/or (iii) determine that all unvested Options and un-exercised vested Options shall expire on the date of such Structural Change. In the case of assumption and/or substitution of Options, appropriate adjustments shall be made so as to reflect such action and all other terms and conditions of the Option Agreements shall remain unchanged, including but not limited to the vesting schedule, all subject to the determination of the Board, which determination shall be at its sole discretion and final. The grant of any substitutes for the Options and/or Shares to Participants further to a Structural Change, as provided in sub-clauses (i) and (ii), shall be considered as full compliance with the terms of this Plan. The value of the exchanged Options and/or Shares pursuant to this section 12.2 shall be determined in good faith solely by the Board, based on the Fair Market Value, and its decision shall be final and binding on all the Participants.
Unless determined otherwise by the Board of Directors, any Options not assumed or exchanged for options and/or shares and/or other securities or rights of the Successor Company shall expire immediately prior to the consummation of the Structural Change.
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For the purposes of this section 12.2, Options shall be considered assumed or substituted if, following the Structural Change, the Options confer the right to purchase or receive, for each underlying Share immediately prior to the Structural Change, the consideration (whether shares, options, cash, or other securities or property) received in the Structural Change by holders of ordinary shares held on the effective date of the Structural Change (and if such holders were offered a choice of consideration, the type of consideration chosen by the holders of a majority of the outstanding ordinary shares); provided, however, that if such consideration received in the Structural Change is not solely ordinary shares (or their equivalent) of the Successor Company or its parent or subsidiary, the Board may, with the consent of the Successor Company, provide for the consideration received in the Structural Change, for each underlying Share immediately prior to the Structural Change, to be solely ordinary shares (or their equivalent) of the Successor Company or its parent or subsidiary equal in value to the per Share consideration received by holders of a majority of the outstanding ordinary shares in the Structural Change; and provided further that the Board may determine, at its discretion, that in lieu of such assumption or substitution of Options for options of the Successor Company or its parent or subsidiary, such Options will be substituted for any other type of asset or property including cash which is fair under the circumstances.
Without derogating from the above, in the event of a Structural Change the Board shall be entitled, at its sole discretion, to require the Participants to exercise all vested Options within a set time period and sell all of their Shares on the same terms and conditions as applicable to the other shareholders selling their Company’s ordinary shares as part of the Structural Change. Each Participant acknowledges and agrees that the Board shall be entitled to authorize any one of its members to sign share transfer deeds in customary form in respect of the Shares held by such Participant and that such share transfer deed shall bind the Participant.
12.3. Liquidation. In the event of the proposed dissolution or liquidation of the Company, all Options will expire immediately prior to the consummation of such proposed action, unless otherwise provided by the Board.
13. Taxes and Withholding Tax
13.1. Approved Options and Non-Approved 102 Options shall be taxed in accordance with Section 102. For the avoidance of doubt it is clarified that any Option granted to a Consultant or a Controlling Shareholder or any Option granted to a Participant who is not an Israeli tax resident, shall not be subject to the provisions of Section 102 and shall be taxed in accordance with Applicable Law.
13.2. Any Tax imposed in respect of the Options and/or Shares, including, but not limited to, in respect of the grant of Options, and/or the exercise of Options into Shares, and/or the Transfer, waiver, or expiration of Options and/or Shares, and/or the sale of Shares, shall be borne solely by the Participants, and in the event of death by their heirs or transferees. The Company, the Affiliates, the Trustee (if applicable) or anyone on their behalf shall not be required to bear the aforementioned Taxes, directly or indirectly, nor shall they be required to gross up such Tax in the Participants’ salaries or remuneration. The applicable Tax shall be deducted from the proceeds of sale of Shares or shall be paid to the Company, an Affiliate or the Trustee (if applicable) by the Participants, including, for the avoidance of doubt, in the event of a cashless exercise. Without derogating from the aforementioned, the Company, an Affiliate and the Trustee (if applicable) shall be entitled to withhold Taxes according to the requirements of any Applicable Laws, rules, and regulations, including withholding taxes at source.
13.3. The Company’s or Trustee’s (if applicable) obligation to deliver Shares upon exercise of an Option or to sell or transfer Shares is subject to payment (or provision for payment satisfactory to the Board and the Trustee (if applicable)) by the Participant of all Taxes due by him under any Applicable Law.
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13.4. The Participants shall indemnify the Company and/or the applicable Affiliate and/or the Trustee (if applicable), immediately upon request, for any Tax (including interest and/or fines of any type and/or linkage differentials in respect of Tax and/or withheld Tax) for which the Participant is liable under any Applicable Law or under the Plan, and which was paid by the Company, the Affiliate or the Trustee (if applicable), or which the Company, the Affiliate or the Trustee (if applicable) are required to pay. The Company, the Affiliate and the Trustee (if applicable) may exercise such indemnification by deducting the amount subject to indemnification from the Participants’ salaries or remunerations.
13.5. In respect to Non-Approved 102 Options, if there occurs a Termination of the Participant’s service to or employment with the Company, the Participant shall extend to the Company or the applicable Affiliate a security or guarantee for the payment of Tax due in respect of such Option as required under Section 102.
14. Registration of the Shares on a Stock Exchange
14.1. Should reorganization or certain other arrangements regarding the Company’s share capital be necessary prior to the registration of the Company’s ordinary shares on a Stock Exchange, such arrangements or reorganization may be also carried out in respect of the Participants and their Options and/or Shares.
14.2. The Participant acknowledges that in the event that the Company’s ordinary shares shall be registered for trading in any Stock Exchange, or in the event of a private offering of shares, the Participant’s rights to sell the Shares may be subject to certain limitations (including a lock-up period), as will be requested by the Company or its underwriters, and the Participant unconditionally agrees and accepts any such limitations.
14.3. The Company does not undertake to cause the ordinary shares or the Shares to be listed on a Stock Exchange, or that the registration of the ordinary shares for trade, if at all, shall take place within a certain period of time.
15. The Rights Attached to the Shares
15.1. Equal Rights. The Shares constitute part of the ordinary shares of the Company, and they shall have equal rights for all intents and purposes as the rights attached to the ordinary shares of the Company, subject to the provisions of this Plan and any Option Agreement. The Shares, being part of the ordinary shares of the Company, shall not be protected against dilution in any manner whatsoever, unless otherwise determined by the Board. It is hereby clarified that the Shares shall not constitute a separate class of shares, but shall be an integral part of the Company’s ordinary shares.
Any change of the Company’s Articles of Association, which may change the rights attached to the Company’s ordinary shares, shall also apply to the Shares, and the provisions hereof shall apply with the necessary modifications arising from any such change.
The grant of Options and Shares under this Plan shall not restrict the Company in any way regarding future creation of additional and/or other classes of shares, including classes of shares, which may in any manner be preferred over the currently existing ordinary shares which are offered to Participants under this Plan. Subject to section 12.1 above, the grant of Options and Shares under this Plan shall not entitle any Participant to receive any compensation in the event of any change of the Company’s capital.
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15.2. Dividend Rights. No Participant shall have any rights to receive dividends in respect of Shares, until such Shares are issued to the Participant or the Trustee. Following the issuance of such Shares by the Company, such Shares will entitle the Participant to receive any dividend, to which other holders of ordinary shares in the Company are entitled.
15.3. Right of First Refusal
15.3.1. Notwithstanding anything to the contrary in the incorporation documents of the Company, none of the Participants shall have a right of first refusal in relation with any sale of shares in the Company by virtue of the Shares held by such Participant or for its benefit.
15.3.2. Unless otherwise determined by the Board, until consummation of an initial public offering of the Company’s securities under the securities laws of any jurisdiction (“IPO”), a Participant shall not have the right to sell Shares issued upon the exercise of an Option within six (6) months and one day of the date of exercise of such Option or issuance of such Shares.
15.3.3. Sale of Shares by the Participant shall be subject to a right of first refusal as set forth in the incorporation documents of the Company or any shareholders agreements, investors’ rights agreements or similar agreement(s) by which some or all holders of ordinary shares of the Company are bound. In the event that the incorporation documents or such agreements of the Company do not contain any provision regarding rights of first refusal, then, unless otherwise determined by the Board, until consummation of an IPO, the sale of Share issuable upon the exercise of an Option shall be subject to a right of first refusal on the part of the Repurchaser(s).
“Repurchaser(s)” means (i) the Company, if permitted by applicable law, (ii) if the Company is not permitted by applicable law, then any affiliate of the Company designated by the Board; or (iii) if no decision is reached by the Board, then the Company’s then existing shareholders who hold more than 2% of the then issued and outstanding share capital of the Company (save, for avoidance of doubt, for other Participants who already exercised their Options), pro rata in accordance with their respective shareholding.
The Participant shall give a notice of sale (hereinafter the “Notice”) to the Company in order to offer the Shares to the Repurchaser(s).
15.3.4. The Notice shall specify the name of each proposed purchaser or other transferee (hereinafter the “Proposed Transferee”), the number of Shares offered for sale, the price per Share and the payment terms. The Repurchaser(s) will be entitled for thirty (30) days from the day of receipt of the Notice (hereinafter the “Notice Period”), to purchase all or part of the offered Shares on a pro rata basis based upon their respective holdings in the Company.
15.3.5. If by the end of the Notice Period not all of the offered Shares have been purchased by the Repurchaser(s), the Participant shall be entitled to sell all Shares at any time during the ninety (90) days following the end of the Notice Period on terms not more favorable than those set out in the Notice, provided that the Proposed Transferee agrees in writing that the provisions of this Section shall continue to apply to the Shares in the hands of such Proposed Transferee. Any sale of Shares issued under the Plan by the Participant that is not made in accordance with the Plan or the Option Agreement shall be null and void.
15.3.6. The Board shall be entitled not to approve and/or recognize a transfer of Shares if such a transfer has not been performed in accordance with the provisions of this section 15.3 or in the event that it has not been preformed in accordance with the provisions of Section 102 and/or section 11 above.
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15.3.7. In the event that the Participant’s Shares shall be over-subscribed, each Repurchaser shall be entitled to purchase his pro-rate share of the Shares (calculated by dividing each acquiring Repurchaser’s rates of holdings or beneficially ownership in the Company, by the aggregate rates of holdings or beneficially ownership in the Company of all the Repurchaser who wish to acquire the Shares).
15.3.8. Without derogating from the aforementioned, any sale of Shares in accordance with this section 15.3 shall be subject to the prior approval of the Board.
15.4. Bring Along. For the avoidance of doubt it is clarified that as part of the ordinary shares of the Company, Shares issued upon exercise of Options or in connection thereto shall be subject to any bring-along provision included in the incorporation documents of the Company or any shareholders agreement or similar agreement(s) by which some or all holders of ordinary shares of the Company are bound.
15.5. Voting Rights. No Participant shall have any rights to vote in the Company’s meetings in respect of underlying Shares, until certificates in respect of such Shares will be issued to the Participant, or the Trustee. Following the issuance of such Shares certificates by the Company, the Participant shall have the same voting rights as other holders of ordinary shares in the Company do. Notwithstanding the aforesaid, and as long as the Company’s ordinary shares are not traded on a Stock Exchange, the Participants shall be obliged to enter into voting agreements with the Company, and/or with certain shareholders of the Company, if so determined by the Board, and as included in the Option Agreement.
16. Changes to the Plan. The Board shall be entitled, from time to time, to update and/or change the terms of this Plan, in whole or in part, at its sole discretion, provided that in the Board’s opinion such a change shall not materially derogate from the rights attached to the Options and/or Shares already granted under this Plan, unless mutually agreed otherwise between the Participant and the Company. The Board shall be entitled to terminate this Plan at any time, provided that such termination shall not materially affect the rights of Participants, to whom Options have already been granted.
17. Effective Date and Duration of the Plan
17.1. The Plan shall be effective as of the day it was adopted by the Board and shall terminate at the end of ten (10) years from such day of adoption.
17.2. The Company shall obtain the approval of the Company’s shareholders for the adoption of this Plan or for any amendment to this Plan, if shareholders’ approval is necessary or desirable to comply with any Applicable Law, including without limitation the securities laws of jurisdictions applicable to Options granted to Participants under this Plan, or if shareholders’ approval is required by any authority or by any governmental agency or by any national securities exchange, including without limitation the US Securities and Exchange Commission.
17.3. Termination of the Plan shall not affect the Board’s ability to exercise the powers granted to it hereunder with respect to Options granted under the Plan prior to the date of such termination.
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18. Successors and Assigns. The Plan and any Option granted thereafter shall be binding on all successors and assigns of the Company and a Participant, including, without limitation, the estate of such Participant and the executor, administrator or trustee of such estate, or any receiver or trustee in bankruptcy or representative of the Participant’s creditors.
19. Miscellaneous
19.1. Notices. Notices and requests regarding this Plan shall be sent in writing by registered mail or by courier to the addresses of the Company and the Participant as follows: if to the Company: at its principal offices; if to the Participant - to the Participant’s address, as registered in the Company’s registries. Such notices shall be deemed received at the addressee as follows: if sent by registered mail - within three (3) business days following their deposit for mailing at a post office located in the country of addressee, or seven (7) business days following their deposit for mailing at a post office located outside the country of addressee, and if hand-delivered - on the day of delivery (or refusal to receive).
19.2. This Plan (together with the applicable Option Agreement(s) entered into with any Participant) constitutes the entire agreements and understandings between the Company and such Participant in connection with the grant of Options to Participant. Any representation and/or promise and/or undertaking made and/or given by the Company or by whosoever on its behalf, which has not been explicitly expressed herein, shall have no force and effect.
19.3. Choice of Law. Unless otherwise specified in a specific Option Agreement, this Plan shall be governed by and construed in accordance with the laws of Israel, without giving effect to principles of conflicts of law. The competent courts of Tel Aviv-Jaffa shall have exclusive jurisdiction to hear all disputes arising in connection with this Plan.
* * * * *
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Exhibit 10.7
PainReform Ltd.
ISRAELI CAPITAL GAIN APPROVED OPTION AGREEMENT
Made effective as of the _____day of _______, 2019
| Between: | PainReform Ltd. | |
| Address [____] | ||
| (hereinafter the “Company”), on the one part | ||
| And: | Name: | ||
| I.D. No.: | |||
| Address: | |||
| (hereinafter the “Participant”) , on the other part | |||
| WHEREAS | On July 2, 2019, the Company’s Board approved the PainReform Ltd. 2019 Option Plan (the “Plan”), a copy of which is attached as Exhibit A hereto; |
| WHEREAS | On [____], 2019 the Plan was filed for approval by the Israeli Tax Authority under Section 102 according to the capital gain route as provided for thereunder; and |
| WHEREAS | Pursuant to the Plan, the Company has decided to grant Options to purchase Shares of the Company to the Participant, and the Participant has agreed to such grant, subject to all the terms and conditions as set forth in the Plan and as provided herein; |
NOW, THEREFORE, it is agreed as follows:
1. Preamble and Definitions. The preamble to this agreement constitutes an integral part hereof. Unless otherwise defined herein, capitalized terms used herein shall have the meaning ascribed to them in the Plan.
2. Grant of Options
2.1 The Company hereby grants to the Participant the number of Options as set forth in Exhibit B hereto, each Option shall be exercisable for one Share, upon payment of the Exercise Price as set forth in Exhibit B, subject to the terms and the conditions as set forth in the Plan and as provided herein.
2.2 The Participant is aware that the Company intends in the future to issue additional shares and to grant additional Options to various entities and individuals, as the Company in its sole discretion shall determine.
2.3 Approved 102 Options and any Shares issued upon conversion thereof shall be held or controlled by the Trustee, as required under Section 102 in accordance with the provisions of the applicable tax route, all in accordance with the provisions of the Plan.
3. Period of Option and Conditions of Exercise
3.1 The term of this Option Agreement shall commence on the Date of Grant and terminate at the Expiration Date, or at the time at which the Option expires pursuant to the terms of the Plan or pursuant to this Option Agreement.
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3.2 Options may be exercised only to purchase whole Shares, and in no case may a fraction of a Share be purchased. If any fractional Share would be deliverable upon exercise, such fraction shall be rounded up one-half or less, or otherwise rounded down, to the nearest whole number.
4. Adjustments. Notwithstanding anything to the contrary in Section 12.2 of the Plan and in addition thereto, if in any Structural Change as described in Section 12.2 of the Plan, the Successor Company (or parent or subsidiary of the Successor Company) does not agree to assume or substitute the Options, all unexercised Options shall expire as of immediately prior to the consummation of the Structural Change.
5. Vesting; Period of Exercise. Subject to the provisions of the Plan, Options shall vest and become exercisable according to the Vesting Dates set forth in Exhibit B hereto, provided that the Participant is an Employee or Service Provider of the Company and/or its Affiliates on the applicable Vesting Date. All unexercised Options granted to the Participant shall terminate and shall no longer be exercisable on the Expiration Date, as described in Section 3 of the Plan.
6. Exercise of Options
6.1 Options may be exercised in accordance with the provisions of Section 7.4 of the Plan.
6.2 In order for the Company to issue Shares upon the exercise of any of the Options, the Participant hereby agrees to sign any and all documents required by any applicable law and/or by the Company’s incorporation documents.
6.3 Pursuant to Section 15.5 of the Plan and, when applicable, subject to the provisions of Section 102, until the consummation of an IPO, any Shares acquired upon the exercise of Options shall be voted by an irrevocable proxy, attached as Exhibit C hereto.
6.4 The Company shall not be obligated to issue any Shares upon the exercise of an Option if such issuance, in the opinion of the Company, might constitute a violation by the Company of any provision of law.
7. Restrictions on Transfer of Options and Shares
7.1 The transfer of Options and the transfer of Shares to be issued upon exercise of the Options shall be subject to the limitations set forth in the Plan and in the Company’s incorporation documents, any shareholders’ agreements, investors’ rights agreements, or similar agreements by which the Company and some or all the holders of ordinary shares of the Company are bound, or in any applicable law including securities law of any jurisdiction in which the Company operates.
7.2 With respect to any Approved 102 Option, subject to the provisions of Section 102, the Participant shall not sell or release from trust any Share received upon the exercise of an Approved 102 Option and/or any share received subsequently following any realization of rights, including without limitation, share dividend, until the lapse of the Holding Period required under Section 102 of the Ordinance. Notwithstanding the above, if any such sale or release occurs during the Holding Period, the sanctions under Section 102 of the Ordinance and under any rules or regulation or orders or procedures promulgated thereunder shall apply to and shall be borne by such Participant.
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7.3 The Participant acknowledges that in the event Company’s shares shall be registered for trading in any public market, the Participant’s right to sell Shares may be subject to limitations (including a lock-up period), as will be requested by the Company or its underwriters, and the Participant unconditionally agrees and accepts any such limitations.
The Participant acknowledges that in order to enforce the above restriction, the Company may impose stop-transfer instructions with respect to the exercised Shares.
7.4 The Participant shall not dispose of any Shares in transactions which violate, in the opinion of the Company, any applicable laws, rules and regulations.
7.5 The Participant agrees that the Company shall have the authority to endorse upon the certificate or certificates representing the Shares such legends referring to the foregoing restrictions, and any other applicable restrictions as it may deem appropriate (which do not violate the Participant’s rights according to this Option Agreement).
8. Taxes; Indemnification
8.1 Any tax consequences arising from the grant or exercise of any Option, from the payment for Shares covered thereby or from any other event or act (of the Company and/or its Affiliates, and/or the Trustee and/or the Participant), hereunder, shall be borne solely by the Participant. The Company and/or its Affiliates and/or the Trustee shall withhold taxes according to the requirements under the applicable laws, rules, and regulations, including withholding taxes at source. Furthermore, the Participant hereby agrees to indemnify the Company and/or its Affiliates and/or the Trustee and hold them harmless against and from any and all liability for any such tax or interest or penalty thereon, including without limitation, liabilities relating to the necessity to withhold, or to have withheld, any such tax from any payment made to the Participant.
8.2 The Participant will not be entitled to receive from the Company and/or the Trustee any Shares allocated or issued upon the exercise of Options prior to the full payments of the Participant’s tax liabilities arising from Options which were granted to him and/or Shares issued upon the exercise of Options. For the avoidance of doubt, neither the Company nor the Trustee shall be required to release any share certificate to the Participant until all payments required to be made by the Participant have been fully satisfied.
8.3 The receipt of the Options, the exercise of the Options and the sale of the Shares issued in respect of the Options may result in tax consequences. THE OPTIONEE IS ADVISED TO CONSULT A TAX ADVISER WITH RESPECT TO THE TAX CONSEQUENCES OF RECEIVING OR EXERCISING THIS OPTION OR DISPOSING OF THE SHARES.
9. Miscellaneous
9.1 No Obligation to Exercise Options. The grant and acceptance of these Options imposes no obligation on the Participant to exercise it.
9.2 Confidentiality. The Participant shall regard the information in this Option Agreement and its exhibits attached hereto as confidential information and the Participant shall not reveal its contents to anyone except when required by law or for the purpose of gaining legal or tax advice.
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9.3 Continuation of Employment or Service. Neither the Plan nor this Option Agreement shall impose any obligation on the Company or an Affiliate to continue the Participant’s employment or service and nothing in the Plan or in this Option Agreement shall confer upon the Participant any right to continue in the employ or service of the Company and/or an Affiliate or restrict the right of the Company or an Affiliate to terminate such employment or service at any time.
9.4 Entire Agreement. Subject to the provisions of the Plan, to which this Option Agreement is subject, this Option Agreement, together with the exhibits hereto, constitute the entire agreement between the Participant and the Company with respect to Options granted hereunder, and supersedes all prior agreements, understandings and arrangements, oral or written, between the Participant and the Company with respect to the subject matter hereof.
9.5 Failure to Enforce - Not a Waiver. The failure of any party to enforce at any time any provisions of this Option Agreement or the Plan shall in no way be construed to be a waiver of such provision or of any other provision hereof.
9.6 Provisions of the Plan. The Options provided for herein are granted pursuant to the Plan and said Options and this Option Agreement are in all respects governed by the Plan and subject to all of the terms and provisions of the Plan.
Any interpretation of this Option Agreement will be made in accordance with the Plan but in the event there is any contradiction between the provisions of this Option Agreement and the Plan, the provisions of the Option Agreement will prevail.
9.7 Binding Effect. The Plan and this Option Agreement shall be binding upon the heirs, executors, administrators and successors of the parties hereof.
9.8 Notices. All notices or other communications given or made hereunder shall be in writing and shall be delivered or mailed by registered mail or delivered by email or facsimile with written confirmation of receipt to the Participant and/or to the Company at the addresses shown on the letterhead above, or at such other place as the Company may designate by written notice to the Participant. The Participant is responsible for notifying the Company in writing of any change in the Participant’s address, and the Company shall be deemed to have complied with any obligation to provide the Participant with notice by sending such notice to the address indicated below.
[Signatures to Follow]
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IN WITNESS WHEREOF, the parties have signed this Israeli Capital Gain Approved Option Agreement in one or more counterparts as of the date first hereinabove set forth.
| PainReform Ltd. | ||
| By: | ||
| By: | Ehud Geller | |
| Chairman of the Board | ||
I, the undersigned, hereby:
(a) acknowledge receipt of a copy of the Plan and accept the Options subject to all of the terms and provisions of the Plan and this Option Agreement. I have reviewed the Plan and this Option Agreement in its entirety, have had an opportunity to obtain the advice of counsel prior to executing this Option Agreement, and fully understand all provisions of this Option Agreement.
(b) agree to notify the Company upon any change in the residence address indicated above.
(c) agree to accept as binding, conclusive and final all decisions or interpretations of the Board upon any questions relating to the Plan and this Option Agreement.
(d) declare that I am familiar with Section 102 and the regulations and rules promulgated thereunder, including without limitations the provisions of the applicable tax route, and agree to comply with such provisions, as amended from time to time.
(e) agree to the terms and conditions of the trust deed signed between the Trustee and the Company and/or the applicable Affiliate, attached hereto as Exhibit D including but not limited to the control of the Shares by the Trustee.
(f) acknowledge that releasing the Shares from the control of the Trustee prior to the termination of the Holding Period constitutes a violation of the terms of Section 102 and I agree to bear the relevant sanctions.
(g) authorize the Company and/or the applicable Affiliate to provide the Trustee with any information required for the purpose of executing its obligations under the Ordinance, the trust deed and the trust agreement, including without limitation information about my Shares, income tax rates, salary bank account, contact details and identification number.
(h) acknowledge that if I cease to be an Israeli resident or if my engagement of the Company or Affiliate is terminated, the Shares shall remain subject to Section 102, the trust deed, the Plan and this Option Agreement.
| Participant’s Name & Signature | Date |
Attachments:
| ● | Exhibit A: PainReform Ltd. 2019 Option Plan |
| ● | Exhibit B: Terms of the Option |
| ● | Exhibit C: Proxy |
| ● | Exhibit D: Trust Deed |
[Signature Page to Israeli Capital Gain Approved Option Agreement/
PainReform Ltd.]
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Exhibit B
Terms of the Options
|
Name of the Participant:
|
|
|
Date of Grant:
|
|
| Designation: |
The Options are ☐ Approved 102 Options
|
|
1. Number of Options granted:
|
|
|
2. Exercise Price:
|
|
| 3. Vesting Dates: |
| Number of Options | Vesting Date |
| [insert a number that is 25% of total options] |
[____][insert 1st anniversary of the date of grant/commencement of employment]
|
| [insert a number that is 6.25% of total options] | At the end of each 3 months period following [____][insert 1st anniversary of the date of grant/commencement of employment] |
| 4. Expiration Date: |
10 years from the Date of Grant unless earlier terminated in accordance with the Plan. |
| By: | ||
| By: | Ehud Geller | |
| Chairman of the Board | ||
| Participant: | ||||
|
Name |
Signature |
Date |
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Exhibit C - Proxy
The undersigned, as beneficial owner of securities of PainReform Ltd. (the “Company”) described below, hereby irrevocably appoints the chairman of the Board of Directors of the Company (“Board”), as may be from time to time, and/or any other director designated by the Board for the purpose hereof from time to time, each individually, as my proxy, instead of myself and on my behalf, with respect to any and all aspects of my shareholdings in the Company, including, without limiting the foregoing generality the exercise of any and all powers and authorities vested within me in my capacity as a shareholder of the Company, to the fullest extent that I will be entitled to act so, in the same manner and with the same effect as if the undersigned were personally present at any such meeting or voting such securities or personally acting on any matters submitted to shareholders for approval or consent.
This proxy is made pursuant the PainReform Ltd. 2019 Option Plan, as may be amended from time to time (the “Plan”).
The securities to be voted under this proxy together with the securities represented by all other similar proxies granted by Participants under the Plan shall be voted by the proxy holder in the same proportion as the votes of the other shareholders of the Company present and voting at the applicable meeting or executing the written consent in lieu of meeting. The proxy holder shall waive any preemptive right, right of first refusal, right of first offer, co-sale right or any other similar participation right or restriction to which I will be entitled by virtue of the securities whether offered by the Company or any shareholder thereof.
This proxy is irrevocable as it may affect rights of third parties. The proxy holder will have the full power of substitution and revocation. All authority herein conferred shall survive the death or incapacity of the undersigned and any obligation of the undersigned hereunder shall be binding upon the heirs, personal representatives, successors and assigns of the undersigned.
The irrevocable proxy shall be deemed to be coupled with an interest and will remain in full force and effect until the closing of the underwritten initial public offering of the Company’s share capital pursuant to a registration statement filed with and declared effective under the Israeli Securities Law, 1968, under the U.S. Securities Act of 1933, as amended, or under any similar law of any other jurisdiction, upon which it will terminate automatically.
This proxy shall be signed exactly as the shareholder’s name appears on his share certificate. Joint shareholders must each sign this proxy. If signed by an attorney in fact, the Power of Attorney must be attached.
|
NAME |
SIGNATURE |
DATE |
WITNESS TO SIGNATURE:
|
NAME |
SIGNATURE |
DATE |
7
Exhibit 10.8
AMENDED AND RESTATED INVESTORS’ RIGHTS AGREEMENT
THIS AMENDED AND RESTATED INVESTORS’ RIGHTS AGREEMENT is made as of the 26th day of November 2008, by and among PainReform Ltd., an Israeli company (the “Company”), and each of the investors listed on Schedule A hereto, each of which is referred to in this Agreement as an “Investor”, and any additional investor that becomes a party to this Agreement in accordance with Section 4.9 hereof.
RECITALS
WHEREAS, the Company and the Investors are parties to that certain Series A Preferred Share Purchase Agreement dated as of November 20, 2008 (the “Purchase Agreement”); and
WHEREAS, the Company and certain of the Investors are parties to that certain Investors’ Rights Agreement dated as of July 2, 2008 (the “Original IRA”); and
WHEREAS, in order to induce the Company to enter into the Purchase Agreement and to induce the Investors to invest funds in the Company pursuant to the Purchase Agreement, the Investors and the Company hereby agree to amend and restate in its entirety the Original IRA such that this Agreement shall govern the rights of the Investors to cause the Company to register Ordinary Shares issuable to the Investors, and to receive certain information from the Company, and shall govern certain other matters as set forth in this Agreement;
NOW, THEREFORE, the parties hereby agree as follows:
1. Definitions. For purposes of this Agreement:
1.1. “Affiliate” means, with respect to any specified Person, any other Person who, directly or indirectly, controls, is controlled by, or is under common control with such Person, including without limitation any general partner, managing member, officer or director of such Person or any venture capital fund now or hereafter existing that is controlled by one or more general partners or managing members of, or shares the same management company with, such Person.
1.2. “Ordinary Shares” means Ordinary Shares of the Company, nominal value NIS0.01 each.
1.3. “Damages” means any loss, damage, or liability (joint or several) to which a party hereto may become subject under the Securities Act, the Exchange Act, or other federal or state law, insofar as such loss, damage, or liability (or any action in respect thereof) arises out of or is based upon (i) any untrue statement or alleged untrue statement of a material fact contained in any registration statement of the Company, including any preliminary prospectus or final prospectus contained therein or any amendments or supplements thereto; (ii) an omission or alleged omission to state therein a material fact required to be stated therein, or necessary to make the statements therein not misleading; or (iii) any violation or alleged violation by the indemnifying party (or any of its agents or Affiliates) of the Securities Act, the Exchange Act, any state securities law, or any rule or regulation promulgated under the Securities Act, the Exchange Act, or any state securities law.
1.4. “Derivative Securities” means any securities or rights convertible into, or exercisable or exchangeable for (in each case, directly or indirectly), Ordinary Shares, including options and warrants.
1.5. “Exchange Act” means the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder.
1.6. “Excluded Registration” means (i) a registration relating to the sale of securities to employees of the Company or a subsidiary pursuant to a share option, share purchase, or similar plan; (ii) a registration relating to an SEC Rule 145 transaction; (iii) a registration on any form that does not include substantially the same information as would be required to be included in a registration statement covering the sale of the Registrable Securities; or (iv) a registration in which the only Ordinary Shares being registered are Ordinary Shares issuable upon conversion of debt securities that are also being registered.
1.7. “Form S-1” means such form under the Securities Act as in effect on the date hereof or any successor registration form under the Securities Act subsequently adopted by the SEC.
1.8. “Form S-2” means such form under the Securities Act as in effect on the date hereof or any successor registration form under the Securities Act subsequently adopted by the SEC.
1.9. “Form S-3” means such form under the Securities Act as in effect on the date hereof or any registration form under the Securities Act subsequently adopted by the SEC that permits incorporation of substantial information by reference to other documents filed by the Company with the SEC.
1.10. “GAAP” means generally accepted accounting principles in the United States.
1.11. “Holder” means any holder of Registrable Securities who is a party to this Agreement.
1.12. “Initiating Holders” means, collectively, Holders who properly initiate a registration request under this Agreement.
1.13. “IPO” means the Company’s first underwritten public offering of its Ordinary Shares under the Securities Act.
1.14. “Major Investor” means any Investor that, individually or together with such Investor’s Permitted Transferees, holds at least 5% of the voting power represented by the then issued and outstanding shares of the Company.
1.15. “Permitted Transferee” shall have the meaning set forth in the Company’s Articles of Association, as may be amended from time to time.
1.16. “Person” means any individual, corporation, partnership, trust, limited liability company, association or other entity.
1.17. “Preferred Shares” means Series A Preferred Shares of the Company, nominal value NIS 0.01 each.
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1.18. “Registrable Securities” means (i) the Ordinary Shares issuable or issued upon conversion of the Preferred Shares; (ii) any Ordinary Shares, or any Ordinary Shares issued or issuable (directly or indirectly) upon conversion and/or exercise of any other shares or securities of the Company, held by the Investors on the date hereof or acquired by the Investors after the date hereof; and (iii) any Ordinary Shares issued as (or issuable upon the conversion or exercise of any warrant, right, or other security that is issued as) a dividend or other distribution with respect to, or in exchange for or in replacement of, the shares referenced in clauses (i) and (ii) above; excluding, however, in all cases, any Registrable Securities sold by a Person in a transaction in which the applicable rights under this Agreement are not assigned pursuant to Section 4.1, and excluding for purposes of Section 2 any shares for which registration rights have terminated pursuant to Section 2.12 of this Agreement.
1.19. “Registrable Securities then outstanding” means the number of shares determined by adding the number of outstanding Ordinary Shares that are Registrable Securities and the number of Ordinary Shares issuable (directly or indirectly) pursuant to then exercisable and/or convertible securities that are Registrable Securities.
1.20. “SEC” means the Securities and Exchange Commission.
1.21. “SEC Rule 144” means Rule 144 promulgated by the SEC under the Securities Act.
1.22. “SEC Rule 144(k)” means Rule 144(k) promulgated by the SEC under the Securities Act.
1.23. “SEC Rule 145” means Rule 145 promulgated by the SEC under the Securities Act.
1.24. “Securities Act” means the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder.
1.25. “Selling Expenses” means all underwriting discounts, selling commissions, and share transfer taxes applicable to the sale of Registrable Securities, and fees and disbursements of counsel for any Holder, except for the fees and disbursements of the Selling Holder Counsel borne and paid by the Company as provided in Section 2.6.
2. Registration Rights. The Company covenants and agrees as follows:
2.1. Demand Registration.
(a) Form S-1 Demand. If at any time after one hundred eighty (180) days after the effective date of the registration statement for the IPO, the Company receives a request from Holders of a majority of the Registrable Securities then outstanding that the Company file a Form S-1 registration statement with respect to at least forty percent (40%) of the Registrable Securities then outstanding (or a lesser percent if the anticipated aggregate offering price, net of Selling Expenses, would exceed $5 million), then the Company shall (i) within ten (10) days after the date such request is given, give notice thereof (the “Demand Notice”) to all Holders other than the Initiating Holders; and (ii) as soon as practicable, and in any event within sixty (60) days after the date such request is given by the Initiating Holders, use commercially reasonable efforts to file a Form S-1 registration statement under the Securities Act covering all Registrable Securities that the Initiating Holders requested to be registered and any additional Registrable Securities requested to be included in such registration by any other Holders, as specified by notice given by each such Holder to the Company within twenty (20) days of the date the Demand Notice is given, and in each case, subject to the limitations of Section 2.1(c) and Section 2.3.
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(b) Form S-3 Demand. If at any time when it is eligible to use a Form S-3 registration statement, the Company receives a request from Holders of at least ten percent (10%) of the Registrable Securities then outstanding that the Company file a Form S-3 registration statement with respect to outstanding Registrable Securities of such Holders having an anticipated aggregate offering price, net of Selling Expenses, of at least $1 million, then the Company shall (i) within ten (10) days after the date such request is given, give a Demand Notice to all Holders other than the Initiating Holders; and (ii) as soon as practicable, and in any event within forty-five (45) days after the date such request is given by the Initiating Holders, file a Form S-3 registration statement under the Securities Act covering all Registrable Securities requested to be included in such registration by any other Holders, as specified by notice given by each such Holder to the Company within twenty (20) days of the date the Demand Notice is given, and in each case, subject to the limitations of Section 2.1(c) and Section 2.3.
(c) Notwithstanding the foregoing obligations, if the Company furnishes to Holders requesting a registration pursuant to this Section 2.1 a certificate signed by the Company’s chief executive officer stating that in the good faith judgment of the Company’s Board of Directors it would be materially detrimental to the Company and its shareholders for such registration statement to either become effective or remain effective for as long as such registration statement otherwise would be required to remain effective, because such action would (i) materially interfere with a significant acquisition, corporate reorganization, or other similar transaction involving the Company; (ii) require premature disclosure of material information that the Company has a bona fide business purpose for preserving as confidential; or (iii) render the Company unable to comply with requirements under the Securities Act or Exchange Act, then the Company shall have the right to defer taking action with respect to such filing, and any time periods with respect to filing or effectiveness thereof shall be tolled correspondingly, for a period of not more than one hundred twenty (120) days after the request of the Initiating Holders is given; provided, however, that the Company may not invoke this right more than once in any twelve (12) month period; and provided further that the Company shall not register any securities for its own account or that of any other shareholder during such one hundred twenty (120) day period other than an Excluded Registration.
(d) The Company shall not be obligated to effect, or to take any action to effect, any registration pursuant to Section 2.1(a) (i) during the period that is sixty (60) days before the Company’s good faith estimate of the date of filing of, and ending on a date that is one hundred eighty (180) days after the effective date of, a Company-initiated registration, provided, that the Company is actively employing in good faith commercially reasonable efforts to cause such registration statement to become effective; (ii) after the Company has effected two registrations pursuant to Section 2.1(a); or (iii) if the Initiating Holders propose to dispose of shares of Registrable Securities that may be immediately registered on Form S-3 pursuant to a request made pursuant to Section 2.1(b). The Company shall not be obligated to effect, or to take any action to effect, any registration pursuant to Section 2.1(b) (i) during the period that is thirty (30) days before the Company’s good faith estimate of the date of filing of, and ending on a date that is ninety (90) days after the effective date of, a Company-initiated registration, provided, that the Company is actively employing in good faith commercially reasonable efforts to cause such registration statement to become effective; or (ii) if the Company has effected two registrations pursuant to Section 2.1(b) within the twelve (12) month period immediately preceding the date of such request. A registration shall not be counted as “effected” for purposes of this Section 2.1(d) until such time as the applicable registration statement has been declared effective by the SEC, unless the Initiating Holders withdraw their request for such registration, elect not to pay the registration expenses therefor, and forfeit their right to one demand registration statement pursuant to Section 2.6, in which case such withdrawn registration statement shall be counted as “effected” for purposes of this Section 2.1(d).
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2.2. Company Registration. If the Company proposes to register (including, for this purpose, a registration effected by the Company for shareholders other than the Holders) any of its securities under the Securities Act in connection with the public offering of such securities solely for cash (other than in an Excluded Registration), the Company shall, at such time, promptly give each Holder notice of such registration. Upon the request of each Holder given within twenty (20) days after such notice is given by the Company, the Company shall, subject to the provisions of Section 2.3, cause to be registered all of the Registrable Securities that each such Holder has requested to be included in such registration. The Company shall have the right to terminate or withdraw any registration initiated by it under this Section 2.2 before the effective date of such registration, whether or not any Holder has elected to include Registrable Securities in such registration. The expenses (other than Selling Expenses) of such withdrawn registration shall be borne by the Company in accordance with Section 2.6.
2.3. Underwriting Requirements.
(a) If, pursuant to Section 2.1, the Initiating Holders intend to distribute the Registrable Securities covered by their request by means of an underwriting, they shall so advise the Company as a part of their request made pursuant to Section 2.1, and the Company shall include such information in the Demand Notice. The underwriter(s) will be selected by the Company and shall be reasonably acceptable to a majority in interest of the Initiating Holders. In such event, the right of any Holder to include such Holder’s Registrable Securities in such registration shall be conditioned upon such Holder’s participation in such underwriting and the inclusion of such Holder’s Registrable Securities in the underwriting to the extent provided herein. All Holders proposing to distribute their securities through such underwriting shall (together with the Company as provided in Section 2.4(e)) enter into an underwriting agreement in customary form with the underwriter(s) selected for such underwriting. Notwithstanding any other provision of this Section 2.3, if the managing underwriter(s) advise(s) the Initiating Holders in writing that marketing factors require a limitation on the number of shares to be underwritten, then the Initiating Holders shall so advise all Holders of Registrable Securities that otherwise would be underwritten pursuant hereto, and the number of Registrable Securities that may be included in the underwriting shall be allocated among such Holders of Registrable Securities, including the Initiating Holders, in proportion (as nearly as practicable) to the number of Registrable Securities owned by each Holder or in such other proportion as shall mutually be agreed to by all such selling Holders; provided, however, that the number of Registrable Securities held by the Holders to be included in such underwriting shall not be reduced unless all other securities are first entirely excluded from the underwriting.
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(b) In connection with any offering involving an underwriting of shares of the Company’s share capital pursuant to Section 2.2, the Company shall not be required to include any of the Holders’ Registrable Securities in such underwriting unless the Holders accept the terms of the underwriting as agreed upon between the Company and its underwriters, and then only in such quantity as the underwriters in their sole discretion determine will not jeopardize the success of the offering by the Company. If the total number of securities, including Registrable Securities, requested by shareholders to be included in such offering exceeds the number of securities to be sold (other than by the Company) that the underwriters in their reasonable discretion determine is compatible with the success of the offering, then the Company shall be required to include in the offering only that number of such securities, including Registrable Securities, which the underwriters and the Company in their sole discretion determine will not jeopardize the success of the offering. If the underwriters determine that less than all of the Registrable Securities requested to be registered can be included in such offering, then the Registrable Securities that are included in such offering shall be allocated among the selling Holders in proportion (as nearly as practicable to) the number of Registrable Securities owned by each selling Holder or in such other proportions as shall mutually be agreed to by all such selling Holders. Notwithstanding the foregoing, in no event shall the number of Registrable Securities included in the offering be reduced unless all other securities (other than securities to be sold by the Company) are first entirely excluded from the offering. For purposes of the provision in this Section 2.3(b) concerning apportionment, for any selling Holder, such Holder and the Permitted Transferees of such Holder shall be deemed to be a single “selling Holder,” and any pro rata reduction with respect to such “selling Holder” shall be based upon the aggregate number of Registrable Securities owned by all Persons included in such “selling Holder,” as defined in this sentence.
(c) For purposes of Section 2.1, a registration shall not be counted as “effected” if, as a result of an exercise of the underwriter’s cutback provisions in Section 2.3(a), fewer than fifty percent (50%) of the total number of Registrable Securities that Holders have requested to be included in such registration statement are actually included.
2.4. Obligations of the Company. Whenever required under this Section 2 to effect the registration of any Registrable Securities, the Company shall, as expeditiously as reasonably possible:
(a) prepare and file with the SEC a registration statement with respect to such Registrable Securities and use its commercially reasonable efforts to cause such registration statement to become effective and, upon the request of the Holders of a majority of the Registrable Securities registered thereunder, keep such registration statement effective for a period of up to one hundred twenty (120) days or, if earlier, until the distribution contemplated in the registration statement has been completed; provided, however, that such one hundred twenty (120) day period shall be extended for a period of time equal to the period the Holder refrains, at the request of an underwriter of Ordinary Shares (or other securities) of the Company, from selling any securities included in such registration;
(b) prepare and file with the SEC such amendments and supplements to such registration statement, and the prospectus used in connection with such registration statement, as may be necessary to comply with the Securities Act in order to enable the disposition of all securities covered by such registration statement;
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(c) furnish to the selling Holders such numbers of copies of a prospectus, including a preliminary prospectus, as required by the Securities Act, and such other documents as the Holders may reasonably request in order to facilitate their disposition of their Registrable Securities;
(d) use its commercially reasonable efforts to register and qualify the securities covered by such registration statement under such other securities or blue-sky laws of such jurisdictions as shall be reasonably requested by the selling Holders; provided that the Company shall not be required to qualify to do business or to file a general consent to service of process in any such states or jurisdictions, unless the Company is already subject to service in such jurisdiction and except as may be required by the Securities Act;
(e) in the event of any underwritten public offering, enter into and perform its obligations under an underwriting agreement, in usual and customary form, with the underwriter(s) of such offering;
(f) use its commercially reasonable efforts to cause all such Registrable Securities covered by such registration statement to be listed on a national securities exchange or trading system and each securities exchange and trading system (if any) on which similar securities issued by the Company are then listed;
(g) provide a transfer agent and registrar for all Registrable Securities registered pursuant to this Agreement and provide a CUSIP number for all such Registrable Securities, in each case not later than the effective date of such registration;
(h) promptly make available for inspection by the selling Holders, any managing underwriter(s) participating in any disposition pursuant to such registration statement, and any attorney or accountant or other agent retained by any such underwriter or selected by the selling Holders, all financial and other records, pertinent corporate documents, and properties of the Company, and cause the Company’s officers, directors, employees, and independent accountants to supply all information reasonably requested by any such seller, underwriter, attorney, accountant, or agent, in each case, as necessary or advisable to verify the accuracy of the information in such registration statement and to conduct appropriate due diligence in connection therewith;
(i) notify each selling Holder, promptly after the Company receives notice thereof, of the time when such registration statement has been declared effective or a supplement to any prospectus forming a part of such registration statement has been filed; and
(j) after such registration statement becomes effective, notify each selling Holder of any request by the SEC that the Company amend or supplement such registration statement or prospectus.
2.5. Furnish Information. It shall be a condition precedent to the obligations of the Company to take any action pursuant to this Section 2 with respect to the Registrable Securities of any selling Holder that such Holder shall furnish to the Company such information regarding itself, the Registrable Securities held by it, and the intended method of disposition of such securities as is reasonably required to effect the registration of such Holder’s Registrable Securities.
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2.6. Expenses of Registration. All expenses (other than Selling Expenses) incurred in connection with registrations, filings, or qualifications pursuant to Section 2, including all registration, filing, and qualification fees; printers’ and accounting fees; fees and disbursements of counsel for the Company; and the reasonable fees and disbursements of one counsel for the selling Holders (“Selling Holder Counsel”), shall be borne and paid by the Company; provided, however, that the Company shall not be required to pay for any expenses of any registration proceeding begun pursuant to Section 2.1 if the registration request is subsequently withdrawn at the request of the Holders of a majority of the Registrable Securities to be registered (in which case all selling Holders shall bear such expenses pro rata based upon the number of Registrable Securities that were to be included in the withdrawn registration), unless the Holders of a majority of the Registrable Securities agree to forfeit their right to one registration pursuant to Section 2.1(a) or Section 2.1(b), as the case may be; provided further that if, at the time of such withdrawal, the Holders shall have learned of a material adverse change in the condition, business, or prospects of the Company from that known to the Holders at the time of their request and have withdrawn the request with reasonable promptness after learning of such information then the Holders shall not be required to pay any of such expenses and shall not forfeit their right to one registration pursuant to Section 2.1(a) or Section 2.1(b). All Selling Expenses relating to Registrable Securities registered pursuant to this Section 2 shall be borne and paid by the Holders pro rata on the basis of the number of Registrable Securities registered on their behalf.
2.7. Delay of Registration. No Holder shall have any right to obtain or seek an injunction restraining or otherwise delaying any registration pursuant to this Agreement as the result of any controversy that might arise with respect to the interpretation or implementation of this Section 2.
2.8. Indemnification. If any Registrable Securities are included in a registration statement under this Section 2:
(a) To the extent permitted by law, the Company will indemnify and hold harmless each selling Holder, and the partners, members, officers, directors, and shareholders of each such Holder; legal counsel and accountants for each such Holder; any underwriter (as defined in the Securities Act) for each such Holder; and each Person, if any, who controls such Holder or underwriter within the meaning of the Securities Act or the Exchange Act, against any Damages, and the Company will pay to each such Holder, underwriter, controlling Person, or other aforementioned Person any legal or other expenses reasonably incurred thereby in connection with investigating or defending any claim or proceeding from which Damages may result, as such expenses are incurred; provided, however, that the indemnity agreement contained in this Section 2.8(a) shall not apply to amounts paid in settlement of any such claim or proceeding if such settlement is effected without the consent of the Company, which consent shall not be unreasonably withheld, nor shall the Company be liable for any Damages to the extent that they arise out of or are based upon actions or omissions made in reliance upon and in conformity with written information furnished by or on behalf of any such Holder, underwriter, controlling Person, or other aforementioned Person expressly for use in connection with such registration.
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(b) To the extent permitted by law, each selling Holder, severally and not jointly, will indemnify and hold harmless the Company, and each of its directors, each of its officers who has signed the registration statement, each Person (if any), who controls the Company within the meaning of the Securities Act, legal counsel and accountants for the Company, any underwriter (as defined in the Securities Act), any other Holder selling securities in such registration statement, and any controlling Person of any such underwriter or other Holder, against any Damages, in each case only to the extent that such Damages arise out of or are based upon actions or omissions made in reliance upon and in conformity with written information furnished by or on behalf of such selling Holder expressly for use in connection with such registration; and each such selling Holder will pay to the Company and each other aforementioned Person any legal or other expenses reasonably incurred thereby in connection with investigating or defending any claim or proceeding from which Damages may result, as such expenses are incurred; provided, however, that the indemnity agreement contained in this Section 2.8(b) shall not apply to amounts paid in settlement of any such claim or proceeding if such settlement is effected without the consent of the Holder, which consent shall not be unreasonably withheld; and provided further that in no event shall the aggregate amounts payable by any Holder by way of indemnity or contribution under Sections 2.8(b) and 2.8(d) exceed the proceeds from the offering received by such Holder (net of any Selling Expenses paid by such Holder), except in the case of fraud or willful misconduct by such Holder.
(c) Promptly after receipt by an indemnified party under this Section 2.8 of notice of the commencement of any action (including any governmental action) for which a party may be entitled to indemnification hereunder, such indemnified party will, if a claim in respect thereof is to be made against any indemnifying party under this Section 2.8, give the indemnifying party notice of the commencement thereof. The indemnifying party shall have the right to participate in such action and, to the extent the indemnifying party so desires, participate jointly with any other indemnifying party to which notice has been given, and to assume the defense thereof with counsel mutually satisfactory to the parties; provided, however, that an indemnified party (together with all other indemnified parties that may be represented without conflict by one counsel) shall have the right to retain one separate counsel, with the fees and expenses to be paid by the indemnifying party, if representation of such indemnified party by the counsel retained by the indemnifying party would be inappropriate due to actual or potential differing interests between such indemnified party and any other party represented by such counsel in such action. The failure to give notice to the indemnifying party within a reasonable time of the commencement of any such action shall relieve such indemnifying party of any liability to the indemnified party under this Section 2.8, to the extent that such failure materially prejudices the indemnifying party’s ability to defend such action. The failure to give notice to the indemnifying party will not relieve it of any liability that it may have to any indemnified party otherwise than under this Section 2.8.
(d) To provide for just and equitable contribution to joint liability under the Securities Act in any case in which either (i) any party otherwise entitled to indemnification hereunder makes a claim for indemnification pursuant to this Section 2.8 but it is judicially determined (by the entry of a final judgment or decree by a court of competent jurisdiction and the expiration of time to appeal or the denial of the last right of appeal) that such indemnification may not be enforced in such case, notwithstanding the fact that this Section 2.8 provides for indemnification in such case, or (ii) contribution under the Securities Act may be required on the part of any party hereto for which indemnification is provided under this Section 2.8, then, and in each such case, such parties will contribute to the aggregate losses, claims, damages, liabilities, or expenses to which they may be subject (after contribution from others) in such proportion as is appropriate to reflect the relative fault of each of the indemnifying party and the indemnified party in connection with the statements, omissions, or other actions that resulted in such loss, claim, damage, liability, or expense, as well as to reflect any other relevant equitable considerations. The relative fault of the indemnifying party and of the indemnified party shall be determined by reference to, among other things, whether the untrue or allegedly untrue statement of a material fact, or the omission or alleged omission of a material fact, relates to information supplied by the indemnifying party or by the indemnified party and the parties’ relative intent, knowledge, access to information, and opportunity to correct or prevent such statement or omission; provided, however, that, in any such case, (x) no Holder will be required to contribute any amount in excess of the public offering price of all such Registrable Securities offered and sold by such Holder pursuant to such registration statement, and (y) no Person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) will be entitled to contribution from any Person who was not guilty of such fraudulent misrepresentation; and provided further that in no event shall a Holder’s liability pursuant to this Section 2.8(d), when combined with the amounts paid or payable by such Holder pursuant to Section 2.8(b), exceed the proceeds from the offering received by such Holder (net of any Selling Expenses paid by such Holder), except in the case of willful misconduct or fraud by such Holder.
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(d) Notwithstanding the foregoing, to the extent that the provisions on indemnification and contribution contained in the underwriting agreement entered into in connection with the underwritten public offering are in conflict with the foregoing provisions, the provisions in the underwriting agreement shall control.
(e) Unless otherwise superseded by an underwriting agreement entered into in connection with the underwritten public offering, the obligations of the Company and Holders under this Section 2.8 shall survive the completion of any offering of Registrable Securities in a registration under this Section 2, and otherwise shall survive the termination of this Agreement.
2.9. Reports Under Exchange Act. With a view to making available to the Holders the benefits of SEC Rule 144 and any other rule or regulation of the SEC that may at any time permit a Holder to sell securities of the Company to the public without registration or pursuant to a registration on Form S-3, the Company shall:
(a) make and keep available adequate current public information, as those terms are understood and defined in SEC Rule 144, at all times after the effective date of the registration statement filed by the Company for the IPO;
(b) use commercially reasonable efforts to file with the SEC in a timely manner all reports and other documents required of the Company under the Securities Act and the Exchange Act (at any time after the Company has become subject to such reporting requirements); and
(c) furnish to any Holder, so long as the Holder owns any Registrable Securities, forthwith upon request (i) to the extent accurate, a written statement by the Company that it has complied with the reporting requirements of SEC Rule 144 (at any time after ninety (90) days after the effective date of the registration statement filed by the Company for the IPO), the Securities Act, and the Exchange Act (at any time after the Company has become subject to such reporting requirements), or that it qualifies as a registrant whose securities may be resold pursuant to Form S-3 (at any time after the Company so qualifies); (ii) a copy of the most recent annual or quarterly report of the Company and such other reports and documents so filed by the Company; and (iii) such other information as may be reasonably requested in availing any Holder of any rule or regulation of the SEC that permits the selling of any such securities without registration (at any time after the Company has become subject to the reporting requirements under the Exchange Act) or pursuant to Form S-3 (at any time after the Company so qualifies to use such form).
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2.10. Limitations on Subsequent Registration Rights. From and after the date of this Agreement, the Company shall not, without the prior written consent of the Holders of a majority of the Registrable Securities then outstanding, enter into any agreement with any holder or prospective holder of any securities of the Company that would provide to such holder the right to include securities in any registration on other than either a pro rata basis with respect to the Registrable Securities or on a subordinate basis after all Holders have had the opportunity to include in the registration and offering all shares of Registrable Securities that they wish to so include; provided that this limitation shall not apply to any additional Investor who becomes a party to this Agreement in accordance with Section 4.9.
2.11. “Market Stand-off” Agreement. Each Holder hereby agrees that it will not, without the prior written consent of the managing underwriter, during the period commencing on the date of the final prospectus relating to the registration by the Company for its own behalf of Ordinary Shares or any other equity securities under the Securities Act on a registration statement on Form S-1, Form S-2, or Form S-3, and ending on the date specified by the Company and the managing underwriter (such period not to exceed (x) one hundred eighty (180) days in the case of the IPO, which period may be extended upon the request of the managing underwriter, to the extent required by any NASD rules, for an additional period of up to fifteen (15) days if the Company issues or proposes to issue an earnings or other public release within fifteen (15) days of the expiration of the 180-day lockup period, or (y) ninety (90) days in the case of any registration other than the IPO, which period may be extended upon the request of the managing underwriter, to the extent required by any NASD rules, for an additional period of up to fifteen (15) days if the Company issues or proposes to issue an earnings or other public release within fifteen (15) days of the expiration of the 90-day lockup period), (i) lend; offer; pledge; sell; contract to sell; sell any option or contract to purchase; purchase any option or contract to sell; grant any option, right, or warrant to purchase; or otherwise transfer or dispose of, directly or indirectly, any Ordinary Shares or any securities convertible into or exercisable or exchangeable (directly or indirectly) for Ordinary Shares (whether such shares or any such securities are then owned by the Holder or are thereafter acquired) or (ii) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of such securities, whether any such transaction described in clause (i) or (ii) above is to be settled by delivery of Ordinary Shares or other securities, in cash, or otherwise. The foregoing provisions of this Section 2.11 shall not apply to the sale of any shares to an underwriter pursuant to an underwriting agreement, and shall be applicable to the Holders only if all officers and directors are subject to the same restrictions and the Company uses commercially reasonable efforts to obtain a similar agreement from all shareholders individually owning more than one percent (1%) of the Company’s outstanding Ordinary Shares (after giving effect to conversion into Ordinary Shares of all outstanding Preferred Shares). The underwriters in connection with such registration are intended third-party beneficiaries of this Section 2.11 and shall have the right, power, and authority to enforce the provisions hereof as though they were a party hereto. Each Holder further agrees to execute such agreements as may be reasonably requested by the underwriters in connection with such registration that are consistent with this Section 2.11 or that are necessary to give further effect thereto. Any discretionary waiver or termination of the restrictions of any or all of such agreements by the Company or the underwriters shall apply pro rata to all Holders subject to such agreements, based on the number of shares subject to such agreements.
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2.12. Termination of Registration Rights. The right of any Holder to request registration or inclusion of Registrable Securities in any registration pursuant to Section 2.1 or Section 2.2 shall terminate upon the earliest to occur of:
(a) the closing of a Deemed Liquidation Event, as such term is defined in the Company’s Articles of Association;
(b) when all of such Holder’s Registrable Securities could be sold without restriction under SEC Rule 144(k); and
(c) the fifth anniversary of the IPO.
3. Information Rights.
3.1. Delivery of Financial Statements. The Company shall deliver to each Major Investor:
(a) as soon as practicable, but in any event within ninety (90) days after the end of each fiscal year of the Company, (i) a balance sheet as of the end of such year, (ii) statements of income and of cash flows for such year, and (iii) a statement of shareholders’ equity as of the end of such year, all such financial statements audited and certified by independent public accountants of nationally recognized standing selected by the Company;
(b) as soon as practicable, but in any event within forty-five (45) days after the end of each of the first three (3) quarters of each fiscal year of the Company, a compiled financial statement that will be prepared by the Company and signed by the CEO or CFO (except that such financial statements may (i) be subject to normal year-end audit adjustments and (ii) not contain all notes thereto that may be required in accordance with GAAP);
(c) as soon as practicable, but in any event thirty (30) days before the end of each fiscal year, a budget and business plan for the next fiscal year (collectively, the “Budget”), prepared on a monthly basis, including balance sheets, income statements, and statements of cash flow for such months and, promptly after prepared, any other budgets or revised budgets prepared by the Company;
(d) such other information relating to the financial condition, business, prospects, or corporate affairs of the Company as any Major Investor may from time to time reasonably request; provided, however, that the Company shall not be obligated under this Section 3.1 to provide information (i) that the Company reasonably determines in good faith to be a trade secret or confidential information (unless covered by an enforceable confidentiality agreement, in form acceptable to the Company) or (ii) the disclosure of which would adversely affect the attorney-client privilege between the Company and its counsel.
If, for any period, the Company has any subsidiary whose accounts are consolidated with those of the Company, then in respect of such period the financial statements delivered pursuant to the foregoing sections shall be the consolidated and consolidating financial statements of the Company and all such consolidated subsidiaries.
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Notwithstanding anything else in this Section 3.1 to the contrary, the Company may cease providing the information set forth in this Section 3.1 during the period starting with the date sixty (60) days before the Company’s good-faith estimate of the date of filing of a registration statement if it reasonably concludes it must do so to comply with the SEC rules applicable to such registration statement and related offering; provided that the Company’s covenants under this Section 3.1 shall be reinstated at such time as the Company is no longer actively employing its commercially reasonable efforts to cause such registration statement to become effective.
3.2. Inspection. The Company shall permit each Major Investor (provided that the Board of Directors has not reasonably determined that such Major Investor is a competitor of the Company), at such Major Investor’s expense, to visit and inspect the Company’s properties; examine its books of account and records; and discuss the Company’s affairs, finances, and accounts with its officers, during normal business hours of the Company as may be reasonably requested by the Major Investor; provided, however, that the Company shall not be obligated pursuant to this Section 3.2 to provide access to any information that it reasonably and in good faith considers to be a trade secret or confidential information (unless covered by an enforceable confidentiality agreement, in form acceptable to the Company) or the disclosure of which would adversely affect the attorney-client privilege between the Company and its counsel.
3.3. Termination of Information Rights. The covenants set forth in Section 3.1 and Section 3.2 shall terminate and be of no further force or effect (i) immediately before the consummation of the IPO, or (ii) when the Company first becomes subject to the periodic reporting requirements of Section 12(g) or 15(d) of the Exchange Act, or (iii) upon a Deemed Liquidation Event, as such term is defined in the Company’s Articles of Association, whichever event occurs first.
3.4. Confidentiality. Each Investor agrees that such Investor will keep confidential and will not disclose, divulge, or use for any purpose (other than to monitor its investment in the Company) any confidential information obtained from the Company pursuant to the terms of this Agreement (including notice of the Company’s intention to file a registration statement), unless such confidential information (a) is known or becomes known to the public in general (other than as a result of a breach of this Section 3.5 by such Investor), (b) is or has been independently developed or conceived by the Investor without use of the Company’s confidential information, or (c) is or has been made known or disclosed to the Investor by a third party without a breach of any obligation of confidentiality such third party may have to the Company; provided, however, that an Investor may disclose confidential information (i) to its attorneys, accountants, consultants, and other professionals to the extent necessary to obtain their services in connection with monitoring its investment in the Company; (ii) to any prospective purchaser of any Registrable Securities from such Investor, if such prospective purchaser agrees to be bound by the provisions of this Section 3.5; (iii) to any existing or prospective Affiliate, partner, member, shareholder, or wholly owned subsidiary of such Investor in the ordinary course of business, provided that such Investor informs such Person that such information is confidential and directs such Person to maintain the confidentiality of such information; or (iv) as may otherwise be required by law, provided that the Investor promptly notifies the Company of such disclosure and takes reasonable steps to minimize the extent of any such required disclosure.
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4. Miscellaneous.
4.1. Successors and Assigns. The rights under this Agreement may be assigned (but only with all related obligations) by a Holder to a transferee of Registrable Securities that (i) is a Permitted Transferee of a Holder or (ii) is or, after such transfer, becomes a Major Holder; provided, however, that (x) the Company is, within a reasonable time after such transfer, furnished with written notice of the name and address of such transferee and the Registrable Securities with respect to which such rights are being transferred; and (y) such transferee agrees in a written instrument delivered to the Company to be bound by and subject to the terms and conditions of this Agreement, including the provisions of Section 2.11. For the purposes of determining the percentage of voting power held by a transferee, the holdings of a transferee that is a Permitted Transferee of a Holder shall be aggregated together and with those of the transferring Holder; provided further that all transferees who would not qualify individually for assignment of rights shall have a single attorney-in-fact for the purpose of exercising any rights, receiving notices, or taking any action under this Agreement. The terms and conditions of this Agreement inure to the benefit of and are binding upon the respective successors and permitted assignees of the parties. Nothing in this Agreement, express or implied, is intended to confer upon any party other than the parties hereto or their respective successors and permitted assignees any rights, remedies, obligations or liabilities under or by reason of this Agreement, except as expressly provided herein.
4.2. Governing Law. This Agreement and any controversy arising out of or relating to this Agreement shall be governed by and construed in accordance with the internal laws of the State of Israel, without regard to conflict of law principles that would result in the application of any law other than the law of the State of Israel.
4.3. Counterparts; Facsimile. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. This Agreement may also be executed and delivered by facsimile signature and in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.
4.4. Titles and Subtitles. The titles and subtitles used in this Agreement are for convenience only and are not to be considered in construing or interpreting this Agreement.
4.5. Notices. All notices and other communications given or made pursuant to this Agreement shall be in writing and shall be deemed effectively given upon the earlier of actual receipt or: (i) personal delivery to the party to be notified; (ii) when sent, if sent by electronic mail or facsimile during the recipient’s normal business hours, and if not sent during normal business hours, then on the recipient’s next business day; (iii) five (5) days after having been sent by registered or certified mail, postage prepaid; or (iv) one (1) business day after the business day of deposit with a nationally recognized overnight courier, freight prepaid, specifying next-day delivery, with written verification of receipt. All communications shall be sent to the respective parties at their addresses as set forth on Schedule A hereto, or to the principal office of the Company and to the attention of the Chief Executive Officer, in the case of the Company, or to such email address, facsimile number, or address as subsequently modified by written notice given in accordance with this Section 4.5.
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4.6. Amendments and Waivers. Any term of this Agreement may be amended and the observance of any term of this Agreement may be waived (either generally or in a particular instance, and either retroactively or prospectively) only with the written consent of the Company and the holders of 66% or more (or, from and after the occurrence the Triggering Event (as defined under the Amended and Restated Articles of Association of the Company), if occurs – a majority) of the Registrable Securities then outstanding; provided that any provision hereof may be waived by any waiving party on such party’s own behalf, without the consent of any other party. Notwithstanding the foregoing, this Agreement may not be amended or terminated and the observance of any term hereof may not be waived with respect to any Investor without the written consent of such Investor, unless such amendment, termination, or waiver applies to all Investors in the same fashion. The Company shall give prompt notice of any amendment or termination hereof or waiver hereunder to any party hereto that did not consent in writing to such amendment, termination, or waiver. Any amendment, termination, or waiver effected in accordance with this Section 4.6 shall be binding on all parties hereto, regardless of whether any such party has consented thereto. No waivers of or exceptions to any term, condition, or provision of this Agreement, in any one or more instances, shall be deemed to be or construed as a further or continuing waiver of any such term, condition, or provision.
4.7. Severability. In case any one or more of the provisions contained in this Agreement is for any reason held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality, or unenforceability shall not affect any other provision of this Agreement, and such invalid, illegal, or unenforceable provision shall be reformed and construed so that it will be valid, legal, and enforceable to the maximum extent permitted by law.
4.8. Aggregation of Shares. All Registrable Securities held or acquired by Permitted Transferees shall be aggregated together for the purpose of determining the availability of any rights under this Agreement and such Permitted Transferees may apportion such rights as among themselves in any manner they deem appropriate.
4.9. Additional Investors. Notwithstanding anything to the contrary contained herein, if the Company issues additional preferred shares after the date hereof, whether pursuant to the Purchase Agreement or otherwise, any purchaser of such shares may become a party to this Agreement by executing and delivering an additional counterpart signature page to this Agreement, and thereafter shall be deemed an “Investor” for all purposes hereunder. No action or consent by the Investors shall be required for such joinder to this Agreement by such additional Investor, so long as such additional Investor has agreed in writing to be bound by all of the obligations as an “Investor” hereunder.
4.10. Entire Agreement. This Agreement (including any Schedules hereto) constitutes the full and entire understanding and agreement among the parties with respect to the subject matter hereof, and any other written or oral agreement relating to the subject matter hereof existing between the parties, including the Original IRA, is expressly terminated.
4.11. Delays or Omissions. No delay or omission to exercise any right, power, or remedy accruing to any party under this Agreement, upon any breach or default of any other party under this Agreement, shall impair any such right, power, or remedy of such non-breaching or non-defaulting party, nor shall it be construed to be a waiver of or acquiescence to any such breach or default, or to any similar breach or default thereafter occurring, nor shall any waiver of any single breach or default be deemed a waiver of any other breach or default theretofore or thereafter occurring. All remedies, whether under this Agreement or by law or otherwise afforded to any party, shall be cumulative and not alternative.
[Remainder of Page Intentionally Left Blank]
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IN WITNESS WHEREOF, the parties have executed this Amended and Restated Investor’s Rights Agreement as of the date first written above.
| Company: | ||
| PainReform Ltd. | ||
| By: | Dan Teleman, Chief Executive Officer | |
| (Name & Title of Signatory) | ||
| The Investors: | ||||
| Ofer Hi-Tech Investments Ltd. | ||||
| By: | ||||
| (Name & Title of Signatory) | ||||
| D Partners II (Cayman), L.P. | D-Partners 2 (Israel), L.P. | |||
| By: | By: | |||
| (Name & Title of Signatory) | (Name & Title of Signatory) | |||
| D Partners II (Cayman) Annex Fund, L.P. | D Partners 2 (Israel) Annex Fund, L.P. | |||
| By: | By: | |||
| (Name & Title of Signatory) | (Name & Title of Signatory) | |||
[PainReform Ltd./ Signature Page to
Amended and Restated Investors’ Rights Agreement /November 2008]
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IN WITNESS WHEREOF, the parties have executed this Amended and Restated Investor’s Rights Agreement as of the date first written above.
| The Investors (continued): | ||||
| Medica III Investments (International) L.P. | Medica III Investments (Israel) L.P. | |||
| By: Medica III Management L.P. | By: Medica III Management L.P. | |||
| its general partner | its general partner | |||
| By: Medica III Management Co. | By: Medica III Management Co. | |||
| its general partner | its general partner | |||
| By: | By: | |||
| Name: | Ehud Geller | Name: | Ehud Geller | |
| Title: | Director | Title: | Director | |
| Medica III Investments (S.F.) L.P. | Medica III Investments (P.F.) L.P. | |||
| By: Medica III Management L.P. | By: Medica III Management L.P. | |||
| its general partner | its general partner | |||
| By: Medica III Management Co. | By: Medica III Management Co. | |||
| its general partner | its general partner | |||
| By: | By: | |||
| Name: | Ehud Geller | Name: | Ehud Geller | |
| Title: | Director | Title: | Director | |
| Medica III Investments (Israel) (B) L.P. | Poalim Medica III Investments L.P. | |||
| By: Medica III Management L.P. | By: Medica III Management L.P. | |||
| its general partner | its general partner | |||
| By: Medica III Management Co. | By: Medica III Management Co. | |||
| its general partner | its general partner | |||
| By: | By: | |||
| Name: | Ehud Geller | Name: | Ehud Geller | |
| Title: | Director | Title: | Director | |
[PainReform Ltd./ Signature Page to
Amended and Restated Investors’ Rights Agreement /November 2008]
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Schedule A
List of Investors and Addresses
| Investor | Address |
| Ofer Hi-Tech Investments Ltd. |
40 Einstein, Tel Aviv, Israel 69102 Facsímile: +972-760-4355 Email: oht@oferhitech.com Attn. Lihu Avitov
|
|
D Partners II (Cayman), L.P. D Partners 2 (Israel), L.P. D Partners 2 (Israel) Annex Fund, L.P. D Partners II (Cayman) Annex Fund, L.P. |
16 Abba Eban Avenue, Herzeliya, Israel Facsimile: +972-9957-8770 email: eylonp@dovrat.com Attn.: Eylon Penchas
|
|
Medica III Investments (International) L.P. Medica III Investments (Israel) L.P. Medica III Investments (S.F.) L.P. Medica III Investments (P.F.) L.P. Medica III Investments (Israel) (B) L.P. Poalim Medica III Investments L.P. |
c/o Medica Venture Partners Ackerstein Towers, Bldg. B, 10th Floor 11 Hamanofim St., PO Box 2206 Herzliya 46175, Israel Facsimile: +972-9-954-2266 email: medica@medicavp.com
|
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Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the use in this Registration Statement on Form F-1 of our report dated May 12, 2020, relating to the financial statements of PainReform Ltd. We also consent to the reference to us under the heading "Experts" in such Registration Statement.
/s/ Brightman Almagor Zohar & Co.
Certified Public Accountants
A Firm in the Deloitte Global Network
Tel Aviv, Israel
June 30, 2020