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:
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 consist primarily of costs incurred for our research activities, which include, among other things:
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.
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:
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 consist primarily of employee-related expenses, including salaries, benefits and share-based compensation. Other general and administrative expenses include directors’ and officers’ liability insurance premiums, costs associated with being a publicly traded company, fees associated with investor relations, 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. 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, primarily consists from accrued interest on convertible notes, change in fair value of derivative warrant liability, bank management fees and commissions and exchange rate differences expenses.
The table below provides our results of operations for the years ended December 31, 2022, 2021 2020 and 2019.2020.
On March 8, 2021, we entered into a definitive securities purchase agreement with certain institutional investors, or the Purchasers, for the purchase and sale of 1,304,346 ordinary shares, and warrants to purchase up to an aggregate of 652,173 ordinary shares at a combined purchase price of $4.60 per ordinary share and accompanying warrant.warrants. We received net proceeds of approximately $5.5 million from the private placement. The warrants are exercisable for a period of five and one half years from the date of issuance and have an exercise price of $4.60 per share, subject to adjustment as set forth in the warrants for share splits, share dividends, recapitalizations and similar events. In July 2021, as a result of an exercise of warrants held by one of the Purchasers, we received gross proceeds of approximately $1.9 million.
We paid an aggregate of approximately $500,000 in placement agent fees and expenses and issued unregistered placement agent warrants to purchase 52,173 ordinary shares, at an exercise price of $5.06 per ordinary share and a term expiring on March 10, 2026.
Developing drugs, conducting clinical trials and commercializing products is expensive and we will need to raise substantial additional funds to achieve our strategic objectives. We believeexpect to continue incurring losses, and negative cash flows from operations until our existing financial resources asproduct, PRF-110, reaches commercial profitability. As a result of the dateinitiation of issuanceour Phase 3 clinical trial in March 2023, along with our current cash position, we believe we will not have sufficient resources to fund operations until the end of this Annual Report on Form 20-F,our Phase 3 study. Therefore, there is substantial doubt about our ability to continue as a going concern.
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.
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.
As of December 31, 2021,2022, we had the following contractual obligations, as defined in the rules and regulations of the SEC.
| | Payments due by period | |
| | (US$ thousands) | |
| | Less than 1 year | | | 1-3 years | | | 3-5 years | | | More than 5 years | | | Total | |
Obligations under master clinical research organization agreement (1) | | $ | 1,744 | | | | - | | | | - | | | | - | | | | 1,744 | |
Obligations under master clinical trial agreement (2) | | | | | | $ | 7,205 | | | | - | | | | - | | | | 7,205 | |
| | | | | | | | | | | | | | | | | | | | |
Total | | $ | 1,744 | | | | 7,205 | | | | - | | | | - | | | | 8,949
| |
| | | |
| | | |
| | | | | | | | | | | | | | | |
Obligations under master clinical research organization agreement(1) | | | 3,886 | | | | | | | | — | | | | — | | | | 4,858 | |
Obligations under master clinical trial agreement(2) | | | | | | | | | | | | | | | | | | | | |
Total | | | | | | | | | | | | | | | | | | | | |
(1) Consists of future milestones payments (excluding pass-through payments) master clinical research organization agreement (also refer to “D. Risk Factors, Risks Related to Our Drug Development and Business”).
(2) Consist of future payments for evaluable subjects (excluding marketing budget) under master clinical trial agreement (also refer to “D. Risk Factors, Risks Related to Our Drug Development and Business”).
Cash Flows
The following table summarizes our statement of cash flows for the years ended December 31, 2021,2022, December 31, 20202021 and December 31, 2019.2020.
| | Year ended December 31, | | | | |
| | (US$ thousands) | | | | |
| | 2021 | | | 2020 | | | 2019 | | | | | | | | | | |
Net cash used in operating activities | | | (6,553 | ) | | | (2,557 | ) | | | (609 | ) | | | (6,459 | )
| | | (6,553 | ) | | | (2,557 | ) |
Net cash used in investing activities | | | (50 | ) | | | (10 | ) | | | - | | | | (6,006 | )
| | | (50 | ) | | | (10 | ) |
Net cash provided by financing activities | | | 7,484 | | | | 17,310 | | | | 1,510 | | | | — | | | | 7,484 | | | | 17,310 | |
Increase in cash and cash equivalents and restricted cash | | | 881 | | | | 14,743 | | | | 901 | | |
Cash and cash equivalents and restricted cash, at the beginning of year | | | 15,690 | | | | 947 | | | | 46 | | |
Cash and cash equivalents and restricted cash, at the end of year | | | 16,571 | | | | 15,690 | | | | 947 | | |
(Decrease) Increase in cash and cash equivalents and restricted cash | | | | (12,465 | ) | | | 881 | | | | 14,743 | |
Cash and cash equivalents and restricted cash, at the beginning of the year | | | | 16,571 | | | | 15,690 | | | | 947 | |
Cash and cash equivalents and restricted cash, at the end of the year | | | | 4,106 | | | | 16,571 | | | | 15,690 | |
Net cash used in operating activities
For the years ended December 31, 2022 and 2021, net cash used in operating activities was approximately $6.5 million, $6.6 million, respectively. The decrease of $0.1 million from the year ended December 31, 2022 to December 31, 2021 is due to an increase in expenses for professional consulting, an increase in share-based compensation that was offset by a decrease in directors and officers insurance expenses.
For the years ended December 31, 2021 2020 and 2019,2020, net cash used in operating activities was approximately $6.6 million, $2.6 million and $0.6 million, respectively. The increase is due to a significant increase of salary expenses for new employees, professional consulting expenses, clinical trials expenses and directorsdirectors’ and officersofficers’ insurance.
Net cash used in investing activities
For the years ended December 31,
2022 and 2021,
the net cash used in investing activities was approximately $6.0 million, $.05 million respectively. The increase during the year ended December 31, 2022 was due to investments in short-term deposits.For the years ended December 31, 2021and 2020, and 2019, the net cash used in investing activities was approximately $50,000 and $10,000 and not material respectively.
Net cash provided by financing activities
For the yearsyear ended December 31, 2022, we had no cash provided by financing activities. For the year ended December 31, 2021, 2020 and 2019, net cash provided by financing activities was approximately $7.5 million and $17.3 million and 1.5 million respectively. The increasedecrease in net cash provided by financing activities was mainly due to the net proceeds received from our initial public offering and from the private investment.investment in 2021 and 2020.
For the years ended December 31, 2021 and 2020, net cash provided by financing activities was approximately $7.5 million and $17.3 million, respectively. The decrease in net cash provided by financing activities was mainly due to the net proceeds received from our initial public offering and from the private investment.
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 expect to continue incurring losses, and negative cash flows from operations until our product, PRF-110, reaches commercial profitability. As a result of these expected losses and negative cash flows from operations, along with our current cash position, we believe that our existing funds will enable uswe only have sufficient resources to fund operations through the end of Q4 2023, and we will be required to raise additional capital in the future to complete our operating expenses and capital expenditure requirements for twelve months from the date of issuance of this Annual Report.clinical trials. Therefore, there is substantial doubt about our ability to continue as a going concern.
C. | Research and Development, Patents and Licenses |
See above, under Item 5A – “Operating Results.”
We are in a development stage with regard to different products. It is not possible for us to predict with any degree of accuracy the outcome of our research, development, or commercialization efforts. As such, it is not possible for us to predict with any degree of accuracy any known trends, uncertainties, demands, commitments or events that are reasonably likely to have a material effect on our net sales or revenues, income from continuing operations, profitability, liquidity or capital resources, or that would cause reported financial information to not necessarily be indicative of future operating results or financial condition. However, to the extent possible, certain trends, uncertainties, demands, commitments and events are in this “Operating and Financial Review and Prospects.”
E. Critical Accounting Estimates
We prepare our financial statements in accordance with U.S. GAAP. In doing so, we must make estimates and assumptions that affect our reported amounts of assets, liabilities and expenses, as well as related disclosure of contingent assets and liabilities. In some cases, we could reasonably have used different accounting policies and estimates. Changes in the accounting estimates are reasonably likely to occur from period to period. Accordingly, actual results could differ materially from our estimates. To the extent that there are material differences between these estimates and actual results, our financial condition or results of operations will be affected. Significant estimates include, but are not limited to, those related to stock-based compensation and fair value of marketable debt securities. For further significant accounting policies please see Note 2 to our audited financial statements of this annual report. We believe that our accounting policies contained therein are critical in fully understanding and evaluating our financial condition and operating results.
65
Derivative warrant liability
Income taxes
DuringIn evaluating our valuation allowance, we consider all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies, and recent financial performance. Due to our lack of earnings history and uncertainties surrounding our ability to generate future taxable income, 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 asnet deferred tax assets have been fully offset by a valuation allowance.
As of December 31, 2019 with changes2022, we had net operating loss (“NOL”) carryforwards for income tax purposes of approximately $19.7 million. Net operating loss carry forwards 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 priceIsrael may be carried forward indefinitely and volatility.offset against future taxable income.
As there has been no public market for our ordinary shares, as of the issuance date of the warrants and as of December 31, 2019 a third-party valuation was performed to arrive at the ordinary share price for each of those dates. 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 different if factors or expected outcomes change and we use significantly different assumptions or estimates.
Following the closing of our initial public offering, the underlying ordinary share value used in calculating the fair value of the derivative warrant liability is determined based on the quoted market price of our ordinary shares.
Share Based Compensation
General and administrative and research and development expenses include share-based compensation to the Company's Chief Executive Officeremployees and Chief Operating Officer.directors. Fair value of stock-option awards was determined 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.
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES |
A. | Directors and Senior Management |
The following table sets forth certain information relating to our directors and senior management as of March 15, 2022.13, 2023. Unless otherwise stated, the address for our directors and senior management is at the Company’s registered address c/o 65 Yigal Alon St., Tel Aviv 6744316 Israel.
Name | | Age | | Position |
Senior Management | | | | |
Ilan Hadar | | 5253 | | Chief Executive Officer and Chief Financial Officer |
Prof. Eli Hazum | | 7375 | | Chief Technology Officer and Director |
Dr. Sigal Aviel | | 5859 | | Chief Operating Officer |
Rita Keynan | | 5354 | | Vice President of Pharmaceutical Operations |
| | | | |
Non-Employee Director | | | | |
Dr. Ehud Geller | | 7576 | | Chairman of the Board and Director |
Efi Cohen-Arazi(1) (2) (3) (4) | | 7468 | | Director |
Dr. Ellen S. Baron(1) (2) (3)(4) | | 6970 | | External Director |
Augustine Lawlor(1) (2) (3)(4) | | 7067 | | External Director |
___________
(1) | Member of the Compensation Committee |
(2) | Member of the Audit Committee |
(3) | Independent Director under Israeli Law |
(4) | Independent Director under the Nasdaq Listing Rules |
Senior Management
Ilan Hadar has served as our Chief Executive Officer and Chief Financial Officer since November 2020. Prior to joining us, Mr. Hadar served as Country Manager Israel and CFO at Foamix Pharmaceuticals Ltd. (now Nasdaq: VYNE) since 2014, where he was instrumental in building the organization and launching new innovative topical drugs in the U.S., as well as a focus on capital markets and M&A. Prior to Foamix, Mr. Hadar was Finance Director at Pfizer Pharmaceutical Ltd., where he oversaw all commercial, financial and operational activities of the local entity. From 2007 to 2011, Mr. Hadar served as Finance Manager at HP Indigo Ltd, a world-leading company in digital printing. Prior to that, Mr. Hadar was Finance Director at BAE Systems (FTSE:BA), the third-largest defencedefense company in the world, where he was responsible for all financial activities of BAE Systems Israel. From 1998 to 2016, Mr. Hadar was Chief Financial Officer at Mango DSP, a global leader of Intelligent Video Solutions, where he was successful in building the company from the incubator stage to a multinational, multi-million dollar revenue-generating company. Mr. Hadar servesservedd on the Board of Directors at Kadimastem, a public Israeli biopharmaceutical company (TASE: KDST). Mr. Hadar received his MBA in Finance and Business Entrepreneurship and B.A. degree at The Hebrew University in Jerusalem, Israel.
Prof. Eli Hazum served as our acting Chief Executive Officer from 2012 to November 2020 and our Chief Technology Officer since April 2018 and a director of our company since December 2019. 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 devotes 60% of his time to the company.
Rita Keynan has served as our Vice President of Pharmaceutical Operations since January 2021. Mrs. Keynan brings over 25 years of managerial experience in the pharmaceutical industry. Mrs. Keynan has been responsible for drug development from early phase trials through NDA filings, including managing all chemistry, manufacturing and control (CMC) activities supporting product development, clinical supplies, scale-up, regulatory submissions and commercial manufacturing. Prior to joining PainReform, Mrs. Keynan served as Executive Director of Drug Development at VYNE Therapeutics Ltd., formerly Foamix Pharmaceuticals, where she managed the drug development department that included a team of nearly a dozen employees in Israel, as well as a contract manufacturing organization (CMO) team in Europe. Additionally, Mrs. Keynan collaborated with functional areas including regulatory, clinical, and quality to ensure successful execution of drug development activities to meet project and company goals. Previously, Mrs. Keynan served as CMC Director, Head of CMC/Innovative Research and Development, and Project Manager at Foamix Pharmaceuticals Ltd., a clinical stage special pharmaceutical company. Mrs. Keynan is the co-inventor of over two dozen patents. Mrs. Keynan holds a B.Sc. in Chemistry and a M.Sc. in Pharmacy from the Hebrew University in Israel.
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 devotes 80%
Rita Keynan has served as our Vice President of her timePharmaceutical Operations since January 2021. Mrs. Keynan brings over 25 years of managerial experience in the pharmaceutical industry. Mrs. Keynan has been responsible for drug development from early phase trials through NDA filings, including managing all chemistry, manufacturing and control (CMC) activities supporting product development, clinical supplies, scale-up, regulatory submissions and commercial manufacturing. Prior to joining PainReform, Mrs. Keynan served as Executive Director of Drug Development at VYNE Therapeutics Ltd., formerly Foamix Pharmaceuticals, where she managed the drug development department that included a team of nearly a dozen employees in Israel, as well as a CMO team in Europe. Additionally, Mrs. Keynan collaborated with functional areas including regulatory, clinical, and quality to ensure successful execution of drug development activities to meet project and company goals. Previously, Mrs. Keynan served as CMC Director, Head of CMC/Innovative Research and Development, and Project Manager at Foamix Pharmaceuticals Ltd., a clinical stage special pharmaceutical company. Mrs. Keynan is the co-inventor of over two dozen patents. Mrs. Keynan holds a B.Sc. in Chemistry and a M.Sc. in Pharmacy from the Hebrew University in Israel.
Non-Employee Directors
Dr. Ehud Geller has been the Chairman of our Board of Directors since November 2008. 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.
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.
Dr. Ellen Baron has served as a director of the company since September 2020. Dr, Baron has been a Managing Director of Outcome Capital LLC, a specialized life science and technology advisory and investment banking firm since February 2017. From 2012 until joining Outcome Capital, she served as a Managing Director of Healthios Capital Markets, LLC. Prior to joining Healthios, Dr. Baron served as a life science venture capital Partner for Oxford Bioscience Partners and as Senior Vice President, Business Development at Human Genome Sciences, a publicly traded biopharmaceutical company. Dr. Baron previously had spent 20 years at Schering-Plough Corporation in both Research and Development and Business Development. Dr. Baron served as Chairman of the Board of Directors of Tetragenetics Inc., a biotech company recently acquired by AbCellera on September 13, 2021, as an independent director at Sixth Element Capital, a UK-based oncology focused venture capital fund and SFH, a Maine-based nutraceutical company. Dr. Baron holds a Ph.D. in Microbiology from Georgetown University School of Medicine, a post-doctorate at the Public Health Research Institute in New York and bachelor’s degree from Goucher College.
Augustine Lawlor has served as a director of the company since September 2020. Mr. Lawlor has been the Managing Director of HealthCare Ventures since 2000. Mr Lawlor has been the Chief Operating Officer of Leap Therapeutics since 2016. Prior to joining HealthCare Ventures, Mr. Lawlor served as Chief Operating Officer of LeukoSite Inc. Mr. Lawlor serves on the board of directors of Cardiovascular Systems, Inc. (NASDAQ: CSII) and Catalyst Biosciences, Inc. (NASDAQ:CBIO), and a number of private companies. He received a B.A. from the University of New Hampshire and a master's degree in management from Yale University.
Arrangements Concerning Election of Directors; Family Relationships
We are not aware of any arrangements or understandings with major shareholders, customers, suppliers or others, pursuant to which any person referred to above was selected as a director or member of senior management. In addition, there are no family relationships among our executive officers and directors.
Compensation of Senior Management and Directors
Aggregate Executive Compensation
The following table presents in the aggregate all compensation paid or accrued to and benefits-in-kind granted to or accrued to all of our senior management and directors as a group for the year ended December 31, 2021.2022. The table does not include any amounts we paid to reimburse any of such persons for costs incurred in providing us with services during this period.
| | Salaries, fees, commissions, and bonuses (in thousands of U.S. dollars) | | | Pension, retirement and similar benefits (in thousands of U.S. dollars) | | | Value of Options Granted(1) (in thousands of U.S. dollars) | |
All senior management and directors as a group, consisting of 8 persons | | | 1,269 | | | | 168 | | | | 797 | |
| | Salaries, fees, commissions, and bonuses | | | Pension, retirement and similar benefits | | | Value of Options Granted(1) | |
| | (in thousands of U.S. dollars) | | | (in thousands of U.S. dollars) | | | (in thousands of U.S. dollars) | |
All senior management and directors as a group, consisting of 8 persons | | | 1,326 | | | | 153 | | | | 1,314 | |
(1) | Consists of amounts recognized as share-based compensation expense for the year ended December 31, 2021.2022. Assumptions and key variables used in the calculation of such amounts are discussed in Note 910 of our financial statements. |
Individual Compensation of Covered Executives The table and summary below outline the compensation granted to our five most highly compensated “office holders” during or with respect to the year ended December 31, 20212022 as required by the Companies Law. The Companies Law defines the term “office holder” of a company to include the chief executive officer (referred to in the Companies Law as the general manager), the 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. We refer to the five individuals for whom disclosure is provided herein as our “Covered Executives.”
Name and Position(1) | | Salary | | | Social Benefits(2) | | | Bonuses | | | Value of Options Granted(3) | | | All Other Compensation(4) | | | Total | | | | | | | | | | | | Value of Options Granted (3) | | | All Other Compensation(4) | | | | |
| | (in thousands of U.S. dollars) | | | (in thousands of U.S. dollars) | |
Ehud Geller, Chairman | | | - | | | | - | | | | - | | | | 79 | | | | 156 | | | | 235 | | | | - | | | | - | | | | - | | | | 91 | | | | 150 | | | | 241 | |
Ilan Hadar, Chief Executive Officer | | | 276 | | | | 60 | | | | 93 | | | | 317 | | | | 24 | | | | 770 | | | | 321 | | | | 54 | | | | 82 | | | | 621 | | | | - | | | | 1,078 | |
Eli Hazum Chief Technology Officer | | | - | | | | - | | | | - | | | | 79 | | | | 151 | | | | 230 | | | | - | | | | - | | | | - | | | | 91 | | | | 144 | | | | 235 | |
Rita Keynan Vice President of Pharmaceutical Operations | | | 218 | | | | 62 | | | | 95 | | | | 85 | | | | | | | | 460 | | | | 216 | | | | 55 | | | | 44 | | | | 208 | | | | - | | | | 523 | |
Sigal Aviel Chief Operating Officer | | | 209 | | | | 46 | | | | 47 | | | | - | | | | - | | | | 302 | | | | 233 | | | | 44 | | | | 52 | | | | 28 | | | | - | | | | 357 | |
(1) | All executive officers listed in the table were employed on a full-time basis during 2021. |
| 2022. |
(2) | “Social Benefits” include payments to the National Insurance Institute, advanced education funds, managers’ insurance and pension funds, vacation pay and recuperation pay as mandated by Israeli law. |
(3) | Consists of amounts recognized as share-based compensation expense for the year ended December 31, 2021.2022. Assumptions and key variables used in the calculation of such amounts are discussed in Note 910 of our financial statements. |
| |
(4) | “All Other Compensation” includes chairman of the board of directors' annual fee automobile-related expenses pursuant to the Company’s automobile leasing program and directors’ consulting related fees. |
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.
Employment Agreement with Ilan Hadar: On November 25, 2020 we entered into an employment agreement with Ilan Hadar pursuant to which Mr. Hadar began serving as our Chief Executive Officer and Chief Financial Officer. Mr. Hadar’s current gross monthly salary is NIS 72,000. Mr. Hadar is entitled to an allocation to a manager’s insurance policy equivalent to an amount up to 15-1/3% of his gross monthly salary, up to 2-1/2% of his gross monthly salary for disability insurance and 7-1/2% of his gross monthly salary for a study fund. The foregoing amounts are paid by us. 7% percent of his gross monthly salary is deducted for the manager’s insurance policy and 2-1/2% is deducted for the study fund. Mr. Hadar is also entitled to reimbursement for reasonable out-of-pocket expenses, including travel expenses, and use of a company automobile and mobile phone.
Mr. Hadar is also entitled to receive options exercisable into our ordinary shares from time to time. As of March 15, 2022,13, 2023, we have granted himMr. Hadar options to purchase 267,296471,390 ordinary shares.
The term of Mr. Hadar’s employment is indefinite, unless earlier terminated for cause by either party, upon the death, disability or retirement age, or without cause by either party, subject to 90 days’ (3 months) advanced notice. Furthermore, a standard twelve (12) months after termination non-competition clause is included in the Agreement.
Consulting Agreement with Eli Hazum. On April 1, 2018, we entered into a 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.
Mr. Hazum is also entitled to receive options exercisable into our ordinary shares from time to time. As of March 15, 2022,13, 2023, we have granted him options to purchase 60,000 ordinary shares.shares under the 2019 option plan and Mr. Hazum was granted, in 2014, 153,882 options under the 2008 option plan.
Employment Agreement with Sigal Aviel. Dr. Sigal Aviel has provided consulting services to our company since October 2014 as Chief Operating Officer. On January 1, 2019, we entered into an employment agreement with Dr. Aviel pursuant to which she continues to serve as our Chief Operating Officer. Dr. Aviel’s employment agreement provides for 80%100% of full-time employment in consideration of a monthly gross base salary of approximately 42,00061,000 NIS. Dr. Aviel will also be entitled to 22 days annual vacation days as well as full social benefits. The employment may terminate upon 60 days’ prior written notice by either party.
Ms. Aviel is also entitled to receive options exercisable into our ordinary shares from time to time. As of March 15, 2022, 13, 2023, we have granted himMs. Aviel options to purchase 102,331125,000 ordinary shares.shares under the 2019 option plan in 2022 and 51,166 options were granted in 2019.
Employment Agreement with Rita Keynan: Keynan: On November 23, 2020 we entered into an employment agreement with Rita Keynan pursuant to which Ms. Keynan will begin serving as our V.P. Operations commencing on January 1, 2021. Ms. Keynan current gross monthly salary is NIS 52,000. Ms. Keynan is entitled to an allocation to a manager’s insurance policy equivalent to an amount up to 15-1/3% of her gross monthly salary, up to 2-1/2% of her gross monthly salary for disability insurance and 7-1/2% of her gross monthly salary for a study fund. The foregoing amounts are paid by us. 7% percent of her gross monthly salary is deducted for the manager’s insurance policy and 2-1/2% is deducted for the study fund. Ms. Keynan is also entitled to reimbursement for reasonable out-of-pocket expenses, including travel expenses, and use of a company automobile and mobile phone.
Ms. Keynan is also entitled to receive options exercisable into our ordinary shares from time to time. As of March 15, 2022, 13, 2023, we have granted her options to purchase 133,652238,952 ordinary shares.
The term of Ms. Keynan’s employment agreement is indefinite, unless earlier terminated for cause by either party, upon the death, disability or retirement age, or without cause by either party, subject to 60 days’ advanced notice. Furthermore, a standard twelve (12) months after termination non-competition clause is included in the Agreement.
Compensation of Directors
At our extraordinary general meeting held in February 2021 our shareholders approved, following the approval of our Compensation Committee and Board of Directors, the payment to each of our directors the following fees: (i) our non-executive directors (other than the external directors) are each entitled to an annual payment of between $13,835 to $23,745 and $350 per meeting, and (ii) our external directors are each entitled to the fixed compensation set under the Companies Regulations (Rules regarding Remuneration and Expenses for an External Director), 5764-2000, or the Remuneration Regulations. Under the current Remuneration Regulations, each external director is entitled to an annual payment of between $13,835 to $23,745 a $450 per meeting. The directors are also entitled to reimbursement of expenses (including travel, stay and lodging), subject to the Companies Law and the regulations promulgated thereunder, and in accordance with our company practices and our Compensation Policy for Executive Officers and Directors, or the Compensation Policy.
On July 6, 2020, our shareholders approved a yearly payment of $150,000 to Dr. Ehud Geller in consideration of his services. Additionally, Dr. Geller is entitled to an annual fee of $150,000 ($37,500 on a quarterly basis),services, payable quarterly, for his services as Chairman of our Board of Directors.
Dr. Ehud Geller is also entitled to receive options to purchase our ordinary shares from time to time. As of March 15, 2023, we have granted Dr. Ehud Geller options to purchase 60,000 ordinary shares.
See also “Item 6. Directors, Senior Management and Employees—C. Board Practices—External Directors” and “Item 7. Major Shareholders and Related Party Transactions—C. Related Party Transactions” below.
For the outstanding equity-based awards granted to our directors, see below under “Item 6. Directors, Senior Management and Employees—Employees—E. Share Ownership—Certain Information Concerning Equity Awards to Office Holders.”
For information on exemption and indemnification letters granted to our directors and officers, please see “C. Board Practices – Exculpation, Insurance and Indemnification of Directors and Officers”.
Board of Directors
Our amended and restated articles of association provide that we may have between five and eight directors, including directors who serve as external directors under the Companies Law. Our board of directors currently consists 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 two directors with the requisite financial and accounting expertise. The board of directors has determined that Mr. Lawlor, Dr. Baron and Dr. Ehud Geller have the requisite financial and accounting expertise.
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; |
| ● | 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.
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.
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. |
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.
Role of Board of Directors in Risk Oversight Process
Risk assessment and oversight are an integral part of our governance and management processes. Our board of directors encourages management to promote a culture that incorporates risk management into our corporate strategy and day-to-day business operations. Management discusses strategic and operational risks at regular management meetings and conducts specific strategic planning and review sessions during the year that include a focused discussion and analysis of the risks facing us. Throughout the year, senior management reviews these risks with the board of directors at regular board meetings as part of management presentations that focus on particular business functions, operations or strategies, and presents the steps taken by management to mitigate or eliminate such risks.
Leadership Structure of the Board of Directors
In accordance with the Companies Law and our articles of association, our board of directors is required to appoint one of its members to serve as chairman of the board of directors. Our board of directors has appointed Dr. Ehud Geller to serve as chairman of the board of directors.
Committees of the Board of Directors
Audit Committee
Our audit committee currently consists of three (3) persons. The current members of the audit committee are Efi Cohen-Arazi, Dr. Ellen Baron and Augustine Lawlor. Mr. Lawlor serves as chairman of the committee. Our board of directors has determined that Mr. Lawlor 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 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.
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.
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; |
| ● | 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
The members of our compensation committee are Efi Cohen-Arazi, Dr. Ellen Baron and Augustine Lawlor. Efi Cohen-Arazi serves 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.
Subject to certain exceptions, the Compensation Policy must be approved by such company’s shareholders every three years. Our current Compensation Policy was approved by our shareholders at an extraordinary general meeting of shareholders held on February 23, 2021. In addition, the Board of Directors is required to periodically examine the Compensation Policy and the need for adjustments in the event of a material change in the circumstances prevailing during the adoption of the compensation policy or for other reasons. As our shareholders have yet to approve a compensation policy, the shareholders are requested to approve the new Compensation Policy, as set forth herein.
A Compensation Policy must be based on, and must include and reference certain matters and provisions set forth in the Companies Law, which include: (i) promoting the company’s goals, work plan and policy with a long-term view; (ii) creating appropriate incentives for the company’s office holders, considering, among other things, the company’s risk management policy; (iii) the company’s size and nature of operations; and (iv) with respect to variable elements of compensation (such as annual cash bonuses), the office holder’s contribution to achieving company objectives and maximization of the company’s profits, with a long-term view and in accordance with his or her position.
Our Compensation Policy is designed to support the achievement of our long-term work plan goals and to ensure that:
Officers’ interests are as closely as possible aligned with our interests;
| ● | Officers’ interests are as closely as possible aligned with our interests; |
The correlation between pay and performance will be enhanced;
| ● | The correlation between pay and performance will be enhanced; |
We will be able to recruit and retain top level executives capable of leading us to further business success, facing the challenges ahead;
| ● | We will be able to recruit and retain top level executives capable of leading us to further business success, facing the challenges ahead; |
Our officers will be motivated to achieve a high level of business performance without taking unreasonable risks. Therefore, the variable compensation component may not be based on extreme business performance goals which might potentially impose unreasonable risks on our officers; and
| ● | Our officers will be motivated to achieve a high level of business performance without taking unreasonable risks. Therefore, the variable compensation component may not be based on extreme business performance goals which might potentially impose unreasonable risks on our officers; and |
An appropriate balance between different compensation elements (e.g., fixed vs. variable, short-term vs. long-term and cash payments vs. equity-based compensation).
| ● | An appropriate balance between different compensation elements (e.g., fixed vs. variable, short-term vs. long-term and cash payments vs. equity-based compensation). |
Our compensation committee and board of directors believe that the most effective executive compensation program is one that is designed to reward achievement and that aligns executives’ interests with those of ours and our shareholders by rewarding performance, with the ultimate objective of improving shareholder value and building a sustainable company. Our compensation committee and board of directors also seek to ensure that we maintain our ability to attract and retain superior employees in key positions and that the compensation provided to key employees remains competitive relative to the compensation paid to similarly situated executives of a selected group of our peer companies and the broader marketplace from which we recruit and compete for talent. Our Board of Directors believes that the proposed Compensation Policy properly balances the requirements of the Companies Law and the philosophy and objectives described above.
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 will be 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.
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.
Equity-based compensation for executive officers (including members of our board of directors) will be 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 will allow the company, under certain conditions, to recover bonuses paid in excess of what should have been received. 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 will allow 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 Remuneration Regulations as such regulations may be amended from time to time, or (ii) in accordance with the amounts determined in our Compensation Policy.
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 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 to examine, among other things, our compliance with applicable law and orderly business procedures. The audit committee is required to oversee the activities and to assess the performance of the internal auditor as well as to review the internal auditor’s work plan.
An internal auditor may not be:
| ● | a person (or a relative of a person) who holds more than 5% of the company’s outstanding shares or voting rights; |
| ● | a person (or a relative of a person) who has the power to appoint a director or the general manager of the company; |
| ● | an office holder or director (or a relative of an officer or director) of the company; or |
| ● | a member of the company’s independent accounting firm, or anyone on its behalf. |
Our nominated internal auditor is Yisrael Gewirtz, partner, Fahn Kanne Grant Thornton Israel, effectively starting in January 2021.
Approval of Related Party Transactions under Israeli Law
Fiduciary Duties of Directors and Officers
The Companies Law imposes a duty of care and a fiduciary duty on all office holders of a company. Each person listed in the table under “Management—Senior Management and Directors” is an office holder under the Companies Law.
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 fiduciary duty requires that an office holder act in good faith and in the best interests of the company.
The duty of care includes a duty to use reasonable means to obtain:
| ● | information on the advisability of a given action brought for his or her approval or performed by virtue of his or her position; and |
| ● | all other important information pertaining to these actions. |
The fiduciary duty includes a duty to:
| ● | refrain from any act involving a conflict of interest between the performance of his or her duties to the company and his or her other duties or personal affairs; |
| ● | refrain from any activity that is competitive with the company; |
| ● | refrain from exploiting any business opportunity of the company to receive a personal gain for himself or herself or others; and |
| ● | disclose to the company any information or documents relating to the company’s affairs which the office holder received as a result of his or her position as an office holder. |
Disclosure of Personal Interests of an Office Holder and Approval of Certain Transactions
The Companies Law requires that an office holder promptly disclose to the company any personal interest that he or she may be aware of and all related material information or documents concerning any existing or proposed transaction by the company. An interested office holder’s disclosure must be made promptly and, in any event, no later than the first meeting of the board of directors at which the transaction is considered. An office holder is not obliged to disclose a personal interest if it derives solely from the personal interest of his or her relative in a transaction that is not considered as an extraordinary transaction.
A “personal interest” is defined under the Companies Law to include a personal interest of any person in an act or transaction of a company, including the personal interest of such person’s relative or of a corporate body in which such person or a relative of such person is a 5% or greater shareholder, director, or general manager or in which he or she has the right to appoint at least one director or the general manager, but excluding a personal interest solely stemming from one’s ownership of shares in the company.
A personal interest furthermore includes the personal interest of a person for whom the office holder holds a voting proxy or the personal interest of the office holder with respect to his or her vote on behalf of a person for whom he or she holds a proxy even if such shareholder has no personal interest in the matter. An office holder is not, however, obliged to disclose a personal interest if it derives solely from the personal interest of his or her relative in a transaction that is not considered an extraordinary transaction.
Under the 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. |
If it is determined that an office holder has a personal interest in a transaction which is not an extraordinary transaction, approval by the board of directors is required for such transaction, unless the company’s articles of association provide for a different method of approval. 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. In general, 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 specific exceptions), then such arrangement is subject to a special majority approval. Arrangements regarding the compensation, exculpation, indemnification, or insurance of a director require the approval of the compensation committee, board of directors, and shareholders by ordinary majority, in that order, and under certain circumstances, a special majority approval.
Generally, a person who has a personal interest in a matter which is considered at a meeting of the board of directors or the audit committee may not be present at such a meeting or vote on that matter unless the chairman of the relevant committee or board of directors (as applicable) determines that he or she should be present in order to present the transaction that is subject to approval. If a majority of the members of the audit committee or the board of directors (as applicable) has a personal interest in the approval of a transaction, then all directors may participate in discussions of the audit committee or the board of directors (as applicable) on such transaction and the voting on approval thereof, but shareholder approval is also required for such transaction.
Disclosure of Personal Interests of Controlling Shareholders and Approval of Certain Transactions
Under Israeli Law, the term “controlling shareholder” means a shareholder with the ability to direct the activities of our company, other than by virtue of being an executive officer or director. A shareholder is presumed to be a controlling shareholder if the shareholder holds 50% or more of the voting rights in a company or has the right to appoint at least half of the directors of the company or its general manager. For the purpose of approving transactions with controlling shareholders, a controlling shareholder is deemed to include any shareholder that holds 25% or more of the voting rights in a public company if no other shareholder holds more than 50% of the voting rights in the company. For purposes 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.
Pursuant to Israeli law, the disclosure requirements regarding personal interests that apply to directors and executive officers also apply to a controlling shareholder of a public company.company. See “—External Directors” above for a definition of controlling shareholder. In the context of a transaction involving a shareholder of the company, a controlling shareholder also includes a shareholder who holds 25% or more of the voting rights in the company if no other shareholder holds more than 50% of the voting rights in the company. For this purpose, the holdings of all shareholders who have a personal interest in the same transaction will be aggregated. The approval of the audit committee or compensation committee, the board of directors, and a special majority, in that order, is required for: (i) extraordinary transactions with a controlling shareholder or in which a controlling shareholder has a personal interest; (ii) the engagement with a controlling shareholder or his or her relative, directly or indirectly, for the provision of services to the company; (iii) the terms of engagement and compensation of a controlling shareholder or his or her relative who is not an office holder; or (iv) the employment of a controlling shareholder or his or her relative by the company, other than as an office holder. For this purpose, a “special majority” approval requires shareholder approval by a majority vote of the shares present and voting at a meeting of shareholders called for such purpose, provided that either: (a) such majority includes at least a majority of the shares held by all shareholders who do not have a personal interest in such compensation arrangement; or (b) the total number of 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.
To the extent that any such transaction with a controlling shareholder is for a period extending beyond three years, approval is required once every three years, unless, with respect to certain transactions, the audit committee determines that the duration of the transaction is reasonable given the circumstances related thereto.
Arrangements regarding the compensation, exculpation, indemnification, or insurance of a controlling shareholder in his or her capacity as an office holder require the approval of the compensation committee and board of directors, and, in general, approval by a special majority of shareholders.
Pursuant to regulations promulgated under the Companies Law, certain transactions with a controlling shareholder or his or her relative, or with directors, that would otherwise require approval of a company’s shareholders may be exempt from shareholder approval upon certain determinations of the audit committee or compensation committee and board of directors.
Shareholders’ Duties
Under the Companies Law, a shareholder has a duty to act in good faith and in a customary manner toward the company and other shareholders and to refrain from abusing his or her power in the company, including, among other things, in voting at general meetings of shareholders and class meetings of shareholders with respect the following matters:
| ● | an amendment of the articles of association of the company; |
| ● | an increase in the company’s authorized share capital; |
| ● | 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. In addition, certain shareholders have a duty of fairness toward the company. These shareholders include any controlling shareholder, any shareholder who knows that he or she has the power to determine the outcome of a shareholder vote and any shareholder who has the power to appoint or to prevent the appointment of an office holder of the company or other power. The Companies Law does not define the substance of the duty of fairness, except to state that the remedies generally available upon a breach of contract will also apply in the event of a breach of the duty to act with fairness.
Exculpation, Insurance and Indemnification of Directors and Officers
Under the Companies Law, a company may not exculpate an office holder from liability for a breach of the duty of loyalty. An Israeli company may exculpate an office holder in advance from liability to the company, in whole or in part, for damages caused to the company as a result of a breach of duty of care but only if a provision authorizing such exculpation is included in its articles of association. Our articles of association include such a provision. A company may not exculpate a director from liability arising out of a prohibited dividend or distribution to shareholders.
Under the Companies Law and the Israeli Securities Law, an Israeli company may indemnify an office holder with respect to the following liabilities and expenses incurred for acts performed as an office holder, either in advance of an event or following an event, provided a provision authorizing such indemnification is contained in its articles of association:
| ● | financial liability imposed on him or her in favor of another person pursuant to a judgment, including a settlement or arbitrator’s award approved by a court. However, if an undertaking to indemnify an office holder with respect to such liability is provided in advance, then such an undertaking must be limited to events which, in the opinion of the board of directors, can be foreseen based on the company’s activities when the undertaking to indemnify is given, and to an amount or according to criteria determined by the board of directors as reasonable under the circumstances, and such undertaking must detail the abovementioned foreseen events and amount or criteria; |
| ● | reasonable litigation expenses, including attorneys’ fees, incurred by the office holder: (i) as a result of an investigation or proceeding instituted against him or her by an authority authorized to conduct such investigation or proceeding, provided that (a) no indictment was filed against such office holder as a result of such investigation or proceeding and (b) no financial liability was imposed upon him or her as a substitute for the criminal proceeding as a result of such investigation or proceeding or, if such financial liability was imposed, it was imposed with respect to an offense that does not require proof of criminal intent; and (ii) in connection with a monetary sanction; |
| ● | expenses associated with an administrative procedure, as defined in the Israeli Securities Law, conducted regarding an office holder, 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. |
Under the Companies Law and the Israeli Securities Law, a company may insure an office holder against the following liabilities incurred for acts performed 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, including a breach arising out of the negligent conduct of the office holder; |
| ● | a breach of fiduciary duty to the company, to the extent that the office holder acted in good faith and had a reasonable basis to believe that the act would not prejudice the company; |
| ● | a monetary liability imposed on the office holder in favor of a third party; and |
| ● | expenses incurred by an office holder in connection with an administrative procedure, including reasonable litigation expenses and reasonable attorneys’ fees. |
Under the Companies Law, a company may not indemnify or insure an office holder against any of the following:
| ● | a breach of fiduciary duty, except for indemnification and insurance for a breach of the fiduciary duty to the company and to the extent that the office holder acted in good faith and had a reasonable basis to believe that the act would not prejudice the company; |
| ● | a breach of duty of care committed intentionally or recklessly, excluding a breach arising out of the negligent conduct of the office holder; |
| ● | an act or omission committed with intent to derive illegal personal benefit; or |
| ● | a fine or forfeit levied against the office holder. |
Under the Companies Law, exculpation, indemnification, and insurance of office holders in a public company must be approved by the compensation committee and the board of directors and, with respect to certain office holders or under certain circumstances, by the shareholders.
Our articles of association and compensation policy allow us to exculpate, indemnify, and insure our office holders according to applicable law.
As of the date of this Annual Report on Form 20-F, no claims for directors’ and officers’ liability insurance have been filed under this policy and we are not aware of any pending or threatened litigation or proceeding involving any of our directors or officers in which indemnification is sought.
We have obtained directors’ and officers’ liability insurance for the benefit of our office holders and intend to continue to maintain such coverage and pay all premiums thereunder to the fullest extent permitted by the Companies Law. In addition, we have entered into agreements with each of our current office holders undertaking to indemnify them to the fullest extent permitted by the Companies Law and our articles of association, to the extent that these liabilities are not covered by insurance.
In the opinion of the Securities and Exchange Commission, indemnification of directors and office holders for liabilities arising under the Securities Act, however, is against public policy and therefore unenforceable.
There is no pending litigation or proceeding against any of our directors or officers as to which indemnification is being sought, nor are we aware of any pending or threatened litigation that may result in claims for indemnification by any director or officer.
See “Item 4.B. Business Overview―Employees.”
See “Item 7.A. Major Shareholders” below.
Share Incentive Plan
2008 PainReform Option Plan
We adopted our 2008 PainReform Option Plan, or the 2008 Plan, on August 7, 2008. The 2008 Plan has expired and no additional grants may be made. As of March 15, 2022, options13, 2023, options to purchase 153,882 ordinary shares remain outstanding with an exercise price of $0.24 per share.
2019 PainReform Option Plan
We adopted our 2019 PainReform Option Plan, or the 2019 Plan, on July 2, 2019 and it is scheduled to expire on July 1, 2029. The 2019 Plan provides for the grant of options to our directors, officers, employees, consultants, advisers and service providers. On November 24, 2020, the board of directors approved the increase of the number of options available for grant under the 2019 Plan by 800,000 and in April 2022, the board of directors approved an additional increase in the number of options available to grant under the 2019 Plan by 1,000,000 options for a total of 1,019,4562,019,456 options. As of March 15, 2022,13, 2023, options to purchase 971,4761,339,939 ordinary shares were outstanding with a weighted average exercise price of $4.51$1.44 per share, and options to purchase 48,000679,517 ordinary shares were available for future issuance. Of such outstanding options, options to purchase 361,280720,552 ordinary shares were vested as of March 15, 2022,2023, with a weighted average exercise price of $3.58$1.50 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.
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.
F. | Disclosure of a Registrant’s Action to Recover Erroneously Awarded Compensation |
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS |
The following table sets forth information with respect to the beneficial ownership of our ordinary shares as of March 15, 202213, 2023 by:
| ● | each of our directors and senior management; |
| ● | all of our directors and senior management as a group; and |
| ● | each person (or group of affiliated persons) known by us to be the beneficial owner of 5% or more of the outstanding ordinary shares. |
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 after March 15, 2021.13, 2023. 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.
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.
| | Ordinary Shares Beneficially Owned | | | Percentage Owned** | | | Ordinary Shares Beneficially Owned | | | Percentage Owned** | |
Senior Management and Directors | | | | | | | | | | | | |
Ilan Hadar(1) | | | 90,769 | | | | 0.8 | % | | | 294,619 | | | | 2.5 | % |
Dr. Ehud Geller(2) | | | 3,310,417 | | | | 30.2 | % | | | 3,337,250 | | | | 28.6 | % |
Dr. Sigal Aviel(3) | | | 102,331 | | | | 0.9 | % | | | 129,291 | | | | 1.1 | % |
Rita Keynan(4) | | | 40,467 | | | | 0.4 | % | | | 149,345 | | | | 1.3 | % |
Prof. Eli Hazum(5) | | | 172,049 | | | | 1.6 | % | | | 198,882 | | | | 1.7 | % |
Ellen S. Baron(6) | | | 18,167 | | | | 0.2 | % | | | 45,000 | | | | | % |
Augustine Lawlor(6) | | | 18,167 | | | | 0.2 | % | | | 45,000 | | | | * | % |
Efi Cohen-Arazi(6) | | | 18,167 | | | | 0.2 | % | | | 45,000 | | | | * | % |
All senior management and directors as a group (8 persons) | | | 3,770,532 | | | | 34.4 | % | | | 4,244,387 | | | | 36.4 | % |
More than 5% Shareholders | | | | | |
| | | | | | | | | |
XT Hi-Tech Investments (1992) Ltd. (7) | | | 852,959 | | | | 8.1 | % | | | 852,959 | | | | 7.3 | % |
Medica III Investment group (2) | | | 3,310,417 | | | | 30.2 | % | | | 3,337,250 | | | | 28.6 | % |
* | Less than 1% |
| |
**
| Based on 11,586,303 ordinary shares outstanding. |
** Based on 10,062,383 ordinary shares outstanding
(1) | Consists of options to purchase 90,769294,619 ordinary shares exercisable at $5.738$0.57 per share and expiring on November 24, 2030.23, 2032. Does not include options to purchase 209,167176,771 ordinary shares exercisable at $5.738$0.57 per share and expiring on November 24, 2030,23, 2032, that vest in more than 60 days fromfrom March 15, 2022. 13, 2023. |
(2) | Consists of 3,292,2503,337,250 beneficially owned by the Medica III Investment group which includes Medica III Investments (International) L.P. which holds 1,112,745 ordinary shares, Medica III Investments (Israel) L.P. which holds 404,455 ordinary shares, Medica III Investments (S.F.) L.P. which holds 439,574 ordinary shares, Medica III Investments (P.F.) L.P. which holds 236,573 ordinary shares, Medica III Investments (Israel) (B) L.P. which holds 571,429 ordinary shares, and Poalim Medica III Investments L.P. which holds 527,474 ordinary shares.shares and Dr. Ehud Geller who holds 45,000 ordinary shares exercisable at $4.5. 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 Batsheva Elran, is the managing entity of Medica III Fund. The principal business addressaddress of Medica III Investment is 60C Medinat Hayehudim, Herzliya, 4676670, Israel. Does not include options to purchase 41,83315,000 ordinary shares approved for issuance to Mr. Geller. Such options are exercisable at $4.50 per share and expiring on February 23, 2031, that vest in more than 60 days from March 15, 2022.13, 2023. |
(3) | Consists of options to purchase 102,331129,291 ordinary shares exercisable at a weighted average exercise price of $1.79$0.57 and expiring on September 5, 2029.November 23, 2032. Does not include options to purchase 46,875 ordinary shares exercisable at $0.57 per share and expiring on November 23, 2032, that vest in more than 60 days from March 13, 2023. |
(4) | Consists of options to purchase 40,467149,345 ordinary shares exercisable at $5.738$0.57 per share and expiring on January 1, 2031.November 23, 2032. Does not include options to purchase 93,13589,607 ordinary shares exercisable at $5.738$0.57 per share and expiring on January 1, 2031,November 23, 2032, that vest in more than 60 days from March 15, 2022.13, 2023. |
(5) | Consists of options to purchase 153,882 ordinary shares exercisable at $0.24 per share and expiring on April 2, 2024 andand options to purchase 18,16745,000 ordinary shares exercisable at $4.50 per share and expiring on February 23, 2031. Does not include options to purchase 41,833 ordinary exercisable at $4.50 per share and expiring on February 23, 2031, that vest in more than 60 days from March 15, 2022. |
(6) | Consists of options to purchase 18,167 ordinary shares exercisable at $4.50 per share and expiring on February 23, 2031. Does not include options to purchase 41,83315,000 ordinary shares exercisable at $4.50 per share and expiring on February 23, 2031, that vest in more than 60 days from March 15, 2022.13, 2023 |
(6) | Consists of options to purchase 45,000 ordinary shares exercisable at $4.50 per share and expiring on February 23, 2031. Does not include options to purchase 15,000 ordinary shares exercisable at $4.50 per share and expiring on February 23, 2031, that vest in more than 60 days from March 13, 2023. |
(7) | The following information is based on a Schedule 13G filed on January 25, 2022. XT Hi-Tech Investments (1992) Ltd., or XT Hi-Tech, is a direct wholly owned subsidiary XT Holdings Ltd., of which Orona Investments Ltd., or Orona, and Lynav Holdings Ltd., or 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., or 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 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. The principal business address XT Hi-Tech is 9 Andrei Sakharov St., Haifa, Israel. |
Record Holders
As of March 15, 2022,10, 2023, based on information provided to us by our transfer agent in the United States and other information reasonably available to us, we had 83 holders of record of our ordinary shares in the United States. Such holders of record held, as of that date, 3%10.3% of our outstanding ordinary shares. The number of record holders is not representative of the number of beneficial holders of our ordinary shares, as 27.4 %55.8% of our outstanding ordinary shares are recorded in the name of Cede & Co. as nominee for the Depository Trust Company, in whose name all shares held in “street name” are held in the United States.
To our knowledge, other than as disclosed in the table above, our other filings with the SEC and this Annual Report, there has been no significant change in the percentage ownership held by any major shareholder since January 1, 2019.
2020.
B. | Related Party Transactions |
The following is a description of the material terms of those transactions with related parties to which we are party and which were in effect since January 1, 2021.2022.
We believe that we have executed all of our transactions with related parties on terms no less favorable to us than those we could have obtained from third parties. See “Item 6.C. Board Practices—Approval of Related Party Transactions under Israeli Law.”
Relationships and Transactions with Directors and Executive Officers
Medica
The Medica III Investment group holds in the aggregate approximately 30.2%31.0% and 32.7%30.2% of our issued and outstanding share capital as of December 31, 20212022 and 2020,2021, respectively. Prof. Eli Hazum has been a partner and CSO of Medica Venture Partners since 1995.
Any future agreements with Medica Venture Partners or the Medica III Investment group must be reviewed and approved by our audit committee and board of directors. See “Management - Approval of Related Party Transactions under Israeli Law.”
Insurance, Exculpation, and Indemnification Agreements
We have entered into indemnification agreements with each of our current directors and executive officers exculpating them from a breach of their duty of care to us to the fullest extent permitted by law, subject to limited exceptions, and undertaking to indemnify them to the fullest extent permitted by Israeli law, subject to limited exceptions, and including with respect to liabilities resulting from an offering of securities by us to the public, including the offering of securities by a shareholder in connection with a secondary offering. See “Item 6.C. Board Practices—Approval of Related Party Transactions Under Israeli Law—Exculpation, Insurance and Indemnification of Directors and Officers.”
Employment and Services Agreements
We have entered into employment or services agreements with our senior management. See “Item 6.B. Compensation.”
Options
We have granted options to purchase our ordinary shares to certain of our officers and directors. See “Item 6.B. Compensation” and “Item 7.A. Major Shareholders.”. We describe our option plans under “Item 6.E. Share Ownership” and “Item 7.A. Major Shareholders.”
Indemnification Agreements
We have entered into indemnification agreements with each of our current directors and executive officers exculpating them from a breach of their duty of care to us to the fullest extent permitted by law, subject to limited exceptions, and undertaking to indemnify them to the fullest extent permitted by Israeli law, subject to limited exceptions, and including with respect to liabilities resulting from an offering of securities by us. See “Item 6.C. Board Practices—Approval of Related Party Transactions Under Israeli Law—Exculpation, Insurance and Indemnification of Directors and Officers.”
C. | Interests of Experts and Counsel |
Not applicable.
ITEM 8. FINANCIAL INFORMATION. |
A. | Statements and Other Financial Information. |
See “Item 18. Financial Statements.”
Legal Proceedings
See “Item 4.B. Business Overview―Legal Proceedings.”
Dividends
We have never declared or paid cash dividends to our shareholders. Currently, we do not intend to pay cash dividends. We intend to reinvest any earnings in developing and expanding our business. Any future determination relating to our dividend policy will be at the discretion of our board of directors and will depend on a number of factors, including future earnings, our financial condition, operating results, contractual restrictions, capital requirements, business prospects, applicable Israeli law and other factors our board of directors may deem relevant. In addition, the distribution of dividends is limited by Israeli law, which permits the distribution of dividends only out of distributable profits.
Other than as otherwise described in this Annual Report on Form 20-F and as set forth below, no significant change has occurred in our operations since the date of our financial statements included in this Annual Report on Form 20-F.
ITEM 9. THE OFFER AND LISTING |
A. | Offer and Listing Details |
On September 1, 2020, our ordinary shares commenced trading on the Nasdaq Capital Market under the symbol “PRFX.”
Not applicable.
Our ordinary shares are listed on the Nasdaq Capital Market.
Not applicable.
Not applicable.
Not applicable.
ITEM 10. ADDITIONAL INFORMATION |
Not applicable.
B. | Memorandum and Articles of Association |
A copy of our Amended and Restated Articles of Association is attached as Exhibit 1.1 to this Annual Report. Other than as disclosed below, the information called for by this Item is set forth in Exhibit 2.1 to this Annual Report and is incorporated by reference into this Annual Report.
We have not entered into any material contracts other than in the ordinary course of business and other than those described in Item 4. “Information on Our Company,” Item 7B “Major Shareholders and Related Party Transactions - Related Party Transactions” or elsewhere in this Annual Report.
There are currently no Israeli currency control restrictions on remittances of dividends on our ordinary shares, proceeds from the sale of the shares or interest or other payments to non-residents of Israel, except for shareholders who are subjects of countries that are, or have been, in a state of war with Israel.
The following description is not intended to constitute a complete analysis of all tax consequences relating to the acquisition, ownership and disposition of our ordinary shares. You should consult your own tax advisor concerning the tax consequences of your particular situation, as well as any tax consequences that may arise under the laws of any state, local, foreign, or other taxing jurisdiction.
Israeli Tax Considerations and Government Programs
The following is a brief summary of the material Israeli tax laws applicable to us and certain Israeli Government programs that benefit us. This section also contains a discussion of material Israeli tax consequences concerning the ownership and disposition of our ordinary shares. This summary does not discuss all the aspects of Israeli tax law that may be relevant to a particular investor in light of his or her personal investment circumstances or to some types of investors subject to special treatment under Israeli law. Examples of such investors include residents of Israel or traders in securities who are subject to special tax regimes not covered in this discussion. 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. The discussion below is subject to change, including due to amendments under Israeli law or changes to the applicable judicial or administrative interpretations of Israeli law, which change could affect the tax consequences described below.
General Corporate Tax Structure in Israel
Israeli resident (as defined below) companies, such as us, are generally subject to corporate tax at the rate of 23% as of 2018. However, the effective tax rate payable by a company that derives income from a Preferred Enterprise or a Preferred Technology Enterprise (as discussed below) may be considerably lower. Capital gains derived by an Israeli company are generally subject to tax at the prevailing corporate tax rate.
Law for the Encouragement of Industry (Taxes), 5729-1969
The Law for the Encouragement of Industry (Taxes), 5729-1969, or the Industry Encouragement Law, provides several tax benefits for “Industrial Companies.”
The Industry Encouragement Law defines an “Industrial Company” as a company resident in Israel, of which 90% or more of its income in any tax year, other than income from defense loans, is derived from an “Industrial Enterprise” owned by it. An “Industrial Enterprise” is defined as an enterprise whose principal activity in a given tax year is industrial production.
The following corporate tax benefits, among others, are available to Industrial Companies:
| ● | amortization over an eight-year period of the cost of patents and rights to use a patent and know-how which were purchased in good faith and are used for the development or advancement of the Industrial Enterprise; |
| ● | deduction over a three-year period of expenses incurred in connection with the issuance and listing of shares on a stock market; and |
| ● | under certain conditions, an election to file tax returns with related Israeli Industrial Companies. |
There can be no assurance that we currently qualify, or will continue to qualify, as an Industrial Company or that the benefits described above will be available in the future.
Law for the Encouragement of Capital Investments, 5719-1959
Tax Benefits for Income from Preferred Enterprise
The Law for the Encouragement of Capital Investments, 5719-1959, or the Investment Law, currently provides certain tax benefits for income generated by “Preferred Companies” from their “Preferred Enterprises.” The definition of a Preferred Company includes, inter alia, a company incorporated in Israel that is not wholly owned by a governmental entity, which:
| ● | owns a Preferred Enterprise, which is defined as an “Industrial Enterprise” (as defined under the Investment Law) that is classified as either a “Competitive Enterprise” (as defined under the Investment Law) or a “Competitive Enterprise in the Field of Renewable Energy” (as defined under the Investment Law); |
| ● | is controlled and managed from Israel; |
| ● | is not a “Family Company,” a “Home Company,” or a “Kibbutz” (collective community) as defined under the Income Tax Ordinance; |
| ● | keeps acceptable books of account and files reports in accordance with the provisions of the Investment Law and the Income Tax Ordinance; and |
| ● | was not, and certain officers of which were not, convicted of certain crimes in the 10 years prior to the tax year with respect to which benefits are being claimed. |
As of January 1, 2017, a Preferred Company is currently entitled to a reduced corporate tax rate of 16% with respect to its income derived by its Preferred Enterprise, unless the Preferred Enterprise is located in development area A, in which case the rate is currently 7.5% (our operations are currently not located in development area A).
Dividends paid out of income attributed to a Preferred Enterprise are generally subject to tax at the rate of 20% or such lower rate as may be provided in an applicable tax treaty. However, if such dividends are paid to an Israeli company, such dividends should be exempt from tax (although, if such dividends are subsequently distributed to individuals or a non-Israeli company, tax at a rate of 20% or such lower rate as may be provided in an applicable tax treaty will apply).
If in the future we generate taxable income, to the extent that we qualify as a “Preferred Company,” the benefits provided under the Investment Law could potentially reduce our corporate tax liabilities. Therefore, the termination or substantial reduction of the benefits available under the Investment Law could materially increase our tax liabilities.
Tax Benefits for Income from Preferred Technology Enterprise
An amendment to the Investment Law was enacted as part of the Economic Efficiency Law that was published on December 29, 2016, and became effective as of January 1, 2017, or the 2017 Amendment. The 2017 Amendment provides new tax benefits to Preferred Companies for “Technology Enterprises,” as described below, and is in addition to the Preferred Enterprise regime provided under the Investment Law.
The 2017 Amendment provides that a technology company satisfying certain conditions will qualify as a “Preferred Technology Enterprise” and may 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 area A. In addition, a Preferred Technology Enterprise may enjoy a reduced capital gains tax rate of 12% on capital gain derived from the sale of certain “Benefited Intangible Assets” (as defined in the Investment Law) to a related foreign company if the Benefited 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 IIA.
Dividends distributed by a Preferred Technology Enterprise that are paid out of Preferred Technology Income are subject to tax at the rate of 20%, but if they are distributed to a foreign company and at least 90% of the shares of the distributing company are held by foreign resident companies then the tax rate may be as low as 4%, subject to the fulfillment of certain conditions.
As we have not yet generated taxable income, there is no assurance that we qualify as a Preferred Technology Enterprise or that the benefits described above will be available to us in the future.
If in the future we generate taxable income, to the extent that we qualify as a “Preferred Company,” the benefits provided under the Investment Law could potentially reduce our corporate tax liabilities. Therefore, the termination or substantial reduction of the benefits available under the Investment Law could materially increase our tax liabilities.
The Encouragement of Research, Development and Technological Innovation in the Industry Law 5744
Under the Encouragement of Research, Development and Technological Innovation in the Industry Law 5744-1984 (formerly known as the Law for the Encouragement of Research and Development in Industry 5744-1984), or Innovation Law, and the regulations and guidelines promulgated thereunder, research and development programs which meet specified criteria and are approved by a committee of the IIA, are eligible for grants. The grants awarded are typically up to 50% of the project’s expenditures, as determined by the research committee. The grantee is required to pay royalties to the State of Israel from the sale of products developed under the program. Regulations under the Innovation Law generally provide for the payment of royalties of 3% to 6% on income generated from products and services based on technology developed using grants, until 100% of the grant, linked to the dollar and bearing interest at the LIBOR rate, is repaid. In July 2017, new regulations came into force. According to the new regulations, the royalties range between 1.3-5% depending on the company’s size and sector. The terms of the IIA participation also require that products developed with IIA grants be manufactured in Israel and that the know-how developed thereunder may not be transferred outside of Israel, unless approval is received from the IIA and additional payments are made to the IIA. However, this does not restrict the export of products that incorporate the funded know-how. The royalty repayment ceiling can reach up to three times the amount of the grant received (plus interest) if manufacturing is transferred outside of Israel, and repayment of up to six times the amount of the grant (plus interest) may be required if the technology itself is transferred outside of Israel or license to use it was granted to a foreign entity.
Taxation of our Shareholders
Capital Gains Tax
Israeli law generally imposes a capital gains tax (i) on the sale of any capital assets by residents of Israel, as defined for Israeli tax purposes, and (ii) on the sale of capital assets located in Israel, including shares of Israeli companies, by non-residents of Israel, unless a specific exemption is available or unless a tax treaty between Israel and the shareholder’s country of residence provides otherwise. The law distinguishes between real gain and inflationary surplus. The inflationary surplus is a portion of the total capital gain that is equivalent to the increase of the relevant asset’s purchase price which is attributable to the increase in the Israeli consumer price index or a foreign currency exchange rate between the date of purchase and the date of sale. The real gain is the excess of the total capital gain over the inflationary surplus.
Israeli Residents
Generally, as of January 1, 2012 and thereafter, the tax rate applicable to real capital gains derived from the sale of shares, whether listed on a stock market or not, is 25% for Israeli individuals, unless such shareholder claims a deduction for financing expenses in connection with such shares, in which case the gain will generally be taxed at a rate of 30%. Additionally, if such shareholder is considered a “substantial shareholder” at the time of the sale or at any time during the 12-month period preceding such sale, the tax rate will be 30%. A “substantial shareholder” is defined as one who holds, directly or indirectly, alone or “together with another” (i.e., together with a relative, or together with someone who is not a relative but with whom, according to an agreement, there is regular cooperation in material matters of the company, directly or indirectly), holds, directly or indirectly, at least 10% of any of the “means of control” in the company. “Means of control” generally include the right to vote, receive profits, nominate a director or an executive officer, receive assets upon liquidation, or instruct someone who holds any of the aforementioned rights regarding the manner in which such rights are to be exercised. However, different tax rates will apply to dealers in securities. Israeli companies are subject to capital gains tax at the regular corporate tax rate (i.e., 23% for the tax year 2018 and thereafter) on real capital gains derived from the sale of listed shares.
As of January 1, 2019, Israeli resident shareholders who are individuals with taxable income that exceeds NIS 649,500 in a tax year (linked to the Israeli consumer price index each year) will be subject to an additional tax at the rate of 3% on the portion of their taxable income for such tax year that is in excess of NIS 649,500 (linked to the Israeli consumer price index each year). For this purpose, taxable income includes taxable capital gains from the sale of our shares and taxable income from dividend distributions.
In some instances where our shareholders are liable for Israeli tax on the sale of their ordinary shares, the payment of the consideration may be subject to the withholding of Israeli tax at source.
Non-Israeli Residents
A non-Israeli resident who derives capital gains from the sale of shares in an Israeli resident company that were purchased after the company was listed for trading on a stock exchange outside of Israel will be exempt from Israeli tax so long as the shares were not held through a permanent establishment that the non-resident maintains in Israel. However, non-Israeli resident corporations will not be entitled to the foregoing exemption if (i) an Israeli resident has a controlling interest, directly or indirectly, alone, “together with another” (as defined above), or together with another Israeli resident, of more than 25% in one or more of the “means of control” (as defined above) in such non-Israeli resident corporation, or (ii) Israeli residents are the beneficiaries of, or are entitled to, 25% or more of the revenues or profits of such non-Israeli resident corporation, whether directly or indirectly.
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, pursuant to the provisions of the Convention between the Government of the United States of America and the Government of the State of Israel with respect to Taxes on Income, as amended, or the U.S.-Israel Tax Treaty, capital gains arising from the sale, exchange or disposition of our ordinary shares by (i) a person who qualifies as a resident of the United States within the meaning of the U.S.-Israel Tax Treaty, (ii) who holds the shares as a capital asset, and (iii) who is entitled to claim the benefits afforded to such person by the U.S.-Israel Tax Treaty generally is generally exempt from Israeli capital gains tax. Such exemption will not apply if: (i) such person holds, directly or indirectly, shares representing 10% or more of our voting power during any part of the 12-month period preceding such sale, exchange, or disposition, subject to particular conditions; (ii) the capital gains from such sale, exchange, or disposition are attributable to a permanent establishment in Israel; or (iii) such person is an individual and was present in Israel for 183 days or more during the relevant tax year. In such case, the capital gain arising from the sale, exchange, or disposition of our ordinary shares would be subject to Israeli tax, to the extent applicable; however, under the U.S.-Israel Tax Treaty, the taxpayer may be permitted to claim a credit for such taxes against the U.S. federal income tax imposed with respect to such sale, exchange, or disposition, subject to the limitations under U.S. law applicable to foreign tax credits. The U.S.-Israel Tax Treaty does not relate to U.S. state or local taxes.
Shareholders may be required to demonstrate that they are exempt from tax on their capital gains in order to avoid withholding at source at the time of sale.
It should be noted that in the event that the real capital gain realized by an individual shareholder is not exempt from tax in Israel, the tax rates applicable to Israeli resident individual shareholders should generally apply.
In some instances where our shareholders may be liable for Israeli tax on the sale of their ordinary shares, the payment of the consideration may be subject to the withholding of Israeli tax at source.
Taxation of Dividend Distributions
Israeli Residents
Israeli resident individuals are generally subject to Israeli income tax on the receipt of dividends paid on our ordinary shares, other than bonus shares (share dividends). As of January 1, 2012 and thereafter, the tax rate applicable to such dividends is generally 25%. With respect to a person who is a “substantial shareholder” (as defined above) at the time the dividend is received or at any time during the preceding 12-month period, the applicable tax rate is 30%. Dividends paid from income derived from Preferred Enterprises and Preferred Technology Enterprises will generally be subject to income tax at a rate of 20%.
As of January 1, 2019, Israeli resident shareholders who are individuals with taxable income that exceeds NIS 649,500 in a tax year (linked to the Israeli consumer price index each year) will be subject to an additional tax at the rate of 3% on the portion of their taxable income for such tax year that is in excess of NIS 649,500 (linked to the Israeli consumer price index each year). For this purpose, taxable income includes taxable capital gains from the sale of our shares and taxable income from dividend distributions.
Dividends paid to an Israeli resident individual shareholder on our ordinary shares will generally be subject to withholding tax at the rates corresponding with the income tax rates detailed above unless we are provided in advance with a withholding tax certificate issued by the Israel Tax Authority stipulating a different rate.
Notwithstanding the above, dividends paid to an Israeli resident “substantial shareholder” (as defined above) on publicly traded shares, like our ordinary shares, which are held via a “nominee company” (as defined under the Israeli Securities Law), are generally subject to Israeli withholding tax at a rate of 25%, unless a different rate is provided under an applicable tax treaty, provided that a certificate from the Israel Tax Authority allowing for a reduced withholding tax rate is obtained in advance.
If the dividend is attributable partly to income derived from a Preferred Enterprise or a Preferred Technology Enterprise and partly to other sources of income, the tax rate will be a blended rate reflecting the relative portions of the various types of income. We cannot assure you that we will designate the profits that are being distributed in a way that will reduce shareholders’ tax liability.
Israeli resident companies are generally exempt from tax on the receipt of dividends paid on our ordinary shares.
Non-Israeli Residents
Unless relief is provided in a treaty between Israel and the shareholder’s country of residence, non-Israeli residents are generally subject to Israeli income tax on the receipt of dividends paid on our ordinary shares at the rate of 25%. With respect to a person (including a corporation) who is a “substantial shareholder” (as defined above) at the time of receiving the dividend or at any time during the preceding 12-month period, absent treaty relief as mentioned above, the applicable Israeli income tax rate is 30%. Notwithstanding the above, dividends paid from income derived from Preferred Enterprises will be subject to Israeli income tax at a rate of 20%. In addition, dividends distributed by a Preferred Technology Enterprise that are paid out of Preferred Technology Income are subject to tax at the rate of 20%, but if they are distributed to a foreign company and at least 90% of the shares of the distributing company are held by foreign resident companies then the tax rate may be as low as 4%, subject to the fulfillment of certain conditions.
In this regard, dividends paid to a non-Israeli resident shareholder on our ordinary shares will generally be subject to withholding tax at the rates corresponding with the income tax rates detailed above unless we are provided in advance with a withholding tax certificate issued by the Israel Tax Authority stipulating a different rate (e.g., in accordance with the provisions of an applicable tax treaty).
Notwithstanding the above, dividends paid to a non-Israeli resident “substantial shareholder” (as defined above) on publicly traded shares, like our ordinary shares, which are held via a “nominee company” (as defined under the Israeli Securities Law), are generally subject to Israeli withholding tax at a rate of 25%, unless a different rate is provided under an applicable tax treaty, provided that a certificate from the Israel Tax Authority allowing for a reduced withholding tax rate is obtained in advance.
In addition, it should be noted that an additional 3% tax might be applicable to individual shareholders if certain conditions are met.
Under the U.S.-Israel Tax Treaty, the maximum Israeli tax on dividends paid to a holder of ordinary shares who qualifies as a resident of the United States within the meaning of the U.S.-Israel Tax Treaty is 25%. Such tax rate is generally reduced to 12.5% if: (i) the shareholder is a U.S. corporation and holds at least 10% of the outstanding shares of our voting stock during the part of our tax year that precedes the date of payment of the dividends and during the whole of our prior tax year; (ii) not more than 25% of our gross income in the tax year preceding the payment of the dividends consists of interest or dividends, other than dividends or interest received from subsidiary corporations 50% or more of the outstanding shares of voting stock of which is owned by us at the time such dividends or interest are received by us; and (iii) the dividends are not sourced from income derived during a period for which we were entitled to the reduced tax rate applicable to a Preferred Enterprise under the Investment Law. If the dividends are sourced from income derived during a period for which we are entitled to the reduced tax rate applicable to a Preferred Enterprise or a Preferred Technology Enterprise under the Investment Law, to the extent that the first two conditions detailed above are met, the Israeli tax rate applicable to such dividends should be 15%.
If the dividend is attributable partly to income derived from a Preferred Enterprise or a Preferred Technology Enterprise and partly to other sources of income, the tax rate will be a blended rate reflecting the relative portions of the various types of income. We cannot assure you that we will designate the profits that are being distributed in a way that will reduce shareholders’ tax liability.
Estate and gift tax
Israeli law presently does not impose estate tax.
Israeli law also does not presently impose gift taxes upon the transfer of assets to Israeli resident individuals so long as it is demonstrated to the satisfaction of the Israel Tax Authority that the transfer was executed in good faith.
Certain U.S. Federal Income Tax Consequences
The following summary describes certain material U.S. federal income tax consequences relating to an investment in the ordinary shares by U.S. Holders (as defined below). This summary deals only with ordinary shares that are held as capital assets within the meaning of section 1221 of the U.S. Internal Revenue Code of 1986, as amended, or the Code (generally, property held for investment). This summary does not address tax considerations of holders that may be subject to special tax rules, including, without limitation, dealers or traders in securities or currencies, brokers, financial institutions, tax-exempt organizations, insurance companies, regulated investment companies, real estate investment trusts, grantor trusts, certain former citizens or residents of the United States, persons who acquire our ordinary shares through the exercise or cancellation of employee stock options or otherwise as compensation for their services, persons that mark their securities to market for U.S. federal income tax purposes, individual retirement and tax-deferred accounts, persons holding ordinary shares as part of a hedging, integrated, conversion or constructive sale transaction, or a straddle, persons subject to the alternative minimum tax, or persons who have a functional currency other than the U.S. dollar. In addition, this discussion does not address the tax treatment of U.S. Holders (as defined below) who own, directly, indirectly, or constructively, 10% or more of our outstanding stock, by vote or value. The discussion below is based upon the Code, final, temporary and proposed Treasury regulations promulgated thereunder, applicable administrative rulings and judicial interpretations thereof, and the U.S.-Israel Tax Treaty, all as in effect as of the date hereof and all of which are subject to change, possibly on a retroactive basis, and all of which are open to differing interpretations. In addition, this summary does not consider the possible application of U.S. federal gift or estate taxes or any aspect of state, local, or non-U.S. tax laws or any additional U.S. federal tax consequences other than U.S. federal income tax consequences. Furthermore, we will not seek a ruling from the IRS with regard to the U.S. federal income tax treatment of an investment in our ordinary shares and can provide no assurance that the tax consequences contained in this summary will not be challenged by the IRS or will be sustained in a court if challenged.
As used in this summary the term “U.S. Holder” means a beneficial owner of ordinary shares that is, for U.S. federal income tax purposes: (i) an individual citizen or resident of the United States, (ii) a corporation (or other entity taxable as a corporation for U.S. federal income tax purposes) created or organized in or under the laws of the United States or any state thereof, or the District of Columbia; (iii) an estate the income of which is subject to U.S. federal income taxation regardless of its source, or (iv) a trust if either (a) a court within the United States is able to exercise primary supervision over the administration of the trust and one or more U.S. persons have the authority to control all substantial decisions of the trust, or (b) the trust has a valid election in effect under applicable Treasury regulations to be treated as a U.S. person. This summary does not consider the U.S. federal tax considerations to a person that is not a U.S. Holder. In addition, the tax treatment of persons who hold or ordinary shares through a partnership or other pass-through entity treated as a partnership for U.S. federal income tax purposes generally depends upon the status of the partner and the activities of the partnership. The tax consequences to such a person or entity are not considered in this summary and such persons and entities should consult their tax advisors with respect to the U.S. federal tax consequences of investing in the ordinary shares.
This summary does not discuss all aspects of U.S. federal income taxation that may be relevant to a particular investor in light of its circumstances. Prospective purchasers of the ordinary shares should consult their own tax advisors with respect to the specific U.S. federal income tax consequences to such person of purchasing, holding, or disposing of the ordinary shares, as well as the effect of any state, local, or other tax laws.
Distributions on ordinary shares
As noted above, we have no current plans to pay dividends. However, subject to the discussion under the heading “Passive Foreign Investment Company Consequences,” U.S. Holders are required to include in gross income the amount of any distribution paid on ordinary shares to the extent the distribution is paid out of our current and/or accumulated earnings and profits, as determined for U.S. federal income tax purposes. To the extent a distribution paid with respect to our ordinary shares exceeds our current and accumulated earnings and profits, such amount will be treated first as a non-taxable return of capital, reducing a U.S. Holder’s tax basis for the ordinary shares to the extent thereof, and thereafter as either long-term or short-term capital gain depending upon whether the U.S. Holder has held our ordinary shares for more than one year as of the time such distribution is received. Preferential tax rates for long-term capital gains are applicable for U.S. Holders that are individuals, estates, or trusts. However, we do not expect to maintain calculations of our earnings and profits under United States federal income tax principles. Therefore, U.S. Holders should expect that the entire amount of any distribution generally will be reported as dividend income. The amount of the dividend will generally be treated as foreign-source dividend income to U.S. Holders. A non-corporate U.S. Holder that meets certain eligibility requirements may qualify for a lower rate of U.S. federal income taxation on dividends paid if we are a “qualified foreign corporation” for U.S. federal income tax purposes. We generally will be treated as a qualified foreign corporation if we are not a passive foreign investment company, or PFIC, in the taxable year in which such dividends are paid or in the preceding taxable year (see discussion below), and (i) we are eligible for benefits under a comprehensive U.S. income tax treaty that includes an exchange of information program and which the U.S. Treasury Department has determined is satisfactory for these purposes, or (ii) our ordinary shares are listed on an established securities market in the United States (which includes the Nasdaq Capital Market). As discussed below under the heading “Passive Foreign Investment Company Consequences,” we believe that we were not a PFIC for U.S. federal income tax purposes for our 2022 taxable year. Because the PFIC determination is highly fact intensive, there can be no assurance that we will be or not be a PFIC in 2023 or any other year. In addition, a non-corporate U.S. Holder will not be eligible for a reduced U.S. federal income tax rate with respect to dividend distributions on ordinary shares if certain holding period and other requirements are not met. Non-corporate U.S. Holders should consult their own tax advisors concerning whether dividends received by them qualify for the reduced rate of tax.
Corporate U.S. Holders generally will not be allowed a “dividends-received deduction” generally allowed to corporate U.S. Holders with respect to dividends received from U.S. corporations for dividends received from us.
The amount of a distribution with respect to our ordinary shares will be equal to the amount of cash and the fair market value of any property distributed plus the amount of any Israeli taxes withheld therefrom. The amount of any cash distributions paid in NIS will equalsequal the U.S. dollar value of the NIS on the date of distribution based upon the exchange rate in effect on such date, regardless of whether the NIS are converted into U.S. dollars at that time, and U.S. Holders who include such distribution in income on such date will have a tax basis in such NIS for U.S. federal income tax purposes equal to such U.S. dollar value. If the dividend is converted to U.S. dollars on the date of receipt, a U.S. Holder generally will not recognize a foreign currency gain or loss. However, if the U.S. Holder converts the NIS into U.S. dollars on a later date, the U.S. Holder must include, in computing its income, any gain or loss resulting from any exchange rate fluctuations. The gain or loss will be equal to the difference between (i) the U.S. dollar value of the amount included in income when the dividend was received and (ii) the amount received on the conversion of the NIS into U.S. dollars. Such gain or loss will generally be ordinary income or loss and United States source income for U.S. foreign tax credit purposes. U.S. Holders should consult their own tax advisors regarding the tax consequences to them if we pay dividends in NIS or any other non-U.S. currency.
Subject to certain significant conditions and limitations, including potential limitations under the U.S.-Israel Tax Treaty, U.S. Holders may be entitled to a credit against their U.S. federal income tax liability or a deduction against U.S. federal taxable income in an amount equal to the non-refundable Israeli tax withheld on distributions on our ordinary shares.shares.. The election to deduct, rather than credit, foreign taxes, is made on a year-by-year basis and applies to all foreign taxes paid by a U.S. Holders should consult their own tax advisors to determine whether and to what extent they would be entitled to such credit.Holder or withheld from a U.S. Holder that year. Distributions paid on our ordinary shares will generally be treated as passive income that is foreign source for U.S. foreign tax credit purposes. As a result of recent changes to the U.S. foreign tax credit rules, a withholding tax generally will need to satisfy certain additional requirements in order to be considered a creditable tax for a U.S. Holder. We have not determined whether these requirements have been met and, accordingly, no assurance can be given that any withholding tax on dividends paid by us will be creditable. U.S. Holders should consult their own tax advisors to determine whether and to what extent they would be entitled to such credit.
The additional 3.8% Medicare tax (described below) may apply to dividends received by certain U.S. Holders who meet certain modified adjusted gross income thresholds.
Disposition of ordinary shares
Subject to the discussion under the heading “Passive Foreign Investment Company Consequences,” upon the sale, exchange or other taxable disposition of ordinary shares, a U.S. Holder generally will recognize capital gain or loss in an amount equal to the difference between the amount realized on the disposition and such U.S. Holder’s adjusted tax basis in the ordinary shares. The adjusted tax basis in an ordinary share generally will be equal to the cost of such ordinary share. The capital gain or loss realized on the sale, exchange, or other disposition of ordinary shares will be long-term capital gain or loss if the U.S. Holder held the ordinary shares for more than one year as of the time of disposition. Preferential tax rates for long-term capital gain will generally apply to non-corporate U.S. Holders. Any gain or loss realized by a U.S. Holder on the sale, exchange, or other disposition of ordinary shares generally will be treated as from sources within the United States for U.S. foreign tax credit purposes. The deductibility of capital losses for U.S. federal income tax purposes is subject to limitations.
The additional 3.8% Medicare tax (described below) may apply to gains recognized upon the sale, exchange, or other taxable disposition of our ordinary shares by certain U.S. Holders who meet certain modified adjusted gross income thresholds.
Passive Foreign Investment Company Consequences
Generally, a non-U.S. corporation will be a PFIC for U.S. federal income tax purposes in any taxable year in which either (i) 75% or more of its gross income for such year consists of certain types of “passive” income or (ii) 50% or more of the average fair market value of its assets during such year (based on quarterly valuations) produce or are held for the production of passive income. Passive income for this purpose generally includes dividends, interest, rents, royalties, annuities, income from certain commodities transactions and from notional principal contracts, and the excess of gains over losses from the disposition of assets that produce passive income. Passive income also includes amounts derived by reason of the temporary investment of funds, including those raised in a public offering. Assets that produce or are held for the production of passive income may include cash, even if held as working capital or raised in a public offering, as well as marketable securities, and other assets that may produce passive income. In determining whether a non-U.S. corporation is a PFIC, a proportionate share of the income and assets of each corporation in which it owns, directly or indirectly, at least a 25% interest (by value) is taken into account.
A foreign corporation’s PFIC status is an annual determination that is based on tests that are factual in nature, and our PFIC status for any year will depend on the composition of our income, fair market value of our assets, and our activities for such year. We believe that we were not a PFIC for U.S. federal income tax purposes for our 20212022 taxable year and we do not expect to be a PFIC in the 2023 taxable year. Because the PFIC determination is highly fact intensive, there can be no assurance that we will be or not be a PFIC in 2022the 2023 taxable year or any other year , and we expect to be a PFIC in 2022.year. Even if we determine that we are not a PFIC after the close of a taxable year, there can be no assurance that the IRS or a court will agree with our conclusion.
If we were a PFIC for any taxable year during which a U.S. Holder held ordinary shares, then unless an election has been made by a U.S. Holder to be taxed under one of the alternative regimes discussed below, gain recognized by a U.S. Holder on a sale or other disposition (including certain pledges) of the ordinary shares would be allocated ratably over the U.S. Holder’s holding period for the ordinary shares. The amounts allocated to the taxable year of the sale or other disposition and to any year before we became a PFIC would be taxed as ordinary income. The amount allocated to each other taxable year would be subject to tax at the highest rate in effect for individuals or corporations, as appropriate, for that taxable year, and an interest charge would be imposed on the amount allocated to that taxable year. Similar rules would apply to any distribution with respect to the ordinary shares in excess of 125% of the average of the annual distributions received by a U.S. Holder during the preceding three years or such U.S. Holder’s holding period, whichever is shorter. In addition, non-corporate U.S. Holders will not be eligible for reduced rates of taxation on any dividends received from us if we are a PFIC in the taxable year in which such dividends are paid or in the preceding taxable year.
If we are treated as a PFIC for any taxable year during the holding period of a non-electing U.S. Holder (i.e., a U.S. Holder that does not elect to be taxed under one of the alternative regimes discussed below), we will continue to be treated as a PFIC for all succeeding years during which such non-electing U.S. Holder is treated as a direct or indirect holder even if we are not a PFIC for such years. A U.S. Holder is encouraged to consult its tax advisor with respect to any available elections that may be applicable in such a situation, including the “deemed sale” election of Section 1298(b)(1) of the Code.
Notwithstanding the default PFIC rules described in the preceding paragraphs, certain elections may be available that would result in alternative tax consequences; i.e., the “qualified electing fund” or “QEF” election and the “mark to market” election. If a U.S. Holder makes a timely and valid mark-to-market election, the U.S. Holder generally will recognize as ordinary income any excess of the fair market value of the ordinary shares at the end of each taxable year over their adjusted tax basis, and will recognize an ordinary loss in respect of any excess of the adjusted tax basis of the ordinary shares over their fair market value at the end of the taxable year (but only to the extent of the net amount of income previously included as a result of the mark-to-market election). The U.S. Holder’s tax basis in the ordinary shares will be adjusted to reflect the income or loss resulting from the mark-to-market election. Any gain recognized on the sale or other disposition of ordinary shares in a year when we are a PFIC will be treated as ordinary income and any loss will be treated as an ordinary loss (but only to the extent of the net amount of income previously included as a result of the mark-to-market election and any loss in excess of such amount will be treated as capital loss). The mark-to-market election is available only if we are a PFIC and the ordinary shares are “regularly traded” on a “qualified exchange” within the meaning of applicable U.S. Treasury regulations. The 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. Although the IRS has not published any authority identifying specific exchanges that may constitute “qualified exchanges,” Treasury Regulations provide that a qualified exchange is (i) a U.S. securities exchange that is registered with the Securities and Exchange Commission, (ii) the U.S. market system established pursuant to section 11A of the Securities and Exchange Act of 1934, or (iii) a non-U.S. securities exchange that is regulated or supervised by a governmental authority of the country in which the market is located, provided that: (a) such non-U.S. exchange has trading volume, listing, financial disclosure, surveillance, and other requirements designed to prevent fraudulent and manipulative acts and practices, to remove impediments to and perfect the mechanism of a free and open, fair and orderly, market, and to protect investors, and the laws of the country in which such non-U.S. exchange is located and the rules of such non-U.S. exchange ensure that such requirements are actually enforced; and (b) the rules of such non-U.S. exchange effectively promote active trading of listed shares. No assurance can be given that the ordinary shares will meet the requirements to be treated as “regularly traded” for purposes of the mark-to-market election. The Nasdaq Capital Market is a qualified exchange for this purpose and, consequently, if the ordinary shares are regularly traded, the mark-to-market election is expected to be available to a U.S. Holder. A mark-to-market election will not apply to ordinary shares held by a U.S. Holder for any taxable year during which we are not a PFIC, but will remain in effect with respect to any subsequent taxable year in which we become a PFIC unless the ordinary shares are no longer regularly traded on a qualified exchange or the IRS consents to the revocation of the election. Such election will not apply to any lower-tier PFIC subsidiary that we own. Each U.S. Holder is encouraged to consult its own tax advisor with respect to the availability and tax consequences of a mark-to-market election with respect to the ordinary shares.
U.S. Holders should consult their tax advisors to determine under what circumstances these elections would be available and, if available, what the consequences of the alternative treatments would be in their particular circumstances.
If a U.S. Holder holds ordinary shares in any year in which we are treated as a PFIC, the U.S. Holder will be required to file IRS Form 8621 and may be subject to certain other information reporting requirements. Failure to file IRS Form 8621 for each applicable taxable year may result in substantial penalties and the statute of limitations on the assessment and collection of U.S. federal income taxes of such U.S. Holder for the related taxable year may not close until three years after the date on which the required information is filed.
The U.S. federal income tax rules relating to PFICs are complex. Prospective U.S. Holders are urged to consult their own tax advisors with respect to the consequences to them of an investment in a PFIC, any elections available with respect to the ordinary shares and the IRS information reporting obligations with respect to the purchase, ownership, and disposition of the ordinary shares in the event we are determined to be a PFIC.
In addition to the income taxes described above, U.S. Holders that are individuals, estates, or trusts and whose income exceeds certain thresholds will be subject to a 3.8% tax on all or a portion of their “net investment income,” which generally would include dividends on, and dispositions of, the ordinary shares. U.S. Holders should consult their tax advisors with respect to the applicability of the 3.8% Medicare tax to their income and gains, if any, resulting from their investment in the ordinary shares.
A U.S. Holder may be subject to backup withholding and information reporting requirements with respect to cash distributions and proceeds from a disposition of ordinary shares. In general, backup withholding will apply only if a U.S. Holder fails to comply with certain identification procedures. Information reporting and backup withholding will not apply with respect to payments made to certain exempt recipients, such as corporations and tax-exempt organizations. Backup withholding is not an additional tax and may be claimed as a credit against the U.S. federal income tax liability of a U.S. Holder, provided that the required information is furnished to the IRS.
Certain U.S. Holders will be required to file an IRS Form 926 (Return by a U.S. Transferor of Property to a Foreign Corporation) or IRS Form 5471, (Information Return of U.S. Persons With Respect to Certain Foreign Corporations) to report a transfer of cash or other property to us and information relating to the U.S. Holder and us. Substantial penalties may be imposed on a U.S. Holder that fails to comply with these reporting requirements. Each U.S. Holder is urged to consult with its own tax advisor regarding these reporting obligations.
Certain U.S. Holders may be required to report information relating to an interest in the ordinary shares, subject to certain exceptions. For example, certain U.S. Holders that own “specified foreign financial assets” with an aggregate value in excess of $50,000 on the last day of the taxable year or $75,000 at any time during the taxable year (and in some circumstances, a higher threshold) are generally required to file IRS Form 8938 with respect to such assets with their tax returns. “Specified foreign financial assets” include any financial accounts maintained by foreign financial institutions, as well as any of the following, but only if they are not held in accounts maintained by financial institutions: (i) stocks and securities issued by non-U.S. persons; (ii) financial instruments and contracts held for investment that have non-U.S. issuers or counterparties; and (iii) interests in foreign entities. In addition, a U.S. Holder should consider the possible obligation to file FinCEN Form 114, Report of Foreign Bank and Financial Accounts, as a result of holding ordinary shares. U.S. Holders are urged to consult their tax advisors regarding the application of these and other reporting requirements that may apply to their ownership of ordinary shares.
THE DISCUSSION ABOVE IS A GENERAL SUMMARY AND IS NOT INTENDED TO CONSTITUTE A COMPLETE ANALYSIS OF ALL TAX CONSEQUENCES RELATING TO THE PURCHASE, OWNERSHIP AND DISPOSITION OF THE ORDINARY SHARES. IT DOES NOT COVER ALL TAX MATTERS THAT MAY BE OF IMPORTANCE TO A PROSPECTIVE INVESTOR. EACH PROSPECTIVE INVESTOR IS URGED TO CONSULT ITS OWN TAX ADVISOR ABOUT THE TAX CONSEQUENCES TO IT RELATING TO THE PURCHASE, OWNERSHIP, AND DISPOSITION OF ORDINARY SHARES IN LIGHT OF THE INVESTOR’S OWN CIRCUMSTANCES.
Not applicable.
Not applicable.
We are subject to certain information reporting requirements of the Exchange Act, applicable to foreign private issuers and under those requirements will file reports with the SEC. The SEC maintains an internet site at http://www.sec.gov that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC. Our filings with the SEC will also be available to the public through the SEC’s website at www.sec.gov.
As a foreign private issuer, we are exempt from the rules under the Exchange Act related to the furnishing and content of proxy statements, and our officers, directors and principal shareholders will be exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the Exchange Act. In addition, we are not required under the Exchange Act to file annual, quarterly and current reports and financial statements with the SEC as frequently or as promptly as U.S. domestic companies whose securities are registered under the Exchange Act. However, we 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, and may submit to the SEC, on a Form 6-K, unaudited quarterly financial information.
Not applicable.
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.
Not applicable.
Not applicable.
Not applicable.
Not applicable.
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES |
None. ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS |
There are no material modifications to the rights of security holders. ITEM 15. CONTROLS AND PROCEDURES |
(a) Disclosure Controls and Procedures Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of December 31, 2021,2022, or the Evaluation Date. Based on such evaluation, those officers have concluded that, as of the Evaluation Date, our disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be included in periodic filings under the Exchange Act and that such information is accumulated and communicated to management, including our principal executive and financial officers, as appropriate to allow timely decisions regarding required disclosure.
(b) Management’s Annual Report on Internal Control over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act. Our management, including our Chief Executive Officer and our Chief Financial Officer, conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework and criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) as of the Evaluation Date. Based on that evaluation, our management has concluded that our internal control over financial reporting was effective as of the Evaluation Date. As all internal control systems, no matter how well designed, have inherent limitations, our internal control over financial reporting may not prevent or detect misstatements.
(c) Attestation Report of the Registered Public Accounting Firm This Annual Report on Form 20-F does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting due to an exemption for emerging growth companies provided in the JOBS Act. (d) Changes in Internal Control over Financial Reporting During the year ended December 31, 2021,2022, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT |
Our board of directors has determined that one member of our audit committee, Augustine Lawlor, is an audit committee financial expert, as defined under the rules under the Exchange Act, and is independent in accordance with applicable Exchange Act rules and the Nasdaq Listing Rules. Our board of directors has adopted a Code of Ethics applicable to all of our directors and employees, including our Chief Executive Officer, Chief Financial Officer, controller or principal accounting officer, or other persons performing similar functions, which is a “code of ethics” as defined in Item 16B of Form 20-F promulgated by the SEC. The full text of the Code of Ethics is posted on our website at www.painreform.com. Information contained on, or that can be accessed through, our website does not constitute a part of this a part of this Annual Report on Form 20-F and is not incorporated by reference herein. If we make any amendment to the Code of Ethics or grant any waivers, including any implicit waiver, from a provision of the Code of Ethics, we will disclose the nature of such amendment or waiver on our website to the extent required by the rules and regulations of the SEC. We have not granted any waivers under our Code of Business Conduct and Ethics. ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES |
Brightman Almagor Zohar & Co., a Firm in the Deloitte Global Network, an independent registered public accounting firm, or Deloitte, has served as our principal independent registered public accounting firm for the year ended December 31, 2020 and through to October 21, 2021.
On December 9, 2021, Kesselman & Kesselman, was appointed as our principal independent registered public accounting firm in Israel and a member of PricewaterhouseCoopers International Limited, or Kesselman & Kesselman.
The following table provides information regarding fees paid or to be paid by us to Deloitte and to Kesselman & Kesselman for all services, including audit services, for the years ended December 31, 20212022 and 2020 2021 | | Year Ended December 31, | | | | 2022 | | | 2021 | | (USD in thousands) | | | | | | | Audit fees (1) | | | 107 | | | | 107 | | Audit-related fees | | | 5 | | | | – | | Tax fees | | | - | | | | – | | All other fees | | | 23 | | | | 34 | | Total | | | 135 | | | | 152 | |
| | Year Ended December 31, | | | | 2021 | | | 2020 | | (USD in thousands) | | | | | | | Audit fees (1) | | | 141 | | | | 107 | | Audit-related fees | | | - | | | | - | | Tax fees | | | - | | | | - | | All other fees | | | - | | | | 45 | | | | | | | | | | | Total | | | | | | | 152 | |
The following table provides information regarding fees paid or to be paid by us to Deloitte and to Kesselman & Kesselman for all services, including audit services, for the years ended December 31, 2021 and 2020:
(1) | The audit fees for the years ended December 31, 2022 and 2021 and 2020 includesinclude professional services rendered in connection with the audit of our annual financial statements and the review of our interim financial statements, statutory audits of the Company, and its subsidiary, issuance of consents and assistance with review of documents filed with the SEC. |
Pre-Approval of Auditors’ Compensation Our audit committee has a pre-approval policy for the engagement of our independent registered public accounting firm to perform certain audit and non-audit services. Pursuant to this policy, which is designed to assure that such engagements do not impair the independence of our auditors, the audit committee pre-approves annually a catalog of specific audit and non-audit services in the categories of audit services, audit-related services and tax services that may be performed by our independent registered public accounting firm. If a type of service, that is to be provided by our auditors, has not received such general pre-approval, it will require specific pre-approval by our audit committee. The policy prohibits retention of the independent registered public accounting firm to perform the prohibited non-audit functions defined in applicable SEC rules. ITEM 16D.16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES |
Not applicable. ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS |
Not applicable. ITEM 16F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT |
On October 21, 2021, Deloitte ceased to be our independent accountant by mutual agreement. Deloitte audited our financial statements as of and for the fiscal years ended December 31, 2020 and 2019. The reports of Deloitte on the financial statements of the Company for the fiscal years ended December 31, 2020 and 2019, did not contain any adverse opinion or disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principles.
During our fiscal years ended December 31, 2020 and 2019, and through the interim period ended October 21, 2021, there were no disagreements between us and Deloitte on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of Deloitte, would have caused Deloitte to make reference to the subject matter of the disagreements in connection with its audit reports on our financial statements. During our two most recent fiscal years ended December 31, 2020 and 2019, and the interim period ended October 21, 2021, Deloitte did not advise the Company of any reportable events specified in Item 304(a)(1)(v) of Regulation S-K with respect to us.
Effective December 9, 2021, Kesselman & Kesselman was appointed as our new independent registered public accounting firm.
During the fiscal year ended December 31, 2020, and the subsequent interim period prior to the engagement of Kesselman & Kesselman, we did not consult Kesselman & Kesselman regarding (i) the application of accounting principles to any specified transaction, either completed or proposed; (ii) the type of audit opinion that might be rendered on our financial statements, and either a written report was provided to the registrant or oral advice was provided that the new accountant concluded was an important factor considered by the registrant in reaching a decision as to the accounting, auditing or financial reporting issue; or (iii) any matter that was either the subject of a disagreement (as defined in Item 16F(a)(1)(iv) and the related instructions to this Item) or a reportable event (as defined in Item 16F(a)(1)(v)). ITEM 16G. CORPORATE GOVERNANCE |
Under the Companies Law, companies incorporated under the laws of the State of Israel, whose shares are publicly traded, including companies whose shares are 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 such matters as external directors, the audit committee, compensation, policy, company’s auditors, and an internal auditor. This is the case even if our shares are not listed on the Tel Aviv Stock Exchange. These requirements are in addition to the corporate governance requirements imposed by the Nasdaq Listing Rules, and other applicable provisions of U.S. securities laws to which we are subject as a foreign private issuer due to the listing of the ordinary shares on the Nasdaq Capital Market. Under the Nasdaq Listing Rules, a foreign private issuer, such as us, may generally follow its home country rules of corporate governance in lieu of the comparable requirements of the Nasdaq Capital Market, except for certain matters including (among others) the composition and responsibilities of the audit committee and the independence of its members within the meaning of the rules and regulations of the SEC. We intend to rely on this “home country practice exemption” with respect to the following Nasdaq Listing Rules:
| ● | Shareholder approval. We will seek shareholder approval for all corporate actions requiring such approval under the requirements of the Companies Law, rather than seeking approval for corporate actions in accordance with Nasdaq Listing Rule 5635. In particular, under this Nasdaq Listing Rule, shareholder approval is generally required for: (i) an acquisition of shares or assets of another company that involves the issuance of 20% or more of the acquirer’s shares or voting rights or if a director, officer or 5% shareholder has greater than a 5% interest in the target company or the consideration to be received; (ii) the issuance of shares leading to a change of control; (iii) adoption or amendment of equity compensation arrangements; and (iv) issuances of 20% or more of the shares or voting rights (including securities convertible into, or exercisable for, equity) of a listed company via a private placement (or via sales by directors, officers or 5% shareholders) if such equity is issued (or sold) at below the greater of the book or market value of shares. By contrast, under the Companies Law, shareholder approval is required (subject to certain limited exceptions) for, among other things: (a) transactions with directors concerning the terms of their service (including indemnification, exemption, and insurance for their service or for any other position that they may hold at a company), for which approvals of the compensation committee, board of directors, and shareholders are all required; (b) extraordinary transactions with controlling shareholders of publicly held companies, which require the special approval described below under “Disclosure of Personal Interests of Controlling Shareholders and Approval of Certain Transactions;” (c) terms of office and employment or other engagement of our controlling shareholder, if any, or such controlling shareholder’s relative, which require the special approval described below under “Disclosure of Personal Interests of Controlling Shareholders and Approval of Certain Transactions;” (d) approval of transactions with Company’s Chief Executive Officer with respect to his or hers compensation, whether in accordance with the approved compensation policy of the Company or not in accordance with the approved compensation policy of the Company, or transactions with officers of the Company not in accordance with the approved compensation policy; and (e) approval of the compensation policy of the Company for office holders. In addition, under the Companies Law, a merger requires approval of the shareholders of each of the merging companies. |
| ● | Nomination of our directors. Israeli law and our amended articles of association do not require director nominations to be made by a nominating committee of our board of directors consisting solely of independent directors, as required under the Listing Rules of the Nasdaq Stock Market. We rely on the exemption available to foreign private issuers under the Nasdaq Listing Rules and follow Israeli law and practice with regard to the process of nominating directors, in accordance with which directors are recommended by our board of directors for election by our shareholders (other than directors elected by our board of directors to fill a vacancy). |
| ● | Quorum requirement. Under our amended and restated articles of association and as permitted under the Companies Law, a quorum for any meeting of shareholders shall be the presence of at least two shareholders present in person, by proxy or by a written ballot, who hold at least 25% of the voting power of our shares (or if a higher percentage is required by law, such higher percentage) instead of 33 1/3% of the issued share capital required under the Nasdaq Listing Rules. If within half an hour from the time designated for the meeting a quorum is not present, them will stand adjourned to the same day in the following week, at the same time and place. If a quorum is not present at the adjourned meeting within half hour from the time designated for its start, the meeting shall take place with any number of participants. |
| ● | Periodic reports. 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 |
| ● | Compensation of officers. We follow Israeli law and practice with respect to the approval of officer compensation. While our compensation committee currently complies with the provisions of the Nasdaq Listing Rules relating to composition requirements and Israeli law generally requires that the compensation of the chief executive officer and all other executive officers be approved, or recommended to the board for approval, by the compensation committee (and in certain instances, shareholder approval is required), Israeli law includes relief from compensation committee approval in certain instances. For details regarding the approvals required under the Israeli Companies Law and regulation promulgated thereunder for the approval of compensation of the chief executive officer, all other executive officers and directors, see Item 6C “Directors, Senior Management and Employees— Board Practices — Approval of Related Party Transactions under Israeli Law — Disclosure of Personal Interests of an Office Holder and Approval of Certain Transactions”). |
Except as stated above, we intend to comply with the rules generally applicable to U.S. domestic companies listed on the Nasdaq Capital Market, subject to certain exemptions the JOBS Act provides to emerging growth companies. We may in the future decide to use other foreign private issuer exemptions with respect to some or all of the other Nasdaq Listing Rules. Following our home country governance practices, as opposed to the requirements that would otherwise apply to a company listed on the Nasdaq Capital Market, may provide less protection than is accorded to investors under the Nasdaq Listing Rules applicable to domestic issuers. ITEM 16H. MINE SAFETY DISCLOSURE |
Not applicable. ITEM 16I. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
Not applicable.
PART III ITEM 17. FINANCIAL STATEMENTS |
We have elected to provide financial statements and related information pursuant to Item 18. ITEM 18. FINANCIAL STATEMENTS |
The financial statements and the related notes required by this Item are included in this Annual Report on Form 20-F beginning on page F-1.
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| | | | | | | | | | | 101 | | The following financial information from PainReform Ltd.’s Annual Report on Form 20-F for the year ended December 31, 2022, formatted in Inline Extensible Business Reporting Language (XBRL): (i) Statement of Financial Position, (ii) Statements of Comprehensive Loss, (iii) Statements of Changes in Equity, (iv) Statements of Cash Flows and (iv) Notes to Financial Statements.* |
# | Management contract or compensatory plan. |
SIGNATURES The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this Annual Report on Form 20-F for the year ended Decemberfiled on its behalf. | PAINREFORM LTD. | | | | | | Date: March 15, 2023 | By: | /s/ Ilan Hadar | | | | Ilan Hadar | | | | Chief Executive Officer | |
PAINREFORM LTD. FINANCIAL STATEMENTS AS OF DECEMBER 31, 2021, formatted in Inline Extensible Business Reporting Language (XBRL): (i) Statement of Financial Position, (ii) Statements of Comprehensive Loss, (iii) Statements of Changes in Equity, (iv) Statements of Cash Flows and (iv) Notes to Financial Statements.*2022 U.S. DOLLARS IN THOUSANDS INDEX | | | Page | | | (Firm Name: Kesselman & Kesselman / PCAOB ID No. 1309) (Firm Name: Brightman Almagor Zohar & Co / PCAOB ID No. 1197) | F-2 | | | | F-4 | | | | F-5 | | | | F-6 | | | | F-8 | | | | F-9 - F-29 |
# | Management contract or compensatory plan. |
SIGNATURES
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this Annual Report on Form 20-F filed on its behalf.
| PAINREFORM LTD. | | | | | | Date: March 16, 2022 | By: | /s/ Ilan Hadar | | | | Ilan Hadar | | | | Chief Executive Officer | |
100
PAINREFORM LTD. FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2021
U.S. DOLLARS IN THOUSANDS
INDEX
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| | | | F-2To the board of directors and shareholders of PainReform Ltd.
| Opinion on the Financial Statements We have audited the accompanying balance sheets of PainReform Ltd. (the “Company”) as of December 31, 2022 and 2021, and the related statements of comprehensive loss, changes in convertible preferred shares and shareholders’ equity (deficit) and cash flows for the years then ended, including 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, 2022, and 2021, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. Substantial Doubt about the Company’s Ability to Continue as a Going Concern The accompanying financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 1(b) to the financial statements, the Company has incurred recurring losses and negative cash flows from operations and has an accumulated deficit as of December 31, 2022 that 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 1(b). The financial statements do not include any adjustments that might result from the outcome of this uncertainty. (Firm Name: 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 of these financial statements in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the 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/ Kesselman & Kesselman / PCAOB ID No. 1309)Certified Public Accountants (Isr.)
A member of PricewaterhouseCoopers International Limited Tel-Aviv, Israel March 15, 2023We have served as the Company's auditor since 2021. | |
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 statements of comprehensive loss, changes in convertible preferred shares and shareholders’ equity (deficit), and cash flows of PainReform Ltd. (the "Company") for the year ended December 31, 2020, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the results of operations and its cash flows for the year ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America. (Firm Name: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 audit. 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 audit 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 audit, 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 audit 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 audit 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 audit provides a reasonable basis for our opinion. /s/ Brightman Almagor Zohar & Co / PCAOB ID No. 1197)Co. | Brightman Almagor Zohar & Co. Certified Public Accountants A Firm in the Deloitte Global Network | | | | F-4March 18, 2021
| | | We served as the Company's auditor since 2008. | F-5
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| | | | F-9 - F-24
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Report of Independent Registered Public Accounting FirmTo theboard of directors and shareholders of PainReform Ltd.
Opinion on the Financial Statements
We have audited the accompanying balance sheet of PainReform Ltd. (the “Company’) as of December 31, 2021 and the related statements of comprehensive loss, changes in convertible preferred shares and shareholders’ equity (deficit) and cash flows for the year then ended, including 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, 2021, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.
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 audit. 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 audit of these financial statements in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the 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 audit 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 audit 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 audit 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 audit provides a reasonable basis for our opinion.
/s/ Kesselman & Kesselman
Certified Public Accountants (Isr.)
A member of PricewaterhouseCoopers International Limited
Tel-Aviv, Israel
March 16, 2022
We have served as the Company’s auditor since 2021
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 sheet of PainReform Ltd. (the "Company") as of December 31, 2020, 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, 2020, 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, 2020 and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.
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 audit. 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 audit 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 audit, 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 audit 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 audit 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.
Brightman Almagor Zohar & Co.
Certified Public Accountants
A Firm in the Deloitte Global Network
Tel Aviv, Israel
March 18, 2021
We have served as the Company's auditor since 2008.
PAINREFORM LTD. BALANCE SHEETS | U.S. dollars in thousands (except share and per share data) |
| | | | | As of December 31, | | | | Note | | | 2022 | | | 2021 | | Assets | | | | | | | | | | Current assets: | | | | | | | | | | Cash and cash equivalents | | | | | $ | 4,096 | | | $ | 16,537 | | Short term deposit | | | | | | 6,085 | | | | - | | Restricted cash | | | 2f | | | | 10 | | | | 34 | | Prepaid clinical trial expenses and deferred clinical trial costs | | | 8b | | | | 1,728 | | | | 1,728 | | Prepaid expenses and other current assets | | | 3 | | | | 365 | | | | 721 | | | | | | | | | | | | | | | Total current assets | | | | | | | 12,284 | | | | 19,020 | | Property and equipment, net | | | | | | | 44 | | | | 53 | | | | | | | | | | | | | | | Total assets | | | | | | $ | 12,328 | | | $ | 19,073 | | | | | | | | | | | | | | | Liabilities and shareholders’ equity | | | | | | | | | | | | | | | | | | | | | | | | | | Trade payables | | | | | | $ | 209 | | | $ | 136 | | Employees and related liabilities | | | | | | | 499 | | | | 423 | | Accrued expenses | | | 4 | | | | 356 | | | | 198 | | | | | | | | | | | | | | | Total current liabilities | | | | | | $ | 1,064 | | | $ | 757 | | | | | | | | | | | | | | | Non-current liabilities: | | | | | | | | | | | | | Provision for unrecognized tax positions | | | 7f | | | | 243 | | | | 234 | | | | | | | | | | | | | | | Total non-current liabilities | | | | | | | 243 | | | | 234 | | | | | | | | | | | | | | | Total liabilities | | | | | | $ | 1,307 | | | $ | 991 | | | | | | | | | | | | | | | Commitments | | | 8 | | | | | | | | | | | | | | | | | | | | | | | Shareholders’ Equity: | | | 10 | | | | | | | | | | Ordinary shares, NIS 0.03 par value; Authorized: 26,666,667 shares as of December 31, 2022 and 2021, respectively; Issued and outstanding: 10,634,166 and 10,482,056 shares as of December 31, 2022 and 2021, respectively. | | | | | | $ | 94 | | | $ | 94 | | Additional paid-in capital | | | | | | | 43,446 | | | | 41,715 | | Accumulated deficit | | | | | | | (32,519 | ) | | | (23,727 | ) | | | | | | | | | | | | | | Total shareholders’ equity | | | | | | | 11,021 | | | | 18,082 | | | | | | | | | | | | | | | Total liabilities and shareholders’ equity | | | | | | $ | 12,328 | | | $ | 19,073 | |
The accompanying notes are an integral part of the financial statements. STATEMENTS OF COMPREHENSIVE LOSS | U.S. dollars in thousands (except share and per share data) |
| | | | | For the Year Ended December 31, | | | | Note | | | 2022 | | | 2021 | | | 2020 | | | | | | | | | | | | | | | Operating expenses: | | | | | | | | | | | | | Research and development expenses | | | 11a | | | $ | (4,422 | ) | | $ | (2,860 | ) | | $ | (354 | ) | General and administrative expenses | | | 11b | | | | (4,447 | ) | | | (4,348 | ) | | | (1,317 | ) | | | | | | | | | | | | | | | | | | Operating loss | | | | | | | (8,869 | ) | | | (7,208 | ) | | | (1,671 | ) | Interest expenses | | | | | | | - | | | | - | | | | (987 | ) | Other financial income (expenses), net | | | 11c | | | | 86 | | | | (32 | ) | | | (1,175 | ) | | | | | | | | | | | | | | | | | | Loss before taxes | | | | | | | (8,783 | ) | | | (7,240 | ) | | | (3,833 | ) | | | | | | | | | | | | | | | | | | Income tax expenses | | | | | | | (9 | ) | | | (6 | ) | | | (220 | ) | Net loss and comprehensive loss | | | | | | $ | (8,792 | ) | | $ | (7,246 | ) | | $ | (4,053 | ) | | | | | | | | | | | | | | | | | | Basic and diluted net loss per share | | | 2p | | | $ | (0.82 | ) | | $ | (0.74 | ) | | $ | (1.25 | ) | | | | | | | | | | | | | | | | | | Weighted average number of shares of Ordinary Share used in computing basic and diluted net loss per share | | | | | | | 10,661,170 | | | | 9,812,234 | | | | 3,243,943 | |
The accompanying notes are an integral part of the financial statements. BALANCE SHEETSSTATEMENTS OF CHANGES IN CONVERTIBLE PREFERRED SHARES AND SHAREHOLDERS’ EQUITY (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 | | | equity (deficit) | | | | | | | | | | | | | | | | | | | | | | | | Balance as of January 31, 2020 | | | 2,954,267 | | | $ | 6,621 | | | | 576,556 | | | $ | 5 | | | $ | 180 | | | $ | (12,428 | ) | | $ | (12,243 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Conversion of preferred shares into ordinary shares | | | (2,954,267 | ) | | | (6,621 | ) | | | 2,954,267 | | | | 26 | | | | 6,595 | | | | - | | | | 6,621 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Conversion of convertible notes into ordinary shares | | | - | | | | - | | | | 2,727,214 | | | | 25 | | | | 7,135 | | | | - | | | | 7,160 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Share issuance under Initial Public Offering, net | | | - | | | | - | | | | 2,500,000 | | | | 22 | | | | 17,288 | | | | - | | | | 17,310 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Equity classification of a derivative warrant liability (Note 4) | | | - | | | | - | | | | - | | | | - | | | | 1,552 | | | | - | | | | 1,552 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Share-based compensation to employees | | | - | | | | - | | | | - | | | | - | | | | 38 | | | | - | | | | 38 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Share-based compensation to service providers | | | - | | | | - | | | | - | | | | - | | | | 202 | | | | - | | | | 202 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Operating lease provided by controlling shareholder | | | - | | | | - | | | | - | | | | - | | | | 33 | | | | - | | | | 33 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Net loss and comprehensive loss | | | - | | | | - | | | | - | | | | - | | | | - | | | | (4,053 | ) | | | (4,053 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Balance as of December 31, 2020 | | | - | | | $ | - | | | | 8,758,037 | | | $ | 78 | | | $ | 33,023 | | | $ | (16,481 | ) | | $ | 16,620 | |
The accompanying notes are an integral part of the financial statements. STATEMENTS OF CHANGES IN CONVERTIBLE PREFERRED SHARES AND SHAREHOLDERS’ EQUITY (DEFICIT) (Cont.) | U.S. dollars in thousands (except share data) |
| | Ordinary shares | | | Additional paid-in | | | Accumulated | | | Total shareholders’ | | | | Number | | | Amount | | | capital | | | deficit | | | equity (deficit) | | | | | | | | | | | | | | | | | | Balance as of Jan 1, 2021 | | | 8,758,037 | | | $ | 78 | | | $ | 33,023 | | | $ | (16,481 | ) | | $ | 16,620 | | | | | | | | | | | | | | | | | | | | | | | Share-based compensation to employees and directors | | | - | | | | - | | | | 812 | | | | - | | | | 812 | | | | | | | | | | | | | | | | | | | | | | | Share-based compensation to service providers | | | - | | | | - | | | | 412 | | | | - | | | | 412 | | | | | | | | | | | | | | | | | | | | | | | Shares and warrants issuance - Private Investment in Public Equity ("PIPE"), net | | | 1,304,346 | | | | 12 | | | | 5,542 | | | | - | | | | 5,554 | | | | | | | | | | | | | | | | | | | | | | | Exercise of warrants | | | 419,673 | | | | 4 | | | | 1,926 | | | | - | | | | 1,930 | | | | | | | | | | | | | | | | | | | | | | | Net loss and comprehensive loss | | | - | | | | - | | | | - | | | | (7,246 | ) | | | (7,246 | ) | | | | | | | | | | | | | | | | | | | | | | Balance as of December 31, 2021 | | | 10,482,056 | | | $ | 94 | | | $ | 41,715 | | | $ | (23,727 | ) | | $ | 18,082 | | | | | | | | | | | | | | | | | | | | | | | Share-based compensation to employees and directors | | | - | | | | - | | | | 1,389 | | | | - | | | | 1,389 | | | | | | | | | | | | | | | | | | | | | | | Share-based compensation to service providers | | | - | | | | - | | | | 342 | | | | - | | | | 342 | | | | | | | | | | | | | | | | | | | | | | | Share issuance to service providers | | | 152,110 | | | | * | | | | - | | | | - | | | | * | | | | | | | | | | | | | | | | | | | | | | | Net loss and comprehensive loss | | | - | | | | - | | | | - | | | | (8,792 | ) | | | (8,792 | ) | | | | | | | | | | | | | | | | | | | | | | Balance as of December 31, 2022 | | | | | | | | | | | | | | | | | | | | | | | | 10,634,166 | | | $ | 94 | | | $ | 43,446 | | | $ | (32,519 | ) | | $ | 11,021 | |
F - 7 STATEMENTS OF CASH FLOWS | U.S. dollars in thousands |
| | For the Year Ended December 31, | | | | 2022 | | | 2021 | | | 2020 | | Cash flows from operating activities | | | | | | | | | | Net loss | | $ | (8,792 | ) | | $ | (7,246 | ) | | $ | (4,053 | ) | Adjustments to reconcile net loss to net cash used in operating activities: | | | | | | | | | | | | | Depreciation | | | 15 | | | | 7 | | | | (* | ) | Operating lease provided by controlling shareholder | | | - | | | | - | | | | 33 | | Share-based compensation to employees | | | 1,389 | | | | 812 | | | | 38 | | Share-based compensation to service providers | | | 342 | | | | 412 | | | | 202 | | Interest expense and amortization of discount on convertible notes | | | - | | | | - | | | | 987 | | Interest income | | | (85 | ) | | | - | | | | - | | Revaluation of derivative warrant liability | | | - | | | | - | | | | 1,105 | | Changes in operating assets and liabilities: | | | | | | | | | | | | | Prepaid expenses and other current assets | | | 356 | | | | (348 | ) | | | (1,884 | ) | Trade payables | | | 73 | | | | (585 | ) | | | 720 | | Employees, related liabilities and accrued expenses | | | 243 | | | | 395 | | | | 295 | | Net cash used in operating activities | | | (6,459 | ) | | | (6,553 | ) | | | (2,557 | ) | Cash flows from investing activities | | | | | | | | | | | | | | | | | | | | | | | | | | Purchase of property and equipment | | | (6 | ) | | | (50 | ) | | | (10 | ) | Purchase of short-term deposit | | | (6,000 | ) | | | - | | | | - | | Net cash used in investing activities | | | (6,006 | ) | | | (50 | ) | | | (10 | ) | Cash flows from financing activities | | | | | | | | | | | | | | | | | | | | | | | | | | Proceeds from exercise of warrants | | | - | | | | 1,930 | | | | - | | Proceeds from issuance of ordinary shares | | | | | | | | | | | | | under Private Investment in Public Equity | | | - | | | | 6,000 | | | | - | | Issuance costs | | | - | | | | (446 | ) | | | - | | Proceeds from issuance of ordinary shares under Initial Public Offering, net | | | - | | | | - | | | | 17,310 | | Net cash provided by financing activities | | | - | | | | 7,484 | | | | 17,310 | | Net increase (decrease) in cash, cash equivalents and restricted cash | | | (12,465 | ) | | | 881 | | | | 14,743 | | Cash, cash equivalents and restricted cash at the beginning of the year | | | 16,571 | | | | 15,690 | | | | 947 | | Cash, cash equivalents and restricted cash at the end of the year | | $ | 4,106 | | | $ | 16,571 | | | $ | 15,690 | |
(*) | Represents amount less than $1 |
Supplemental cash flow information: | | December 31, | | | | 2022 | | | 2021 | | | 2020 | | Cash and cash equivalents | | $ | 4,096 | | | $ | 16,537 | | | $ | 15,677 | | | | | | | | | | | | | | | Restricted cash | | | 10 | | | | 34 | | | | 13 | | | | | | | | | | | | | | | Total cash, cash equivalents, and restricted cash | | $ | 4,106 | | | $ | 16,571 | | | $ | 15,690 | |
The accompanying notes are an integral part of the financial statements.
NOTES TO FINANCIAL STATEMENTS
U.S. dollars in thousands, (exceptexcept share and per share data)data
| | | | | As of December 31, | | | | Note | | | 2021 | | | 2020 | | Assets | | | | | | | | | | Current assets: | | | | | | | | | | Cash and cash equivalents | | | | | $ | 16,537 | | | $ | 15,677 | | Restricted cash | | 2e | | | | 34 | | | | 13 | | Prepaid clinical trial expenses and deferred clinical trial costs | | 7c | | | | 1,728 | | | | 1,294 | | Prepaid expenses and other current assets | | 3 | | | | 721 | | | | 807 | | | | | | | | | | | | | | Total current assets | | | | | | 19,020 | | | | 17,791 | | | | | | | | | | | | | | Property and equipment, net | | | | | | 53 | | | | 10 | | | | | | | | | | | | | | Total assets | | | | | $ | 19,073 | | | $ | 17,801 | | | | | | | | | | | | | | Liabilities and shareholders’ equity | | | | | | | | | | | | | | | | | | | | | | | | Trade payables | | | | | $ | 136 | | | $ | 720 | | Employees and related liabilities | | | | | | 423 | | | | 92 | | Accrued expenses | | | | | | 198 | | | | 149 | | | | | | | | | | | | | | Total current liabilities | | | | | $ | 757 | | | $ | 961 | | | | | | | | | | | | | | Non-current liabilities: | | | | | | | | | | | | Provision for unrecognized tax positions | | 6f | | | | 234 | | | | 220 | | Total non-current liabilities | | | | | | 234 | | | | 220 | | | | | | | | | | | | | | Total liabilities | | | | | $ | 991 | | | $ | 1,181 | | | | | | | | | | | | | | Commitments and contingencies | | 7 | | | | 0 | | | | 0 | | | | | | | | | | | | | | Shareholders’ Equity: | | 9 | | | | | | | | | | Ordinary shares, NIS 0.03 par value; Authorized: 26,666,667 and 16,666,667 shares as of December 31, 2021 and 2020, respectively; Issued and outstanding: 10,482,056 and 8,758,037 shares as of December 31, 2021 and 2020, respectively; | | | | | $ | 94 | | | $ | 78 | | Additional paid-in capital | | | | | | 41,715 | | | | 33,023 | | Accumulated deficit | | | | | | (23,727 | ) | | | (16,481 | ) | | | | | | | | | | | | | Total shareholders’ equity | | | | | | 18,082 | | | | 16,620 | | | | | | | | | | | | | | Total liabilities, shareholders’ equity | | | | | $ | 19,073 | | | $ | 17,801 | |
The accompanying notes are an integral part of the financial statements.F - 4
| a. | STATEMENTS OF COMPREHENSIVE LOSS
| U.S. dollars in thousands (except share and per share data)PainReform Ltd. ("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. The Company’s proprietary extended-release drug-delivery system is designed to provide an extended period of post-surgical pain relief without the need for repeated dose administration while reducing the potential need for the use of opiates.
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| | | | | For the Year Ended December 31, | | | | Note | | | 2021 | | | 2020 | | | 2019 | | | | | | | | | | | | | | | Operating expenses: | | | | | | | | | | | | | Research and development expenses | | 10a | | | $ | (2,860 | ) | | $ | (354 | ) | | $ | (136 | ) | General and administrative expenses | | 10b | | | | (4,348 | ) | | | (1,317 | ) | | | (553 | ) | | | | | | | | | | | | | | | | | Operating loss | | | | | | (7,208 | ) | | | (1,671 | ) | | | (689 | ) | | | | | | | | | | | | | | | | | Financial expense, net | | 10c | | | | (32 | ) | | | (2,162 | ) | | | (590 | ) | | | | | | | | | | | | | | | | | Loss before taxes | | | | | | (7,240 | ) | | | (3,833 | ) | | | (1,279 | ) | | | | | | | | | | | | | | | | | Tax expenses | | | | | | (6 | ) | | | (220 | ) | | | 0 | | Net loss and comprehensive loss | | | | | $ | (7,246 | ) | | $ | (4,053 | ) | | $ | (1,279 | ) | | | | | | | | | | | | | | | | | Basic and diluted net loss per share (*) | | 2m | | | $ | (0.74 | ) | | $ | (1.25 | ) | | $ | (4.17 | ) | | | | | | | | | | | | | | | | | Weighted average number of shares of ordinary share used in computing basic and diluted net loss per share (*) | | | | | | 9,812,234 | | | | 3,243,943 | | | | 576,556 | |
(*) Share and per share data is presented on a retroactive basis to reflect the reverse share split, refer to note 1(c)Since its inception, the Company has devoted substantially all its efforts to research and development, clinical trials, and capital raising activities. The Company is still in its development and clinical stage and has not yet generated revenues. The Company has incurred significant losses and negative cash flows from operations and incurred losses of $8,792, $7,246 and $4,053 for the years ended December 31, 2022, 2021 and 2020, respectively. During the years ended December 31, 2022, 2021 and 2020, the Company had negative operating cash outflows of $6,459, $6,553, and $2,557, respectively. As of December 31, 2022, the Company’s accumulated deficit was $32,519. The Company has funded its operations to date primarily through equity financing and has cash on hand (including short term deposits and restricted cash) of $10,191 as of December 31, 2022. The Company expects to continue incurring losses, and negative cash flows from operations until its product, PRF-110, reaches commercial profitability. As a result of the initiation of the Company's Phase III clinical trial in March 2023, along with its current cash position, the Company does not have sufficient resources to fund operations until the end of its phase III study, nor to continue as a going concern for at least one year from the issuance date of these financial statements. Management's plans include continued raising capital through sale of additional equity securities, debt or capital inflows from strategic partnerships. There are no assurances, however, that the Company's will successfully obtain the level of financing needed for its operations. If the Company is unsuccessful in raising capital, it may need to reduce activities, curtail, or abandon some or all of its operations, which could materially harm the Company’s business, financial condition and results of operations. These factors raise substantial doubt about the Company’s ability to continue as a going concern.
These financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business and do not include any adjustments that might result from the outcome of this uncertainty. On March 11, 2021, the Company closed a private placement of 1,304,346 ordinary shares, par value NIS 0.03 per share (the “Ordinary Shares”) and accompanying warrants to purchase an aggregate of up to 652,173 Ordinary Shares at a combined purchase price of $4.60 per share and accompanying warrant resulting in gross proceeds of $6,000. The warrants are exercisable immediately at an exercise price of $4.60 per share and expire five and a half years from the issuance date. On July 22, 2021, the Company issued 419,673 Ordinary Shares upon exercise of warrants for consideration totalling $1,930 (Note 10). The accompanying notes are an integral part of the financial statements.
F - | c. | The Company effected a 1-for-3 reverse split of the Company’s Ordinary Shares and convertible preferred shares on July 6, 2020. All issued and outstanding Ordinary Shares and convertible preferred share and related per share amounts contained in these financial statements have been retroactively adjusted to reflect this reverse share split for all periods presented. On September 3, 2020, the Company closed its initial public offering ("IPO") of 2,500,000 units at a price of $8.00 per unit. Each unit consisted of one Ordinary Share and one warrant to purchase one Ordinary Share. The ordinary shares and warrants were immediately separable from the units and were issued separately. The warrants are exercisable immediately, expire five years from the date of issuance and have an exercise price of $8.80 per share. On October 5, 2020, the underwriters exercised their over-allotment option and were issued warrants to purchase 375,000 Ordinary Shares in return for proceeds of $3 per share. These warrants also expire five years from the date of issuance and have an exercise price of $8.80 per share. The Company received gross proceeds of approximately $20,000 (net proceeds of approximately $17.3 million after deducting underwriting discounts and commissions and other offering expenses). |
F - 9 NOTES TO FINANCIAL STATEMENTS
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 | | | equity (deficit) | | Balance as of Jan 1, 2019 | | | 2,954,267 | | | $ | 6,621 | | | | 576,556 | | | $ | 5 | | | $ | 66 | | | $ | (11,149 | ) | | $ | (11,078 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Share-based compensation | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 89 | | | | 0 | | | | 89 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Operating lease provided by controlling shareholder | | | - | | | | 0 | | | | - | | | | 0 | | | | 25 | | | | 0 | | | | 25 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Net loss and comprehensive loss | | | - | | | | 0 | | | | - | | | | 0 | | | | 0 | | | | (1,279 | ) | | | (1,279 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Balance as of December 31, 2019 | | | 2,954,267 | | | $ | 6,621 | | | | 576,556 | | | $ | 5 | | | $ | 180 | | | $ | (12,428 | ) | | $ | (12,243 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Conversion of preferred shares into ordinary shares | | | (2,954,267 | ) | | | (6,621 | ) | | | 2,954,267 | | | | 26 | | | | 6,595 | | | | 0 | | | | 6,621 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Conversion of convertible notes into ordinary shares | | | 0 | | | | 0 | | | | 2,727,214 | | | | 25 | | | | 7,135 | | | | 0 | | | | 7,160 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Share issuance under Initial Public Offering, net | | | 0 | | | | 0 | | | | 2,500,000 | | | | 22 | | | | 17,288 | | | | 0 | | | | 17,310 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Equity classification of a derivative warrant liability (Note 4) | | | - | | | | - | | | | - | | | | 0 | | | | 1,552 | | | | 0 | | | | 1,552 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Share-based compensation to employees | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 38 | | | | 0 | | | | 38 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Share-based compensation to service providers | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 202 | | | | 0 | | | | 202 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Operating lease provided by controlling shareholder | | | - | | | | 0 | | | | - | | | | 0 | | | | 33 | | | | 0 | | | | 33 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Net loss and comprehensive loss | | | - | | | | 0 | | | | - | | | | 0 | | | | 0 | | | | (4,053 | ) | | | (4,053 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Balance as of December 31, 2020 | | | 0 | | | $ | 0 | | | | 8,758,037 | | | $ | 78 | | | $ | 33,023 | | | $ | (16,481 | ) | | $ | 16,620 | |
The accompanying notes are an integral part of the financial statements.F - 6
STATEMENT OF CHANGES IN CONVERTIBLE PREFERRED SHARES AND SHAREHOLDERS’ EQUITY (DEFICIT)(Cont.)
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 | | | equity (deficit) | | Balance as of Jan 1, 2021 | | | 0 | | | $ | 0 | | | | 8,758,037 | | | $ | 78 | | | $ | 33,023 | | | $ | (16,481 | ) | | $ | 16,620 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Share-based compensation to employees and directors | | | | | | | | | | | | | | | | | | | 812 | | | | 0 | | | | 812 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Share-based compensation to service providers | | | | | | | | | | | | | | | | | | | 412 | | | | | | | | 412 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Shares and warrants issuance - Private Investment in Public Equity ("PIPE"), net | | | 0 | | | | 0 | | | | 1,304,346 | | | | 12 | | | | 5,542 | | | | 0 | | | | 5,554 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Exercise of warrants | | | 0 | | | | 0 | | | | 419,673 | | | | 4 | | | | 1,926 | | | | 0 | | | | 1,930 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Net loss and comprehensive loss | | | - | | | | 0 | | | | - | | | | 0 | | | | 0 | | | | (7,246 | ) | | | (7,246 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Balance as of December 31, 2021 | | | 0 | | | $ | 0 | | | | 10,482,056 | | | $ | 94 | | | $ | 41,715 | | | $ | (23,727 | ) | | $ | 18,082 | |
F - 7
STATEMENTS OF CASH FLOWS
| U.S. dollars in thousands, except share and per share data | d. | In December 2019, an outbreak of a novel coronavirus disease, or COVID-19, was first identified and began to spread across the globe and, in March 2020, the World Health Organization declared it a pandemic. This contagious disease has spread across the globe and is impacting economic activity and financial markets worldwide. While the spread of COVID-19 has not yet materially impacted the Company's operations nor affected management’s judgment and assumptions at the end of 2022, 2021 and 2020, the Company's previously anticipated timeline for its planned trials has been impacted by COVID-19, particularly in the manufacturing process. The extent to which COVID-19 continues to impact the Company's development efforts will depend on future developments, which are highly uncertain and cannot be predicted, including the actions to contain COVID-19 or treat its impact, among others. |
| | For the Year Ended December 31, | | | | 2021 | | | 2020 | | | 2019 | | Cash flows from operating activities | | | | | | | | | | | | | | | | | | | | Net loss | | $ | ( 7,246 | ) | | $ | (4,053 | ) | | $ | (1,279 | ) | Adjustments to reconcile net loss to net cash used in operating activities: | | | | | | | | | | | | | Depreciation | | | 7 | | | | (* | ) | | | 1 | | Operating lease provided by controlling shareholder | | | 0 | | | | 33 | | | | 25 | | Share-based compensation to employees | | | 812 | | | | 38 | | | | 89 | | Share-based compensation to service providers | | | 412 | | | | 202 | | | | 0 | | Interest expense and amortization of discount on convertible notes | | | 0 | | | | 987 | | | | 541 | | Issuance costs | | | 0 | | | | 0 | | | | 47 | | Revaluation of derivative warrant liability | | | 0 | | | | 1,105 | | | | 2 | | Change in: | | | | | | | | | | | | | Other current and non-current assets | | | (348 | ) | | | (1,884 | ) | | | (183 | ) | Trade payables | | | (585 | ) | | | 720 | | | | (2 | ) | Other accounts payable and accrued expenses | | | 395 | | | | 295 | | | | 150 | | | | | | | | | | | | | | | Net cash used in operating activities | | | (6,553 | ) | | | (2,557 | ) | | | (609 | ) | | | | | | | | | | | | | | Cash flows from investing activities | | | | | | | | | | | | | | | | | | | | | | | | | | Purchase of property and equipment | | | (50 | ) | | | (10 | ) | | | 0 | | | | | | | | | | | | | | | Net cash used in investing activities | | | (50 | ) | | | (10 | ) | | | 0 | | | | | | | | | | | | | | | Cash flows from financing activities | | | | | | | | | | | | | | | | | | | | | | | | | | Proceeds from issuance of convertible notes, net | | | 0 | | | | 0 | | | | 241 | | Proceeds from exercise of warrants | | | 1,930 | | | | 0 | | | | 0 | | Proceeds from issuance of ordinary shares | | | | | | | | | | | | | under Private Investment in Public Equity | | | 6,000 | | | | 0 | | | | 0 | | Issuance costs | | | (446 | ) | | | 0 | | | | 0 | | Proceeds from issuance of August and December 2019 convertible notes and warrants, net | | | 0 | | | | 0 | | | | 1,269 | | Proceeds from issuance of ordinary shares under Initial Public Offering, net | | | | | | | 17,310 | | | | | | Net cash provided by financing activities | | | 7,484 | | | | 17,310 | | | | 1,510 | | | | | | | | | | | | | | | Change in cash, cash equivalents and restricted cash | | | 881 | | | | 14,743 | | | | 901 | | Cash, cash equivalents and restricted cash at the beginning of the year | | | 15,690 | | | | 947 | | | | 46 | | | | | | | | | | | | | | | Cash, cash equivalents and restricted cash at the end of the year | | $ | 16,571 | | | $ | 15,690 | | | $ | 947 | |
| e. | U.S. and global markets are experiencing volatility and disruption following the escalation of geopolitical tensions and the start of the military conflict between Russia and Ukraine. In February 2022, Russia launched a full-scale military invasion of Ukraine. Although the length and impact of the ongoing military conflict is highly unpredictable, the conflict in Ukraine could lead to market disruptions, including significant volatility in commodity prices, credit and capital markets. Additionally, Russia’s prior annexation of Crimea, recent recognition of two separatist republics in the Donetsk and Luhansk regions of Ukraine and subsequent military interventions in Ukraine have led to sanctions and other penalties being levied by the United States, European Union and other countries against Russia, Belarus, the Crimea Region of Ukraine, the so-called Donetsk People’s Republic, and the so-called Luhansk People’s Republic, including agreement to remove certain Russian financial institutions from the Society for Worldwide Interbank Financial Telecommunication (SWIFT) payment system. Additional potential sanctions and penalties have also been proposed and/or threatened. Russian military actions and the resulting sanctions could adversely affect the global economy and financial markets and lead to instability and lack of liquidity in capital markets, potentially making it more difficult for us to obtain additional funds. Any of the abovementioned factors could affect our business, prospects, financial condition, and operating results. The extent and duration of the military action, sanctions and resulting market disruptions are impossible to predict. |
| f. | The continued listing standards of Nasdaq require, among other things, that the minimum bid price of a listed company’s stock be at or above $1.00. If the closing minimum bid price is below $1.00 for a period of more than 30 consecutive trading days, the listed company will fail to comply with Nasdaq’s listing rules and, if it does not regain compliance within the grace period, will be subject to delisting. As previously reported, on August 16, 2022, the Company received a notice from the Nasdaq Listing Qualifications Department notifying us that for 30 consecutive trading days, the bid price of our ordinary shares had closed below the minimum $1.00 per share requirement. In accordance with Nasdaq’s listing rules, the Company were afforded a grace period of 180 calendar days, or until February 6, 2023, to regain compliance with the bid price requirement. In order to regain compliance, the bid price of ordinary shares must close at a price of at least $1.00 per share for a minimum of 10 consecutive trading days. On February 7, 2023, Nasdaq notified us that the Company were eligible for a second 180 day compliance period. If at anytime before August 7, 2023, the bid price of our ordinary shares closes at or above $1 per share for a minimum of 10 consecutive trading days, the Company will regain compliance with the listing standards of Nasdaq. If the Company fail to regain compliance by August 7, 2023, our ordinary shares will be subject to delisting. |
(*) | Represents amount less than $1
|
The accompanying notes are an integral part of the financial statements.
NOTES TO FINANCIAL STATEMENTS
NOTES TO FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data | g. | The Company report our financial results in U.S. dollars. A portion of research and development and general and administrative expenses of our Israeli operations are incurred in New Israeli Shekel ("NIS"). As a result, the Company is exposed to exchange rate risks that may materially and adversely affect our financial results. If the NIS appreciates against the U.S. dollar, or if the value of the NIS decline against the U.S. dollar, at a time when the rate of inflation in the cost of Israeli goods and services exceed the rate of decline in the relative value of the NIS, then the U.S. dollar-denominated cost of our operations in Israel would increase and our results of operations could be materially and adversely affected. Inflation in Israel compounds the adverse impact of a devaluation of the NIS against the U.S. dollar by further increasing the amount of our Israeli expenses. Israeli inflation may also (in the future) outweigh the positive effect of any appreciation of the U.S. dollar relative to the NIS, if, and to the extent that, it outpaces such appreciation or precedes such appreciation. The Israeli rate of inflation did not have a material adverse effect on our financial condition during 2022 ,2021 and 2020. Given our general lack of currency hedging arrangements to protect us from fluctuations in the exchange rates of the NIS in relation to the U.S. dollar (and/or from inflation of such non-U.S. currencies), the Company may be exposed to material adverse effects from such movements. the Company cannot predict any future trends in the rate of inflation in Israel or the rate of devaluation (if any) of the U.S. dollar against the NIS. |
| h. | In April 2022, the Company's board of directors decided to increase the number of reserved Ordinary Shares under the 2019 PainReform Option Plan (the “2019 Plan”) by an additional amount of 1,000,000 Ordinary Shares. As a result of the decision, the Company's option pool increased by an additional 1,000,000 ordinary shares (Note 10). |
NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES |
The financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”). The significant accounting policies described below have been applied consistently in relation to all the periods presented, unless otherwise stated. | 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. Estimates are primarily used for, but not limited to, valuation of share-based compensation, capitalization of software costs, valuation allowance and uncertain tax positions. 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. F - 11 NOTES TO FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
| 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 originally denominated in U.S. dollars are presented at their original amounts. Balances in non-U.S. dollar currencies are translated into U.S. dollars using historical and current exchange rates for non-monetary and monetary balances, respectively. For non-U.S. dollar transactions and other items in the statements of income (indicated below), the following exchange rates are used: (i) for transactions - exchange rates at transaction dates or average exchange rates; and (ii) for other items (derived from non-monetary balance sheet items such as depreciation) - historical exchange rates. Currency transaction gains and losses are presented in financial income or expenses, as appropriate. | 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. Bank deposits with original maturity dates of more than three months but at balance sheet date are less than one year are included in short-term deposits. The fair value of bank deposits approximates the carrying value since they bear interest at rates close to the prevailing market rates. As of December 31, 2022 and 2021, the Company’s restricted cash consisted of immaterial bank deposits that were denominated in NIS. Restricted deposits are presented at cost including accrued interest. These bank deposits are used as securities for the Company's credit cards. | g. | 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 and 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 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. As of December 31, 2022, and 2021 no assets or liabilities are measured in fair value. F - 12 NOTES TO FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
| h. | 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, software and electronic equipment | | | 33 | | Furniture and office equipment | | | 7 | |
| i. | NOTE 1:-Research and development expenses: | GENERAL
|
| a. | PainReform Ltd. ("Research and development costs include costs of payroll and related expenses of employees, subcontractors and consultants and other costs related to the Company") was incorporatedCompany's operation of its planned clinical trials. Research and started business operations in November 2007.development expenses are charged to the statements of comprehensive loss as incurred.
Clinical trial costs are a significant component of research and development expenses and include costs associated with third-party contractors. The Company is aoutsources its clinical stage specialty pharmaceutical company focused ontrial activities utilizing external entities such as clinical research organizations, independent clinical investigators, and other third-party service providers to assist the reformulationCompany with the execution of established therapeutics. The Company’s proprietary extended release drug-delivery system is designed to provide an extended period of post-surgical pain relief without the need for repeated dose administration while reducing the potential need for the use of opiates.its clinical trials. Clinical trial costs are expensed as incurred. | j. | Employee severance benefits: |
| b. | LiquidityThe Company is required to make severance payments upon dismissal of an Israeli employee or upon termination of employment in certain circumstances.
|
Since its inception, the Company has devoted substantially all of its efforts to research and development, clinical trials, and capital raising activities. The Company is still in its development and clinical stage and has not yet generated revenues.
The Company has incurred losses of $7,246, $4,053 and $1,279 for the years ended December 31, 2021, 2020 and 2019, respectively. As of December 31, 2021, the Company’s accumulated deficit was $23,727. The Company has funded its operations to date primarily through equity financing.
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.
On March 11, 2021, the Company closed a private placement of 1,304,346 ordinary shares and accompanying warrants to purchase an aggregate of up to 652,173 ordinary shares at a combined purchase price of $4.60 per share and accompanying warrant resulting in gross proceeds of $6,000. The warrants are exercisable immediately at an exercise price of $4.60 per share and expire five and a half years from the issuance date.
On July 22 2021, the Company issued 419,673 ordinary shares upon exercise of warrants for consideration totalling $1,930 (Note 9).
Based on the Company's current operating plan, the Company believes that its existing capital resources will be sufficient to fund operations for at least twelve months after the date the financial statements are issued.
| c.
| In accordance with the current employment terms with all of its employees (Section 14 of the Israeli Severance Pay Law, 1963) located in Israel, the Company makes regular deposits with certain insurance companies for accounts controlled by each applicable employee in order to secure the employee’s full retirement benefit and severance obligation. The Company effected a 3-for-1 reverse splitis relieved from any severance pay liability with respect to each such employee after it makes the payments on behalf of the employee. The liability accrued in respect of these employees and the amounts funded, as of the respective agreement dates, are not reflected on the Company’s ordinary sharesbalance sheet, as the amounts funded are not under the control and convertible preferred shares on July 6, 2020. All issuedmanagement of the Company and outstanding ordinary shares and convertible preferred shares and related per share amounts contained in these financial statementsthe pension or severance pay risks have been retroactively adjustedirrevocably transferred to reflect this reverse share splitthe applicable insurance companies. The amounts of severance payment expenses were $60, $58 and $13 for all periods presented. |
On September 3, 2020, the Company closed its initial public offering ("IPO") of 2,500,000 units at a price of $8.00 per unit. Each unit consisted of one ordinary share and one warrant to purchase one ordinary share. The ordinary shares and warrants were immediately separable from the units and were issued separately. The warrants are exercisable immediately, expire five years from the date of issuance and have an exercise price of $8.80 per share. On October 5, 2020, the underwriters exercised their over-allotment option and were issued warrants to purchase 375,000 ordinary shares in return for net amount of $3. The Company received gross proceeds of approximately $20,000 (net proceeds of approximately $17.3 million after deducting underwriting discounts and commissions and other offering expenses).the years ended December 31, 2022, 2021 and 2020, respectively.
F - 9
PAINREFORM LTD. | k. | Legal and other contingencies: NOTES TO FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
Certain conditions may exist as of the date of the financial statements, which may result in a loss to the Company but which will only be resolved when one or more future events occur or fail to occur. The Company’s management assesses such contingent liabilities, if any, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against the Company or unasserted claims that may result in such proceedings, the Company’s management evaluates the perceived merits of any legal proceedings or unasserted claims as well as the perceived merits of the amount of relief sought or expected to be sought. Management applies the guidance in ASC 450-20, “Loss Contingencies” when assessing losses resulting from contingencies. If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be reasonable estimated, then the estimated liability is recorded as accrued expenses in the Company’s financial statements. Legal costs incurred in connection with loss contingencies are expensed as incurred. F - 13 NOTES TO FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
d.The Company accounts for income taxes in accordance with ASC 740, “Income Taxes”. ASC 740 prescribes the use of the asset and liability method whereby deferred tax asset and liability account balances are determined based on differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The Company provides a valuation allowance, if necessary, to reduce deferred tax assets to their estimated realizable value if it is more likely than not that a portion or all the deferred tax assets will not be realized, based on the weight of available positive and negative evidence. As of December 31, 2022, and 2021, the Company had a full valuation allowance on its deferred tax assets. Deferred tax liabilities and assets are classified as non-current in accordance with ASU 2015‑17.
| In late 2019,
The Company implements a novel straintwo-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 COVID-19,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 positions as the largest amount that is more than 50% (cumulative basis) likely to be realized upon ultimate settlement. As of December 31, 2022 and 2021, the total gross amount of provision for unrecognized tax positions was reported$243 and $234, respectively (Note 7f). The Company recognizes interest and penalties, if any, related to unrecognized tax positions in Wuhan, China. While initiallytax expenses and exchange differences in financial expense. | m. | Concentrations of credit risk: |
Financial instruments that potentially subject the outbreak was largely concentratedCompany to concentrations of credit risk consist principally of cash, cash equivalents and restricted cash. Cash and cash equivalents and restricted cash are invested in China, it rapidly spread across the globe, includinga major bank in Israel and the United States. The extent to which COVID-19 pandemic impacts Management believes that the banks that hold the Company’s operations will dependcash, cash equivalent and restricted cash are financially sound and, accordingly, minimal credit risk exists with respect to this cash, cash equivalent and restricted cash. The Company relies, and expects to continue to rely, on future developments,a single supplier to manufacture supplies and raw materials for its clinical trial. This clinical trial could be adversely affected by a significant interruption in these manufacturing services or the availability of raw materials. F - 14 NOTES TO FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
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. | o. | Derivative warrant liability |
Financial equity instruments that do not meet the US GAAP criteria for equity classification are classified as a 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”. | p. | Basic and diluted loss per share: |
Basic loss per share is computed on the basis of the net loss for the period divided by the weighted average number of Ordinary Shares and vested Ordinary Shares issuable for little or no further consideration outstanding during the period. Diluted loss per share is based upon the weighted average number of ordinary shares and of potential Ordinary Shares outstanding when dilutive. Potential Ordinary Shares include outstanding stock options, restricted shares and warrants, which are highly uncertainincluded under the treasury stock method when dilutive. For the years ended December 31, 2022, 2021 and cannot be predicted with confidence, including2020, all outstanding share options, restricted shares, convertible notes, and warrants have been excluded from the duration and severitycalculation of the outbreak,diluted net loss per share as all such securities are anti-dilutive for all years presented. The loss and the actionsweighted average number of shares used in computing basic and diluted net loss per share is as follows: | | Year ended December 31, | | | | 2022 | | | 2021 | | | 2020 | | | | | | | | | | | | Numerator: | | | | | | | | | | Net loss applicable to shareholders of ordinary shares | | $ | (8,792 | ) | | $ | (7,246 | ) | | $ | (4,053 | ) | | | | | | | | | | | | | | Denominator: | | | | | | | | | | | | | Shares of Ordinary Share and restricted shares used in computing basic and diluted net loss per share | | | 10,661,170 | | | | 9,812,234 | | | | 3,243,943 | | Net loss per share of ordinary share, basic and diluted | | $ | (0.82 | ) | | $ | (0.74 | ) | | $ | (1.25 | ) |
F - 15 NOTES TO FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
| q. | Share-based compensation: |
Share-based compensation to employees and consultants is 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 mayis ultimately expected to vest is recognized as an expense over the requisite service period using the strait line method. The Company has elected to recognize forfeitures, as incurred. The Company grants share (“Share Based Compensation”) to its employees, officers, directors, and non-employees in consideration for services rendered (Note 10). The Company accounts for Share-Based Compensation awards classified as equity awards using the grant-date fair value method. The fair value at grant-date of the issued equity award is recognized as an expense on a straight-line basis over the requisite service period. The fair value of each share option granted is estimated using 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 using the “simplified” method when the required conditions are met. The risk-free interest rate is based on the yield from U.S. treasury bonds with an equivalent term. The expected dividend yield assumption is based on the Company’s historical experience and expectation of no future dividend pay outs. The Company has historically not paid cash dividends and has no foreseeable plans to pay cash dividends in the future. The Company elected to recognize Share-Based Compensation cost for awards with only service conditions that have a graded vesting schedule using the straight-line method based on the multiple-option award approach. | r. | 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. After the consummation of such equity financings, these costs are recorded as a reduction of the respective gross proceeds. Should a planned equity financing be requiredabandoned, terminated, or significantly delayed, the deferred offering costs are written off to contain the COVID-19 or treat its impact.operating expenses. As of December 31, 20212022 and signing date on these financial statements the Company did not experience a significant impact on its operation. |
NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES |
The financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”).
The significant accounting policies described below have been applied consistently in relation to all the periods presented, unless otherwise stated.
| 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 at the dates of the transactions. All transaction gains and losses from re-measurement and from translation of monetary balance sheet items denominated in currencies other than dollars are reflected in the statements of comprehensive loss as financial expenses, net.
F - 10
NOTES TO FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
| | |
| | | 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.
As of December 31, 2021, and 2020, the Company’s restricted cash consisted of immaterial bank deposits that were denominated in New Israeli Shekel. Restricted deposits are presented at cost including accrued interest. These bank deposits are used as securities for the Company's credit card and rent guaranty. | 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 and 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.
As of December 31, 2019 the Company’s derivative warrant liability was classified within Level 3 of the fair value hierarchy because their fair values are estimated by utilizing valuation models and significant unobservable inputs. During 2020 the derivative warrant was classified to equity (see note 4). As of December 31, 2021, and 2020 no assets or liabilities are measured in fair value.
| 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, software and electronic equipment
| | | 33
| | Furniture and office equipment | | | 7
| | Leasehold improvements
| | | * | |
*The depreciable life of leasehold improvements is limited by the expected lease term, unless there is a transfer of title or a purchase option for the leased asset reasonably certain of exercise.
| h. | Research and development expenses:
|
Research and development costs include costs of payroll and related expenses of employees, subcontractors and consultants and other costs related to the Company's operation of its planned clinical trial. Research and development expenses are charged to the statements of comprehensive loss as incurred.
Clinical trial costs are a significant component of research and development expenses and include costs associated with third-party contractors. The Company outsources its clinical trial activities utilizing external entities such as clinical research organizations, independent clinical investigators, and other third-party service providers to assist the Company with the execution of its clinical trials. Clinical trial costs are expensed as incurred.
F - 11
NOTES TO FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
| | |
The Company accounts for income taxes in accordance with ASC 740, “Income Taxes”. ASC 740 prescribes the use of the asset and liability method whereby deferred tax asset 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, 2021, and 2020, 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 positions as the largest amount that is more than 50% (cumulative basis) likely to be realized upon ultimate settlement. As of December 31, 2021 and 2020, the total gross amount of provision for unrecognized tax positions was $234 and $220, respectively (Note 6e). The Company recognizes interest and penalties, if any, related to unrecognized tax positions in tax expenses and exchange differences in financial expense.
| 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 and the United States.
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 this cash, cash equivalent and restricted cash.
The Company relies, and expects to continue to rely, on a single supplier to manufacture supplies and raw materials for its clinical trial. This clinical trial could be adversely affected by a significant interruption in these manufacturing services or the availability of raw materials.
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.
F - 12
NOTES TO FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
| | |
| l. | Derivative warrant liability
|
Financial equity instruments that do not meet the US GAAP criteria for equity classification are classified as a 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.
For the years ended December 31, 2021, 2020 and 2019, 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, | | | | 2021 | | | 2020 | | | 2019 | | | | | | | | | | | | Numerator: | | | | | | | | | | Net loss applicable to shareholders of ordinary shares | | $ | (7,246 | ) | | $ | (4,053 | ) | | $ | (1,279 | ) | Interest accrued on convertible preferred shares | | | 0 | | | | 0 | | | | (1,130 | ) | Total loss attributed to ordinary shares | | | (7,246 | ) | | | (4,053 | ) | | | (2,409 | ) | | | | | | | | | | | | | | Denominator: | | | | | | | | | | | | | Shares of ordinary share used in computing basic and diluted net loss per share | | | 9,812,234 | | | | 3,243,943 | | | | 576,556 | | Net loss per share of ordinary share, basic and diluted | | $ | (0.74 | ) | | $ | (1.25 | ) | | $ | (4.17 | ) |
| n. | Share-based compensation:
|
Share-based compensation to employees and consultants is 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.
The expected dividend yield assumption is based on the Company’s historical experience and expectation of no future dividend pay outs. The Company has historically not paid cash dividends and has no foreseeable plans to pay cash dividends in the future.
F - 13
NOTES TO FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
| | |
| 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. After the consummation of such equity financings, these costs are recorded as a reduction of the respective gross proceeds. Should a planned equity financing be abandoned, terminated or significantly delayed, the deferred offering costs are written off to operating expenses. As of December 31, 2021 and 2020, there were no deferred offering costs.
s.Segment Reporting The Company has one operating and reportable segment. An operating segment is defined as a component that engages in business activities whose operating results are reviewed by the chief operating decision maker, who is the Company’s Chief Executive Officer, for the purpose of assessing performance and allocating resources and for which discrete financial information is available. t.Leases In accordance with Accounting Standards Codification (“ASC”) 842, Leases, the Company determines whether an arrangement is or contains a lease at the inception of the arrangement and whether such a lease is classified as a financing lease or operating lease at the commencement date of the lease. The Company elected not to recognize the right-of-use assets and lease liabilities for short-term leases which it defines as leases with lease terms. The company defines a short-term lease if a lease has a lease term of 12 months or less and does not include an option to purchase the underlying asset that the lessee is reasonably certain to exercise. All of the Company's leases are classified as short-term. Lease expense for lease payments is recognized on a straight-line basis over the lease term in general and administrative (Note 8a). F - 16 NOTES TO FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
| u. | Recently adopted accounting pronouncement |
In August 2020, the FASB issued Accounting Standards Update (“ASU”) 2020-06, Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (“ASU 2020-06”). This guidance simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts in an entity’s own equity. The Company adopted ASU 2020-06 on January 1, 2022 and it did not have a material impact on the Company’s financial statements and disclosures. | v. | | p.Recently Issued Accounting Pronouncements Not Yet Adopted | Segment Reporting
|
The Company has one operating segment. An operating segment is defined as a component that engages in business activities whose operating results are reviewed by the chief operating decision maker for the purpose of assessing performance and allocating resources and for which discrete financial information is available.
Right of Use ("ROU") assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. The Company’s lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option.
Lease expense for lease payments is recognized on a straight-line basis over the lease term. The Company elected the practical expedient of the short-term lease recognition exemption for all leases with a term shorter than 12 months
| r. | Disclosure of recent accounting pronouncements
|
ASC Topic 740, "Income Taxes ", was amended to simplify the accounting for income taxes to improve consistency of accounting methods and remove certain exceptions. Effective January 1, 2021, the Company adopted this income taxes amendment. The implementation of the updated guidance did not have a significant effect on the Company’s financial statements.
| s. | Issued accounting pronouncements effective in future periods |
In August 2020, the FASB issued guidance that is expected to reduce complexity and improve comparability of financial reporting associated with accounting for convertible instruments and contracts in an entity’s own equity. This guidance will be effective for the Company on January 1, 2022 and is not expected to have a material impact on the Company’s financial statements and disclosures.
F - 14
NOTES TO FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 3:-Management does not believe that any recently issued, but not yet effective, accounting pronouncements, if currently adopted, would have a material effect on the Company’s financial statements.
| PREPAID EXPENSES AND OTHER CURRENT ASSETS
|
NOTE 3:- | PREPAID EXPENSES AND OTHER CURRENT ASSETS |
| | December 31, | | | | 2022 | | | 2021 | | | | | | | | | Receivables from governmental authorities | | $ | 55 | | | $ | 218 | | Prepaid expenses | | | 310 | | | | 473 | | Other | | | - | | | | 30 | | | | | | | | | | | | | $ | 365 | | | $ | 721 | |
| | December 31, | | | | 2021 | | | 2020 | | | | | | | | | Receivables from governmental authorities | | $ | 218 | | | $ | 53 | | Prepaid expenses | | | 473 | | | | 734 | | Other | | | 30 | | | | 20 | | | | | | | | | | | | | $ | 721 | | | $ | 807 | |
NOTE 4:- | ACCURUED EXPENSES |
| | December 31, | | | | 2022 | | | 2021 | | | | | | | | | Directors’ fees | | $ | 33 | | | $ | 46 | | Manufacturing expenses | | | 168 | | | | 13 | | Advisors and legal expenses | | | 155 | | | | 139 | | | | | | | | | | | | | $ | 356 | | | $ | 198 | |
F - 17 NOTES TO FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data NOTE 4:- | FAIR VALUE MEASUREMENTS
|
During the year ended December 31, 2019, the Company issued warrants related to its convertible notes (refer to Note 5(b)). As of December 31, 2019, the warrants did not meet the US GAAP criteria for equity classification, and accordingly were classified as a derivative warrant liability and were measured at fair value on the issuance date and as of December 31, 2019, as well as through the date of consummation of the IPO, with changes in fair value recognized as financial expenses in the statements of comprehensive loss. On September 3, 2020, upon consummation of the IPO, the exercise price of the warrants and the number of shares to be issued upon exercise of the warrants were fixed (refer to Note 5(b)), such that it then met the criteria for equity classification of the warrants under US GAAP. Accordingly, the derivative warrant liability was classified to equity as of such date.
A summary of significant unobservable inputs (Level 3 inputs) used in measuring as follows:
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 of December 31, 2019, the warrants did not meet the US GAAP criteria for equity classification, and accordingly were classified as a derivative warrant liability and were measured at fair value on the issuance date and as of December 31, 2019, as well as through the date of consummation of the IPO, with changes in fair value recognized as financial expenses in the statements of comprehensive loss. On September 3, 2020, upon consummation of the IPO, the exercise price of the warrants and the number of shares to be issued upon exercise of the warrants were fixed (refer to Note 6(b)), such that they met the criteria for equity classification under US GAAP. Accordingly, the derivative warrant liability was classified to equity as of such date. A summary of significant unobservable inputs (Level 3 inputs) used in measuring the fair value of these warrants is as follows: | | September 3, | | | December 31 | | | | 2020 | | | 2019 | | Exercise price | | | | | | | Expected volatility | | 72.29% | | | 72.29% | | Risk free rate | | 0.22% | | | 1.5-1.67% | | Expected life (years) | | 3.98-5 | | | 4.65-5 | | Dividend yield | | 0 | | | 0 | |
F - 15
NOTES TO FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 4:- | FAIR VALUE MEASUREMENTS (Cont.) | | September 3, | | | December 31 | | | | 2020 | | | 2019 | | Exercise price | | $ | 6.72-$8.80 | | | $ | 2.55-$4.74 | | Expected volatility | | | 72.29 | % | | | 72.29 | % | Risk free rate | | | 0.22 | % | | | 1.5-1.67 | % | Expected life (years) | | | 3.98-5 | | | | 4.65-5 | | Dividend yield | | | - | | | | - | |
| | |
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 | | $ | 0 | | | | | | | Issuance of warrants in connection with convertible notes (Note 5 (b)) | | | 445 | | Changes in fair value | | | 2 | | | | | | | Balance as of December 31, 2019 | | $ | 447 | | | | | | | Changes in fair value | | | 1,105 | | Equity classification of a derivative warrant liability | | | (1,552 | ) | | | $ | 0 | |
NOTE 5:NOTE 6:- | CONVERTIBLE NOTES |
| a. | From 2014 until 2019, the Company issued convertible notes in the total principal amount of $4,417 to existing shareholders. The Company recorded interest expense amounting to $271 and $379 for the years ended December 31, 2020 and 2019, respectively. |
Concurrent with the closing of the IPO, all of the Company’s convertible notes (inclusive of accrued interest on all outstanding notes) were converted into 2,415,022 units (consisting of one Ordinary Share and one warrant to purchase one Ordinary Share). | b. | In August and December 2019, the Company issued 14.2 units of convertible notes (the “2019 Convertible Notes”) and warrants. Each unit consisted of one convertible note and one warrant. In consideration for the units issued the Company received a total amount of $1,420 (representing a consideration of $100 per unit), after giving effect to a 10% discount. |
| a. | From 2014 untilOn September 3, 2020, upon consummation of the IPO, the outstanding balance of the 2019 the Company issued convertible notes in the total principal amount of $4,417 to existing shareholders. The Company recorded interest expense amounting to $271 and $379 for the years ended December 31, 2020 and 2019, respectively.
|
Concurrent with the closing of the IPO, all of the Company’s convertible notes (inclusive of accrued interest on all outstanding notes) were converted into 2,415,022 units (consisting of one ordinary share and one warrant to purchase one ordinary share).
| b. | In August and December 2019, the Company issued 14.2Convertible Notes was converted into 312,170 units, of convertible notes (the “2019 Convertible Notes”) and warrants. Each unit consistedeach consisting of one convertible noteOrdinary Share and one warrant. In consideration forwarrant to purchase one Ordinary Share, exercisable immediately, at an exercise price of $8.80 and with an expiry date of 5 years from the units issued the Company received a total amount of $1,420 (representing a consideration of $100 per unit), after giving effect to a 10% discount.
|
On September 3, 2020, upon consummation of the IPO, the outstanding balance of the 2019 Convertible Notes was converted into 312,170 units, each consisting of one ordinary share and one warrant to purchase one ordinary share, exercisable immediately, at an exercise price of $8.80 and with an expiry date of 5 years from the IPO closing date (refer to note 1(c)).
IPO closing date. Additionally, on the IPO consummation date, the amount and exercise price of the warrants originally granted in August and December 2019, was fixed at 297,589 warrants and at an exercise price of $6.72, each exercisable into a single unit (refer to Note 1(c)), consisting of one ordinary share and one warrant to purchase one ordinary shares, exercisable through September 3, 2025, at an exercise price of $8.80. Accordingly, since the warrants met the criteria of equity classification, the respective derivative warrant liability, was classified in equity (refer to note 4). | c. | On December 9, 2019, in connection with the 2019 Convertible Notes, the Company issued to the placement agent in the offering described above warrants (the “Agents' Warrants”) to purchase an aggregate of 55,785 ordinary shares or units (refer to Note 1(d)), at an exercise price of $6.72, per unit. Eacheach exercisable into a single unit consists(refer to Note 1(c)), consisting of one ordinary shareOrdinary Share and one warrant to purchase one ordinary share,Ordinary Shares, exercisable through September 3, 2025, at an exercise price of $8.80. Accordingly, since the warrants met the criteria of equity classification, the respective derivative warrant liability, was classified in equity (refer to note 5).
F - 18 NOTES TO FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data NOTE 6:- | CONVERTIBLE NOTES (Cont.) |
| c. | On December 9, 2019, in connection with the 2019 Convertible Notes, the Company issued to the placement agent in the offering described above warrants (the “Agents' Warrants”) to purchase an aggregate of 55,785 Ordinary Shares, or units (refer to Note 6(b)), at an exercise price of $6.72 per unit. Each unit consists of one ordinary share and one warrant to purchase one Ordinary Share, exercisable through September 3, 2025, at an exercise price of $8.80. The Agents' Warrants expire on December 8, 2024. |
As a result of the issuance of the Agents' Warrants, the Company recorded a discount on the convertible note, which was amortized as financial expense amounting to $65 for the year ended December 31, 2020.
F - 16
NOTES TO FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
As a result of the issuance of the Agents' Warrants, the Company recorded a discount on the convertible note, which was amortized as financial expense amounting to $65 for the year ended December 31, 2020. | a. | Tax rates applicable to the Company: |
Taxable income of the Company is subject 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, 2021,2020 and 2019.Israeli Corporate tax rate which was 23% for the years ended December 31, 2022, 2021 and 2020.
| b. | Net operating loss carry forward: |
As of December 31, 2021, and 2020, the Company had net operating loss carry forwards for Israeli income tax purposes of approximately $19,261 and $15,114, respectively. Net operating loss carry forwards in Israel may be carried forward indefinitely and offset against future taxable income.
| c. | As of December 31, 2022, and 2021, the Company had finalnet operating loss carry forwards for Israeli income tax assessments for tax years prior topurposes of approximately $19,695 and including the tax year ended December 31, 2015.$19,261, respectively. Net operating loss carry forwards in Israel may be carried forward indefinitely and offset against future taxable income. | c. | As of December 31, 2022, the Company had final tax assessments for tax years prior to and including the tax year ended December 31, 2016. |
| d. | Deferred income taxes: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, | | | | 2022 | | | 2021 | | | | | | | | | Net operating loss carry forward | | $ | 4,530 | | | $ | 4,434 | | | | | | | | | | | Research and development expenses | | | 812 | | | | 463 | | Other | | | 34 | | | | 21 | | | | | | | | | | | Less: Valuation allowance | | | (5,376 | ) | | | (4,918 | ) | | | | | | | | | | 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 on December 31, 2022, and 2021. F - 19 NOTES TO FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data NOTE 7:- | TAXES ON INCOME (Cont.) |
| e. | Reconciliation of theoretical tax expenses to actual expenses |
The primary difference between the statutory tax rate of the Company and the effective rate results virtually from the changes in valuation allowance in respect of carry forward tax losses, share based compensation expenses and research and development expenses due to the uncertainty of the realization of such tax benefits. | f. | Uncertain tax positions: |
A reconciliation of the opening and closing amounts of total unrecognized tax benefits is as follows: | | December 31, | | | | 2022 | | | 2021 | | | 2020 | | Opening balance | | $ | 234 | | | $ | 220 | | | $ | - | | Tax positions taken in the current year | | | | | | | - | | | | 217 | | Interest and Exchange difference | | | 9 | | | | 14 | | | | 3 | | | | | | | | | | | | | | | Closing balance | | $ | 243 | | | $ | 234 | | | $ | 220 | |
The balance of total unrecognized tax position as of December 31, 2022, 2021 and 2020 is $243, $234, $220 respectively, which, if recognized, would affect the effective tax rate in the Company's statements of comprehensive loss. The Company recognizes interest and penalties, if any, related to unrecognized tax positions in tax expenses and exchange differences in financial expense. The accrued interest and exchange difference related to uncertain tax positions and the expenses recognized during the year ended December 31, 2022, 2021 and 2020 is $9, $14, $3 respectively. F - 20 NOTES TO FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data 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, | | | | 2021 | | | 2020 | | Deferred tax assets: | | | | | | | Net operating loss carry forward | | $ | 4,434 | | | $ | 3,476 | | | | | | | | | | | Deferred tax asset before valuation allowance | | | 4,434 | | | | 3,476 | | Valuation allowance | | | (4,434 | ) | | | (3,476 | ) | | | | | | | | | | Net deferred tax asset | | $ | 0 | | | $ | 0 | |
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 on December 31, 2021 and 2020. | a. | | e. | Reconciliation of theoretical tax expenses to actual expenses |
The primary difference between the statutory tax rate of the Company and the effective rate results virtually from the changes in valuation allowance in respect of carry forward tax losses, share based compensation expenses and research and development expenses due to the uncertainty of the realization of such tax benefits.
| f. | Uncertain tax positions:During the year ended December 31, 2020, the Company was party to a lease agreement with a related party for an annual fee of $33. As of December 31, 2020, the lease agreement with the related party was terminated.
|
A reconciliation of the opening and closing amounts of total unrecognized tax benefits is as follows:
| | December 31, | | | December 31, | | | December 31, | | | | 2021 | | | 2020 | | | 2019 | | Opening balance | | | 220 | | | | 0 | | | | 0 | | Tax positions taken in the current year | | | 0 | | | | 217 | | | | 0 | | Interest | | | 6 | | | | 3 | | | | 0 | | Exchange difference | | | 8 | | | | 0 | | | | 0 | | | | | | | | | | | | | | | Closing balance | | $ | 234 | | | $ | 220 | | | $ | 0 | |
The balance of total unrecognized tax position as of December 31, 2021 is $234 which, if recognized, would affect the effective tax rate in the Company's statements of comprehensive loss.
The Company recognizes interest and penalties, if any, related to unrecognized tax positions in tax expenses and exchange differences in financial expense. The accrued interest and exchange difference related to uncertain tax positions and the expenses recognized during the year ended December 31, 2021, are $9 and $8.
F - 17
NOTES TO FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 7:- | COMMITMENTS AND CONTINGENCIES |
| a. | During the years ended December 31, 2020 and 2019, the Company was party to a lease agreement with a related party for an annual fee of $33. As of December 31, 2020, the lease agreement with the related party was terminated.
On December 10, 2020, the Company entered into a new rental agreement with an un-related party for a period of twelve months starting on January 1, 2021, with an extension option for an additional twelve months, for an annual rental fee of $20. As of December 31, 2021, the agreement was terminated. On July 26, 2021, the Company engaged in a new rental agreement with an un-related party for a period of twelve months starting on August 15, 2021 with2021. In August 2022, the company extended the lease for an additional 12 months up to August 2023. The company has an extension option for an additional twelve months subject to the Company's prior notice. The Company is not reasonably certain to exercise this extension option. The annual rent fees are $75. The Company gave the lessor a bank guaranty of $16, as collateral and the bank holds this amount restricted cash.is $68. | b. | On November 13, 2020, and December 3, 2020, the Company entered into a Master Clinical Research Organization Agreement (the “First Agreement”) and a Master Clinical Trial Agreement (the “Second Agreement”) with Lotus Clinical Research (“Lotus”) as the Company's clinical research organization. |
| | On November 23, 2020, the Company entered into an employment agreement with Rita Kenan under which Mrs. Kenan serves as the VP Operations commencing January 1, 2021. Under the terms of the agreement, the Company paid Mrs. Keenan a bonus, in the amount of $45 in 2021.
|
| c. | On November 13, 2020 and December 3, 2020, the Company entered into a Master Clinical Research Organization Agreement (the “First Agreement”) and a Master Clinical Trial Agreement (the “Second Agreement”) with Lotus Clinical Research ("Lotus") as the Company's clinical research organization. According to the agreements Lotus will serve as the clinical research organization for the Company's planned Phase 3 trials of PRF-110, which are expected to commence in March 2023 and to take place in 2022.during the years 2023 - 2024. Under the first agreement,First Agreement, the Company is obligated to pay an accumulated amount of approximately $2,907 (excluding pass-through costs)based upon a milestone completionscompletion and under the second agreementSecond Agreement an accumulated amount of approximately $7,107 (excluding advertising budget)based upon actual number of evaluable subjects.
UnderDuring the First Agreement, a non-refundablefourth quarter of 2022 and throughout the first quarter of 2023 the company and the CRO negotiated the term of the first and the second agreements and mutually agreed to update the total milestone completion payment to $5,568 and to update the payment for the actual number of $581 was made on December 28, 2020. In Addition, during 2021 payments in a total amount of $581 were made accordingevaluable subject to milestones set in the agreement.
Under the Second Agreement, a non-refundable deposit (the “Second Agreement Deposit”) of $710 was made on January 12, 2021.$8,636.
As of December 31, 20212022, and 2020,2021, the Company accounted for thesethe amounts of net $1,728 and $1,294 as prepaid clinical trial expense and deferred clinical trial costs after recognition ofrecorded $1,110 and $145 as clinical trials expenses in 2022 and 2021,. respectively. No expenses were recorded in 2020. |
F - 21 NOTES TO FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data NOTE 9:- | NOTE 8:-
| TEMPORARY EQUITY |
Convertible Preferred Shares:
Convertible preferred shares consisted 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 | | | | 2,954,267 | | | $ | 6,621 | | | $ | 15,250 | |
The preferred shares conferred upon their holders all rights accruing to holders of ordinary shares in the Company, and, in addition, the rights, preferences and privileges granted to the preferred shares as follows.
On September 3, 2020, upon consummation of the IPO, all of the Company’s outstanding convertible preferred shares were converted into 2,954,267 ordinary shares.
F - 18
NOTES TO FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 9:- | SHAREHOLDERS’ EQUITY |
Ordinary shares:
The ordinary shares confer 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. | On July 6, 2020, pursuant to the Company’s shareholders approval, the Company effected a 3-for-1 reverse split of the Company’s ordinary shares and convertible preferred shares.
|
| b.Convertible Preferred Shares:
| Convertible preferred shares consisted of the IPO closing date,following: | | Convertible Preferred Shares - Series A | | | | Shares Authorized | | | Shares Issued and Outstanding | | | Carrying Value | | | Liquidation Preference | | As of December 31, 2019 | | | 18,300,000 | | | | 2,954,267 | | | $ | 6,621 | | | $ | 15,250 | |
The preferred shares conferred upon their holders all rights accruing to holders of Ordinary Shares in the Company, and, in addition, the rights, preferences and privileges granted to the underwriterspreferred shares as follows. On September 3, 2020, upon consummation of the IPO, warrants to purchase 125,000 ordinary shares, which equals five percent (5%)all of the total number of units sold in the IPO, excluding the over-allotment option, at an exercise price $10.00 per share. The warrants (the “Underwriters’ Warrants”) contain a cashless exercise feature. The Underwriters’ Warrants are exercisable for ordinaryCompany’s outstanding convertible preferred shares on a cash or cashless basis at an exercise price of $10.00 per ordinary share which price reflects 125% of the public offering price of the units issued in the offering. The Underwriters’ Warrants are exercisable following twelve (12) months after the effective date of the registration statement relating to the IPO and expire five (5) years after such effective date. The Underwriters’ Warrants are non-transferable.
As part of the IPO, the Company granted the IPO underwriters an over-allotment to purchase up to 375,000 additional warrants at the public offering price of $0.01, less the underwriting discounts and commissions.were converted into 2,954,267 Ordinary Shares. |
On October 5, 2020 the underwriters exercised their over-allotment option and were issued warrants to purchase 375,000 ordinary shares in return for net amount of $3. The warrants are exercisable through September 3, 2025, at an exercise price of $8.80.
| c. | On March 11, 2021, the Company issued to certain institutional investors (the “Purchasers”) 1,304,346 ordinary shares and warrants to purchase up to an aggregate of 652,173 ordinary shares at a combined purchase price of $4.60 per ordinary share and accompanying warrant in a Private Investment in Public Equity ("Private placement") pursuant to a securities purchase agreement. The private placement resulted in gross proceeds of approximately $6,000. The Company received net amount of $5,554 less issuance costs.
|
On July 22, 2021, as a result of an exercise of warrants to purchase 419,673 shares held by one of the Purchasers, the Company received gross proceeds of $1,930.
In connection with the private placement, the Company also entered into a Registration Rights Agreement, dated as of March 8, 2021, with the Purchasers (the “Registration Rights Agreement”). Pursuant to the Registration Rights Agreement, the Company filed a registration statement (the “Registration Statement”), with the SEC to register the resale of the ordinary shares and the ordinary shares issuable upon exercise of the warrants. The Registration Statement was declared effective on April 9, 2021.
The Company paid the placement agents of the private placement a cash placement fee equal to $390 and an expense reimbursement of $40. The Company also issued to the placement agents warrants to purchase 52,173 ordinary shares, at an exercise price of $5.06 per ordinary share and a term expiring on March 10, 2026. The Company paid a total of approximately $500 in placement agent fees and other expenses. F - 19
NOTES TO FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 9:- | SHAREHOLDERS’ EQUITY (Cont.)
| | |
Warrants and warrants units
The following table summarizes the warrants and warrants units outstanding as of December 31, 2021:
NOTE 10:- | SHAREHOLDERS’ EQUITY |
Type | ISSUANCE DATE | NUMBER OF WARRANTS | EXERCISE PRICE | EXERCISABLE THROUGH | August 2019 warrants (note 5b) | August 22, 2019 | 205,268 | $6.72 (*) | August 22, 2024 | December 2019 warrants (note 5b) | December 9, 2019 | 92,321 | $6.72 (*) | December 8, 2024 | Warrants to 2019 Convertible Notes placement agent (note 5c) | December 9, 2019 | 55,785 | $6.72 (*) | December 8, 2024 | Warrants to underwriters (note 9) | September 3, 2020 | 125,000 | $10.00 | September 1, 2025 | Warrants to underwriters (note 9) | October 5, 2020 | 375,000 | $8.80 | September 3, 2025 | IPO warrants (note 1d, note 5b) | September 3, 2020 | 2,812,170 | $8.80 | September 3, 2025 | PIPE warrants (note 1c) | March 11, 2021 | 232,500 | $4.60 | September 10, 2026 | Warrants to PIPE placement agent (note 1c) | March 11,2021 | 52,173 | $5.06 | March 8, 2026 | | | | | | Total | | 3,950,217 | | |
(*) Each warrant is exercisable into a unit consisting of one share and one warrant
Share-based compensation:
The Ordinary Shares confer 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. | 1. | On July 6, 2020, pursuant to the Company’s shareholders approval, the Company effected a 3-for-1 reverse split of the Company’s Ordinary Shares and convertible preferred shares. |
| 2. | In addition, on the IPO closing date, the Company granted to the underwriters of the IPO warrants to purchase 125,000 Ordinary Shares, which equals five percent (5%) of the total number of units sold in the IPO, excluding the over-allotment option, at an exercise price $10.00 per share. The warrants (the “Underwriters’ Warrants”) contain a cashless exercise feature. The Underwriters’ Warrants are exercisable for Ordinary Shares on a cash or cashless basis at an exercise price of $10.00 per Ordinary Share which price reflects 125% of the public offering price of the units issued in the offering. The Underwriters’ Warrants are exercisable following twelve (12) months after the effective date of the registration statement relating to the IPO and expire five (5) years after such effective date. The Underwriters’ Warrants are non-transferable. As part of the IPO, the Company granted the IPO underwriters an over-allotment to purchase up to 375,000 additional warrants at the public offering price of $0.01, less the underwriting discounts and commissions. On October 5, 2020 the underwriters exercised their over-allotment option and were issued warrants to purchase 375,000 Ordinary Shares at a net amount of $3 per share. The warrants are exercisable through September 3, 2025, at an exercise price of $8.80. |
F - 22 NOTES TO FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data NOTE 10:- | SHAREHOLDERS’ EQUITY (Cont.) |
| 3. | On March 11, 2021, the Company issued to certain institutional investors (the “Purchasers”) 1,304,346 Ordinary Shares and warrants to purchase up to an aggregate of 652,173 ordinary shares at a combined purchase price of $4.60 per Ordinary Share and accompanying warrant in a Private Investment in Public Equity ("Private placement") pursuant to a securities purchase agreement. The private placement resulted in gross proceeds of approximately $6,000. The Company received net amount of $5,554 less issuance costs. On July 22, 2021, as a result of an exercise of warrants to purchase 419,673 shares held by one of the Purchasers, the Company received gross proceeds of $1,930. In connection with the private placement, the Company also entered into a Registration Rights Agreement, dated as of March 8, 2021, with the Purchasers (the “Registration Rights Agreement”). Pursuant to the Registration Rights Agreement, the Company filed a registration statement (the “Registration Statement”), with the SEC to register the resale of the ordinary shares and the Ordinary Shares issuable upon exercise of the warrants. The Registration Statement was declared effective on April 9, 2021. The Company paid the placement agents of the private placement a cash placement fee equal to $390 and an expense reimbursement of $40. The Company also issued to the placement agents warrants to purchase 52,173 Ordinary Shares, at an exercise price of $5.06 per ordinary share and a term expiring on March 10, 2026. The Company paid a total of approximately $500 in placement agent fees and other expenses. |
| 4. | In April 2022, the Company issued 152,110 shares to Crescendo in connection with the first grant (Note 10d.5 and note 13). |
| c. | Warrants and warrants units: |
The following table summarizes the warrants and warrants units outstanding as of December 31, 2022: Type | Issuance Date | Number of warrants | Exercise price | Exercisable through | August 2019 warrants | August 22, 2019 | 205,268 | $6.72 (*) | August 22, 2024 | December 2019 warrants | December 9, 2019 | 148,106 | $6.72 (*) | December 8, 2024 | Warrants to underwriters | September 3, 2020 | 125,000 | $10.00 | September 1, 2025 | Warrants to underwriters | October 5, 2020 | 375,000 | $8.80 | September 3, 2025 | IPO warrants | September 3, 2020 | 2,812,170 | $8.80 | September 3, 2025 | PIPE warrants | March 11, 2021 | 232,500 | $4.60 | September 10, 2026 | Warrants to PIPE placement agent | March 11,2021 | 52,173 | $5.06 | March 8, 2026 | TOTAL | | 3,950,217 | | |
(*) Each warrant is exercisable into one IPO unit consisting of one share and one IPO warrant with an exercise price of $8.80. F - 23 NOTES TO FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data NOTE 10:- | SHAREHOLDERS’ EQUITY (Cont.) |
| d. | Share-based compensation: |
On August 7, 2008, the Board of Directors approved the adoption of the 2008 Share Option Plan (the “2008 Plan”). As of December 31, 2021, and 2020, 153,882 share options were outstanding and no share options were available for future grant under the 2008 Plan. 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. | | On August 7, 2008, the Board of Directors approved the adoption of the 2008 Share Option Plan (the “2008 Plan”). The 2008 Plan has expired, and no additional grants may be made. The intrinsic value of share options outstanding and exercisable as of December 31, 2021, 2020 and 2019 was $168, $651 and $275, respectively.
| | Number of options | | | Weighted average exercise price | | | Weighted average remaining contractual life | | | | | | | | | | | | Options outstanding as of December 31, 2019 | | | 153,882 | | | $ | 0.24 | | | | 4.25 | | Options granted in 2020 | | | | | | | | | | | | | Options outstanding as of December 31, 2020 | | | 153,882 | | | $ | 0.24 | | | | 3.25 | | Options granted in 2021 | | | | | | | | | | | | | Options outstanding as of December 31, 2021 | | | 153,882 | | | $ | 0.24 | | | | 2.25 | | | | | | | | | | | | | | | Options exercisable as of December 31, 2021 | | | 153,882 | | | $ | 0.24 | | | | 2.25 | |
F - 20
NOTES TO FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
As a result of the Modification, (A) 667,641 options were cancelled, comprised of (i) 51,166 options that had been granted in September 2019, at an exercise price of $3.34, (ii) 267,296 options that had been granted in November 2020, at an exercise price of $5.74, (iii) 133,652 options granted in January 2021, at an exercise price of $5.74, and (iv) 51,072 options granted in May 2021, at an exercise price of $3.01, and (ii) 164,455 options that had been granted in April 2022 at an exercise price of $1.06 (the “Cancelled Options”), and (B) 988,773 new options had been granted (including 21,268 option granted to a new employee) (the “New Options”). NOTE 9:- | SHAREHOLDERS’ EQUITY (Cont.)The intrinsic value of share options outstanding and exercisable as of December 31, 2022 was $27. | | |
On July 2, 2019, the Board of Directors approved the adoption of the 2019 Share Option Plan (the “2019 Plan”). | | On July 2, 2019, the Board of Directors approved the adoption of 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 971,476 ordinary shares. As of December 31, 2021, share options to purchase 971,476 ordinary shares were outstanding (as of December 31, 2020, share options to purchase 219,456 ordinary shares were outstanding).
On February 23, 2021, the shareholders of the Company approved the grant of options to purchase an aggregate of 300,000 ordinary shares to three current board members, the Chairman of the board of directors and to the Chief Technology Officer (who is also a director). Each was granted with options to purchase 60,000 ordinary shares of the Company. The options are exercisable to acquire one Ordinary share of the Company at an exercise price of $4.50 per share. The options vest on a quarterly basis over thirty-six months, so that 1/12 of the options shall vest on the last day of each three-month period, provided that on such date each of the serving directors and Chief Technology Officer, shall serve in such capacity. The options will expire after ten years from their grant date.
In January through May 2021 the Company granted an aggregate of 452,020 options to employees. The options are exercisable at exercise prices ranging from $3.01 to $5.74 per share. The options vest over a four year period, 4/16 of the options shall vest following the lapse of a period of twelve months commencing at the date of grant. The remaining 12/16 of the options shall vest on quarterly basis, so that 1/12 of the options shall vest on the expiry of each quarter, provided that on such date each of the employees shall continue to provide the services as an employee of the Company. The options will expire after ten years from their grant date.
The following table summarizes information about options granted to employees:
| | Year ended December 31, 2021 | | | Year ended December 31, 2020 | | | Year ended December 31, 2019 | | | | Number of options | | | Weighted average Exercise price | | | Number of options | | | price | | | Number of options | | | price | | | | | | | | | | | | | | | | | | | | | Outstanding at the beginning of the year | | | 219,456 | | | | 2.62 | | | | 219,456 | | | | 2.62 | | | | 0 | | | | 0 | | | | | | | | | | | | | | | | | | | | | | | | | | | Granted | | | 752,020 | | | | 5.07 | | | | 0 | | | | 0 | | | | 219,456 | | | | 2.62 | | | | | | | | | | | | | | | | | | | | | | | | | | | Forfeited | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | | | | | | | | | | | | | | | | | | | | | | | | Exercised | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | | | | | | | | | | | | | | | | | | | | | | | | Outstanding at the end of the year | | | 971,476 | | | | 4.51 | | | | 219,456 | | | | 2.62 | | | | 219,456 | | | | 2.62 | | | | | | | | | | | | | | | | | | | | | | | | | | | Exercisable at the end of the year | | | 361,280 | | | | 3.58 | | | | 200,269 | | | | 2.55 | | | | 156,386 | | | | 2.77 | |
Upon the adoption of the 2019 Plan, the Company reserved for issuance 971,476 ordinary shares. On February 23, 2021, the shareholders of the Company approved the grant of options to purchase an aggregate of 300,000 Ordinary Shares to three current board members, the Chairman of the board of directors and to the Chief Technology Officer (who is also a director). Each was granted with options to purchase 60,000 Ordinary Shares of the Company. The options are exercisable to acquire one Ordinary Share of the Company at an exercise price of $4.50 per share. The options vest on a quarterly basis over thirty-six months, so that 1/12 of the options shall vest on the last day of each three-month period, provided that on such date each of the serving directors and Chief Technology Officer, shall serve in such capacity. The options will expire after ten years from their grant date. In addition, the unrecognized compensation cost as of the date of Modification will be recognized over the vesting period of the new options. As a result, an amount of 50% of the unrecognized compensation cost of the cancelled options were vested immediately in the amount of $454, and the remaining unrecognized compensation cost will be recognized over the remaining vesting period and until December 31, 2022. In April 2022, the Company’s board of directors approved the grant of options to purchase 164,455 Ordinary Shares of the Company to employees. The options were granted under the Company's 2019 plan. The fair value of share options granted was estimated using the Black Scholes option-pricing model, which requires several assumptions, of which the most significant are the expected share price, volatility, and the expected option term. The options vest over a four-year period, 4/16 of the options shall vest following the lapse of a period of twelve months commencing at the date of grant. The remaining 12/16 of the options shall vest on quarterly basis, so that 1/16 of the options shall vest on the expiry of each quarter. The weighted average grant date fair value per option was $0.89 with exercise price of $1.06. |
F - 24 NOTES TO FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data NOTE 10:- | SHAREHOLDERS’ EQUITY (Cont.) |
F - 21
PAINREFORM LTD. | | Modification of share-based compensation On November 23, 2022 ("the commencement date"), the Company’s board of directors approved: (1) the cancellation of certain outstanding options granted to employees in September 2019 (which were fully vested), November 2020, January 2021, May 2021 and April 2022, and the grant of a greater number of replacement options thereof under the new terms with a lower exercise price of US $0.57 and a shorter vesting period (except for September 2019's grant). The effect of the modification is discussed in the next paragraph ("the modification") (2) The grant of 21,268 options to a new employee on the same terms of the replacement options granted to the rest of the Company's employees, as described above. NOTES TO FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
As a result of the Modification, (A) 667,641 options were cancelled, comprised of (i) 51,166 options that had been granted in September 2019, at an exercise price of $3.34, (ii) 267,296 options that had been granted in November 2020, at an exercise price of $5.74, (iii) 133,652 options granted in January 2021, at an exercise price of $5.74, and (iv) 51,072 options granted in May 2021, at an exercise price of $3.01, and (ii) 164,455 options that had been granted in April 2022 at an exercise price of $1.06 (the “Cancelled Options”), and (B) 988,773 new options had been granted (including 21,268 option granted to a new employee) (the “New Options”). The New Options vest and become exercisable under the following schedule: 50% of the shares covered by the options are immediately vesting on the commencement date determined by the administrator (and in the absence of such determination, the date on which such options were granted), and 6.25% of the shares covered by the options at the end of each subsequent three-month period thereafter over the course of the following two years. The Modification was considered as a Type I modification. The total incremental fair value of these options amounted to $165. An amount of 50% of the incremental fair value were vested immediately at the commencement date in the amount of $83 were recognized immediately, and the remaining incremental fair value will be recognized over the remaining vesting period through December 31, 2022. In addition, the unrecognized compensation cost as of the date of Modification will be recognized over the vesting period of the new options. As a result, an amount of 50% of the unrecognized compensation cost of the cancelled options were vested immediately in the amount of $454, and the remaining unrecognized compensation cost will be recognized over the remaining vesting period and until December 31, 2022. As of December 31, 2022, the Company had 619,387 unvested options. The total unrecognized compensation cost of employee options as of December 31, 2022 is $1,032. The intrinsic value of share options outstanding as of December 31, 2022 was $9. The intrinsic value of share options exercisable as of December 31, 2022 was $9. NOTE 9-F - 25
NOTES TO FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data NOTE 10:- | SHAREHOLDERS’ EQUITY (Cont.) |
| 3. | The following tables summarizes information about options granted to employees and directors: The 2008 Plan Share options outstanding and exercisable to employees and directors under the 2008 Plan are as follows: |
| | Number of options | | | Weighted average exercise price | | | Weighted average remaining contractual life | | | | | | | USD | | | | | Options outstanding at beginning of year | | | 153,882 | | | $ | 0.24 | | | | 2.25 | | Changes during the year: | | | | | | | | | | | | | Options granted | | | - | | | | - | | | | - | | Options exercised | | | - | | | | - | | | | - | | Options forfeited | | | - | | | | - | | | | - | | Options outstanding at end of year | | | 153,882 | | | $ | 0.24 | | | | 1.25 | | Options exercisable at end of year | | | 153,882 | | | $ | 0.24 | | | | 1.25 | |
| | The 2019 Plan Share options outstanding and exercisable to employees and directors under the 2019 Plan are as follows: |
| | Number of options | | | Weighted average exercise price | | | Weighted average remaining contractual life | | | | | | | USD | | | | | Options outstanding at beginning of year | | | 971,476 | | | $ | 4.51 | | | | 8.72 | | Changes during the year: | | | 361,280 | | | | 3.58 | | | | 8.14 | | Options granted | | | 1,153,228 | | | | 0.64 | | | | 9.82 | | Options cancelled | | | 667,641 | | | | 4.19 | | | | 8.21 | | Options exercised | | | - | | | | - | | | | - | | Options forfeited | | | 117,124 | | | | 3.34 | | | | 6.45 | | Options outstanding at end of year | | | 1,339,939 | | | $ | 1.44 | | | | 9.39 | | Options exercisable at end of year | | | 720,552 | | | $ | 1.50 | | | | 9.25 | |
F - 26 NOTES TO FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data NOTE 10:- | SHAREHOLDERS’ EQUITY (Cont.) |
| 4. | The following table sets forth the assumptions that were used in determining the fair value of options granted to employees in 2019 plan for the years ended on December 31, 2022 and 2021: |
| | | 2022* | | | | 2021* | | Expected term | | | 5.28-6.07 | | | | 5.86-6.11 | | Risk-free interest rates | | | 2.69%-3.88 | % | | | 0.52%-1.13 | % | Volatility | | | 79.3%-82.6 | % | | | 69.67%-78.99 | % | Dividend yield | | | - | | | | - | | Exercise price | | $ | 0.57-1.06 | | | $ | 3.013-5.738 | |
| c. | | * The assumptions presented above are the original assumptions used to determine the options fair value at the date of the grants. The assumptions used to determine the incremental value of the options at the modification date are as presented at the Company's options valuation. The Company recognized $1,104, $713 and $18 during the years ended December 31, 2022, 2021 and 2020, respectively, as share-based compensation expenses which was included in general and administrative expenses, and $285, $99 and $20 during the years ended December 31, 2022, 2021 and 2020, respectively, as share-based compensation expense which was included in research and development expenses. |
| 5. | In August 2020, the Company entered into an IR/PR service agreement (the “Service Agreement”) with Crescendo Communications, LLC (“Crescendo”), for a period of two years, commencing immediately after the IPO closing date, and in consideration for 3.75% of the Company's share capital fully diluted Pre-IPO. On August 23, 2020, the Company's Board of Directors approved the Service Agreement with Crescendo and the grant of 152,110 restricted Company's Ordinary Shares ("the first grant"). The Company recognized $275, $412 and $137 during the year ended December 31, 2022, 2021, and 2020, respectively, as share-based compensation expenses in respect with the first grant. In April 2022 the foregoing shares have been issued. In May 2022, following discussions between the Company and Crescendo regarding the number of shares to which he is entitled, the Company's board of Directors approved the grant of an additional 86,965 of the Company's Ordinary shares, par value NIS 0.03 each to Crescendo ("the second grant"). During 2022 the Company has recognized $67 as share-based compensation expenses in connection with the second grant (Note 10d.4 and note 13). |
The following table sets forth the assumptions that were usedF - 27
NOTES TO FINANCIAL STATEMENTS
U.S. dollars in determining the fair value of options granted to employees in 2019 plan for the years ended on December 31, 2021, 2020thousands, except share and 2019:per share data NOTE 11:- | SELECTED STATEMENTS OF OPERATIONS DATA |
| | Year ended December 31 | | | | 2021 | | | 2020 | | | 2019 | | Expected life | | | 5.86-6.11 | | | | - | | | | 5.75-10 | | Risk-free interest rates | | | 0.52%-1.13 | % | | | 0 | | | | 1.43%-2.13 | % | Volatility | | | 69.67%-78.99 | % | | | 0 | | | | 82.29%-85.56 | % | Dividend yield | | | 0 | | | | 0 | | | | 0 | | Exercise price | | $ | 3.013-5.738 | | | | - | | | $ | 0.24-3.339 | |
| a. | Research and development expenses: |
| | Year ended December 31, | | | | 2022 | | | 2021 | | | 2020 | | | | | | | | | | | | Subcontractors and consultants | | $ | 2,228 | | | $ | 1,654 | | | $ | 217 | | Payroll and related expenses | | | 766 | | | | 719 | | | | 90 | | Share-based compensation expense | | | 285 | | | | 99 | | | | 18 | | Clinical trials expenses | | | 1,121 | | | | 357 | | | | - | | Other expenses | | | 22 | | | | 31 | | | | 29 | | | | | | | | | | | | | | | | | $ | 4,422 | | | $ | 2,860 | | | $ | 354 | |
The Company recognized $713 and $18 during the years ended December 31, 2021 and 2020, respectively, as share-based compensation expense which was included in general and administrative expenses, and $99 and $18 during the years ended December 31, 2021 and 2020, respectively, as share-based compensation expense which was included in research and development expenses. | b. | General and administrative expenses: The following table summarizes information about share options outstanding and exercisable in 2019 plan to employees and directors during the years ended December 31, 2020 were as follows:
| | Number of options | | | Weighted average exercise price | | | Weighted average remaining contractual life | | | | | | | | | | | | Options outstanding as of December 31, 2020 | | | 219,456 | | | $ | 2.62 | | | | 8.56 | | Options granted in 2021 | | | 752,020 | | | $ | 5.06 | | | | 9.05 | | Options outstanding as of December 31, 2021 | | | 971,746 | | | $ | 4.51 | | | | 8.72 | | | | | | | | | | | | | | | Options exercisable as of December 31, 2021 | | | 361,280 | | | $ | 3.58 | | | | 8.14 | |
The intrinsic value of share options outstanding as of December 31, 2021 and 2020 was $224 and $407, respectively. The intrinsic value of share options exercisable as of December 31, 2021 and 2020 was $224 and $385, respectively.
| d. | In August 2020, the Company entered into an IR/PR service agreement (the “Service Agreement”) with Crescendo Communications, LLC (“Crescendo”), for a period of two years, commencing immediately after the IPO closing date, and in consideration for 152,110 restricted Company's ordinary shares, reflecting 3.75% of the Company's' share capital fully diluted Pre-IPO. On August 23, 2020, the Company's Board of Directors approved the Service Agreement with Crescendo and the grant of the abovesaid ordinary shares. The Company recognized $412 and $137 during the year ended December 31, 2021 and 2020 as share-based compensation expense related to the shares. As of December 31, 2021, the foregoing shares have not been formally issued.
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F - 22
NOTES TO FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTE 10:- | SELECTED STATEMENTS OF OPERATIONS DATA
|
| a. | Research and development expenses: | | Year ended December 31, | | | | 2022 | | | 2021 | | | 2020 | | | | | | | | | | | | Professional services | | $ | 1,489 | | | $ | 1,697 | | | $ | 727 | | Payroll and related expenses | | | 780 | | | | 688 | | | | 154 | | D&O insurance | | | 653 | | | | 935 | | | | 360 | | Rent and office maintenance | | | 249 | | | | 210 | | | | 37 | | Share-based compensation expense | | | 1,104 | | | | 713 | | | | 20 | | Other expenses | | | 172 | | | | 105 | | | | 19 | | | | | | | | | | | | | | | | | $ | 4,447 | | | $ | 4,348 | | | $ | 1,317 | |
| c. | Other financial income (expenses), net: |
| | | |
| | Year ended December 31, | | | | 2022 | | | 2021 | | | 2020 | | | | | | | | | | | | Interest income | | | 160 | | | | - | | | | - | | Issuance expenses | | | - | | | | - | | | | (65 | ) | Bank fees | | | (13 | ) | | | (10 | ) | | | (3 | ) | Change in fair value of derivative warrant liability | | | - | | | | - | | | | (1,105 | ) | Exchange rate differences | | $ | (61 | ) | | $ | (22 | ) | | $ | (2 | ) | Total other financial expenses, net | | $ | 86 | | | $ | (32 | ) | | $ | (1,175 | ) |
| | Year ended December 31, | | | | 2021 | | | 2020 | | | 2019 | | | | | | | | | | | | Subcontractors and consultants | | $ | 1,654 | | | $ | 217 | | | $ | 21 | | Payroll and related expenses | | | 719 | | | | 90 | | | | 59 | | Share-based compensation expense | | | 99 | | | | 18 | | | | 14 | | Clinical trials expenses | | | 357 | | | | 0 | | | | 0 | | Other expenses | | | 31 | | | | 29 | | | | 42 | | | | | | | | | | | | | | | | | $ | 2,860 | | | $ | 354 | | | $ | 136 | |
| b. | General and administrative expenses:
|
| | Year ended December 31, | | | | 2021 | | | 2020 | | | 2019 | | | | | | | | | | | | Professional services | | $ | 1,697 | | | $ | 727 | | | $ | 342 | | Payroll and related expenses | | | 688 | | | | 154 | | | | 60 | | D&O insurance | | | 935 | | | | 360 | | | | 0 | | Rent and office maintenance | | | 210 | | | | 37 | | | | 33 | | Share-based compensation expense | | | 713 | | | | 20 | | | | 75 | | Other expenses | | | 105 | | | | 19 | | | | 43 | | | | | | | | | | | | | | | | | $ | 4,348 | | | $ | 1,317 | | | $ | 553 | |
| c. | Financial expenses, net:
|
| | Year ended December 31, | | | | 2021 | | | 2020 | | | 2019 | | | | | | | | | | | | Interest expense and amortization of discount on convertible notes | | $ | 0 | | | $ | 987 | | | $ | 541 | | Issuance expenses | | | 0 | | | | 65 | | | | 47 | | Bank fees | | | 10 | | | | 3 | | | | 2 | | Change in fair value of derivative warrant liability | | | 0 | | | | 1,105 | | | | 2 | | Exchange rate differences | | | 22 | | | | 2 | | | | (2 | ) | Total financial expenses, net | | $ | 32 | | | $ | 2,162 | | | $ | 590 | |
F - 23F - 28
NOTES TO FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data
NOTES TO FINANCIAL STATEMENTS
U.S. dollars in thousands, except share and per share data NOTE 11:NOTE 12:- | RELATED PARTIES BALANCES AND TRANSACTIONS |
| a. | During the year ended December 31, 2019 the Company issued convertible notes in the amount of $95, to existing shareholders. As described under Note 6 above, the notes bore interest at an annual interest rate of 8%, compounded on the basis of a 365-day year and were convertible into convertible preferred shares of the Company. |
| 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 $33 for the office space and $20 as a quarterly management fee. The management services continued until the end of March 2018. |
| a. | DuringThe sublease ceased as of August 2019, and from then until December 31, 2020 the yearCompany was provided with an office space at no cost by Medica Venture Partners. For the years ended December 31, 2020 and 2019, the Company issued convertible notes in therecorded an amount of $95, to existing shareholders. As described under Note 5 above, the notes bore interest at an annual interest rate of 8%, compounded on the basis of a 365-day year$33 and were convertible into convertible preferred shares of the Company.
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| 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 $33 for the office space and $20$25, respectively, as a quarterly management fee. The management services continued untillease expense and a corresponding increase in additional paid-in capital, representing a contribution from its controlling shareholder. As of December 31, 2020, the end of March 2018.lease agreement with the related party was terminated.
| c. | 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, which was granted on July 6, 2020 and successful completion of Company’s IPO which closed on September 3, 2020. |
The sublease ceased as of August 2019, and from then until December 31, 2020 the Company was provided with an office space at no cost by Medica Venture Partners. For the years ended December 31, 2020 and 2019, the Company recorded an amount of $33 and $25, respectively, as a lease expense and a corresponding increase in additional paid-in capital, representing a contribution from its controlling shareholder. As of December 31, 2020, the lease agreement with the related party was terminated. | d. | On February 23, 2021, the shareholders of the Company approved the grant of options to purchase an aggregate of 300,000 Ordinary Shares to three board members, the Chairman of the board of directors and to its Chief Technology Officer (who also serves as a director). |
Balances with related parties: | | Year ended December 31, | | | | 2022 | | | 2021 | | | 2020 | | | | | | | | | | | | Employees accrued salaries and bonuses | | $ | 359 | | | $ | 356 | | | $ | 79 | | Directors accrued fees expenses | | | 33 | | | | 82 | | | | 35 | | | | | | | | | | | | | | | | | $ | 392 | | | $ | 438 | | | $ | 114 | |
Transactions with related parties: | c. | 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 which was granted on July 6, 2020 and successful completion of Company’s IPO which closed on September 3, 2020. | | Year ended December 31, | | | | 2022 | | | 2021 | | | 2020 | | Amounts charged to: | | | | | | | | | | Research and development expenses | | $ | 702 | | | $ | 151 | | | $ | - | | | | | | | | | | | | | | | General and administrative expenses | | | 2,091 | | | | 2,155 | | | | 370 | | | | | | | | | | | | | | | Interest expense on convertible notes | | $ | - | | | $ | - | | | $ | 251 | |
NOTE 13:- | SUBSEQUENT EVENTS |
| d. | OnIn February 23, 2021, the shareholders of2023, the Company approvedissued 86,965 Ordinary shares par value NIS 0.03, to Crescendo in connection with the second grant of options to purchase an aggregate of 300,000 ordinary shares to three board members, the Chairman of the board of directors(Note 10d.5 and to its Chief Technology Officer (who also serves as a director)10b.4).
|
Balances with related parties:
| | 2021 | | | 2020 | | | | | | | | | Employees accrued salaries | | $ | 356 | | | $ | 79 | | Directors accrued expenses | | $ | 82 | | | $ | 35 | | | | | | | | | | | | | $ | 438 | | | $ | 114 | |
Transactions with related parties:
| | 2021 | | | 2020 | | | 2019 | | Amounts charged to: | | | | | | | | | | Research and development expenses | | $ | 151 | | | $ | 0 | | | $ | 0 | | | | | | | | | | | | | | | General and administrative expenses | | | 2,155 | | | | 370 | | | | 210 | | | | | | | | | | | | | | | Interest expense on convertible notes | | $ | 0 | | | $ | 251 | | | $ | 351 | |
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