Filed Pursuant to Rule 424(b)(5)
Registration No. 333-225789

 

 

CHECK-CAP LTD.

 

 

1,881,500 Units (each Unit contains One Ordinary Share and one Series D Warrant to purchase 0.5 Ordinary Share)

 

and

 

1,024,876 Pre-funded Units (each Pre-funded Unit contains One Pre-funded Warrant to
purchase One Ordinary Share and One Series D Warrant to purchase 0.5 Ordinary Share)

 

1,453,188 Ordinary Shares Underlying the Series D Warrants, and

 

1,024,876 Ordinary Shares Underlying the Pre-funded Warrants

 

Placement Agent Warrants to purchase 203,446 Ordinary Shares

 

We are offering 1,881,500 units (each unit consisting of one ordinary share and one Series D Warrant to purchase 0.5 ordinary share) to institutional investors at an offering price of $2.58 per unit pursuant to this prospectus. Each Series D Warrant contained in a unit entitles the holder to purchase 0.5 ordinary share at an exercise price of $2.58 per share, will be exercisable immediately and will expire five years from the date of issuance.

 

We are also offering a total of 1,024,876 pre-funded units to purchasers whose purchase of units in this offering would otherwise result in the purchaser, together with its affiliates and certain related parties, beneficially owning more than 4.99% (or at the election of the purchaser, 9.99%) of our outstanding ordinary shares immediately following the consummation of this offering, (each pre-funded unit consisting of one pre-funded warrant to purchase one ordinary share and one Series D Warrant to purchase 0.5 ordinary share) in lieu of units that would otherwise result in the purchaser’s beneficial ownership exceeding 4.99% (or at the election of the purchaser, 9.99%) of our outstanding ordinary shares.  Each pre-funded warrant contained in a pre-funded unit will be exercisable for one ordinary share.  The pre-funded units are being offered at an offering price of $2.57 per share. The pre-funded warrants included in the pre-funded units will have an exercise price of $0.01 per share, will be immediately exercisable and may be exercised at any time until all of the pre-funded warrants are exercised in full.  The Series D Warrants contained in the pre-funded units will have identical terms as the Series D Warrants contained in the units.

 

Units and the pre-funded units will not be issued or certificated.  The ordinary shares or pre-funded warrants, as the case may be, and the Series D Warrants can only be purchased together in this offering but the securities contained in the units or pre-funded units will be issued separately.

 

Pursuant to this prospectus supplement and the accompanying prospectus, we will also issue the placement agent warrants described below, as part of the compensation payable to the placement agent in connection with this offering.

 

The ordinary shares issuable from time to time upon exercise of the Series D Warrants, the pre-funded warrants and the placement agent warrants and the Series D Warrants, the pre-funded warrants and placement agent warrants are also being offered by this prospectus supplement and accompanying prospectus. We refer to the ordinary shares, the Series D Warrants, the pre-funded warrants, placement agent warrants, the ordinary shares issuable upon exercise of the Series D Warrants, pre-funded warrants and placement agent warrants being offered hereby, collectively, as the “securities.” See “Description of the Offered Securities” for more information.

 

Our ordinary shares are listed on the Nasdaq Capital Market under the symbol “CHEK.” The last reported sale price of our ordinary shares on February 1, 2019 was $3.44 per share.  The offering price of the unit is $2.58 per unit and $2.57 per pre-funded unit.  The offering price per unit and pre-funded unit, as the case may be, was negotiated between us, the placement agent and investors based on market conditions at the time of pricing.  We do not intend to list the pre-funded warrants, Series D Warrants or placement agent warrants on any securities exchange or other nationally recognized trading system. There is no established public trading market for the pre-funded warrants, Series D Warrants or placement agent warrants, and we do not expect a market to develop. Without an active trading market, the liquidity of the pre-funded warrants, Series D Warrants and placement agent warrants will be limited.

 

We have engaged H.C. Wainwright & Co., LLC, or the placement agent, to act as our exclusive placement agent for this offering. The placement agent has agreed to use its “reasonable best efforts” to arrange for the sale of our securities offered by this prospectus supplement and the accompanying prospectus, but the placement agent has no obligation to purchase or sell any of such securities or to arrange for the purchase or sale of any specific number or dollar amount of such securities. There is no required minimum number of our securities that must be sold as a condition to completion of this offering. Because there is no minimum offering amount required as a condition to closing this offering, the actual offering amount, placement agent fees, and proceeds to us, if any, are not presently determinable and may be substantially less than the total maximum offering amounts set forth below. We have not arranged to place the funds from investors in an escrow, trust or similar account. We have agreed to pay the placement agent the fees set forth in the table below in connection with this offering, which assumes that we sell all of the securities we are offering hereby.

 

We are an “emerging growth company” as that term is used in the Jumpstart Our Business Startups Act of 2012 and, as such, have elected to comply with certain reduced public company reporting requirements for this prospectus and future filings.

 

Investing in our securities involves a high degree of risk.  See the section entitled “Risk Factors” beginning on page S-4 of this prospectus and in the documents incorporated by reference into this prospectus for a discussion of risks that should be considered in connection with an investment in our securities

 

 

(1)

We have also agreed to pay the placement agent a management fee equal to 1.0% of the gross proceeds raised in this offering, a non-accountable expense allowance of $30,000 and reimbursement for legal fees and expenses in the amount of up to $110,000 and to issue the placement agent or its designees warrants to purchase up to 203,446 of our ordinary shares, which represent 7.0% of the gross proceeds of this offering divided by the offering price. See “Plan of Distribution” on page S-33 of this prospectus supplement for more information regarding these arrangements.

 

(2)	The amount of the offering proceeds to us presented in this table does not give effect to the sale or exercise, if any, of the warrants included in the units or pre-funded units, the pre-funded warrants included in the pre-funded units or the placement agent warrants.

 

 

TABLE OF CONTENTS

 

PROSPECTUS SUPPLEMENT

 

PROSPECTUS SUMMARY	S - 1
THE OFFERING	S - 2
RISK FACTORS	S - 4
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS	S - 7
USE OF PROCEEDS	S - 9
DIVIDEND POLICY	S - 9
PRINCIPAL MARKETS	S - 10
CAPITALIZATION	S - 11
DESCRIPTION OF SECURITIES WE ARE OFFERING	S - 12
TAXATION	S - 16
PLAN OF DISTRIBUTION	S - 33
LEGAL MATTERS	S - 35
EXPERTS	S - 35
EXPENSES	S - 35
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE	S - 36
WHERE YOU CAN FIND ADDITIONAL INFORMATION	S - 36

 

PROSPECTUS

 

 

 

 

 

RISK FACTORS

 

Before deciding to invest in our securities, you should consider carefully the following risk factors affecting us and our securities and the other information contained or incorporated by reference in this prospectus, including in the 2017 Annual Report and the Report on Form 6-K filed with the SEC on February 4, 2019.  As a result of these risks and uncertainties, our business, financial condition and results of operations could be materially and adversely affected, and the value of our securities could decline.  The risks and uncertainties we discuss in the documents incorporated by reference are those that we currently believe may materially affect our company.  The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may materially and adversely affect our business, financial condition and results of operations.

 

Risks Relating to this Offering

 

Our management will have broad discretion over the use of proceeds from this offering and may not obtain a favorable return on the use of these proceeds.

 

Our management will have broad discretion in determining how to apply the net proceeds from this offering and may spend the proceeds in a manner that our shareholders may not deem desirable.  We currently intend to use the net proceeds that we will receive from this offering to finance the continuation of our product development and clinical studies in Europe and the United States.  We cannot assure you

 

A substantial number of ordinary shares and ordinary share equivalents will be sold in this offering, which could cause the price of our ordinary shares to decline.

 

In this offering we will sell 1,881,500 ordinary shares and pre-funded warrants to purchase 1,024,876 ordinary shares, which represents approximately 35% of our ordinary shares as of February 3, 2019 after giving effect to the sale of the ordinary shares and assuming the full exercise of the pre-funded warrants in this offering. In addition, we are issuing Series D Warrants to purchase an aggregate of 1,453,188 ordinary shares and the placement agent will receive warrants to purchase up to 203,446 shares of common stock. This sale and any future sales of a substantial number of ordinary shares in the public market, or the perception that such sales may occur, could adversely affect the price of our ordinary shares on the Nasdaq Capital Market. We cannot predict the effect, if any, that market sales of those securities or the availability of those securities for sale will have on the market price of our ordinary shares. As result of the dilution experienced by existing shareholders due to this offering, we may be subject to class action litigation based on this dilution.  In addition, a decline in the price of our ordinary shares might impede our ability to raise capital through the issuance of additional ordinary shares or other equity securities, and may cause you to lose part or all of your investment in our ordinary shares. The sale of ordinary shares issued upon the exercise of our outstanding options and warrants could further dilute the holdings of our then existing shareholders.

 

Additional financing or future equity issuances may result in future dilution to our shareholders.

 

We expect that we will need to raise additional funds in the future to complete the development and commercialization of our C-Scan system, to finance internal growth, to make acquisitions or for other reasons.  Any required additional financing may not be available on terms acceptable to us, or at all.  If we raise additional funds by issuing equity securities, you may experience significant dilution of your ownership interest and the newly issued securities may have rights senior to those of the holders of our ordinary shares.  The price per share at which we sell additional securities in future transactions may be higher or lower than the price per share in this offering. Alternatively, if we raise additional funds by obtaining loans from third parties, the terms of those financing arrangements may include negative covenants or other restrictions on our business that could impair our operational flexibility, and would also require us to fund additional interest expense.  If we raise additional funds through collaborations, licensing arrangements or other structured financing transactions, we may relinquish rights to certain of our technologies or products, grant security interests in our assets or grant licenses to third parties on terms that are unfavorable to us.  If adequate additional financing is not available when required or is not available on acceptable terms, we may be unable to successfully commercialize our product or continue our research and development.

 

In addition, to the extent that outstanding stock options or warrants have been or may be exercised or other shares issued, you may experience further dilution.

There is no public market for the pre-funded warrants, Series D Warrants, or placement agent warrants being offered by us in this offering.

 

There is no established public trading market for the pre-funded warrants, Series D Warrants, and the placement agent warrants being offered in this offering.  We do not intend to list the pre-funded warrants, Series D Warrants, or placement agent warrants on any securities exchange or other nationally recognized trading system. There is no established public trading market for the pre-funded warrants, Series D Warrants, or the placement agent warrants and we do not expect a market to develop. Without an active trading market, the liquidity of the pre-funded warrants, Series D Warrants, and the placement agent warrants will be limited.

 

The pre-funded warrants, Series D Warrants, and placement agent warrants are speculative in nature.

 

The pre-funded warrants, Series D Warrants, and the placement agent warrants do not confer any rights of ordinary share ownership on its holders, such as voting rights or the right to receive dividends, but rather merely represent the right to acquire ordinary shares at a fixed price. For example, commencing on the date of issuance, holders of the pre-funded warrants may exercise their right to acquire ordinary shares and pay an exercise price per share of $0.01, subject to adjustment upon certain events and commencing on the date of issuance, holders of the Series D Warrants may exercise their right to acquire the ordinary shares and pay an exercise price for the warrants, subject to certain adjustments, prior to the fifth year anniversary of the date of issuance, after which date any unexercised Series D Warrants will expire and have no further value. Moreover, following this offering, the market value of the Series D Warrants and pre-funded warrants, if any, is uncertain and there can be no assurance that the market value of the Series D Warrants and pre-funded warrants will equal or exceed their imputed offering price. There can be no assurance that the market price of the ordinary shares will ever equal or exceed the exercise price of the Series D Warrants or the placement agent warrants, and consequently, whether it will ever be profitable for holders of the Series D Warrants or placement agent warrant to exercise their respective warrants.

 

Holders of our pre-funded warrants, Series D Warrants, and placement agent warrants will have no rights as shareholders until such holders exercise their respective pre-funded warrants, Series D Warrants, and placement agent warrants and acquire our ordinary shares.

 

Until holders of the pre-funded warrants, the Series D Warrants, and placement agent warrants acquire our ordinary shares upon exercise of their respective pre-funded warrants, Series D Warrants, and placement agent warrants, holders of the pre-funded warrants, Series D Warrants, and the placement agent warrants will have no rights with respect to the ordinary shares underlying such warrants.  Upon exercise of the pre-funded warrants, the Series D Warrants, or the placement agent warrants, the holders thereof will be entitled to exercise the rights of a holder of ordinary shares only as to matters for which the record date occurs after the exercise date.

 

There has been and may continue to be significant volatility in the volume and price of our ordinary shares on the Nasdaq Capital Market.

 

The market price of our ordinary shares has been and may continue to be highly volatile. Factors, including timing, progress and results of current and future preclinical studies and clinical trials and our research and development programs; regulatory matters, concerns about our financial position, operations results, litigation, government regulation, developments or disputes relating to agreements, patents or proprietary rights, may have a significant impact on the market volume and price of our stock. Unusual trading volume in our shares occurs from time to time.

 

We have never declared or paid a dividend and currently do not intend to pay cash dividends in the foreseeable future. Any return on investment may be limited to the value of our securities.

 

We have never declared and do not anticipate paying cash dividends on our ordinary shares in the foreseeable future. Our board of directors has discretion to declare and pay dividends on our ordinary shares and will make any determination to do so based on a number of factors, such as our operating results, financial condition, current and anticipated cash needs and other business and economic factors that our board of directors may deem relevant. In addition, we are only permitted to pay dividends out of “profits” (as defined by the Israeli Companies Law, 1999, or the “Israeli Companies Law”), provided that there is no reasonable concern that the dividend distribution will prevent us from meeting our existing and foreseeable obligations, as they become due. If we do not pay dividends, our ordinary shares may be less valuable because a return on your investment will only occur if the trading price of our securities appreciates. Further, you should not rely on an investment in us if you require dividend income from your investments.

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This prospectus and the documents incorporated herein by reference contain statements that may be deemed to be “forward-looking statements” within the meaning of the federal securities laws.  These statements relate to anticipated future events, future results of operations and/or future financial performance.  In some cases, you can identify forward-looking statements by their use of terminology such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “target”, “future,” “intend,” “may,” “ought to,” “plan,” “possible,” “potentially,” “predicts,” “project,” “should,” “will,” “would,” negatives of such terms or other similar terms.  These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements including, without limitation, the risks identified above in “Risk Factors” and those contained in the 2017 Annual Report and the Report on Form 6-K filed with the SEC on February 4, 2019.  The forward-looking statements in this prospectus and the documents incorporated herein by reference include, without limitation, statements relating to:

 

·

our goals, targets and strategies;

 

·

the timing and conduct of the clinical trials for our C-Scan system, including statements regarding the timing, progress and results of current and future preclinical studies and clinical trials, and our research and development programs;

 

·

timing or likelihood of regulatory filings, approvals and required licenses for our C-Scan system;

 

·

our future business development, results of operations and financial condition;

 

·

our ability to adequately protect our intellectual property rights and enforce such rights and to avoid violation of the intellectual property rights of others;

 

·

our plans to develop, launch and commercialize our C-Scan system and any future products;

 

·

the timing, cost or other aspects of the commercial launch of our C-Scan system;

 

·

our estimates regarding expenses, future revenues, capital requirements and our need for additional financing and strategic partnerships;

 

·

our estimates regarding the market opportunity, clinical utility, potential advantages, and market acceptance of our C-Scan system;

 

·

the impact of government laws and regulations;

 

·

our ability to recruit and retain qualified clinical, regulatory and research and development personnel;

 

·

the availability of reimbursement or other forms of funding for our products from government and commercial payors;

 

·

difficulties in maintaining commercial scale manufacturing capacity and capability and our ability to generate growth;

 

·

our failure to comply with regulatory guidelines;

 

·

uncertainty in industry demand and patient wellness behavior;

 

·

general economic conditions and market conditions in the medical device industry;

 

·

future sales of large blocks of our securities, which may adversely impact our share price;

 

·

depth of the trading market in our securities; and

 

·

our expectations regarding the use of proceeds of this offering.

 

The preceding list is not intended to be an exhaustive list of all of our forward-looking statements.  Forward-looking statements reflect our current views with respect to future events and are based on assumptions and subject to risks and uncertainties.

 

You should not unduly rely on any forward-looking statements.  Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that future results, levels of activity, performance and events and circumstances reflected in the forward-looking statements will be achieved or will occur.  Except as required by law, we undertake no obligation to update publicly any forward-looking statements for any reason after the date of this prospectus, to conform these statements to actual results or to changes in our expectations.

 

USE OF PROCEEDS

 

DIVIDEND POLICY

 

We have never declared or paid dividends on our ordinary shares and currently do not intend to pay cash dividends on our ordinary shares in the foreseeable future.  We currently intend to retain all of our future earnings, if any, to finance the growth and development of our business.

 

Our ability to distribute dividends also may be limited by future contractual obligations and by Israeli law.  The Israeli Companies Law restricts our ability to declare dividends.  Unless otherwise approved by a court, we can distribute dividends only from “profits” (as defined by the Israeli Companies Law), and only if there is no reasonable concern that the dividend distribution will prevent us from meeting our existing and foreseeable obligations as they become due.  Subject to the foregoing, payment of future dividends, if any, will be at the discretion of our board of directors and will depend on various factors, such as our financial condition, operating results, current and anticipated cash needs and other business and economic factors that our board of directors may deem relevant.  See “Description of Share Capital—Dividend and Liquidation Rights.” The payment of dividends may be subject to Israeli withholding taxes.  See Item 10E of the 2017 Annual Report, “Additional Information—Taxation—Israeli Tax Considerations and Government Programs—Taxation of Our Shareholders—Taxation of Non-Israeli Shareholders on Receipt of Dividends” which is incorporated herein by reference.  Furthermore, if we pay a dividend out of income attributed to our Benefited Enterprise that was generated during the tax exemption period, we may be subject to tax on the grossed-up amount of such distributed income at the corporate tax rate which would have been applied to our Benefited Enterprise’s income had we not enjoyed the exemption.  See Item 10E of the 2017 Annual Report, “Additional Information—Taxation – Israeli Tax Considerations and Government Programs — Law for the Encouragement of Capital Investments, 5719-1959 — Tax Benefits Subsequent to the 2005 Amendment” which is incorporated herein by reference.

 

PRINCIPAL MARKETS

 

Our ordinary shares, Series A Warrants and Series C Warrants are listed on the Nasdaq Capital Market under the symbols “CHEK,” “CHEKW,” and “CHEKZ” respectively.  On April 4, 2018, we effected a 1-for-12 reverse share split of our ordinary shares.  We do not intend to list the pre-funded warrants or Series D Warrants on any securities exchange or other nationally recognized trading system. Without an active trading market, the liquidity of the pre-funded warrants and Series D Warrants will be limited.

 

CAPITALIZATION

 

The following table sets forth our capitalization as of September 30, 2018:

 

·

on an actual basis; and

 

·

on an adjusted basis, to give effect to the issuance and sale in this offering of 1,881,500 units at the offering price of $2.58 per unit and the issuance and sale of 1,024,876 pre-funded units at the offering price of $2.57 per pre-funded unit, assuming full exercise of the pre-funded warrants sold in this offering, excluding the proceeds, if any, from the exercise of the Series D Warrants issued in this offering and after deducting the placement agent fees and estimated offering expenses payable by us.

 

 

The number of issued and outstanding shares as of September 30, 2018 in the table excludes:

 

·

4,364,384 ordinary shares issuable upon the exercise of outstanding warrants with a weighted average exercise price of $16.25 per ordinary share;

 

·

379,661 ordinary shares issuable upon the exercise of outstanding options with a weighted average exercise price of $15.90 per ordinary share, granted under our option and equity incentive plans;

 

·

113,584 outstanding restricted stock units issued to directors, employees and consultants;

 

·

681,556 ordinary shares that are available for future option grants under the 2015 Plan;

 

·

1,024,876 ordinary shares issuable upon exercise of the pre-funded warrants offered hereby at an exercise price of $0.01 per share;

 

·

1,453,188 ordinary shares issuable upon exercise of the Series D Warrants offered hereby at an exercise price of $2.58 per share; and

 

·

203,446 ordinary shares issuable upon exercise of the placement agent warrants to be issued to the placement agent as compensation in connection with this offering, at an exercise price of $3.225 per share.

 

DESCRIPTION OF SECURITIES WE ARE OFFERING

 

We are offering (i) 1,881,500 units, each unit consisting of one ordinary share and one Series D Warrant to purchase 0.5 ordinary share, and (ii) 1,024,876 pre-funded units, each pre-funded unit consisting of one pre-funded warrant to purchase one ordinary share and one Series D Warrant to purchase 0.5 ordinary share.  The ordinary share and accompanying Series D Warrant included in each unit will be issued separately, and the pre-funded warrant to purchase one ordinary share and the accompanying Series D Warrant included in each pre-funded unit will be issued separately.  The units and pre-funded units will not be issued or certificated.  We are also registering the ordinary shares included in the units and the ordinary shares issuable from time to time upon exercise of the pre-funded warrants included in pre-funded units, the Series D Warrants included in the units and the pre-funded units offered hereby and the placement agent warrants.

 

Ordinary Shares

 

The material terms and provisions of our ordinary shares are described under the caption “Description of Ordinary Shares” on page 8 of the accompanying prospectus.

 

Pre-Funded Warrants

 

The following summary of certain terms and provisions of pre-funded warrants included in the pre-funded units that are being offered hereby is not complete and is subject to, and qualified in its entirety by, the provisions of the pre-funded warrant, the form of which is filed as an exhibit to a Report on Form 6-K to be filed by us with the SEC in connection with this offering.  Prospective investors should carefully review the terms and provisions of the form of pre-funded warrant for a complete description of the terms and conditions of the pre-funded warrants.

 

Duration and Exercise Price

 

Each pre-funded warrant included in the pre-funded units offered hereby will have an initial exercise price per share equal to $0.01.  The pre-funded warrants will be immediately exercisable and may be exercised at any time until the pre-funded warrants are exercised in full.  The exercise price and number of ordinary shares issuable upon exercise is subject to appropriate adjustment in the event of stock dividends, stock splits, reorganizations or similar events affecting our ordinary shares and the exercise price.  The pre-funded warrants will be issued separately from the accompanying one Series D Warrant to purchase 0.5 ordinary share included in the pre-funded units, and may be transferred separately immediately thereafter.

 

Exercisability

 

The pre-funded warrants will be exercisable, at the option of each holder, in whole or in part, by delivering to us a duly executed exercise notice accompanied by payment in full for the number of ordinary shares purchased upon such exercise (except in the case of a cashless exercise as discussed below).  A holder (together with its affiliates) may not exercise any portion of the pre-funded warrant to the extent that the holder would own more than 4.99% of the outstanding ordinary shares immediately after exercise, except that upon at least 61 days’ prior notice from the holder to us, the holder may increase the amount of ownership of outstanding stock after exercising the holder’s pre-funded warrants up to 9.99% of the number of ordinary shares outstanding immediately after giving effect to the exercise, as such percentage ownership is determined in accordance with the terms of the pre-funded warrants.  Purchasers of pre-funded units in this offering may also elect, prior to the issuance of the pre-funded units, to have the initial exercise limitation set at 9.99% of our outstanding ordinary shares.

 

Cashless Exercise

 

If, at the time a holder exercises its pre-funded warrants, a registration statement registering the issuance of the ordinary shares underlying the pre-funded warrants under the Securities Act is not then effective or available for the issuance of such shares, then in lieu of making the cash payment otherwise contemplated to be made to us upon such exercise in payment of the aggregate exercise price, the holder may elect instead to receive upon such exercise (either in whole or in part) the net number of ordinary shares determined according to a formula set forth in the pre-funded warrants.

 

Transferability

 

Subject to applicable laws, a pre-funded warrant may be transferred at the option of the holder upon surrender of the pre-funded warrant to us together with the appropriate instruments of transfer.

 

Fractional Shares

 

No fractional ordinary shares will be issued upon the exercise of the pre-funded warrants.

 

Trading Market

 

There is no trading market available for the pre-funded warrants on any securities exchange or nationally recognized trading system.  The ordinary shares issuable upon exercise of the pre-funded warrants are currently listed on the Nasdaq Capital Market.

 

Right as a Shareholder

 

Except as otherwise provided in the pre-funded warrants or by virtue of such holder’s ownership of ordinary shares, the holders of the pre-funded warrants do not have the rights or privileges of holders of our ordinary shares, including any voting rights, until they exercise their pre-funded warrants.

 

Series D Warrants

 

The following summary of certain terms and provisions of Series D Warrants included in the units and the pre-funded units that are being offered hereby is not complete and is subject to, and qualified in its entirety by, the provisions of the Series D Warrants, the form of which is filed as an exhibit to a Report on Form 6-K to be filed by us with the SEC in connection with this offering.  Prospective investors should carefully review the terms and provisions of the form of Series D Warrant for a complete description of the terms and conditions of the Series D Warrants.

 

Duration and Exercise Price

 

Each Series D Warrant entitles the holder to purchase 0.5 ordinary share at an initial exercise price equal to $2.58 per share.  The Series D Warrants will be immediately exercisable and will expire on the fifth anniversary of the original issuance date.  The exercise price and number of ordinary shares issuable upon exercise is subject to appropriate adjustment in the event of stock dividends, stock splits, reorganizations or similar events affecting our ordinary shares and the exercise price.  The Series D Warrants will be issued separately from the ordinary shares included in the units, or the pre-funded warrants included in the pre-funded units, as the case may be, and may be transferred separately immediately thereafter.  One Series D Warrant to purchase 0.5 ordinary share will be included in each unit or pre-funded unit purchased in this offering.

 

Cashless Exercise

 

If, at the time a holder exercises its Series D Warrants, a registration statement registering the issuance of the ordinary shares underlying the Series D Warrants under the Securities Act is not then effective or available for the issuance of such shares, then in lieu of making the cash payment otherwise contemplated to be made to us upon such exercise in payment of the aggregate exercise price, the holder may elect instead to receive upon such exercise (either in whole or in part) the net number of ordinary shares determined according to a formula set forth in the Series D Warrants.

 

Exercisability

 

The Series D Warrants will be exercisable, at the option of each holder, in whole or in part, by delivering to us a duly executed exercise notice accompanied by payment in full for the number of ordinary shares purchased upon such exercise (except in the case of a cashless exercise as discussed below).  A holder (together with its affiliates) may not exercise any portion of the Series D Warrant to the extent that the holder would own more than 4.99% of the outstanding ordinary shares immediately after exercise, except that upon at least 61 days’ prior notice from the holder to us, the holder may increase the amount of ownership of outstanding stock after exercising the holder’s Series D Warrants up to 9.99% of the number of ordinary shares outstanding immediately after giving effect to the exercise, as such percentage ownership is determined in accordance with the terms of the Series D Warrants.

 

Fractional Shares

 

No fractional ordinary shares will be issued upon the exercise of the Series D Warrants

 

Transferability

 

Subject to applicable laws, a Series D Warrant may be transferred at the option of the holder upon surrender of the Series D Warrant to us together with the appropriate instruments of transfer.

 

Exchange Listing

 

There is no trading market available for the Series D Warrants on any securities exchange or nationally recognized trading system.  The ordinary shares issuable upon exercise of the Series D Warrants are currently listed on the Nasdaq Capital Market.

 

Right as a Shareholder

 

Except as otherwise provided in the Series D Warrants or by virtue of such holder’s ownership of ordinary shares, the holders of the Series D Warrants do not have the rights or privileges of holders of our ordinary shares, including any voting rights, until they exercise their Series D Warrants.

 

Fundamental Transaction

 

If, at any time while the Series D Warrants are outstanding, (1) we consolidate or merge with or into another entity in which we are not the surviving entity; (2) we sell, lease, assign, convey or otherwise transfer all or substantially all of our assets; (3) any tender offer or exchange offer (whether completed by us or a third party) is completed pursuant to which holders of a majority of our outstanding ordinary shares tender or exchange their shares for securities, cash or other property; (4) we effect any reclassification of our ordinary shares or compulsory share exchange pursuant to which our outstanding ordinary shares are effectively converted or exchanged for other securities, cash or property or (5) any transaction is consummated whereby any person or entity acquires more than 50% of our outstanding ordinary shares (each, a “Fundamental Transaction”), then upon any subsequent exercise of a Series D Warrant, the holder thereof will have the right to receive the same amount and kind of securities, cash or other property as it would have been entitled to receive upon the occurrence of such Fundamental Transaction if it had been, immediately prior to such Fundamental Transaction, the holder of the number of ordinary shares then issuable upon exercise of the Series D Warrant.

 

In the event of a fundamental transaction which is approved by our Board, the holders of the Series D Warrants have the right to require us or a successor entity to redeem the Series D Warrant for cash in the amount of the Black-Scholes value of the unexercised portion of the Series D Warrant on the date of the consummation of the fundamental transaction.  In the event of a fundamental transaction which is not approved by our Board, the holders of the Series D Warrants have the right to require us or a successor entity to redeem the Series D Warrant for the consideration paid in the fundamental transaction in the amount of the Black Scholes value of the unexercised portion of the Series D Warrant on the date of the consummation of the fundamental transaction.

 

TAXATION

 

The following description is not intended to constitute a complete analysis of all tax consequences relating to our ordinary shares, Series D Warrants and pre-funded warrants (sometimes referred to collectively or individually as our “securities”).  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.

 

U.S. Federal Income Taxation

 

The following are the material U.S. federal income tax consequences of the acquisition, ownership and disposition of our securities.

 

The discussion below of the U.S. federal income tax consequences to “U.S. Holders” will apply to a beneficial owner of our securities that is for U.S. federal income tax purposes:

 

·

an individual citizen or resident of the United States;

 

·

a corporation (or other entity treated as a corporation) that is created or organized (or treated as created or organized) in or under the laws of the United States, any state thereof or the District of Columbia;

 

·

an estate whose income is includible in gross income for U.S. federal income tax purposes regardless of its source; or

 

·

a trust if (i) a U.S. court can exercise primary supervision over the trust’s administration and one or more U.S. persons are authorized to control all substantial decisions of the trust; or (ii) it has a valid election in effect under applicable U.S. Treasury regulations to be treated as a U.S. person.

 

A beneficial owner of our securities that is described above is referred to herein as a “U.S. Holder.”  If a beneficial owner of our securities is not described as a U.S. Holder and is not an entity treated as a partnership or other pass-through entity for U.S. federal income tax purposes, such owner will be considered a “Non-U.S. Holder.”  The material U.S. federal income tax consequences of the acquisition, ownership and disposition of our securities applicable specifically to Non-U.S. Holders are described below under the heading “Non-U.S. Holders.”

 

This discussion is based on the Internal Revenue Code of 1986, as amended (the “Code”), its legislative history, Treasury regulations promulgated thereunder, published rulings and court decisions, all as currently in effect.  These authorities are subject to change or differing interpretations, possibly on a retroactive basis.

 

This discussion does not address all aspects of U.S. federal income taxation that may be relevant to any particular holder based on such holder’s individual circumstances.  In particular, this discussion considers only holders that own and hold our securities as capital assets within the meaning of Section 1221 of the Code, and does not address the potential application of the alternative minimum tax or the U.S. federal income tax consequences to holders that are subject to special rules, including:

 

·

financial institutions or financial services entities;

 

·

broker-dealers;

 

·

persons that are subject to the mark-to-market accounting rules under Section 475 of the Code;

 

·

tax-exempt entities;

 

·

governments or agencies or instrumentalities thereof;

 

·

insurance companies;

 

·

regulated investment companies;

 

·

real estate investment trusts;

 

·

certain expatriates or former long-term residents of the United States;

 

·

persons that actually or constructively own 5% or more of our shares;

 

·

persons that acquired our securities pursuant to an exercise of employee options, in connection with employee incentive plans or otherwise as compensation;

 

·

persons that hold our securities as part of a straddle, constructive sale, hedging, conversion or other integrated transaction;

 

·

persons whose functional currency is not the U.S. dollar;

 

·

passive foreign investment companies; or

 

·

controlled foreign corporations.

 

This discussion does not address any aspect of U.S. federal non-income tax laws, such as gift or estate tax laws, or state, local or non-U.S. tax laws or, except as discussed herein, any tax reporting obligations applicable to a holder of our securities.  Additionally, this discussion does not consider the tax treatment of partnerships or other pass-through entities or persons who hold our securities through such entities.  If a partnership (or other entity classified as a partnership for U.S. federal income tax purposes) is the beneficial owner of our securities, the U.S. federal income tax treatment of a partner in the partnership generally will depend on the status of the partner and the activities of the partnership.  This discussion also assumes that any distribution made (or deemed made) to a holder in respect of our securities and any consideration received (or deemed received) by a holder in connection with the sale or other disposition of our securities will be in U.S. dollars.  In addition, this discussion also assumes that we will be and have been treated as a foreign corporation for U.S. federal income tax purposes.  In this regard, as described in “Risk Factors – Risks Related to Taxation” in the 2017 Annual Report which is incorporated herein by reference, there is a risk that we could be treated as a domestic (U.S.) corporation for U.S. federal income tax purposes by reason of the transactions related to our acquisition of all of the business operations and substantially all of the assets of Check-Cap LLC on May 31, 2009.  Moreover, this discussion assumes that a holder will receive only ordinary shares and will not be entitled to a fractional share upon the exercise of a Series D Warrant or a pre-funded warrant.

 

We have not sought, and will not seek, a ruling from the Internal Revenue Service (the “IRS”) or an opinion of counsel as to any U.S. federal income tax consequence described herein.  The IRS may disagree with the description herein, and its determination may be upheld by a court.  Moreover, there can be no assurance that future legislation, regulations, administrative rulings or court decisions will not adversely affect the accuracy of the statements in this discussion.

 

EACH HOLDER OF OUR SECURITIES IS URGED TO CONSULT ITS OWN TAX ADVISOR WITH RESPECT TO THE PARTICULAR TAX CONSEQUENCES TO SUCH HOLDER OF THE ACQUISITION, OWNERSHIP AND DISPOSITION OF OUR SECURITIES, INCLUDING THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL, AND NON-U.S. TAX LAWS, AS WELL AS U.S. FEDERAL TAX LAWS AND ANY APPLICABLE TAX TREATIES.

 

Tax Treatment of Pre-Funded Warrants

 

Although the law is not completely settled in the area, pre-funded warrants will probably be treated as ordinary shares for U.S. federal income tax purposes.  Any person that elects to receive pre-funded warrants in lieu of our ordinary shares in this offering should consult their own tax advisor regarding the application of the U.S. federal income tax laws to their particular situation.

 

Allocation of Purchase Price and Characterization of Units

 

Each unit and pre-funded unit should be treated for U.S. federal income tax purposes as an investment unit consisting of one ordinary share or pre-funded warrant, as the case may be, and one Series D Warrant to purchase 0.5 ordinary share.  For U.S. federal income tax purposes, each holder must allocate the purchase price of a unit or pre-funded unit between that ordinary share or pre-funded warrant, as applicable, and one Series D Warrant based on the relative fair market value of each at the time of issuance.  The price allocated to each ordinary share, pre-funded warrant and one Series D Warrant generally will be the holder’s tax basis in such security, as the case may be.

 

U.S. Holders

 

Taxation of Cash Distributions

 

Subject to the passive foreign investment company, or PFIC, rules discussed below, a U.S. Holder generally will be required to include in gross income as ordinary income the amount of any cash dividend paid in respect of our ordinary shares.  A cash distribution on our ordinary shares generally will be treated as a dividend for U.S. federal income tax purposes to the extent the distribution is paid out of our current or accumulated earnings and profits (as determined for U.S. federal income tax purposes).  Such dividend generally will not be eligible for the dividends received deduction generally allowed to U.S. corporations in respect of dividends received from other U.S. corporations.  The portion of such cash distribution, if any, in excess of such earnings and profits will be applied against and reduce (but not below zero) the U.S. Holder’s adjusted tax basis in the ordinary shares.  Any remaining excess generally will be treated as gain from the sale or other taxable disposition of such ordinary shares.

 

With respect to non-corporate U.S. Holders, any such cash dividends may be subject to U.S. federal income tax at the lower applicable regular long term capital gains tax rate (see “— Taxation on the Disposition of Ordinary Shares, Pre-Funded Warrants or the Series D Warrants” below) provided that (a) our ordinary shares are readily tradable on an established securities market in the United States or we are eligible for the benefits of the United States-Israel Tax Treaty, (b) we are not a PFIC, as discussed below, for either the taxable year in which the dividend was paid or the preceding taxable year, and (c) certain holding period requirements are met.  Therefore, if our ordinary shares are not readily tradable on an established securities market, and we are not eligible for the benefits of the United States-Israel Tax Treaty, then cash dividends paid by us to non-corporate U.S. Holders with respect to such ordinary shares will not be subject to U.S. federal income tax at the lower regular long term capital gains tax rate.  Under published IRS authority, shares are considered for purposes of clause (a) above to be readily tradable on an established securities market in the United States only if they are listed on certain exchanges, which presently include the NASDAQ Capital Market.  Although our ordinary shares are currently listed and traded on the NASDAQ Capital Market, U.S. Holders nevertheless should consult their own tax advisors regarding the availability of the lower rate for any cash dividends paid with respect to our ordinary shares.

 

Dividends paid to a U.S. Holder with respect to our ordinary shares generally will be foreign source income, which may be relevant in calculating such U.S. Holder’s foreign tax credit limitations.  Subject to certain conditions and limitations, Israeli tax withheld on dividends may be deducted from such U.S. Holder’s taxable income or credited against such U.S. Holder’s U.S. federal income tax liability.  The limitation on foreign taxes eligible for credit is calculated separately with respect to specific classes of income.  For this purpose, dividends that we distribute generally should constitute “passive category income,” or, in the case of certain U.S. Holders, “general category income.” A foreign tax credit for foreign taxes imposed on distributions may be denied if a U.S. Holder does not satisfy certain minimum holding period requirements.  The rules relating to the determination of the foreign tax credit are complex, and U.S. Holders should consult their tax advisors to determine whether and to what extent they will be entitled to this credit.

 

Adjustments with Respect to Warrants

 

The terms of the Series D Warrants and pre-funded warrants provide for an adjustment to the number of ordinary shares for which the warrant may be exercised or to the exercise price of the warrant in certain events.  An adjustment that has the effect of preventing dilution generally is not taxable.  However, the U.S. Holders of the Series D Warrants or pre-funded warrants would be treated as receiving a constructive distribution from us if, for example, the adjustment increases the warrant holders’ proportionate interest in our assets or earnings and profits (e.g., through a decrease in the exercise price of the Series D Warrants or pre-funded warrants) as a result of a distribution of cash to the holders of our ordinary shares, which is taxable to the U.S. Holders of such ordinary shares as described under “—Taxation of Cash Distributions,” above.  Such constructive distribution would be subject to tax as described under that section in the same manner as if the U.S. Holders of the Series D Warrants or pre-funded warrants received a cash distribution from us equal to the fair market value of such increased interest.

 

Taxation on the Disposition of Ordinary Shares, Pre-funded Warrants or Series D Warrants

 

Upon a sale or other taxable disposition of our ordinary shares, pre-funded warrants or Series D Warrants, and subject to the PFIC rules discussed below, a U.S. Holder generally will recognize capital gain or loss in an amount equal to the difference between the amount realized and the U.S. Holder’s adjusted tax basis in the securities.

 

The regular U.S. federal income tax rate on capital gains recognized by U.S. Holders generally is the same as the regular U.S. federal income tax rate on ordinary income, except that long term capital gains recognized by non-corporate U.S. Holders generally are subject to U.S. federal income tax at a maximum regular rate of 20%.  Capital gain or loss will constitute long term capital gain or loss if the U.S. Holder’s holding period for the securities exceeds one year.  The deductibility of capital losses is subject to various limitations.  Any such gain or loss that a U.S. Holder recognizes generally will be treated as U.S. source income or loss for foreign tax credit limitation purposes.

 

If an Israeli capital gains tax applies to any gains from the disposition of our ordinary shares, pre-funded warrants or Series D Warrants by a U.S. Holder, such tax may be treated as a foreign tax eligible for a deduction from such holder’s U.S. federal taxable income or a foreign tax credit against such holder’s U.S. federal income tax liability (subject to certain conditions and limitations).  In addition, if such Israeli tax applies to any such gain, a U.S. Holder may be entitled to certain benefits under the United States-Israel Tax Treaty, if such holder is considered a resident of the United States for purposes of, and otherwise meets the requirements of, the United States-Israel Tax Treaty.  U.S. Holders should consult their own tax advisors regarding the deduction or credit for any such Israeli tax and their eligibility for the benefits of the United States-Israel Tax Treaty.

 

Additional Taxes

 

U.S. Holders that are individuals, estates or trusts and whose income exceeds certain thresholds generally may be subject to a 3.8% Medicare contribution tax on unearned income, including, without limitation, dividends on, and gains from the sale or other taxable disposition of, our ordinary shares, pre-funded warrants or Series D Warrants, subject to certain limitations and exceptions.  U.S. Holders should consult their own tax advisors regarding the effect, if any, of such tax on their ownership and disposition of our ordinary shares, pre-funded warrants or Series D Warrants.

 

Exercise or Lapse of a Series D Warrant

 

Subject to the PFIC rules discussed below, a U.S. Holder generally will not recognize gain or loss upon the exercise of a Series D Warrant for cash (except to the extent the U.S. Holder receives a cash payment for any fractional share that would otherwise have been issued upon exercise of the Series D Warrant).  An ordinary share acquired pursuant to the exercise of a Series D Warrant for cash generally will have a tax basis equal to the U.S. Holder’s tax basis in the Series D Warrant, increased by the amount paid to exercise the Series D Warrant, and decreased by the adjusted tax basis allocable to any fractional share that would otherwise have been issued upon exercise of the Series D Warrant.  The holding period of such ordinary share generally would begin on the day after the date of exercise of the Series D Warrant.  If a Series D Warrant is allowed to lapse unexercised, a U.S. Holder generally will recognize a capital loss equal to such holder’s tax basis in the Series D Warrant.

 

The tax consequences of a cashless exercise of Series D Warrants are not clear under current tax law.  A cashless exercise may be tax-free (except to the extent the U.S. Holder receives a cash payment for any fractional share that would otherwise have been issued upon exercise of the Series D Warrant), either because it is not a realization event (i.e., not a transaction in which gain or loss is realized) or because the transaction is treated as a recapitalization for U.S. federal income tax purposes.  In either tax-free situation, a U.S. Holder’s tax basis in the ordinary shares received would equal the U.S. Holder’s basis in the Series D Warrants surrendered (less any amount allocable to any fractional share that would otherwise have been issued upon exercise of the Series D Warrant).  If the cashless exercise were treated as not being a realization event, the U.S. Holder’s holding period in the ordinary shares could be treated as commencing on the date following the date of exercise of the Series D Warrants.  If the cashless exercise were treated as a recapitalization, the holding period of the ordinary shares received would include the holding period of the Series D Warrants.

 

It is also possible that a cashless exercise could be treated as a taxable exchange in which gain or loss is recognized.  In such event, a U.S. Holder could be deemed to have surrendered a number of Series D Warrants with a fair market value equal to the exercise price for the number of Series D Warrants deemed exercised.  For this purpose, the number of Series D Warrants deemed exercised would be equal to the amount needed to receive on exercise the number of ordinary shares issued pursuant to the cashless exercise of the Series D Warrants (and cash in lieu of fractional shares).  In this situation, the U.S. Holder would recognize capital gain or loss in an amount equal to the difference between the fair market value of the Series D Warrants deemed surrendered to pay the exercise price and the U.S. Holder’s tax basis in such Series D Warrants deemed surrendered.  Such gain or loss would be long-term or short-term depending on the U.S. Holder’s holding period in the Series D Warrants.  In this case, a U.S. Holder’s tax basis in the ordinary shares received would equal the sum of the fair market value of the Series D Warrants deemed surrendered to pay the exercise price and the U.S. Holder’s tax basis in the Series D Warrants deemed exercised (less any amount allocable to any fractional share that would otherwise have been issued upon exercise of the Series D Warrants), and a U.S. Holder’s holding period for the ordinary shares should commence on the date following the date of exercise of the Series D Warrants.  There also may be alternative characterizations of any such taxable exchange that would result in similar tax consequences, except that a U.S. Holder’s gain or loss would be short-term.

 

Due to the absence of authority on the U.S. federal income tax treatment of a cashless exercise of the Series D Warrants, it is unclear which, if any, of the alternative tax consequences and holding periods described above would be adopted by the IRS or a court of law.  Accordingly, U.S. Holders should consult their tax advisors regarding the tax consequences of a cashless exercise of Series D Warrants or pre-funded warrants.

 

Passive Foreign Investment Company Rules

 

A foreign (i.e., non-U.S.) corporation will be a PFIC if either (a) at least 75% of its gross income in a taxable year of the foreign corporation, including its pro rata share of the gross income of any corporation in which it is considered to own at least 25% of the shares by value, is passive income, or (b) at least 50% of its assets in a taxable year of the foreign corporation, ordinarily determined based on fair market value and averaged quarterly over the year, including its pro rata share of the assets of any corporation in which it is considered to own at least 25% of the shares by value, are held for the production of, or produce, passive income.  Passive income generally includes dividends, interest, rents and royalties (other than certain rents or royalties derived from the active conduct of a trade or business), and gains from the disposition of passive assets.

 

Our actual PFIC status for our current taxable year (2018) or any subsequent taxable year is uncertain and will not be determinable until after the end of such taxable year. Accordingly, there can be no assurance with respect to our status as a PFIC for our current taxable year or any subsequent taxable year.

 

If we are determined to be a PFIC for any taxable year (or portion thereof) that is included in the holding period of a U.S. Holder of our ordinary shares, pre-funded warrants or Series D Warrants, and, in the case of our ordinary shares, the U.S. Holder did not make a timely QEF election for our first taxable year as a PFIC in which the U.S. Holder held (or was deemed to hold) the ordinary shares, a purging election, a QEF election along with a purging election, or a mark-to-market election, each as described below, such holder generally will be subject to special rules for regular U.S. federal income tax purposes with respect to:

 

·

any gain recognized by the U.S. Holder on the sale or other disposition of its ordinary shares, pre-funded warrants or Series D Warrants; and

 

·

any “excess distribution” made to the U.S. Holder (generally, any distributions to such U.S. Holder during a taxable year of the U.S. Holder that are greater than 125% of the average annual distributions received by such U.S. Holder in respect of the ordinary shares during the three preceding taxable years of such U.S. Holder or, if shorter, such U.S. Holder’s holding period for the ordinary shares).

 

Under these rules,

 

·

the U.S. Holder’s gain or excess distribution will be allocated ratably over the U.S. Holder’s holding period for the ordinary shares, pre-funded warrants or Series D Warrants;

 

·

the amount allocated to the U.S. Holder’s taxable year in which the U.S. Holder recognized the gain or received the excess distribution or to the period in the U.S. Holder’s holding period before the first day of our first taxable year in which we qualified as a PFIC will be taxed as ordinary income;

 

·

the amount allocated to other taxable years (or portions thereof) of the U.S. Holder and included in its holding period will be taxed at the highest ordinary tax rate in effect for that year and applicable to the U.S. Holder; and

 

·

the interest charge generally applicable to underpayments of tax will be imposed in respect of the tax attributable to each such other taxable year of the U.S. Holder.

 

Although a determination as to our PFIC status is made annually, an initial determination that we are a PFIC generally will apply for subsequent years to a U.S. Holder that held (or was deemed to hold) our ordinary shares, pre-funded warrants or Series D Warrants while we were a PFIC, whether or not we meet the test for PFIC status in those subsequent years.  If we are determined to be a PFIC in any taxable year, and then cease to meet the test for PFIC status in a subsequent taxable year, a U.S. Holder may be able to make a purging election to eliminate this continuing PFIC status with respect to its ordinary shares in certain circumstances.  A purging election generally creates a deemed sale of such ordinary shares at their fair market value on the last day of our tax year during which we qualified as a PFIC (or, in the case of a purging election made in connection with a QEF election, the first day of our taxable year in which qualify as a QEF with respect to such U.S. Holder).  Any gain recognized by the purging election generally will be treated as an excess distribution subject to the special tax and interest charge rules described above.  As a result of the purging election, the U.S. Holder generally will increase the adjusted basis in its ordinary shares by the amount of gain recognized and will also have a new holding period in its ordinary shares for purposes of the PFIC rules.

 

In general, if we are determined to be a PFIC, a U.S. Holder may also avoid the PFIC tax consequences described above with respect to the ordinary shares by making a timely QEF election (or a QEF election along with a purging election).  Pursuant to the QEF election, a U.S. Holder generally will be required to include in income its pro rata share of our net capital gains (as long term capital gain) and other earnings and profits (as ordinary income), on a current basis, in each case whether or not distributed, in the taxable year of the U.S. Holder in which or with which our taxable year ends if we are treated as a PFIC for that taxable year.  However, a U.S. Holder may make a QEF election only if we agree to provide certain tax information to such holder annually.  At this time, we do not intend to provide U.S. Holders with such information as may be required to make a QEF election effective.

 

Alternatively, if a U.S. Holder, at the close of its taxable year, owns ordinary shares in a PFIC that are treated as marketable stock, the U.S. Holder may make a mark-to-market election with respect to such ordinary shares for such taxable year.  If the U.S. Holder makes a valid mark-to-market election for the first taxable year of the U.S. Holder in which the U.S. Holder holds (or is deemed to hold) the ordinary shares and for which we are determined to be a PFIC, such holder generally will not be subject to the PFIC rules described above with respect to its ordinary shares as long as such shares continue to be treated as marketable stock.  Instead, in general, the U.S. Holder will include as ordinary income for each year that we are treated as a PFIC the excess, if any, of the fair market value of its ordinary shares at the end of its taxable year over the adjusted tax basis in its ordinary shares.  The U.S. Holder also will be allowed to take an ordinary loss in respect of the excess, if any, of the adjusted tax basis of its ordinary shares over the fair market value of its ordinary shares at the end of its taxable year (but only to the extent of the net amount of previously included income as a result of the mark-to-market election).  The U.S. Holder’s adjusted tax basis in its ordinary shares will be adjusted to reflect any such income or loss amounts, and any further gain recognized on a sale or other taxable disposition of the ordinary shares in a taxable year in which we are treated as a PFIC generally will be treated as ordinary income.  Special tax rules may also apply if a U.S. Holder makes a mark-to-market election for a taxable year after the first taxable year in which the U.S. Holder holds (or is deemed to hold) our ordinary shares and for which we are determined to be a PFIC.  Currently, a mark-to-market election may not be made with respect to warrants.

 

The mark-to-market election is available only for stock that is regularly traded on a national securities exchange that is registered with the U.S. Securities and Exchange Commission, including the Nasdaq Capital Market, or on a foreign exchange or market that is regulated or supervised by a governmental authority of the country in which the exchange or market is located and which (A) meets certain requirements, that are enforced by law, relating to trading volume, listing, financial disclosure, surveillance and other requirements that are designed to (i) prevent fraudulent and manipulative acts and practices, (ii) remove impediments to and perfect the mechanism of a free and open, fair and orderly, market and (iii) protect investors and (B) has rules that effectively promote the active trading of listed stock.  Although our ordinary shares are currently listed and traded on the Nasdaq Capital Market, U.S. Holders nevertheless should consult their own tax advisors regarding the availability and tax consequences of a mark-to-market election with respect to our ordinary shares under their particular circumstances.

 

If we are a PFIC and, at any time, have a foreign subsidiary that is classified as a PFIC, a U.S. Holder of our securities may be deemed to own a portion of the shares of such lower-tier PFIC, and generally could incur liability for the deferred tax and interest charge described above if we receive a distribution from, or dispose of all or part of our interest in, or the U.S. Holder were otherwise deemed to have disposed of an interest in, the lower-tier PFIC.  A mark-to-market election generally would not be available with respect to such a lower-tier PFIC.  U.S. Holders are urged to consult their own tax advisors regarding the tax issues raised by lower-tier PFICs.

 

A U.S. Holder that owns (or is deemed to own) ordinary shares in a PFIC during any taxable year of the U.S. Holder may have to file an IRS Form 8621 (whether or not a mark-to-market election is or has been made) with such U.S. Holder’s U.S. federal income tax return and provide such other information as may be required by the U.S. Treasury Department.

 

The rules dealing with PFICs and purging and mark-to-market elections are very complex and are affected by various factors in addition to those described above.  Accordingly, U.S. Holders of our securities should consult their own tax advisors concerning the application of the PFIC rules to our securities under their particular circumstances.

 

Non-U.S. Holders

 

Cash dividends paid or deemed paid to a Non-U.S. Holder with respect to our ordinary shares generally will not be subject to U.S. federal income tax unless such dividends are effectively connected with the Non-U.S. Holder’s conduct of a trade or business within the United States (and, if required by an applicable income tax treaty, are attributable to a permanent establishment or fixed base that such holder maintains or maintained in the United States).

 

In addition, a Non-U.S. Holder generally will not be subject to U.S. federal income tax on any gain attributable to a sale or other taxable disposition of our securities unless such gain is effectively connected with its conduct of a trade or business in the United States (and, if required by an applicable income tax treaty, is attributable to a permanent establishment or fixed base that such holder maintains or maintained in the United States) or the Non-U.S. Holder is an individual who is present in the United States for 183 days or more in the taxable year of such sale or other disposition and certain other conditions are met (in which case, such gain from U.S. sources generally is subject to U.S. federal income tax at a 30% rate or a lower applicable tax treaty rate).

 

Dividends and gains that are effectively connected with the Non-U.S. Holder’s conduct of a trade or business in the United States (and, if required by an applicable income tax treaty, are attributable to a permanent establishment or fixed base that such holder maintains or maintained in the United States) generally will be subject to regular U.S. federal income tax at the same regular U.S. federal income tax rates as applicable to a comparable U.S. Holder and, in the case of a Non-U.S. Holder that is a corporation for U.S. federal income tax purposes, may also be subject to an additional branch profits tax at a 30% rate or a lower applicable tax treaty rate.

 

Backup Withholding and Information Reporting

 

In general, information reporting for U.S. federal income tax purposes should apply to distributions made on our securities within the United States to a U.S. Holder (other than an exempt recipient) and to the proceeds from sales and other dispositions of our securities by a U.S. Holder (other than an exempt recipient) to or through a U.S. office of a broker. Payments made (and sales and other dispositions effected at an office) outside the United States will be subject to information reporting in limited circumstances.  In addition, certain information concerning a U.S. Holder’s adjusted tax basis in its securities and adjustments to that tax basis and whether any gain or loss with respect to such securities is long term or short term also may be required to be reported to the IRS, and certain holders may be required to file an IRS Form 8938 (Statement of Specified Foreign Financial Assets) to report their interest in our securities.

 

Moreover, backup withholding of U.S. federal income tax, currently at a rate of 24%, generally will apply to dividends paid on our securities to a U.S. Holder (other than an exempt recipient) and the proceeds from sales and other dispositions of our securities by a U.S. Holder (other than an exempt recipient), in each case who:

 

·

fails to provide an accurate taxpayer identification number;

 

·

is notified by the IRS that backup withholding is required; or

 

·

in certain circumstances, fails to comply with applicable certification requirements.

 

A Non-U.S. Holder generally may eliminate the requirement for information reporting and backup withholding by providing certification of its foreign status, under penalties of perjury, on a duly executed applicable IRS Form W-8 or by otherwise establishing an exemption.

 

Backup withholding is not an additional tax. Rather, the amount of any backup withholding will be allowed as a credit against a U.S. Holder’s or a Non-U.S. Holder’s U.S. federal income tax liability and may entitle such holder to a refund, provided that certain required information is timely furnished to the IRS.

 

Holders are urged to consult their own tax advisors regarding the application of backup withholding and the availability of and procedures for obtaining an exemption from backup withholding in their particular circumstances.

 

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 securities purchased in this offering by investors who are non-Israeli residents.  This summary does not discuss all the aspects of Israeli tax law that may be relevant to a particular investor in light of his or her personal investment circumstances or to some types of investors subject to special treatment under Israeli law.  Examples of such investors include residents of Israel or traders in securities who are subject to special tax regimes not covered in this discussion.  Because parts of this discussion are based on new tax legislation that has not yet been subject to judicial or administrative interpretation, we cannot assure you that the appropriate tax authorities or the courts will accept the views expressed in this discussion.  The discussion below is subject to change, including due to amendments under Israeli law or changes to the applicable judicial or administrative interpretations of Israeli law, which change could affect the tax consequences described below.

 

The following description is not intended to constitute a complete analysis of all Israeli tax consequences relating to the ownership and disposition of our securities.  You should consult your own tax advisor concerning any tax consequences that may arise Israeli law.

 

General Corporate Tax Structure in Israel

 

Israeli resident companies are generally subject to corporate tax, currently at the rate of 23% (effective as of January 1, 2018 and thereafter, reduced from 24% for the 2017 tax year and 25% for the 2016 tax year) of a company’s taxable income.  However, the effective tax rate payable by a company that derives income from an Approved Enterprise, a Benefited Enterprise, a Preferred Enterprise or a Priority Technological Enterprise (as discussed below) may be considerably less.  Capital gains derived by an Israeli resident company are subject to tax at the prevailing corporate tax rate.

 

Law for the Encouragement of Industry (Taxes), 5729-1969

 

The Law for the Encouragement of Industry (Taxes), 5729-1969, generally referred to as the Industry Encouragement Law, provides several tax benefits for “Industrial Companies.” The Industry Encouragement Law defines an “Industrial Company” as a company resident in Israel, of which 90% or more of its income in any tax year, other than income from defense loans, is derived from an “Industrial Enterprise” owned by it and located in Israel or in the “Area” (as such term is defined under Section 3A of the Israeli Income Tax Ordinance (New Version), 5721-1961, referred to as the Ordinance).  An “Industrial Enterprise” is defined as an enterprise whose principal activity in a given tax year is industrial production.

 

The following corporate tax benefits, among others, are available to Industrial Companies:

 

·

amortization over an eight-year period of the cost of purchased know-how and patents and rights to use a patent and know-how which are used for the development or advancement of the Industrial Enterprise, commencing the tax year in which the company started to use such know-how/ patent;

 

·

under limited conditions, an election to file consolidated tax returns with related Israeli Industrial Companies; and

 

·

expenses related to a public offering are deductible in equal amounts over three years.

 

Eligibility for the benefits under the Industry Encouragement Law is not subject to receipt of prior approval from any governmental authority.  We believe that we may qualify as an “Industrial Company” within the meaning of the Industry Encouragement Law; however, there can be no assurance that we will qualify as an Industrial Company or that the benefits described above will be available in the future.

 

Law for the Encouragement of Capital Investments, 5719-1959

 

The Law for the Encouragement of Capital Investments, 5719-1959, generally referred to as the Investment Law, provides certain incentives for capital investments in production facilities (or other eligible assets).

 

The Investment Law has been amended several times in recent years, primarily: Amendment 60, effective April 1, 2005, referred to as the 2005 Amendment; Amendment 68, effective as of January 1, 2011, referred to as the 2011 Amendment; Amendment 71, effective as of January 1, 2014, referred to as the 2014 Amendment; and Amendment 73, effective as of January 1, 2017, referred to as the 2017 Amendment.  Pursuant to the foregoing amendments, generally tax benefits that were granted in accordance with the provisions of the Investment Law prior to each such amendment remain in force; however, any benefits granted subsequent to the respective amendment are subject to the provisions of the Investment Law as amended.

 

Tax Benefits Prior to the 2005 Amendment

 

Prior to the 2005 Amendment, a capital investment in eligible production facilities (or other eligible assets) could, upon application to the Investment Center of the Israeli Ministry of Economy (formerly named the Ministry of Industry, Trade and Labor), be designated as an “Approved Enterprise” and accordingly, entitled to certain tax benefits under the Investment Law.  Each certificate of approval for an Approved Enterprise relates to a specific investment program in the Approved Enterprise, delineated both by the financial scope of the investment and by the physical characteristics of the facility or the asset.  We do not have any Approved Enterprises.

 

Tax Benefits Subsequent to the 2005 Amendment

 

Pursuant to the 2005 Amendment, a company whose facilities meet certain criteria set forth in the 2005 Amendment may claim certain tax benefits offered by the Investment Law (as further described below) directly in its tax returns, without the need to obtain prior approval.  In order to receive the tax benefits, a company must make an investment which meets all of the conditions, including exceeding a minimum entitling investment amount, set forth in the Investment Law.  Such investment allows a company to receive “Benefited Enterprise” status, and may be made over a period of no more than three years ending at the end of the year in which the company chose to have the tax benefits apply to its Benefited Enterprise, referred to as the “Year of Election.”

 

The extent of the tax benefits available under the 2005 Amendment to qualifying income of a Benefited Enterprise depends on, among other things, the geographic location in Israel of the Benefited Enterprise.  The location will also determine the period for which tax benefits are available.  Under the “Exemption Track” the tax benefits include an exemption from corporate tax on undistributed income generated by the Benefited Enterprise for a period of two to ten years, depending on the geographic location of the Benefited Enterprise in Israel, and a reduced corporate tax rate of 10% to 25% for the remainder of the benefits period, depending on the level of foreign investment in the company in each year.  The benefits period is for a duration of seven or ten years, depending on the location of the Benefited Enterprise, from the later of the first year in which the company generated taxable income from its Benefited Enterprise and the Year of Election, but in any event not more than 12 or 14 years from the Year of Election, depending on the location of the company.  A company qualifying for tax benefits under the Exemption Track which pays a dividend (as well as a deemed dividend, such as investments in subsidiaries, granting loans to related parties, repurchases of shares, acquisitions of securities/shares, capital reductions and additional events which reflect the transfer of funds out of the Benefitted Enterprise activity) out of income derived during the tax exemption period by its Benefited Enterprise will be subject to corporate tax in respect of the amount of the dividend (grossed-up to reflect the pre-tax income that it would have had to earn in order to distribute the dividend) at the corporate tax rate which would have otherwise been applicable.  Dividends paid out of income attributed to a Benefited Enterprise are generally subject to withholding tax at source at the rate of 20% or such lower rate as may be provided in an applicable tax treaty. Applying reduced tax rates in accordance with a certain tax treaty is subject to the receipt in advance of a valid certificate from the Israel Tax Authority allowing for a reduced tax rate.

 

The benefits available to a Benefited Enterprise are subject to the fulfillment of conditions stipulated in the Investment Law and its regulations.  If a company does not meet these conditions, it may be required to refund the amount of tax benefits, as adjusted by the Israeli consumer price index, and interest, or other monetary penalties.

 

We currently have one Benefited Enterprise program under the Investment Law, which, we believe, entitle us to certain tax benefits with respect to income to be derived from our Benefited Enterprise.  During the benefits period, taxable income from our Benefited Enterprise program (once generated) will be tax exempt.  We chose 2010 as the Year of Election.  We believe that we are located in the Zone A specified development zone and therefore, believe we are entitled to a 10-year benefit period, commencing with the year we will first earn taxable income relating to such enterprise, subject to a 14-year limitation from the Year of Election, in which case the tax benefit period will in any event end in 2023.

 

Tax Benefits under the 2011 Amendment and the 2014 Amendment

 

The 2011 Amendment canceled the availability of the benefits granted to companies under the Investment Law prior to 2011 and, instead, introduced new benefits for income generated by a “Preferred Company” through its “Preferred Enterprise” (as such terms are defined in the Investment Law) as of January 1, 2011.  The definition of a Preferred Company includes a company incorporated in Israel that is not wholly-owned by a governmental entity, and that, among other things, owns a Preferred Enterprise and is controlled and managed from Israel.  Under the 2014 Amendment, effective as of January 1, 2014, a Preferred Company is entitled to a reduced corporate tax rate of 16% with respect to its preferred income derived by its Preferred Enterprise in 2014 and thereafter, unless the Preferred Enterprise is located in a specified development zone (referred to as “Zone A”), in which case the rate will be 9% for the 2014 tax year and thereafter and, pursuant to the 2017 Amendment (as discussed below), 7.5% from 2017 and thereafter.  We believe our facilities are located in the Zone A specified development zone.

 

Dividends paid out of income attributed to a Preferred Enterprise are generally subject to withholding tax at source at the rate of 20% or such lower rate as may be provided in an applicable tax treaty.  However, if such dividends are paid to an Israeli company, no tax is required to be withheld (although, if such dividends are subsequently distributed to individuals or a non-Israeli company, withholding tax at a rate of 20% or such lower rate as may be provided in an applicable tax treaty will apply).

 

The 2011 Amendment also provided transitional provisions to address companies already enjoying existing tax benefits under the Investment Law.  These transitional provisions provide, among other things, that unless an irrevocable request is made to apply the provisions of the Investment Law as amended in 2011 with respect to income to be derived as of January 1, 2011, a Benefited Enterprise can elect to continue to benefit from the benefits provided to it before the 2011 Amendment came into effect, provided that certain conditions are met.

 

We examined the possible effect, if any, of the provisions of the 2011 Amendment on our financial statements and decided not to apply the new benefits under the 2011 Amendment.

 

Tax Benefits under the 2017 Amendment

 

Under the 2017 Amendment, in the event that a Preferred Enterprise is located in a specified development zone (referred to as “Zone A”), a Preferred Company is entitled to a reduced corporate tax rate of 7.5% with respect to its income derived by its Preferred Enterprise in 2017 and thereafter (reduced from 9% for the 2016 tax year).

 

In addition, the 2017 Amendment provides two new tax incentive tracks – the “Priority Technological Enterprise” track and “Special Priority Technological Enterprise” track (as such terms are defined in the Investment Law).  The benefits available to a Priority Technological Enterprise or Special Priority Technological Enterprise are subject to the fulfillment of conditions stipulated in the Investment Law.

 

A Priority Technological Enterprise is entitled to a reduced corporate tax rate of 12% with respect to its income which qualifies as “Preferred Technology Income”, as defined in the Investment Law, unless the Priority Technological Enterprise is located in a specified development zone (referred to as “Zone A”), in which case the rate will be 7.5%.  A Special Priority Technological Enterprises is entitled to a reduced corporate tax rate of 6% with respect to its Preferred Technology Income.

 

Our company does not qualify as a Priority Technological Enterprise or Special Priority Technological Enterprise, within the meanings of the Investment Law.

 

The termination or substantial reduction of any of the benefits available under the Investment Law could materially increase our future tax liabilities.

 

The Encouragement of Research, Development and Technological Innovation in the Industry Law 5744-1984 (formerly known as the Encouragement of Industrial Research and Development Law, 5744-1984)

 

Under the Encouragement of Research, Development and Technological Innovation in the Industry Law 5744-1984 (formerly known as the Encouragement of Industrial Research and Development Law, 5744-1984), referred to as the Research Law, research and development programs which meet specified criteria and are approved by the IIA (formerly the OCS) are eligible for grants.

 

Under the Research Law as currently in effect, the grants awarded are typically up to 50% of the project’s approved expenditures.  The grantee is required to pay royalties to the State of Israel from the sale of products developed under the program.  Regulations under the Research Law, as currently in effect, generally provide for the payment of royalties of 3% to 5% (and at an increased rate under certain circumstances) on sales of products and services based on technology developed using grants, until 100% (which may be increased under certain circumstances) of the grant in U.S. dollars and bearing interest at the LIBOR rate, is repaid.  The repayment is made in NIS in accordance with the U.S. dollar/ NIS exchange rate at the date of the payment.  The terms of the Israeli government participation also require that products developed with IIA grants be manufactured in Israel and that the technology developed thereunder may not be transferred outside of Israel, unless approval is received from the IIA and additional payments are made to the State of Israel.  However, this does not restrict the export of products that incorporate the funded technology.  If manufacturing is moved outside of Israel, the royalty repayment rate is increased and the royalty ceiling can reach up to three times the amount of the grants received, and if a transfer of IIA funded know-how outside of Israel is approved by the IIA, it would be subject to a one-time payment that can be up to six times the amount of grants (plus interest).  Even following the full repayment of any IIA grants, we must nevertheless continue to comply with the requirements of the Research Law.  If we fail to comply with any of the conditions and restrictions imposed by the Research Law, or by the specific terms under which we received the grants, we may be required to refund any grants previously received together with interest and penalties, and, in certain circumstances, may be subject to criminal charges.

 

As of September 30, 2018, we had received funding from the IIA (formerly the OCS) for the financing of a portion of our research and development expenditures in an aggregate amount of approximately $5.3 million.  As of September 30, 2018, we had not paid any royalties to the IIA and had a contingent obligation to the IIA in the amount of approximately $5.6 million.

 

Taxation of our Security Holders

 

General

 

The Ordinance applies Israeli income tax on a worldwide basis with respect to Israeli residents, and on an Israeli source income, with respect to non-Israeli residents.  Dividends distributed (or deemed distributed) by an Israeli resident company to a holder in respect of its securities and consideration received by a holder (or deemed received) in connection with the sale or other disposition of securities of an Israeli resident company are considered to be an Israeli source income.

 

Allocation of Purchase Price and Characterization of Units

 

Each unit and pre-funded unit purchased in this offering should be treated for Israeli income tax purposes as an investment unit consisting of one ordinary share or pre-funded warrant, as the case may be, and one Series D Warrant to purchase 0.5 ordinary share.  For Israeli income tax purposes, the allocation of the purchase price of a unit or pre-funded unit between that ordinary share or pre-funded warrant, as applicable, and one Series D Warrant would usually be based on the relative fair market value of each at the end of the first trading day of the securities.  The price allocated to each ordinary share, pre-funded warrant and one Series D Warrant generally will be the holder’s tax basis in such security, as the case may be.

 

Taxation of Cash Distributions

 

A cash distribution on our ordinary shares generally will be treated as a dividend for Israeli income tax purposes to the extent the distribution is paid out of our current or accumulated earnings and profits (as determined for Israeli income tax purposes).  The portion of cash distribution, if any, in excess of such earnings and profits will be treated for Israeli tax purpose as a reduction of capital and may have additional or different tax implications.

 

Dividends distributed to holders (other than Israeli companies) of our shares will be generally taxed at the rate of 25%, unless distributed to a holder who is at the time of receiving the dividend or at any time during the preceding 12 months “substantial shareholder”.  A “substantial shareholder” is generally a person who alone or together with such person’s “relative” (as such term is defined in Section 88 of the Ordinance) or another person who collaborates with such person on a permanent basis, holds, directly or indirectly, at least 10% of any of the “means of control” of the corporation.  “Means of control” generally include the right to vote, receive profits, nominate a director or an executive officer, receive assets upon liquidation, or order someone who holds any of the aforesaid rights how to act, regardless of the source of such right.  The tax rate applicable to dividends distributed to a “substantial shareholder” is 30%.  Dividends distributed to an Israeli company are not subject to tax.

 

However, dividends distributed from income attributed to an Approved Enterprise, a Benefited Enterprise, a Preferred Enterprise, or a Priority Technological Enterprise may be subject to reduced tax rates, as follows: (i) dividends distributed from income attributed to a Benefited Enterprise in 2014 and thereafter (whether to a company or to an individual) are subject to tax at the rate of 20% (provided that in respect of a company that is not a foreign investment company, 12 years have not yet elapsed since the end of the benefits period); (ii) dividends distributed from income attributed to a Preferred Enterprise, an Approved Enterprise or a Priority Technological Enterprise are generally subject to tax at the rate of 20%; and (iii) dividends distributed to an Israeli company are generally not subject to tax.  We cannot assure you that in the event we declare a dividend we will designate the income out of which the dividend is paid in a manner that will reduce shareholders’ tax liability.

 

Taxation of Non Israeli Holders on Cash Dividends

 

Non-Israeli residents are generally subject to Israeli withholding tax on the receipt of dividends paid on our ordinary shares at the rate of 25%, unless a relief is provided in a treaty between Israel and the shareholder’s country of residence (subject to the receipt of a valid certificate from the Israel Tax Authority allowing for a reduced tax rate).  With respect to a person who is a “substantial shareholder” at the time of receiving the dividend or at any time during the preceding 12 months, the applicable withholding tax rate is 30%.

 

However, a distribution of dividends to non-Israeli residents is subject to withholding tax at source at a rate of 20% if the dividend is distributed from income attributed to an Approved Enterprise, Benefited Enterprise, a Preferred Enterprise or a Priority Technological Enterprise as the case may be, unless a reduced tax rate is available under an applicable tax treaty.

 

Under the Convention Between the Government of the United States of America and the Government of the State of Israel with respect to Taxes on Income, as amended, generally referred to as the United States-Israel Tax Treaty, the maximum rate of withholding tax on dividends paid to an individual holder who is a U.S. resident (for purposes of the United States-Israel Tax Treaty) is 25%.  With respect to dividends paid to a U.S. corporation that held 10% or more of our outstanding voting capital throughout the tax year in which the dividend is distributed and the preceding tax year and provided that not more than 25% of the gross income of the paying corporation for such prior taxable year (if any) consists of certain interest or dividends, the maximum rate of tax withheld at source is 12.5%; provided, however, that if the paying corporation is an Approved Enterprise, the applicable withholding tax rate under such circumstances is 15%.  We believe that the reference in the United States-Israel Tax Treaty to an Approved Enterprise under the Investment Law is deemed to include also a Benefitted Enterprise, a Preferred Enterprise and a Priority Technological Enterprise under the Investment Law.

 

U.S. residents who are subject to Israeli withholding tax on a dividend may be entitled to a credit or deduction for U.S. federal income tax purposes in the amount of the taxes withheld, subject to detailed rules contained in U.S. tax legislation.

 

Adjustments with Respect to Warrants

 

The terms of the Series D Warrants and pre-funded warrants provide for an adjustment to the number of ordinary shares for which the warrant may be exercised or adjustment to the exercise price of the warrant in certain events.  An adjustment of the exercise price or an adjustment that has the effect of preventing dilution generally is not taxable.  However, the holders of the Series D Warrants or pre-funded warrants may be treated as receiving a constructive distribution from us if, for example, the adjustment increases the warrant holders’ proportionate interest in our assets or earnings and profits (e.g., through a decrease in the exercise price of the Series D Warrants or pre-funded warrants).  Such constructive distribution would be subject to tax as described under that section in the same manner as if the holders of the Series D Warrants or pre-funded warrants received a cash distribution from us equal to the fair market value of such increased interest.

 

Taxation on the Disposition of Ordinary Shares, Pre-funded Warrants or Series D Warrants

 

General

 

The disposition of our ordinary shares, pre-funded warrants or Series D Warrants is a taxable event subject to Israeli capital gains tax.  The Israeli capital gains rate is generally 25% for individuals who are not “substantial shareholders” (as defined above) and 30% for substantial shareholders, and the corporate tax rate (currently 23%) applies for corporations. However, if the holder claims a deduction for interest and linkage fluctuation expenses in connection with the purchase and holding of such securities, the capital gain will generally be taxed at a rate of 30%.

 

Non Israeli Holders

 

A non-Israeli resident who derives capital gains from the sale of traded securities (including but not limited to ordinary shares and Series D Warrants) of 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 securities were not held through a permanent establishment that the non-resident maintains in Israel.  However, non-Israeli corporations will not be entitled to the foregoing exemption if Israeli residents: (i) have a controlling interest of 25% or more in such non-Israeli corporation; or (ii) are the beneficiaries of, or are entitled to, 25% or more of the revenues or profits of such non-Israeli corporation, whether directly or indirectly.

 

The sale of prefunded warrants (to the extent not traded) will be exempt from tax in Israel by a non-Israeli resident holder so long as the prefunded warrants (i) were not held through a permanent establishment that the non-resident maintains in Israel and (ii) were not received from a relative or in a tax free reorganization transaction and (iii) are not traded on the Tel Aviv Stock Exchange on the date of sale.  However, non-Israeli corporations will not be entitled to the foregoing exemption if Israeli residents: (i) have a controlling interest of 25% or more in such non-Israeli corporation; or (ii) are the beneficiaries of, or are entitled to, 25% or more of the revenues or profits of such non-Israeli corporation, whether directly or indirectly.

 

Additionally, a sale of securities by a non-Israeli resident may be exempt from Israeli capital gains tax under the provisions of an applicable tax treaty.  For example, under the United States-Israel Tax Treaty, the sale, exchange or other disposition of shares by a shareholder who (i) is a U.S. resident (for purposes of the treaty); (ii) holds the shares as a capital asset; and (iii) is entitled to claim the benefits afforded to such person by the treaty, is generally exempt from Israeli capital gains tax.  Such exemption will not apply if, among other things: (i) the capital gain arising from such sale, exchange or other disposition is treated as industrial or commercial profits attributed to a permanent establishment in Israel, subject to certain conditions; (ii) the shareholder holds, directly or indirectly, shares representing 10% or more of the voting capital of the corporation during any part of the 12-month period preceding the disposition, subject to certain conditions; (iii) the capital gain arising from such sale, exchange or disposition is treated as royalties; or (iv) such U.S. resident is an individual and was present in Israel for 183 days or more during the relevant taxable year.  In such case, the sale, exchange or disposition of our securities would be subject to Israeli tax, to the extent applicable; however, under the United States-Israel Tax Treaty, the taxpayer would be permitted to claim a credit for such taxes against the U.S. federal income tax imposed with respect to such sale, exchange or disposition, subject to the limitations under U.S. law applicable to foreign tax credits.  The United States-Israel Tax Treaty does not relate to U.S. state or local taxes.

 

In some instances where our shareholders may be liable for Israeli tax on the sale of their securities, the payment of the consideration may be subject to the withholding of Israeli tax at source.  Shareholders may be required to demonstrate that they are exempt from tax on their capital gains and to obtain an exemption from withholding tax certificate from the Israel Tax Authority in order to avoid withholding at source at the time of sale.

 

Exercise or Lapse of Series D Warrants

 

A holder of Series D Warrants generally will not recognize gain or loss upon the exercise of a Series D Warrant for cash.  An ordinary share acquired pursuant to the exercise of a Series D Warrant for cash generally will have a tax basis equal to the holder’s tax basis in the Series D Warrant, increased by the amount paid to exercise the Series D Warrant.  The purchase date of such ordinary share generally would be the day on which the Series D Warrant was purchased.  If a Series D Warrant is allowed to lapse unexercised, the holder generally will recognize a capital loss equal to such holder’s tax basis in the Series D Warrant.

 

It is possible that a cashless exercise would be treated as a taxable exchange in which gain or loss is recognized.  In such event, a holder could be deemed to have surrendered a number of Series D Warrants with a fair market value equal to the exercise price for the number of Series D Warrants deemed exercised.  For this purpose, the number of Series D Warrants deemed exercised would be equal to the number of Series D Warrants that would entitle the holder to receive upon exercise the number of ordinary shares issued pursuant to the cashless exercise of the Series D Warrants.  In this situation, the holder would recognize capital gain or loss in an amount equal to the difference between the fair market value of the Series D Warrants deemed surrendered to pay the exercise price and the holder’s tax basis in the Series D Warrants deemed surrendered.

 

Surtax

 

Subject to the provisions of an applicable tax treaty, individuals who are subject to tax in Israel are also subject to an additional tax at a rate of 3% on annual income (including, but not limited to, dividends, interest and capital gain) exceeding NIS 649,560 for 2019, which amount is linked to the annual change in the Israeli consumer price index.

 

Estate and Gift Tax

 

Israeli law presently does not impose estate or gift taxes.

 

EACH PROSPECTIVE INVESTOR IN OUR SECURITIES IS URGED TO CONSULT ITS OWN TAX ADVISOR WITH RESPECT TO THE PARTICULAR TAX CONSEQUENCES TO SUCH INVESTOR OF THE ACQUISITION, OWNERSHIP AND DISPOSITION OF OUR SECURITIES, INCLUDING THE APPLICABILITY AND EFFECT OF ANY ISRAELI TAX LAWS AND ANY APPLICABLE TAX TREATIES.

 

 

PLAN OF DISTRIBUTION

 

Pursuant to an engagement agreement dated January 23, 2019, we have engaged H.C. Wainwright & Co., LLC, or the placement agent, to act as our exclusive placement agent in connection with this offering of our ordinary shares pursuant to this prospectus supplement and accompanying prospectus. Under the terms of the engagement agreement, the placement agent has agreed to be our exclusive placement agent, on a reasonable best efforts basis, in connection with the issuance and sale by us of our ordinary shares in this takedown from our shelf registration statement. The terms of this offering were subject to market conditions and negotiations between us, the placement agent and prospective investors. The engagement agreement does not give rise to any commitment by the placement agent to purchase any of the units and pre-funded units offered hereby, and the placement agent will have no authority to bind us by virtue of the engagement agreement. Further, the placement agent does not guarantee that it will be able to raise new capital in any prospective offering.

 

We have entered into securities purchase agreements directly with investors in connection with this offering, and we will only sell to investors who have entered into securities purchase agreements.

 

We expect to deliver the securities being offered pursuant to this prospectus supplement on or about February 6, 2019, subject to customary closing conditions.

 

We have agreed to pay the placement agent a total cash fee equal to 7% of the gross proceeds of this offering. We will also pay the placement agent a management fee equal to 1.0% of the gross proceeds raised in this offering, a non-accountable expense allowance of $30,000 and reimbursement for legal fees and expenses in the amount of up to $110,000. We estimate our total expenses associated with the offering, excluding placement agent fees and expenses, will be approximately $250,000.

 

We have also agreed to issue to the placement agent, warrants to purchase up to 203,446 ordinary shares which is equal to 7.0% of the aggregate number of ordinary shares (including ordinary shares issuable upon exercise of pre-funded warrants) placed in the offering.  The placement agent warrants will have an exercise price of $3.225 per share, which is equal to 125% of the offering price per share in this offering, and will have a term of five years from the effective date of the offering.  The placement agent warrants will have substantially the same terms as the Series D Warrants being sold to the investors in the offering. Pursuant to FINRA Rule 5110(g), the placement agent warrants and any shares issued upon exercise of the placement agent warrants shall not be sold, transferred, assigned, pledged, or hypothecated, or be the subject of any hedging, short sale, derivative, put or call transaction that would result in the effective economic disposition of the securities by any person for a period of 180 days immediately following the date of  commencement of sales of this offering, except the transfer of any security: (i) by operation of law or by reason of our reorganization; (ii) to any FINRA member firm participating in the offering and the officers or partners thereof, if all securities so transferred remain subject to the lock-up restriction set forth above for the remainder of the time period; (iii) if the aggregate amount of our securities held by the placement agent or related persons do not exceed 1% of the securities being offered; (iv) that is beneficially owned on a pro-rata basis by all equity owners of an investment fund, provided that no participating member manages or otherwise directs investments by the fund and the participating members in the aggregate do not own more than 10% of the equity in the fund; or (v) the exercise or conversion of any security, if all securities remain subject to the lock-up restriction set forth above for the remainder of the time period.

 

LEGAL MATTERS

 

Certain legal matters with respect to Israeli law, including the validity of the units and the ordinary shares included in the units and underlying the Series D Warrants, the pre-funded warrants and the placement agent warrants offered by this prospectus will be passed upon for us by Fischer Behar Chen Well Orion & Co., Tel Aviv, Israel.  Certain matters concerning this offering including the validity of the Series D Warrants, the pre-funded warrants and the placement agent warrants will be passed upon for us by McDermott Will & Emery LLP, New York, New York.  Legal counsel to the placement agent is Haynes and Boone, LLP, New York, New York.

 

EXPERTS

 

The financial statements incorporated by reference in this Prospectus have been audited by Brightman Almagor Zohar & Co., a member firm of Deloitte Touche Tohmatsu, an independent registered public accounting firm, as stated in their report incorporated by reference herein (which report expresses an unqualified opinion on the financial statements and includes an explanatory paragraph referring to significant doubts about the Company’s ability to continue as going concern).  Such financial statements have been so included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing.  The address of Brightman Almagor Zohar & Co., a member firm of Deloitte, is 1 Azrieli Center, Tel Aviv, 67021, Israel.

 

Financial Industry Regulatory Authority, Inc. filing fee		$	9,660.98
Legal fees and expenses		$	200,000.00
Accounting fees and expenses		$	10,000.00
Miscellaneous fees and expenses		$	30,339.02
Total		$	250,000.00

INCORPORATION OF CERTAIN INFORMATION BY REFERENCE

 

The SEC allows us to “incorporate by reference” the information we file with it, which means that we can disclose important information to you by referring you to those documents.  The information incorporated by reference is considered to be part of this prospectus.  The documents we are incorporating by reference as of their respective dates of filing are:

 

·

our Annual Report on Form 20-F for the fiscal year ended December 31, 2017, filed with the SEC on April 4, 2018;

 

·

our Reports on Form 6-K filed with the SEC on April 5, 2018, April 19, 2018, May 4, 2018, May 8, 2018, May 17, 2018, May 21, 2018, May 22, 2018, June 4, 2018, June 21, 2018, June 29, 2018, July 31, 2018 (as amended on August 1, 2018), August 1, 2018, September 4, 2018, September 5, 2018, September 25, 2018, October 9, 2018, November 5, 2018, November 6, 2018, December 13, 2018, December 19, 2018,  December 21, 2018 and February 4, 2019 (in each case, to the extent expressly incorporated by reference into our effective registration statements on Form F-3); and

 

·

the description of our ordinary shares contained in our Registration Statement on Form F-1, as amended, under the Securities Act, as originally filed with the SEC on December 23, 2014 (Registration No. 333- 201250) under the heading “Description of Securities” and as incorporated into our Registration Statement on Form 8-A12B, filed with the SEC February 11, 2015.

 

Potential investors, including any beneficial owner, may obtain a copy of any of the documents summarized herein (subject to certain restrictions because of the confidential nature of the subject matter) or any of our SEC filings incorporated by reference herein without charge by written or oral request directed to Lior Torem, Chief Financial Officer; at Check-Cap Building, 29 Abba Hushi Avenue, P.O. Box 1271, Isfiya, 3009000, Israel; Our telephone number is +972-4-8303400.

 

You should rely only on the information incorporated by reference or provided in this prospectus or any prospectus supplement.  We have not authorized anyone else to provide you with different information.  We are not making an offer of these securities in any state where the offer is not permitted.  You should not assume that the information in this prospectus or any prospectus supplement is accurate as of any date other than the date on the front of those documents.

 

Any statement contained in a document incorporated by reference herein shall be deemed to be modified or superseded for purposes of this prospectus to the extent that a statement contained herein, or in a subsequently filed document incorporated by reference herein, modifies or supersedes that statement.  Any statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute part of this prospectus.

 

WHERE YOU CAN FIND ADDITIONAL INFORMATION

 

We have filed with the SEC a registration statement on Form F-3 under the Securities Act with respect to the securities offered pursuant to this prospectus.  This prospectus does not contain all of the information contained in the registration statement.  The rules and regulations of the SEC allow us to omit certain information from this prospectus that is included in the registration statement.  Statements made in this prospectus concerning the contents of any contract, agreement or other document are summaries of all material information about the documents summarized, but are not complete descriptions of all terms of these documents.  If we filed any of these documents as an exhibit to the registration statement, you may read the document itself for a complete description of its terms.  Reference is made to each such exhibit for a more complete description of the matters involved and such statements shall be deemed qualified in their entirety by such reference. Our SEC filings, including the registration statement, are available to you on the SEC’s Web site at http://www.sec.gov.

 

We are subject to the information reporting requirements of the Exchange Act that are applicable to foreign private issuers, and under those requirements are filing reports with the SEC.  Those other reports or other information may be inspected without charge at the locations described above.  As a foreign private issuer, we are exempt from the rules under the Exchange Act related to the furnishing and content of proxy statements, and our officers, directors and principal shareholders are exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the Exchange Act.  In addition, we are not required under the Exchange Act to file annual, quarterly and current reports and financial statements with the SEC as frequently or as promptly as United States 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 will submit to the SEC, on Form 6-K, unaudited quarterly financial information.

 

We maintain a corporate website at https://www.check-cap.com.  Information contained on, or that can be accessed through, our website does not constitute a part of this prospectus.  We have included our website address in this prospectus solely as an inactive textual reference.  We post on our website any materials required to be so posted on such website under applicable corporate or securities laws and regulations, including, posting any XBRL interactive financial data required to be filed with the SEC and any notices of general meetings of our shareholders.

 

Check-Cap Ltd.

 

1,881,500 Units (each Unit contains One Ordinary Share and one Series D Warrant to purchase 0.5 Ordinary Share)

 

and

 

1,024,876 Pre-funded Units (each Pre-funded Unit contains One Pre-funded Warrant to
purchase One Ordinary Share and One Series D Warrant to purchase 0.5 Ordinary Share)

 

1,453,188 Ordinary Shares Underlying the Series D Warrants, and

 

1,024,876 Ordinary Shares Underlying the Pre-funded Warrants

 

Placement Agent Warrants to purchase 203,446 Ordinary Shares

 

Prospectus Supplement

 

H.C. Wainwright & Co.

 

February 4, 2019

 

 

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