ENZY Enzymotec Ltd. - Ordinary Shares (delisted)

ITEM 3: Key Information

A.	Selected Financial Data

 

The following tables set forth our selected consolidated financial data, which is derived from our consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States of America, or U.S. GAAP. You should read the following selected consolidated financial data in conjunction with “Item 5. Operating and Financial Review and Prospects” and our consolidated financial statements and the related notes included in Item 8 of this annual report, or the financial statements. The selected consolidated statements of operations data for the years ended December 31, 2014, 2015 and 2016 and the selected consolidated balance sheet data as of December 31, 2015 and 2016 are derived from our audited consolidated financial statements. The selected consolidated statements of operations data for the years ended December 31, 2012 and 2013 and the selected consolidated balance sheet data as of December 31, 2012, 2013 and 2014 have been derived from our previously reported audited consolidated financial statements which are not included in this annual report.

You should read this selected financial data in conjunction with, and it is qualified in its entirety by reference to, our historical financial information and other information provided in this annual report including “Item 5. Operating and Financial Review and Prospects” and our consolidated financial statements, included elsewhere in this annual report. The historical results set forth below are not necessarily indicative of the results to be expected in future periods.

 

 

	(1)	Basic and diluted earnings (loss) per ordinary share is computed based on the basic and diluted weighted average number of ordinary shares outstanding during each period using the two-class method for participating preferred shares for the period before our initial public offering. For additional information, see Notes 1 and 15 to our consolidated financial statements included elsewhere in this annual report.
	(2)	Adjusted EBITDA and non-GAAP net income are non-GAAP financial measures. For definitions of these financial measures and reconciliations to our net income, see “— Non-GAAP Financial Measures” below.

Segment Data

The following tables summarize segment data for the years ended December 31, 2014, 2015 and 2016, which is derived from Note 5 to our consolidated financial statements included elsewhere in this annual report. The financial information included in this table under the heading “Nutrition segment” includes the results of operations of AL using the proportionate consolidation method. While under the equity method used in the presentation of our consolidated statements of operations, we recognize our share in the net results of AL as a share in profits of equity investee, under U.S. GAAP, for purposes of segment reporting, we are required to present our results of operations on the same basis provided to and utilized by management to analyze the relevant segment’s results of operations, which is achieved using the proportionate consolidation method of reporting. Under the proportionate consolidation method, we recognize our proportionate share of the gross revenues of AL and record our proportionate share of the joint venture’s costs of production in our statement of operations. For more information regarding the accounting treatment of AL in our consolidated and segment statements of operations, see “Item 5. A. Operating and Financial Review and Prospects — Operating Results — Joint venture accounting.”

 

 

____________________

	(1)	Represents the change from proportionate consolidation to the equity method of accounting.
	(2)	Includes depreciation and amortization, but excludes share-based compensation expense.
	(3)	Includes depreciation and amortization, but excludes share-based compensation expense and secondary offering expenses.
	(4)	Includes depreciation and amortization, but excludes share-based compensation expense, provision for bad debt related to payment intermediator and business development related expenses.
	(5)	Adjusted EBITDA is a non-GAAP financial measure. For a definition and a reconciliation of adjusted EBITDA to our net income, see “— Non-GAAP Financial Measures” below.

 

 

We present adjusted EBITDA as a supplemental performance measure because we believe it facilitates operating performance comparisons from period to period and company to company by backing out potential differences caused by changes in foreign exchange rates that impact financial assets and liabilities denominated in currencies other than our functional currency (affecting financial income (expenses), net), tax positions (such as the impact on periods or companies of changes in effective tax rates) and the age and book depreciation of fixed assets (affecting relative depreciation expense). In addition, both adjusted EBITDA and non-GAAP net income exclude the non-cash impact of share-based compensation expense and a number of unusual items that we do not believe reflect the underlying performance of our business. Because adjusted EBITDA and non-GAAP net income facilitate internal comparisons of operating performance on a more consistent basis, we also use adjusted EBITDA and non-GAAP net income in measuring our performance relative to that of our competitors.

Adjusted EBITDA and non-GAAP net income are not measures of our financial performance under U.S. GAAP and should not be considered as alternatives to net income, operating income or any other performance measures derived in accordance with U.S. GAAP or as alternatives to cash flow from operating activities as measures of our profitability or liquidity. Adjusted EBITDA and non-GAAP net income have limitations as analytical tools, and you should not consider these financial measures in isolation or as a substitute for, or superior to, an analysis of our results as reported under U.S. GAAP , because the excluded or included items may have significant effects on our operating results and financial condition. The limitations of these non-GAAP financial measures as performance measures are that they provide a view of our results of operations without reflecting all events during a period and may not provide a comparable view of our performance to other companies in our industry. When evaluating our performance, you should consider adjusted EBITDA and non-GAAP net income alongside other financial performance measures, including cash flow metrics, net income (loss), operating income (loss) and our other U.S. GAAP results.

The following table presents a reconciliation of adjusted EBITDA to net income (loss) for each of the periods indicated:

The following table presents a reconciliation of non-GAAP net income to net income (loss) for each of the periods indicated:

 

The following table presents a reconciliation of Non-GAAP diluted earnings per share to GAAP diluted earnings (loss) per share:

 

B.	Capitalization and Indebtedness   Not applicable.

C.	Reasons for the Offer and Use of Proceeds   Not applicable.

 

 

D.	Risk Factors

 

Investing in our ordinary shares involves a high degree of risk. You should carefully consider the following risk factors, in addition to the other information set forth in this annual report before purchasing our ordinary shares. If any of the following risks actually occurs, our business, financial condition and results of operations could suffer. In that case, the trading price of our ordinary shares would likely decline and you might lose all or part of your investment.

 

Risks relating to our business and industry

A high proportion of the sales of the InFat product is to our customers who then use it in their infant formula products sold to end users in China and therefore our revenues are subject to the effects of Chinese market trends and competition, including competition from locally produced products that are not subject to import taxes.

In 2016, sales of InFat, the infant formula ingredient product sold by our joint venture. AL, accounted for 31.7% of our total net revenues (or 46.5% of our total segment net revenues). In 2016, we estimate that the vast majority of total InFat net revenues were attributable to sales directly or indirectly into China. Sales of InFat are spread among a number of different non-Chinese manufacturers of infant formula that primarily produce products containing InFat for Chinese infant formula brands, as well as a number of different Chinese local manufacturers of infant formula. The infant nutrition products produced by such manufacturers using InFat may be sold under the manufacturers’ brand names, or may be manufactured by one or more manufacturers and then sold by third parties under the third parties’ brand names.

 

While InFat is not currently produced in China or another country that has a free trade arrangement with China , competitors are producing their products in territories that have trade arrangement with China. These competitors, and local Chinese infant formula manufacturers, benefit from relatively high import taxes on infant formula products and ingredients imported into China that are imposed on InFat. Our ability to compete effectively with pricing offered by existing or future competitors who manufacture their products in China or in territories that have trade arrangement with China and are not subject to import taxes could be limited, which could have an adverse effect on our results of operations and financial condition .

In addition, the Chinese market for infant formula has been experiencing shifts in consumer purchasing habits and has seen a transition in sales channels from traditional commerce to e-commerce. We are dependent on the ability of our customers who manufacture and sell infant nutrition products in China using InFat to adapt and react to such trends and our ability to sell our products to new customers whose business model is consistent with the consumer purchasing trends. In the past, some of our customers in China have not been able to shift from traditional commerce in a timely and efficient manner in order to effectively sell their products via e-commerce channels. If our customers are unable to effectively market products with InFat through prevailing commercial channels , our results of operations may be further adversely affected.

We are subject to a degree of customer concentration and our customers do not enter into long-term purchase commitments with us.

During the year ended December 31, 2016, our twelve largest customers accounted for approximately half of our revenues.  Our customers generally do not enter long-term purchase commitments with us and we may therefore have limited insight into their future purchasing plans. Our largest customers may determine to lower their purchasers or cease purchasing our products completely. For example, one of our largest purchasers of krill products, which accounted for 15% of our revenues in 2013, purchased our products at significantly lower levels in 2014 through 2016. Even if a significant customer continues to purchase our products at the same or a greater level, their decision to defer purchases, even for a few weeks, could materially adversely impact our results of operations in a particular quarter and can result in quarter-to-quarter variability in our financial results.  For example, some of AL’s customers in China deferred purchases from AL, which had an adverse effect on our quarterly results during 2015 and 2016. The success or failure (losing market share, for example) of just a few of our customers ’ businesses could have a material effect on our business, financial condition and results of operations.  Our business may not develop in a manner that would make us less reliant on a small number of large customers. Our results of operations may be materially adversely affected if a significant customer elects to stop purchasing our products and we are unable to find new purchasers to offset the loss of that customer.

New Chinese regulations relating to infant formula came into force on October 2016 and others are constantly evaluated. These regulatory changes affecting the ability of our customers to market infant nutrition products containing InFat could adversely affect our revenues and results of operations.

 

China is continually examining and changing the regulations applicable to infant formula and nutrition, including specifically the regulations applicable to the infant formula manufacturers who purchase InFat.  In October 2016, new regulations came into force in China (with a grace period that will end in January 2018) which, will limit infant formula manufacturers to manufacturing a maximum of three product lines and required that the recipe for each product line be distinctly different from the other recipes of the same stage.  Pre-approval of the China Food and Drug Administration, or CFDA, is required with respect to these new regulations. All manufacturing plants must be pre-approved by the Chinese Certification and Accreditation Administration, or CNCA, and labelling requirements have been tightened, with the current requirement to register each infant formula product prior to January 2018. We believe that such regulations will result in a decrease in the number of distinct infant formula products in China and manufacturers will have to make a determination as to which infant formula products they will produce. As these regulations have recently come into force, we cannot predict whether manufacturers (including those who already do so) will produce infant formulas containing InFat in order to have a distinct product line or if the limited number of product lines will result in fewer manufacturers including premium ingredients such as InFat. If one or or more manufacturers who currently use InFat in one of their infant formula products determine to cease marketing such product or other manufacters determine not to include InFat in one of the three product lines they are permitted to produce, sales of InFat may be adversely affected. In addition, we estimate that, from time to time, we will see further proposed regulations in China that aim, among other things, to improve public safety, regulate marketing claims consolidate product lines, upgrade production conditions and promote product heterogeneity.  For example, there is a proposed regulation that limits the ability of persons to make claims about the benefits of sn-2 palmitate (the scientific name of the InFat product) and dictates the techniques to measure sn-2 palmitate content in infant formula, which are different from current market standards. The existing regulations, and new proposed regulations, if ultimately adopted, may inhibit use by our customers of certain currently used marketing claims or limit the number of distinct infant formula products using InFat, which could have a materially negative effect on our revenues and results of operations.  Furthermore, we cannot predict whether China will implement any further or different regulations of infant formula and nutrition, which could have a materially negative effect on our revenues and results of operations. 

 

We rely on AarhusKarlshamn AB, or AAK, our Swedish joint venture partner, to procure raw materials and for the manufacture of InFat. While all of AAK’s claims in arbitration initiated against us by AAK were rejected in February 2016, the arbitration has strained our relationship with AAK, and we cannot assure you that tensions and disagreements will be resolved or that the relationship will remain unchanged or will continue.

All of the revenues from sales of our InFat product are derived from sales by AL , which is a joint venture between AAK and us. AAK provides the raw materials for and carries out most of the manufacturing processes of InFat (in a single facility owned by AAK and located in Sweden). Therefore, we depend on AAK to procure raw materials and produce InFat for AL at competitive prices. Under our joint venture agreement, we and AAK are each responsible for particular functions related to the production, marketing and sale of the final InFat product. In particular, we are responsible for research and development, business development and marketing, and AAK is responsible for the production, management of inventory, logistics relating to the sales and delivery of the InFat product and obtaining permits and licenses related to AL’s operations in Sweden.

    In May 2014, AAK submitted a claim for arbitration against us to the International Chamber of Commerce, or the ICC, seeking a declaration that our disclosures in connection with our initial public offering constituted a material and intentional breach of the non-disclosure obligations related to AL contained in the joint venture agreement. We subsequently brought counterclaims against AAK in the arbitration.  In two separate decisions by the ICC tribunal issued in February and May 2016, the tribunal rejected, in their entirety, AAK ’ s requests for declaratory relief in connection with alleged breaches by the Company of the joint venture agreement ’ s non-disclosure obligations and all relief we requested with respect to our counterclaims against AAK. For more information, see “Item 8.A. Financial Information—Consolidated Financial Statements and Other Financial Information—Legal Proceedings.”

While the operations of the joint venture generally continued in their ordinary course during and since the arbitration, the arbitration has strained the relationship of the Company and AAK , resulting in disagreements between the parties with respect to operational matters and the extent to which the handling of these matters serves the best interests of AL. We cannot assure you that these tensions and disagreements will be resolved now that the arbitration has concluded. AAK may also have economic or business interests or goals that are inconsistent with ours. If our relationship with AAK were to deteriorate, it could adversely affect our sales of InFat, which could have a material adverse effect on our results of operations and financial condition.

Furthermore, the term of our joint venture with AAK expires on December 31, 2019, subject to extension for additional three-year periods, unless we or AAK duly terminate the joint venture upon giving notice of termination no later than twelve months prior to the applicable expiration date. There can be no assurance that we or AAK will not terminate the agreement prior to the expiration date, or will renew the joint venture agreement or otherwise continue our relationship. We are precluded from competing with AL during the term of the relationship with AAK. If upon termination of the agreement we sell our share in AL to AAK pursuant to the buy/sell mechanism contained in the joint venture agreement, we would be subject, during the three-year period after the end of provision of services under the agreement, to non-competition obligations. Such obligations would preclude us from developing or producing InFat or competing products. Such non-competition obligations could limit our development and sales of new or existing products and could have a material adverse effect on our business, financial condition and results of operations.

 

Our inventories include sensitive compounds which may face spoilage or obsolescence.

 

A considerable portion of our inventories, including a major part of the raw materials used in the production of our products, as well as final products, are comprised of compounds that are subject to relatively high levels of decomposition, contamination, oxidization and other damaging processes or events. In particular, we currently have a significant inventory of frozen krill and resin. The value of such inventories once subject to obsolecence, decomposition, contamination or oxidization, for example, is greatly reduced to the point that it may become worthless.  For example, during 2016, we wrote-off $2.0 million in inventory that has or will become obsolete.  Further reduction in our sales may lead to additional inventory becoming obsolete and therefore written-off. We maintain our inventory in conditions suited for their specifications at storage facilities operated by us or by third party vendors; however, in light of the relative sensitivity of these materials, it is possible that our failure to timely use such inventory or a single event or a conjunction of several events will lead to a considerable reduction of the value of our inventory, which would adversely affect our financial condition and results of operations.

 

Our inability to manage our inventory levels, in particular our high level of inventory relative to sales of our products, may have an adverse effect on our profitability.

 

In the past, we purchased significant amounts of raw materials, particularly krill, in anticipation of potential customer needs and in order to ensure that we would have the raw materials necessary to produce our products.  As customer demand has changed with respect to some of our products, our current inventory levels are higher than necessary for our manufacturing needs.  Accordingly, it may take a number of years until we use our current inventory to manufacture our products.  Higher inventory results in increased storage costs and expenses related to additional personnel required to manage the inventory.  In addition, our failure to use the inventory in a timely manner could result in inventory write-offs to reflect value decreases over time.  For example, during 2016, we wrote-off $2.0 million in inventory values as it was determined that we could not use this inventory in production. Further reduction in our sales may lead to additional inventory becoming obsolete and therefore written-off. If we are unable to effectively manage inventory levels, we may have to sell large portions of inventory at amounts less than their carrying value or write down or otherwise dispose of a significant part of inventory, which could materially adversely affrect our gross profit, operating income, and net income levels during the period in which such event or events occur. 

 

A significant portion of the sales of our InFat product is to a small number of customers.   If any one or more of these customers were to lose market share, suffer financially, stop using InFat in all or a significant portion of the infant nutrition products sold under its brand name or use a competitor’s ingredient instead of ours, our business, financial condition and results of operations could be materially adversely affected.

        In 2016, we estimate that approximately 20% of total InFat net revenues were attributable to sales in China by, and under the brand name of, Biostime International Holdings Ltd., or Biostime , a large Chinese pediatric nutrition company.  In addition, approximately 50% of total InFat net revenues were attributable to three customers. Regulatory changes and market trends in China in recent years with respect to the production of infant formula adversely impacted some of AL’s customers, including Biostime and some of our other customers, reducing their sales and resulting in a decrease in sales of InFat which is an ingredient in AL’s customers’ infant formula.  Further regulatory changes may also negatively affect our revenues and results of operations.

In addition, Chinese authorities have conducted investigations and levied fines related to alleged price fixing by infant nutrition companies including Biostime and may do so in the future. To the extent that there are future investigations regarding alleged anti-competitive practices by our end customers, their reputations and results of operations could be harmed, which in turn could adversely impact our business, financial condition and results of operations.  Furthermore, the percentage of our net revenues attribute to sales in China by, and under the brand name of, Biostime decreased in 2016. We believe this is due to greater online sales of infant nutrition products in China compared to supermarkets and health stores. If Biostime were, for any reason, to suffer further decreases in sales, cease operations or discontinue the inclusion of the InFat ingredient in all or a significant portion of the infant nutrition products sold under its brand name, or if Biostime or other Chinese pediatric nutrition companies were to use a competitor’s ingredient, this could significantly adversely affect sales of the InFat product, which could materially adversely impact our business, financial condition and results of operations.

The demand for premium products based on omega-3, and , in particular, krill oil, has declined in the past and may decline in the future. This decrease, together with a significant increase in capacity by competing manufacturers of these products, has resulted in, and may continue to cause, intense competition and price pressure , which could impair our ability to generate revenues in the krill oil market.

 

Krill oil accounted for 23.2% of our total net revenues (or 18.2% of our total segment net revenues) in 2016. During 2014, demand for premium omega -3 products and especially krill oil products significantly decreased  and eventually it stabilized over 2015 and 2016. At the same time, krill oil suppliers previously increased capacity, which, together with the relatively lower demand for krill oil products, has led to intensified competition and price pressure and erosion.  We cannot provide any assurance that the demand for premium omega -3 products and in particular, krill oil products, which are sold at higher prices than standard omega -3 products, will not decline again in the future, including as a result of changes in consumer preferences and new information and clinical studies.  Even if demand for these products increases again, such increases may not be sustainable or may not be sufficient to meet current available capacity.  A further decrease in demand for krill oil - based products or further price erosion in this market due to overcapacity or other reasons will decrease our revenues and could have a material adverse impact on our business, financial condition and results of operations.

 

Variations in the cost of raw materials for the production of our products may have a material adverse effect on our business, financial condition and results of operations.

Our offering of products as 'medical foods' in the United States may be challenged by regulatory authorities.

The products offered within our VAYA Pharma segment are sold under physician supervision in the United States as 'medical foods' on the basis of their meeting the criteria for 'medical foods' in the Federal Food, Drug, and Cosmetic Act, or the FFDCA, and the Food and Drug Administration, or FDA regulations. The term medical food is defined in the FDCA as a food which is formulated to be consumed or administered enterally under the supervision of a physician and which is intended for the specific dietary management of a disease or condition for which distinctive nutritional requirements, based on recognized scientific principles, are established by medical evaluation. See “— Risks related to government regulation — VAYA Pharma segment” below. Medical foods are not required to undergo premarket review or approval by the FDA.

We believe that our VAYA Pharma products meet the criteria for 'medical foods' established by the FFDCA, and that the labeling and marketing of our medical foods is consistent with FDA regulatory requirements. However, our offering of one or more of these products as 'medical food' could be challenged by the FDA. The FDA has previously issued warning letters to other companies challenging the classification of their products as “medical food.” We believe that these letters indicate that the FDA may be applying a narrower interpretation of what qualifies as a “medical food.” Given this enhanced focus on medical food companies, we cannot provide any assurance that we will not also receive such a letter and the FDA could take the position that one or more of our medical food products may not be lawfully sold in the United States as “medical food.” If such a challenge were to occur, we could incur significant costs responding to such a claim and defending our products’ status as medical foods and ultimately litigation. If we are unable to demonstrate to the FDA’s satisfaction that the product(s) meet the regulatory requirements for “medical foods,” we would need to suspend further sale and distribution of the alleged violative products in, and could be required to withdraw such product or products from the U.S. market. We could seek to re-position the products as “dietary supplements,” a distinct category of “food” under the FFDCA and FDA regulations. This would require new labels, labeling and revised claims for the products, and would impose other regulatory requirements on us not applicable to “medical foods.” The United States is the principal market for the sales of the products of our VAYA Pharma segment and the cessation of such sales, even for a limited period, could have a material adverse effect on our operations, financial situation, operating results and business prospects.

Our product development cycle is lengthy and uncertain, and our development or commercialization efforts for our products may be unsuccessful.

We are currently working on several new products, including new uses and applications for existing products that are in various stages of development. Some of these products address new medical indications or provide new nutritional or medical benefits, while others provide different levels or concentrations of active ingredients and offer improved secondary characteristics. Research and development is a time-consuming, expensive and uncertain process that takes years to complete, with no guarantee of a favorable outcome. Because of the long and challenging product development cycle, evolving regulatory environment, changing market conditions and other factors, there is significant uncertainty as to the future development, success and commercialization of any products we may attempt to develop or commercialize. Even if our existing products prove to be successful, we may spend years and dedicate significant financial and other resources developing products that may never be commercialized. If we are unsuccessful in developing promising products, securing any necessary regulatory approvals and commercializing such products after having invested significant resources, efficiently or not at all, such failures could have a material and adverse effect on our business, financial condition and results of operations.

 

We are dependent on a single facility that houses the majority of our operations , and disruptions at this facility could negatively affect our business, financial condition and operations .

Our administrative headquarters, all of our research and development laboratories and our production plant are located in a single facility in the Sagi 2000 Industrial Area, near Migdal Ha’Emeq, Israel. The manufacture of all of the products that we sell takes place at this facility, other than the final InFat product and certain grades of our Sharp GPC product. Although the InFat product sold by AL is manufactured in Sweden, the production of the InFat enzymes, the core element for the manufacture of InFat, also takes place at our Migdal Ha’Emeq facility. Accordingly, we are highly dependent on the uninterrupted and efficient operation of this facility. If operations at this facility were to be disrupted for any reason, such as a result of equipment failures, earthquakes and other natural disasters, fires, accidents, work stoppages, power outages, acts of war or terrorism or other reasons, our business, financial condition and results of operations could be materially adversely affected. Lost sales or increased costs that we may experience due to certain disruptions may not be recoverable under our insurance policies, and longer-term business disruptions could result in a loss of customers. If this were to occur, our business, financial condition and operations could be materially negatively impacted.

We depend on third parties to obtain raw materials, in particular krill, necessary for the production of our products, and we do not intend to enter into purchasing agreements for onboard krill meal in 2017. If we cannot secure sufficient supply sources at competitive prices or need to utilize a greater percentage of frozen krill than anticipated with current inventory levels, our gross profits from the sale of krill oil will be adversely affected.

 

        We depend on a limited number of third parties to supply krill meal, an essential raw material for the production of our krill oil, which accounted for 23.2% of our total net revenues (or 18.2% of our total segment net revenues) in 2016. Krill are small crustaceans found in oceans throughout the world. In recent years we purchased the majority of the krill meal pursuant to agreements with operators of vessels that harvest Antarctic krill and process it into krill meal onboard . There is only a limited number of vessels capable of producing krill meal onboard. In 2014, we also purchased frozen krill, which, while more expensive to process into krill meal onshore compared to krill from vessels that process krill meal onboard, is more readily obtainable. Due to our current inventory levels, we do not intend to enter into purchasing agreements with vessel operators producing krill meal in 2017. This may have a negative effect on our ability to source krill meal, and thus to produce and ultimately sell krill oil, beyond this year.

 

Going forward, we cannot give any assurance regarding our ability to secure sufficient supply sources of krill meal at competitive prices, in good quality and upon fair and reasonable contractual terms or successfully implement the logistical changes required. Agreements with owners of fishing vessels are mainly seasonal, as they typically relate to a specific fishing season or trip. Obtaining sufficient quantities of krill oil is also dependent on the quality of krill and respective fat content. Should prices rise or available quantities of high quality krill decrease, our business, financial condition and results of operations may be adversely affected. In addition to krill, certain raw materials used in the production of our products (such as sunflower lecithin) are of limited supply globally, and we may not be successful in obtaining a sufficient amount of these raw materials on reasonable terms or at all.

 

 

In the event that we have to increase our reliance on frozen krill, which costs more than krill that is purchased from vessels that process krill meal onboard, our gross profits will be adversely affected. Additionally, frozen krill is subject to relatively high levels of decomposition, contamination, oxidization and other damaging processes or events. It is possible that our failure to use our inventory of frozen krill on a timely basis will lead to a considerable reduction of the value of our inventory, which would adversely affect our financial condition and results of operations.

 

We anticipate that the markets in which we participate will become more competitive due in part to business combinations among existing competitors, the arrival of new competitors and technological developments. If we are unable to compete effectively, our financial results may suffer.

The markets in which we sell our InFat, krill oil, PS and VAYA Pharma products are becoming more competitive, and it is possible that the number of companies seeking to develop products in these markets will increase in the future. Competitors range in size from small, single product companies to large, multifaceted corporations, which have greater financial, technical, marketing and other resources than those available to us.

 Business combinations, joint ventures or mergers among our competitors that result in larger competitors with greater resources or distribution networks, or the acquisition of a competitor by a major technology, pharmaceutical or nutrition company seeking to enter the markets in which we operate, could result in increased competition and have a material adverse effect on our business, financial condition and results of operations. We currently compete directly with IOI Loders Croklaan, the producer of Betapol, in the market for sn-2 palmitate. In 2015, IOI Loders Croklaan established a joint veture with Kerry Ingredients, an Ireland-based company with considerable global marketing capabilities, as well as dry-blend capabilities. Although this JV was terminated during 2016, IOI Loders Croklaan continues to produce its sn-2 palmiatate product in Malaysia which has a free trade agreement with China, and therefore may be able to sell its products at a lower price in China compared to InFat. If we are unable to compete successfully with the pricing offered by IOI Loders Croklaan, or by other competitors who create similar business combinations, our revenues and profitability may suffer. In addition, other competitors are developing similar sn-2 palmitate products that they may manufacture in China, or in territories with trade arrangements with China, who are targeting our customers. Such competition can contribute to the price pressure and have an adverse effect on our future results.

The markets in which our InFat product is sold are becoming increasingly competitive.  The InFat product is an ingredient used in the general infant nutrition products market. InFat addresses the sn-2 palmitate market, which currently holds less than 10% share of the infant formula oils market as a whole. In contrast, the majority of the oils used in the infant nutrition market are currently palm-oil based vegetable oil blends, with bovine milk fat also used to some extent. Despite the low market share held by InFat, we believe that if the market for sn-2 palmitate within the infant nutrition market will continue to grow, it may encourage more specialty oil producers to seek to develop and offer competitive products, increasing the level of competition that we face.   Such emerging competition may have an adverse effect on the results of our operations due to loss of market share, price erosion and other factors.

In the krill oil market, we primarily compete with Aker BioMarine AS, Neptune Technologies & Bioressources Inc., or Neptune, Rimfrost USA, LLC (a joint venture of Avoca, Inc.) and Olympic Seafood AS.  See “– Risks relating to our business and industry – The demand for products based on omega-3, and, in particular, premium products such as krill oil, has declined in the past and may continue to decline. This decrease, together with a significant increase in capacity by competing manufacturers of these products, has resulted in, and may continue to cause, intense competition and price pressure, which could impair our ability to generate revenues in the krill oil market". In the market for our PS product line, our principal competitors are Chemi Nutraceuticals Inc., Lipoid GmbH and Lipogen Ltd.

While medical foods became subject to FDA regulation in the United States in 1988, the medical foods market is relatively new and our VAYA Pharma products currently face little direct competition from other medical food manufacturers. As the market develops, we could face future competition from companies seeking to enter the market, in particular, large multi-national nutrition companies, such as Abbott Laboratories, Nestlé and Danone (through its clinical nutrition subsidiary, Numico N.V.), which have expressed interest in the medical foods market. Such potential competitors may have greater financial, technical, marketing and other resources than those available to us, and, accordingly, the ability to devote greater resources than we can to the development, promotion, sale and support of products. In addition, physicians may prefer to prescribe prescription drugs produced by pharmaceutical drug manufacturers rather than our medical food products and customers may prefer to use prescription drugs instead of our medical food products due to the present limited reimbursement by third-party payers. We may be unable to compete successfully against our future competitors in the medical foods market, which may result in price reductions, reduced margins and the inability to maintain market acceptance for our VAYA Pharma products.

Our quarterly results of operations have fluctuated in the past and may fluctuate in the future due to variability in our revenues.

Our revenues and other results of operations have fluctuated from quarter to quarter in the past and could continue to fluctuate in the future. With respect to most of our products, our customers generally purchase large quantities on an as-needed basis in anticipation of their own manufacturing and production schedules. Concentration of manufacturing and production times among a number of customers or delays in production or other occurrences which result in delays in purchasing could result in a meaningful shift of revenues from one quarter to the next.

Furthermore, we base our current and future expense levels on our revenue forecasts and operating plans, and our costs are relatively fixed in the short term. Accordingly, we would likely not be able to reduce our costs sufficiently to compensate for an unexpected shortfall in revenues during a particular quarter, and even a relatively small decrease in revenues could disproportionately and adversely affect our financial results for that quarter. The variability and unpredictability of these and other factors could result in our failing to meet financial expectations for a given period.

As a result of alleged infringement on intellectual property, we may have to pay royalties with respect to sales of our krill oil products in the United States or Australia , and any infringement of intellectual property of others could also require us to pay royalties.

Our commercial success depends in part on our ability to operate without infringing upon the proprietary rights of others. Beginning in October 2011, Neptune, one of our principal competitors in the krill oil products market, filed a series of complaints in the U.S. District Court for the District of Delaware alleging patent infringement by one or more of our krill oil products. In addition, in April 2013, we received a Notice of Institution of Investigation from the U.S. International Trade Commission, or ITC, regarding a similar complaint filed by Neptune in that forum.

In April 2014, we signed a final settlement and license agreement with Neptune which resulted in the termination and dismissal of the above-mentioned complaints and investigation. According to the settlement and license agreement, we made a one-time settlement payment to Neptune.  In addition, we agreed, among other things, that, in the event that the outcome of an Inter Partes Review, or IPR, in the United States or a post-grant reexamination in Australia for certain agreed claims in Neptune’s patent is unfavorable to us, we will be obligated to pay royalties to Neptune with respect to sales in the United States or Australia, respectively.  In the IPR, the U.S. Patent and Trademark Office, or USPTO, determined that 26 of 28 challenged claims in Neptune’s U.S. Patent No. 8,278,351 are unpatentable. We appealed the USPTO decision regarding the two remaining challenged claims on September 8, 2015. With respect to the Australian proceedings, the Australian Patent Office issued a reexamination report on on October 26, 2016 finding in favor of Neptune. We are currently in the process of preparing our arguments in response to this report. On November 2, 2016, Neptune provided us with a Notice of Default and Termination in respect of the settlement and license agreement based on what it characterized as material breaches. We believe there have not been any material breaches of the settlement agreement and intend to vigorously defend our rights. See “Item 8.A. Financial Information—Consolidated Financial Statements and Other Financial Information—Legal Proceedings.”

If the appeal in the United States or the reexamination in Australia results in unfavorable outcomes to us we may be required to pay license fees or royalties to Neptune.  If we are found to have infringed patents of any other third party which are determined to be valid and enforceable, we may be subject to monetary damages, including in the form of lost profits or a royalty. In the case of another third party, it may also be granted injunctive relief which would prevent us from selling the infringing products in the jurisdiction in which it has patent, a significant market for our krill oil products. In addition to any monetary damages awarded against us, in some instances we have also agreed to be financially responsible for any damages awarded against certain of our customers as a result of the purchase, importation, use, sale or offer to sell of our products if they are found to infringe certain of Neptune’s intellectual property rights and we may have to agree to similar terms. Moreover, defending against these claims has been, and defending against similar claims in the future may continue to be, time-consuming and costly, and has diverted, and may in the future divert, management’s time and attention from our business. Thus, these proceedings could materially adversely impact our business and financial results.

Unfavorable publicity or consumer perception of our products, such as krill oil, the supplements that contain them as ingredients and any similar products distributed by other companies could have a material adverse effect on our reputation, the demand for our products and our ability to generate revenues.

 

        We are dependent upon consumer perception of the safety and quality of our products, such as krill oil , and the supplements that contain them, as well as that of similar products distributed by other companies. Consumer perception of supplements and their ingredients can be significantly influenced by scientific research or findings, national media attention and other related publicity about product use. A product may achieve high sales due to a favorable perception among consumers, but may be unable to sustain such sales as consumer preferences change. If future scientific research or publicity questions earlier positive research or publicity about our particular products and supplements that contain them as ingredients, questions such products’ effectiveness or generally disfavors the supplements industry, our sales could decrease and our results of operations and financial condition could be materially adversely affected. Additionally, whether or not accurate, adverse publicity , including in the form of published scientific research or other publicity , that associates consumption of our products , supplements containing them or any other similar products distributed by other companies with illness or other negative effects could have a material adverse effect on our reputation and the demand for our products or supplements that contain them , which could materially impede our ability to generate revenues.

 

We are generally reliant upon third parties for the distribution or commercialization of our products.

Part of our strategy is to enter into and maintain arrangements with third parties that are generally exclusive with respect to a particular territory related to the marketing, sales and distribution of our products. Our revenues are dependent in part on the successful efforts of these third parties. Entering into strategic relationships can be a complex process and the interests of our distribution partners may not be or may not remain aligned with our interests. There can be no assurance that our distribution partners will market, sell and/or distribute our products successfully or choose the best means for achieving commercialization of our products. Some of our current and future distribution partners may decide to compete with us, refuse or be unable to fulfill or honor their contractual obligations to us, or reduce their commitment to, or even abandon, their relationships with us. Further, there can be no assurance that any such third-party collaboration will be on favorable terms. We may not be able to control the amount and timing of resources our distribution partners devote to our products or the efforts they expend in obtaining any requisite local approvals for our products. In addition, we may incur liabilities relating to the distribution and commercialization by our distributors of our products. While the agreements with such distributors generally include customary indemnification provisions indemnifying us for liabilities relating to the packaging of our products and their use and storage, there can be no assurance that these indemnification rights will be sufficient in amount, scope or duration to fully offset the potential liabilities associated with our distributors’ handling and use of our products. Any such liabilities, individually or in the aggregate, could have a material adverse effect on our business, financial condition or results of operations.

A growing portion of our VAYA Pharma products sales in the United States are conducted through an online pharmacy operated by a third party vendor. As this trend continues, we become increasingly reliant on that vendor. A disruption in our vendor's activities for any reason or a determination to replace this vendor could result in difficulties distributing our VAYA Pharma products, loss of revenues and customers for a substantial period which may have a material adverse effect on our business, financial condition, reputation and results of operations.

Further , we have entered into other joint ventures in the past and may enter into other joint ventures in the future. Any current or future joint venture partner may take actions contrary to our policies or objectives, undergo a change of control, experience financial and other difficulties, or   be unable or unwilling to fulfill its obligations under the joint venture , each of which may affect our financial condition or results of operations. In addition, no assurance can be given that the actions or decisions of our joint venture partner will not affect our joint venture in a way that hinders our corporate objectives or that causes material adverse effects on our business, financial condition, reputation and results of operations.

We may not be able to maintain or increase market acceptance for our products.

The degree of market acceptance for our products and those of our customers depends upon a number of factors, including the receipt of regulatory approvals, the establishment and demonstration in the medical community of the clinical efficacy and safety of the products, and the establishment and demonstration of the potential advantages over competing products. Additionally, to ensure sustained and increased market acceptance for our VAYA Pharma products , we must continue to demonstrate the potential advantages over existing and new treatment methods , and we may have to expand the reimbursement of government and third-party payers. In the case of our Nutrition products, market acceptance is dependent on the acceptance of the product and appropriate distribution with large retailers, competitive pricing and the extent to which the products fulfill customer expectations and demands. There can be no assurance that consumers, physicians, patients, payers, the medical community in general, distributors or retailers will continue to accept and utilize any existing or new products that may be developed by us. Failure to achieve such market acceptance for our products could have a material adverse effect on our growth, business, financial condition or results of operations.

Our business relies on the experience and expertise of our senior management, as well as on our ability generally to retain existing, or hire additional, skilled personnel.

Additionally, we depend on our ability to attract and retain additional highly qualified and skilled technical, scientific, sales, managerial and finance personnel. Competition for skilled personnel is intense and the unexpected loss of an employee with a particular skill could materially adversely affect our operations until a replacement can be found and trained. Furthermore, although our employee base increased from 195 as of December 31, 2015 to 205 as of December 31, 2016, a significant number of employees left our company during 2016. While they were replaced by newly hired personnel, the loss of valued knowledge, skills and experience may adversely effect our operational and financial results. If we are not able to retain our existing skilled scientific and technical personnel and attract and retain sufficiently additional skilled scientific and technical personnel, as required, for our research and development and manufacturing operations on acceptable terms, we may not be able to continue to execute our business plan on schedule. Further, any failure to effectively integrate new personnel could prevent us from successfully growing our company.

 

Changes in senior management, in particular the appointment of our new President and Chief Executive Officer, may adversely affect our ability to successfully implement our business plan.

 

Mr. Erez Israeli has been appointed as our new President and Chief Executive Officer and is beginning in such role on April 18, 2017. Mr. Israeli is replacing Dr. Ariel Katz, who has been our President and Chief Executive Officer since 2000. We cannot be certain what impact the transition to Mr. Israeli will have on our business or that additional changes in senior management will not occur. In particular, transition may result in changes to or delays in implmenetation of our business plan, which may affect our results of operations and the price of our ordinary shares.

We are subject to risks relating to the operation and expansion of our production or processing facilities and capabilities.

Following the 2013 expansion of our Migdal Ha’Emeq manufacturing facility , the krill meal extraction process is being performed entirely in house at our Migdal Ha’Emeq manufacturing facility. This facility is located on land leased from the Israel Land Administration.  During 2015 and 2016, we further expanded our manufacturing facility in Israel, which increased the facility’s overall production capacity.

We may also seek to build new production facilities in the future. In October 2011, we exercised an option for a long-term lease from the Israel Land Administration for a plot of land adjacent to our existing facility, pursuant to which we were obligated to complete certain construction projects by August 2016. In February 2016, the Israel Land Administration informed us of its intent to terminate the lease agreement for this adjoining plot. We have filed a request with the Israel Land Administration to modify the lease or to extend the period to complete these projects and are awaiting response. However, we cannot provide any assurance that the Israel Land Administration will agree to modify the lease or extend the completion period.  If we are unable to amend the lease or prolong the construction completion period, we may not be able to build an additional production plant on this adjoining plot, which could prevent us from further expanding our production capacity or require us to find additional space for a second production plant if we choose to expand. Even if we undertake construction, we do not believe it would be completed before 2018. In addition, to the extent we proceed in building a new facility, regardless of the location, there can be no assurance that we will be able to obtain the requisite approvals, overcome operational challenges of implementing expansion projects, or have the necessary capital resources for the construction of this plant, or if we do, that the plant will be built or that it will satisfy demand. Conversely, there can be no assurance that demand for our products will increase commensurate with the increased production capacity. Furthermore, we cannot assure you that any further projects, if implemented, will be implemented in a timely and cost - efficient manner, and that our current production will not be adversely affected by the operational challenges of implementing the expansion projects.

 

Our ability to obtain krill may be affected by conservation regulation or initiatives.

A substantial part of our activities in our Nutrition segment requires the use of krill. Limits on krill harvesting established by the Commission for the Conservation of Antarctic Marine Living Resources, or the Commission for Conservation, may limit our revenue.   The Commission for Conservation imposes limitations and conditions regarding krill harvested in Antarctic waters. Additionally, the Commission for Conservation regulates the licensing of vessels eligible to harvest krill in these specific Antarctic Ocean areas. In the areas currently being fished for krill, the Commission for Conservation has established a combined annual catch limit of 620,000 metric tons. In 2014, approximately 300,000 metric tons were harvested. The substantial majority of harvested krill is used for aquaculture feed and fish bait while only a small portion is used for human consumption, the latter of which offers higher profit margins. The Commission for Conservation has established limits because increases in krill catches could have a negative effect on the ecosystem, including other marine life, particularly birds, seals and fish which mainly depend on krill for food. The lowering of these quotas or imposition of any other requirement or limitation affecting our ability to source krill, such as adoption of additional conservation measures, may reduce the future availability of krill and cause significant increases in its price. Any such development could harm our sales and gross profits.

Potential future acquisitions of companies or technologies may require management ’s time and attention , may disrupt our business and may not yield the returns expected.

We may acquire or make investments in businesses, technologies or products, whether complementary or otherwise, as a means to expand our business, if appropriate opportunities arise. We cannot give assurances that we will be able to identify future suitable acquisition or investment candidates, or, if we do identify suitable candidates, that we will be able to make acquisitions or investments on reasonable terms or at all. In addition, we have no prior experience in integrating acquisitions and we could experience difficulties incorporating an acquired company’s personnel, operations, technology, or product offerings into our own or in retaining and motivating key personnel from these businesses. We may also incur unanticipated liabilities as a result of such acquisitions or investments . The financing of any such acquisition or investment, or of a significant general expansion of our business, may not be readily available on favorable terms. Any significant acquisition or investment, or major expansion of our business, may require us to explore external financing sources, such as an offering of our equity or debt securities. We cannot be certain that these financing sources will be available to us or that we will be able to negotiate commercially reasonable terms for any such financing, or that our actual cash requirements for an acquisition, investment or expansion will not be greater than anticipated. In addition, any indebtedness that we may incur in such a financing may inhibit our operational freedom, while any equity securities that we may issue in connection with such a financing would dilute our shareholders. Any such difficulties could disrupt our ongoing business, distract our management and employees, increase our expenses and adversely affect our results of operations. Furthermore, we cannot provide any assurance that we will realize the anticipated benefits and/or synergies of any such acquisition or investment.

Disruption to our IT system could adversely affect our reputation and have a material adverse impact on our business and results of operations.

Our business operations, production facilities and research and development technologies rely on our IT system to collect, analyze and store our data. While we utilize offsite back-up storage, there can be no guarantee that such back-up storage, together with our existing onsite back-up storage, will be effective if it becomes necessary to rely on them. If our existing or future IT system does not function properly, or if the IT system proves incompatible with new technologies, we could experience interruptions in data transmissions and slow response times, preventing us from completing routine business, production or research activities.

 

Additionally, our IT systems contain personal, financial and other information that is entrusted to us by our customers and employees as well as financial, proprietary and other confidential information related to our business. Despite our investments in risk prevention and contingencies, data protection, prevention of intrusions, data leaks and access control systems, we can provide no assurance that our current IT system is fully protected against third-party intrusions, viruses, hacker attacks, information or data theft or other similar threats. Any such security breach, whether actual or alleged, could result in system disruptions or shutdowns and/or destruction, alteration, theft or unauthorized disclosure of confidential information. The risk of a security breach or disruption, particularly through cyber-attack or cyber intrusion, including by computer hackers, foreign governments and cyber terrorists, has risen as the number, intensity and sophistication of attempted attacks and intrusions from around the world have increased. Furthermore, there has been heightened legislative and regulatory focus on data security in the U.S. and abroad, including requirements for varying levels of customer notification in the event of a data breach. As we continue to develop our technologies, we may need to update our IT system and storage capabilities. Any such breach of our information security can result in adverse publicity, a loss of consumer confidence, reduced sales and profits, and criminal penalties or civil liabilities, any of which could materially adversely affect our business, operating results and financial condition.

 

Lastly, disruption or failure of our IT system for technical reasons, natural disaster or other unanticipated catastrophic events, including power interruptions, storms, fires, floods, earthquakes, acts of war or terrorism could significantly impair our ability to deliver our products on schedule and materially and adversely affect our relationships with our partners and customers, our business, our reputation and our results of operations.

We are not able to predict the results of clinical trials, which may prove unsuccessful or be delayed by certain factors.

We conduct clinical and pre-clinical studies to support the efficacy and safety of our products and their ingredients during their development, to extend known benefits and to uncover new benefits of our existing products and ingredients. While clinical trials are generally not required with respect to regulatory approvals for our nutrition products, we use the results of these trials to maximize the product’s reach to new customers and as a basis for establishing long-term supply agreements. Although prior to initiating clinical trials, our compounds are tested on animals in pre-clinical trials to test their toxicity and efficacy, pre-clinical trials on animals cannot predict fully whether a proposed product will prove to be safe or effective in humans. Pre-clinical and clinical data required for regulatory approval must be developed under strict regulatory standards and may be found, on review by health regulatory authorities, to be of insufficient quality to support an application for commercialization of a product or to substantiate claims concerning a currently marketed product’s safety or effectiveness. In addition, positive results in previous clinical studies of our products may not be predictive of similar results in future clinical trials and interim results during a clinical trial do not necessarily predict final results. A number of companies in the pharmaceutical industry have suffered significant setbacks in late-stage clinical trials even after achieving promising results in early-stage development. Our clinical trials may produce negative or inconclusive results, and we may decide, or regulators may require us, to conduct additional clinical trials. Moreover, clinical data may be susceptible to varying interpretations and analyses, and some companies that have believed their product candidates performed satisfactorily in preclinical studies and clinical trials have nonetheless failed to obtain FDA approval for their products.

Recruitment of participants in a clinical study is challenging.  Identification of the appropriate study population and sites is a crucial point for success. Clinical studies with infants to test the safety and efficacy of our ingredients for infant formula are challenging since parents are frequently reluctant to permit their children to participate in trials. A number of other factors could affect the feasibility and outcome of clinical trials, including, but not limited to, study design, the size of the available study population, the eligibility criteria for participation in the clinical trials, and the availability of clinical trial sites. Prior to initiating a clinical trial, we carefully select the study population and sites with the goal of having the best chances of success and to avoid delays in study recruitment. In addition, we seek to ensure that all other study related activities, such as product supply and data capture, are ready prior to initiation in order to avoid administrative delay.  Nevertheless, our clinical trials may not be successful and may be delayed or otherwise terminated prior to the end of recruitment.

Administering our product candidates to humans may produce undesirable and unexpected side effects. These side effects could interrupt, delay or halt clinical trials of our product candidates and could result in the FDA or other regulatory authorities denying approval of our product candidates for any or all targeted indications. Our ability to commercialize any new products is dependent upon the success of product development efforts and the success of clinical studies. Existing products may be the subject of post-marketing clinical trials. If these clinical trials and product development efforts fail to produce satisfactory results, or if we are unable to maintain the financial and operational capability to complete these development efforts, we may be unable to generate revenues for existing products and potential new products.

If we are unable to maintain manufacturing efficiency and quality and meet our customers’ needs, our financial performance could be adversely affected.

Manufacturing our products involves highly complex processes that require advanced equipment.  In addition, our products must be manufacturered in accordance with the specifications of our customers, which can result in varied processes for different customers.  We and our competitors, continuously modify these processes in an effort to improve our manufacturing efficiency and product performance. In implementing such processes and adjustments, we may experience difficulties in achieving and maintaining high levels of quality and effecting transitions to new manufacturing processes, all of which may cause us to suffer delays in product deliveries or result in our inability to deliver products in a timely manner or at all. Difficulties in the manufacturing process or our inability to manufacture products consistent with customer specifications, in a cost-effective manner or at all, may adversely affect our results of opertaions, damage our reputation and result in us losing our customers.

We could be subject to product liability lawsuits, which could result in costly and time-consuming litigation and significant liabilities.

The development of pharmaceutical, medical food and human nutrition products involves an inherent risk of product liability claims and associated adverse publicity. Our products may be found to be harmful, or to contain harmful substances. This exposes us to substantial risk of litigation and liability and/or may force us to discontinue production of certain products. Although we have product liability insurance for up to $10.0 million (per claim and in the aggregate per year), this coverage may not insure us against all claims made. Product liability insurance is costly and often limited in scope. There can be no assurance that we will be able to obtain or maintain insurance on reasonable terms or to otherwise protect ourselves against potential product liability claims that could impede or prevent commercialization of a material product or line of products. Furthermore, a product liability claim could damage our reputation, whether or not such claims are covered by insurance or are with or without merit. A product liability claim against us, or the withdrawal of a product from the market, could have a material adverse effect on our business or financial condition. Furthermore, product liability lawsuits, regardless of their success, would likely be time - consuming and expensive to resolve and would divert management’s time and attention, which could seriously harm our business.

 

We depend on international sales, which expose us to risks associated with the business environment in those countries.

Our international operations and sales are subject to a number of risks, including:

•

potentially longer accounts receivable collection periods and greater difficulties in their collection;

•

potential instability of local economies;

•

impact of potential military or civil conflicts and other political risks;

•

disruptions or delays in shipments caused by customs brokers, work stoppages or government agencies;

•

potential imposition by governments of controls that prevent or restrict the transfer of funds;

•

regulatory limitations imposed by foreign governments and unexpected changes in regulatory requirements, tariffs, customs, duties, tax laws and other trade barriers as well as our ability to comply with such regulatory requirements, tariffs, customs, duties, and laws;

•

difficulties in staffing and managing foreign operations;

•

laws and business practices favoring local competition and potential preference for locally produced products;

•

potentially adverse tax consequences;

•

difficulties in protecting or enforcing intellectual property rights in certain foreign countries, particularly in Asia; and

•

fluctuations in exchange rates, described below.

If we fail to overcome the challenges that we encounter in our international sales operations, our business and results of operations could be materially adversely affected.

Exchange rate fluctuations between the dollar and the shekel, the Euro and other non-U.S. currencies may negatively affect our earnings.

The dollar is our functional and reporting currency. Although most of our revenues and a portion of our expenses are denominated in dollars, a significant portion of our cost of revenues and operating expenses is incurred in shekels. As a result, we are exposed to the risks that the shekel may appreciate relative to the dollar, or, if the shekel instead devalues relative to the dollar, that the inflation rate in Israel may exceed such rate of devaluation of the shekel, or that the timing of such devaluation may lag behind inflation in Israel. In any such event, the dollar cost of our operations in Israel would increase and our dollar-denominated results of operations would be adversely affected. We cannot predict any future trends in the rate of inflation in Israel or the rate of devaluation (if any) of the shekel against the dollar. For example, the dollar appreciated relative to the shekel by 12.0% and 0.3% in 2014 and 2015, respectively, compounded by the 0.2% and 1.0% rate of deflation in Israel in 2014 and 2015, respectively, which had the effect of decreasing the dollar cost of our operations in Israel. However, in 2016, the dollar cost of our operations in Israel was negatively impacted as the dollar was depreciated relative to the shekel by 1.5%, eclipsing the 0.2% rate of deflation in Israel in 2016. If the dollar cost of our operations in Israel increases, our dollar-measured results of operations will be adversely affected. Our operations also could be adversely affected if we are unable to effectively hedge against currency fluctuations in the future.

Although most of our revenues and a portion of our expenses are denominated in dollars, we do have substantial revenues and certain expenses that are denominated in other currencies apart from the dollar and the shekel, particularly the euro. Therefore, our operating results and cash flows are also subject to fluctuations due to changes in the relative values of the dollar and these foreign currencies. These fluctuations could negatively affect our operating results and could cause our revenues and net income or loss to vary from quarter to quarter. Furthermore, to the extent that we increase our revenues in certain countries, such as several countries in the Asia Pacific region, where our sales are denominated in dollars, a strengthening of the dollar versus other currencies could make our products less competitive in those foreign markets and collection of receivables more difficult.

We engage in currency hedging activities. These measures, however, may not adequately protect us from material adverse effects due to the impact of inflation in Israel or from fluctuations in the relative values of the dollar and foreign currencies in which we transact business, and may result in a financial loss. For further information, see “Item 11. Quantitative and Qualitative Disclosures about Market Risk” elsewhere in this annual report.

 

Additionally, the United Kingdom’s prospective withdrawal from the European Union or E.U., commonly referred to as “Brexit” has adversely impacted the global markets and currencies, as shown by a sharp decline in the value of the British pound as compared to the U.S. dollar. A potential devaluation of the local currencies of our international buyers relative to the U.S. dollar may impair the purchasing power of our international buyers and could cause international buyers to decrease their participation in our marketplaces or use of our services. We translate sales and other results denominated in foreign currency into U.S. dollars for our financial statements. If volatility in exchange rates resulting from Brexit continues in the short term as the U.K. negotiates its exit from the E.U., during periods of a strengthening dollar, our reported international sales and earnings could be reduced because foreign currencies may translate into fewer dollars.

Under applicable employment laws, we may not be able to enforce covenants not to compete.

We generally enter into non-competition agreements with our employees. These agreements prohibit our employees, if they cease working for us, from competing directly with us or working for our competitors or clients for a limited period. We may be unable to enforce these agreements under the laws of the jurisdictions in which our employees work and it may be difficult for us to restrict our competitors from benefitting from the expertise our former employees or consultants developed while working for us. For example, Israeli courts have required employers seeking to enforce non-compete undertakings of a former employee to demonstrate that the competitive activities of the former employee will harm one of a limited number of material interests of the employer which have been recognized by the courts, such as the secrecy of a company’s confidential commercial information or the protection of its intellectual property. If we cannot demonstrate that such interests will be harmed, we may be unable to prevent our competitors from benefiting from the expertise of our former employees or consultants and our ability to remain competitive may be diminished.

 If we fail to manage our growth effectively, our business could be disrupted and we may not achieve our goals.

Our future financial performance and ability to commercialize our products and to compete effectively will depend, in part, on our ability to manage any future growth effectively. We have made and expect to continue to make significant investments to enable our future growth through, among other things, new product innovation, clinical trials for new products, expansion of our manufacturing facility, expanding into new territories or into new business segments. It is possible that our growth and expansion plans will not flourish or that the return on those investments will be considerably delayed, thus having a material adverse effect on our business and results of operations. We must also be prepared to further increase production capabilities, expand our work force and to train, motivate and manage additional employees as the need for additional personnel arises. Our personnel, facilities, systems, procedures and controls may not be adequate to support our future operations. Any failure to manage future growth effectively could have a material adverse effect on our business and results of operations

We face risks in connection with securities litigation.

We and several of our current and former directors and officers have been named as defendants securities class action lawsuits. For more information, see “Item 8.A. Financial Information—Consolidated Financial Statements and Other Financial Information—Legal Proceedings.”     Following mediation, the parties reached an agreement in principle to settle the securities class action lawsuits. Under the proposed class action settlement, the claims against the us and our officers and directors will be dismissed with prejudice and released in exchange for a cash payment of $6.5 million to be funded by our insurers. The proposed settlement remains subject to the satisfaction of various conditions, including negotiation and execution of a final stipulation of settlement to be approved by the Company, the Company’s insurers and the plaintiffs.   We cannot provide any assurance that the settlement will be approved.  Legal expenses beyond those incurred and presently contemplated to be incurred or a settlement or adverse judgment on the merits in which we are obligated to pay could have a material adverse impact on the Company’s results of operations and financial condition.  In addition, securities litigation, irrespective of its merits, is costly to defend and diverts management’s attention and resources, which could adversely affect our business.

Risks related to government regulation

We are subject to significant and increasing government regulations regarding the sale and marketing of our products.

The selling and marketing of our products are generally subject to comprehensive laws, regulations and standards enforced by various regional, national and local regulatory bodies, including the FDA, the Federal Trade Commission, or FTC, and U.S. Department of Agriculture, or USDA, in the United States, the European Commission in the E.U., the Therapeutic Goods Administration, or TGA, in Australia, the Ministry of Health in China, the CFDA, the Health Sciences Authority, or HAS in Singapore, and the Ministry of Health in Israel and others. Compliance with the various regulatory bodies ’ requirements is costly and time - consuming. See “Item 4. B. Information on the Company — Business Overview — Government regulation” below. Legal and regulatory demands are increasing in a number of countries with respect to our products, and legislative bodies may repeal laws or enact new laws that would impact the sale and marketing of our products or development of new products. With respect to InFat, new regulations in China came into force in October 2016 with a grace period that will end in January 2018. The key changes in the regulations include a restriction for infant formula manufacturers to a maximum of three product lines with a maximum of three stages per line; each recipe should be distinctly different from the other recipes of the same stage and requires CFDA pre-approval. All manufacturing facilities must be pre-approved by the CNCA and labelling requirements have been tightened. These regulations may adversely affect the infant formula industry. Additionally, regulatory authorities may change processes, regulations, and policies related to our products, which could impact product development, commercialization and business operations and require us to make changes to our products, the claims we make regarding our products or our operations. In addition, there is a lack of harmonization among the laws, regulations and standards in the principal countries in which we sell our products.

 

Where regulatory approvals are required for our nutrition products, the process of obtaining such approvals can be costly and time - consuming and there is no guarantee of approval. Such processes therefore could delay or prevent the production and commercialization of new products. In addition, if we fail to comply with any legal or regulatory requirement, or fail to obtain any necessary regulatory approval we could be subject to various enforcement actions, including warning letters, fines, product recalls or seizures, interruption in or suspension of product manufacturing capabilities, other operating restrictions, injunctions, delays in obtaining or inability to obtain product approvals, other civil penalties and criminal sanctions. Any such enforcement action may result in significant unanticipated expenditures and may have a material adverse effect on our reputation, operations, financial situation or operating results.

Nutrition Segment

The regulatory requirements we face similarly may impact our reputation, operations, financial situation or operating results. For example, legislation in the United States requires companies that manufacture or distribute dietary supplements, including certain products of our Nutrition segment, to report serious adverse events allegedly associated with their products to the FDA and maintain recordkeeping procedures for all alleged adverse events (serious and non-serious). As a result, consumers, the press or government regulators may misinterpret reports of adverse events as evidence that the ingredient or product caused the reported event, which could lead to consumer confusion, damage to our reputation, banned or recalled ingredients or products, increased insurance costs, class action litigation and a potential increase in product liability litigation, among other things.

Further, we comply with current good manufacturing practice, or GMP, guidelines for food for human consumption and are subject to periodic self-assessment. We are subject to regular inspections with respect to our GMP compliance by the Israeli Ministry of Health. We also maintain an ISO 9001-2008 quality system certificate and a Hazard Analysis and Critical Control Points (HACCP) certificate for food safety. For more information regarding the regulations affecting our nutrition products, see “Item 4. B . Information on the Company — Business Overview – Government regulation — Nutrition segment.”

VAYA Pharma Segment

The products offered by our VAYA Pharma segment are sold under physician supervision in the United States as “medical foods,” which do not require premarket approval, on the basis of their meeting the criteria for 'medical foods' in the FFDCA and FDA regulations. Although we believe that our VAYA Pharma products meet the criteria for 'medical foods' established by the FFDCA, and that the labeling and marketing of our medical foods is consistent with FDA regulatory requirements, our offering of one or more of these products as 'medical food' could be challenged by the FDA, which could have a material adverse effect on the results and operations of our VAYA Pharma segment. In addition, were we to be unsuccessful in obtaining FDA approval in the United States, this could significantly adversely affect the sale of the products outside the United States. For more information regarding this risk, see “—Our offering of products as 'medical foods' in the United States may be challenged by regulatory authorities.”

  FDA policies and guidance, including in the area of medical foods, are continually evolving.  It is possible we will be required to apply for and obtain certain approvals for the clinical investigation of existing or new medical food products. For example, based on recent FDA guidance, in order to initiate a human clinical trial relating to the effect(s) of a medical food on disease, a sponsor may be required to file an Investigational New Drug Application (IND) with FDA and obtain authorization from the agency prior to beginning the investigation.  Furthermore, FDA has indicated that investigations of conventional foods or dietary supplements studied for use in the diagnosis, cure, mitigation, treatment, or prevention of disease, or even to reduce the risk of disease in medically vulnerable populations (including, for instance, individuals less than 12 months of age and those with altered immune systems), are subject to the IND requirements.  Changes in FDA’s policies and guidance may affect our ability to make health-related claims about our products and to market and sell medical foods.  These regulatory policy changes may have a material adverse effect on our business, or cause us to incur considerable costs.

Since supply to our U.S. customers includes import into the U.S. of products or their materials, we dependent upon being able to import such products or materials into the U.S. in accordance with the applicable requirements of the FDA, U.S. customs and other regulatory bodies. Any regulatory or procedural restrictions on our import abilities may have a material adverse effect on our business.

The FTC regulates certain aspects of the advertising and marketing of our products. Under the Federal Trade Commission Act, a company must be able to substantiate both the express and implied claims that are conveyed by an advertisement. It is not uncommon for the FTC to conduct an investigation of the claims that are made about products in new and emerging areas of science that involve a potentially vulnerable population such as infants and children, or that relate to conditions impacting significant portions of the population. Any adverse action by the FTC could have a negative impact on our results of operations and financial condition.

Sales in the United States of the products of our VAYA Pharma segment are significantly impacted by the reimbursement policies of government healthcare or private health insurers.

The products offered by our VAYA Pharma segment are sold in the United States on the basis of their meeting the requirements for “medical foods,” as interpreted and enforced by the FDA. Medical foods are not required to undergo premarket review or approval by the FDA, as is required for prescription drugs. However, primarily because our VAYA Pharma products are not approved as prescription drugs by the FDA, most consumers purchasing these products in the United States are currently unable to obtain reimbursement from third-party payers under government healthcare or private insurance plans, which generally do not provide reimbursement for medical foods. While we are attempting to broaden acceptance of our VAYA Pharma products as eligible for reimbursement by third-party payers, no assurance can be given that we will be successful in our efforts. We believe that, unless we are able to obtain widespread reimbursement for our VAYA Pharma products in the United States, future sales and profitability of our VAYA Pharma products may be significantly adversely impacted and we may be unable to achieve our projected sales of these products. Additionally, the new U.S. president recently signed an executive order directing federal agencies with authorities and responsibilities under the Patient Protection and Affordable Care Act, or the PPACA, to waive, defer, grant exemptions from, or delay the implementation of any provision of the PPACA that would impose a fiscal or regulatory burden on certain entities, and members of the U.S. Congress have drafted legislation to repeal and potentially replace the PPACA. Changes to the PPACA, including any legal uncertainty surrounding rules governing reimbursements, could make it more difficult for us to sell our VAYA Pharma products profitably in the United States, thus materially and adversely affecting our business, financial condition and results of operations.

 

Changes in laws, regulations or governmental policies in jurisdictions in which we operate or where our products are sold may impact our business.

 

We may depend on distributors and agents outside of Israel for compliance and adherence to local laws and regulations.  Significant political or regulatory developments, such as those stemming from the recent change of the presidential administration in the U.S. or the U.K.’s Brexit referendum could have a material adverse effect on us.

 

In the United States, the new presidential administration has expressed support for and may implement greater restrictions on free trade and increases tariffs on goods imported into the United States, as well as a comprehensive tax reform, including in corporate and income taxation. We cannot predict whether quotas, duties, tariffs, taxes or other similar restrictions will be imposed by the United States or other countries upon the import or export of our products in the future. However, given our significant sales, distribution, import and manufacturing operations in the U.S., changes in U.S. political, regulatory and economic conditions or in its policies governing international trade and foreign manufacturing and investment in the U.S. could adversely affect our business. 

 

In the United Kingdom, a recent referendum was held in which voters approved an exit from the E.U., commonly referred to as “Brexit.” On February 8, 2017, the U.K.’s House of Commons approved a bill authorizing the government to start exit talks with the E.U. The impact on us from Brexit will depend, in part, on the outcome of tariff, trade, regulatory and other negotiations. Brexit could also lead to legal uncertainty and potentially divergent national laws and regulations as the U.K. determines which E.U. laws to replace or replicate. While we do not currently have significant business with U.K. entities, it is hard to predict the effect of such events, as they may cause currency exchange rate fluctuations, trade issues, regulatory developments etc. which may have an effect beyond the U.K..

We could incur significant costs in complying with environmental, health and safety laws or permits or as a result of satisfying any liability or obligation imposed under such laws or permits.

We are subject to extensive environmental, health and safety laws and regulations in a number of jurisdictions, primarily Israel, governing, among other things, the use, storage, registration, handling and disposal of chemicals, waste materials and sewage; chemicals, air, water and ground contamination; air emissions and the cleanup of contaminated sites, including any contamination that results from spills due to our failure to properly dispose of chemicals, waste materials and sewage. In particular, our operations at our Migdal Ha’Emeq manufacturing facility use chemicals and produce emissions, waste materials and sewage, and accordingly require permits from various governmental authorities. These authorities conduct periodic inspections in order to review and ensure our compliance with the various regulations. Our manufacturing processes include pollutant emissions which at peak capacity approach maximum permitted levels. Our Israeli facilities are periodically audited by the Ministry of Environmental Protection and we are making an investment of $0.7 million during 2017 in equipment designed to treat pollutants. Nevertheless, such equipment may not be completely effective or may malfunction, which could result in a violation of regulations or our need to stop operations at our manufacturing facility until we can make any necessary repairs or improvements to ensure we are compliant with regulatory requirements.

These laws, regulations and permits could potentially require us to further dedicate significant resources for compliance and/or remediation. Laws and regulations relating to environmental matters are often subject to change. In the event of any changes or new laws or regulations, we could be subject to new compliance measures or to penalties for activities which were previously permitted. If we fail to comply with such laws, regulations or permits, we may be subject to fines and other civil, administrative or criminal sanctions, including the revocation of permits and licenses necessary to continue our business activities. In addition, we may be required to pay damages or civil judgments in respect of third-party claims, including those relating to personal injury (including exposure to hazardous substances we use, store, handle, transport, manufacture or dispose of), property damage or contribution claims. Some environmental laws allow for strict, joint and several liability for remediation costs, regardless of comparative fault. We may be identified as a potentially responsible party under such laws. Such developments could have a material adverse effect on our business, financial condition and results of operations.

 

Risks related to our intellectual property

We may not be able to protect our proprietary technology or prevent its unauthorized use by third parties.

Our ability to obtain and maintain patent protection and trade secret protection for our intellectual property and proprietary technologies, our products and their uses is important to our commercial success. We rely on a combination of patent, copyright, trademark and trade secret laws, non-disclosure and confidentiality agreements, licenses, assignments of invention agreements and other restrictions on disclosure and use to protect our intellectual property rights.   We have been granted over 110 patents in more than a dozen countries and have applications for approximately 90 additional patents pending worldwide.

Patents that claim specific molecules or active ingredients are generally considered to be the strongest form of intellectual property protection for products that are new molecules. However, as the main ingredients of our products are derived from nature, those types of claims are generally not available for our products. Instead, our issued patents and pending patent applications cover specifically selected narrow compositions, proprietary processes used in the manufacture of certain products, or specific uses for certain products. Accordingly, other parties may compete with us, for example, by independently developing or obtaining similar or competing technologies, designing around our patents and/or marketing competing products that do not claim our patented uses.

Furthermore, there can be no assurance that patent applications relating to our products, processes or technologies will result in patents being issued, or that any patents that have been issued will be adequate to protect our intellectual property or that we will enjoy patent protection for any significant period of time. Additionally, any issued patents may be challenged by third parties, and patents that we hold may be found by a judicial authority to be invalid or unenforceable. If any of our composition-of-matter patents or pending applications was to be subject to a successful challenge or failed to issue, our business and competitive advantage could be significantly affected. Other parties may independently develop similar or competing technology or design around any patents that may be issued to or held by us. Our current patents will expire or they may otherwise cease to provide meaningful competitive advantage, and we may be unable to adequately develop new technologies and obtain future patent protection to preserve our competitive advantage or avoid adverse effects on our business.

In addition to seeking patents for some of our proprietary technologies, processes and products, we also rely on trade secrets, including unpatented know-how, technology and other proprietary information in attempting to develop and maintain a competitive position. However, trade secret protection is risky and uncertain and the disclosure or independent development of our proprietary technology could have a material adverse impact on our business and results of operations. Any party with whom we have executed non-disclosure and/or non-use agreements may breach those agreements and disclose our proprietary technology, including our trade secrets, and we may not be able to obtain adequate remedies for such breaches. Enforcing a claim that a party illegally disclosed or misappropriated a trade secret is difficult, expensive and time-consuming, and a favorable outcome is not guaranteed. In addition, if any of our trade secrets were to be lawfully obtained or independently developed by a competitor, we would have no right to prevent such third party, or those to whom they communicate such technology or information, from using that technology or information to compete with us.

We cannot be certain that the steps that we have taken will prevent the misappropriation or other violation of our confidential information and other intellectual property, particularly in foreign countries, such as China, in which laws may not protect our proprietary rights as fully as in the United States and other developed economies. Moreover, if we lose any key personnel, we may not be able to prevent the unauthorized disclosure or use of our technical knowledge or other trade secrets by those former employees. If we are unable to maintain the security of our proprietary technology, this could materially adversely affect our competitive advantage, business and results of operations.

We may become subject to litigation regarding intellectual property rights.

Our commercial success depends in part on our ability to operate without infringing upon the proprietary rights of others. In recent years, there has been significant litigation in the United States and abroad involving patents and other intellectual property rights in the industries in which we operate. As discussed above, we were previously involved in legal proceedings in the United States concerning our krill oil products with Neptune, one of our principal competitors in the krill oil market which resulted in a final settlement and license agreement.

We may also, in the future, be a party to litigation to determine the scope and validity of our own intellectual property, which, if resolved adversely to us, could invalidate or render unenforceable our intellectual property or generally preclude us from restraining competitors from commercializing products using technology developed by us. In addition, because patent applications can take many years until the patents issue, there may be applications now pending of which we are unaware, which may later result in issued patents that our products may infringe. If any of our products infringe a valid and enforceable patent, or if we wish to avoid potential intellectual property litigation or alleged infringement, we may not be able to sell applicable products unless and until we can obtain a license, which we may not be able to obtain on commercially reasonable terms, if at all. Alternatively, we could be forced to pay substantial royalties or redesign a product to avoid infringement. A successful claim of infringement against us, or our failure or inability to develop non-infringing technology or license the infringed technology, on acceptable terms and on a timely basis, if at all, could materially adversely affect our business and results of operations. These outcomes could also directly and indirectly benefit our competitors, including, for example, by obtaining judgments against or payments from us, reputational harm to us and our products, and/or gaining market share from us. Furthermore, litigation to establish or challenge the validity of patents, to defend against infringement, enforceability or invalidity claims or to assert infringement, invalidity or enforceability claims against others, if required, regardless of its success, would likely be time-consuming and expensive to resolve and would divert management’s time and attention, which could seriously harm our business.

In addition to our existing agreements related to the Neptune litigation (see “Item 8. A. Financial Information — Consolidated Financial Statements and Other Financial Information — Legal Proceedings”) we may in the future agree to be financially responsible for any damages awarded against certain of our customers, and in some cases the cost of defense for such customers, as a result of the purchase, importation, use, sale or offer to sell of our products that a third party claims infringes its intellectual property rights. If any of the products at issue are found to infringe the valid and enforceable intellectual property right of such third party, the payment of such damages could have a materially adverse impact on our financial results and business.

It is possible that the products currently marketed or under development by us may in the future be found to infringe patents issued or licensed to others or otherwise violate the intellectual property rights of others. Likewise, it is possible that other parties may independently develop similar technologies, duplicate our technologies or, with respect to patents that are issued to us, or rights licensed to us, design around the patented aspects of the technologies. Third parties may also obtain patents that we may need to license from them in order to conduct our business.

Changes in U.S. or foreign patent law could diminish the value of patents in general, thereby impairing our ability to protect our products.

Obtaining and enforcing patents involves technological and legal complexity, and is costly, time - consuming, and inherently uncertain. Patent policy also continues to evolve in the United States and many foreign jurisdictions and the issuance, scope, validity, enforceability and commercial value of our patent rights are highly uncertain. For example, the U.S. Supreme Court has ruled on several patent cases in recent years, including narrowing the scope of patent protection available in certain circumstances or weakening the rights or remedies of patent owners in certain situations. In addition to increasing uncertainty with regard to our ability to obtain patents in the future, this combination of events has created uncertainty with respect to the value of patents, once obtained. Furthermore, decisions by the U.S. Congress, the federal courts, and the U.S. Patent and Trademark Office or comparable authorities in foreign jurisdictions could change the laws and regulations governing patents in unpredictable ways that may weaken or undermine our ability to obtain new patents or to enforce our existing patents and patents we might obtain in the future.

We may not be able to protect our intellectual property rights throughout the world.

Filing, prosecuting, maintaining and defending patents on each of our products in all countries throughout the world would be prohibitively expensive, and our intellectual property rights in some countries outside the United States are less extensive than those in the United States. In addition, the laws of some foreign countries do not protect intellectual property rights to the same extent as federal and state laws in the United States. Also, it may not be possible to effectively enforce intellectual property rights in some foreign countries at all or to the same extent as in the United States and other countries. Consequently, we are unable to prevent third parties from using our inventions in all countries, or from selling or importing products made using our inventions in the jurisdictions in which we do not have (or are unable to effectively enforce) patent protection. Competitors may use our technologies in jurisdictions where we have not obtained patent protection to develop, market or otherwise commercialize their own products, and we may be unable to prevent those competitors from importing those infringing products into territories where we have patent protection but enforcement is not as strong as in the United States. These products may compete with our products and our patents and other intellectual property rights may not be effective or sufficient to prevent them from competing in those jurisdictions. Moreover, competitors or others in the chain of commerce may raise legal challenges against our intellectual property rights or may infringe upon our intellectual property rights, including through means that may be difficult to prevent or detect.

Many companies have encountered significant problems in protecting and defending intellectual property rights in foreign jurisdictions, including China, a significant market for InFat and other products. The legal systems of certain countries, including China, have not historically favored the enforcement of patents or other intellectual property rights, which could hinder us from preventing the infringement of our patents or other intellectual property rights in those countries and result in substantial risks to us.

Furthermore, proceedings to enforce our patent rights in the United States or foreign jurisdictions could result in substantial costs and divert our efforts and attention from other aspects of our business, could put our patents at risk of being invalidated or interpreted narrowly and our patent applications at risk of not issuing, and could provoke third parties to assert patent infringement or other claims against us. We may not prevail in any lawsuits that we initiate and the damages or other remedies awarded, if any, may not be commercially meaningful. Accordingly, our efforts to enforce our intellectual property rights in the United States and around the world may be inadequate to obtain a significant commercial advantage from the intellectual property that we develop or license from third parties.

Risks related to our ordinary shares

The market price of our ordinary shares may be subject to fluctuation, regardless of our operating results and financial condition. As a result, our shareholders could lose all or part of their investment.

 The stock market in general, and the market price of our ordinary shares, have been and will be subject to fluctuation, whether due to, or irrespective of, our operating results and financial condition. During the year ended December, 31 2016, our share price ranged from $5.50 to $9.83, and since our initial public offering in September 2013, has been as high as $35.12. The market price of our ordinary shares on the NASDAQ Global Select Market may fluctuate as a result of a number of factors, some of which are beyond our control, including, but not limited to:

•

actual or anticipated variations in our and our competitors’ results of operations and financial condition;

•

new competitors entering our markets;

•

market acceptance of our products and the effect of changing consumer preferences, including in China, on our sales ;

•

the mix of products that we sell and related services that we provide;

•

changes in earnings estimates or recommendations by securities analysts, if they continue to cover our ordinary shares;

•

the results of operations of AL and our relationship with AAK, including following the decisions of the arbitral tribunal ;

•

development of technological innovations or new competitive products by others;

•

outcome of litigation in which we may be involved from time to time;

•

announcements of technological innovations or new products by us;

•

publication of the results of pre-clinical or clinical trials for any of our products or products under development;

•

failure by us to achieve a publicly announced milestone;

•

delays between our expenditures to develop and market new or enhanced products and the generation of sales from those products;

•

developments concerning intellectual property rights, including our involvement in litigation;

•

regulatory developments and the decisions of regulatory authorities as to the marketing of our current products or products that use our products as an ingredient or the approval or rejection of new or modified products;

•

changes in the amounts that we spend to develop, acquire or license new products, technologies or businesses;

•

changes in our expenditures to promote our products;

•

our sale or proposed sale, or the sale by our significant shareholders, of our ordinary shares or other securities in the future;

•

changes in key personnel;

•

success or failure of research and development projects of us or our competitors;

•

the trading volume of our ordinary shares; and

•

general economic and market conditions and other factors, including factors unrelated to our operating performance.

These factors and any corresponding price fluctuations may materially and adversely affect the market price of our ordinary shares and result in substantial losses being incurred by our investors. In the past, following periods of market volatility, public company shareholders have often instituted securities class action litigation. Lawsuits brought against us by shareholders, such as the shareholder class action suits against us, some of our past and present directors and certain of our executive officers, have in the past, and could in the future, cause us to incur costs defending the lawsuits and divert the resources and attention of our management from the operation of our business. For more information, see “—Risks relating to our business and industry—We face risks in connection with securities litigation.”

If equity research analysts do not continue to publish research or reports about our business or if they issue unfavorable commentary or downgrade our ordinary shares, the price of our ordinary shares could decline.

The trading market for our ordinary shares will rely in part on the research and reports that equity research analysts publish about us and our business. We do not have control over these analysts and we do not have commitments from them to write research reports about us. The price of our ordinary shares could decline if one or more equity research analysts downgrade(s) our ordinary shares or if those analysts issue other unfavorable commentary or cease publishing reports about us or our business.

Future sales of our ordinary shares could reduce the market price of our ordinary shares.

If our existing shareholders, particularly our largest shareholders, our directors, their affiliates, or our executive officers, sell a substantial number of our ordinary shares in the public market, the market price of our ordinary shares could decrease significantly. As of March 10, 2017, the holders of 4,623,232 ordinary shares were entitled to require that we register their shares under the Securities Act for resale into the public markets. All shares sold pursuant to an offering covered by such registration statement will be freely transferable. See “Item 7.B. Major Shareholders and Related Party Transactions—Related Party Transactions—Investors’ Rights Agreement.” Sales by us or our shareholders of a substantial number of ordinary shares in the public market, or the perception that these sales might occur, could cause the market price of our ordinary shares to decline or could impair our ability to raise capital through a future sale of, or pay for acquisitions using, our equity securities.

 

      In addition to these registration rights, as of December 31, 2016, 2,147,336 ordinary shares were subject to outstanding equity awards granted to directors, officers, employees, and other service providers under our equity incentive plans (including outstanding options and vested restricted share units), including 1,061,474 ordinary shares issuable under currently exercisable share options. These shares may be freely sold in the public market upon issuance, except for shares held by affiliates who have certain restrictions on their ability to sell. As of December 31, 2016, 2,455,092 shares remained available for issuance under our equity incentive plans (which number includes 2,147,336 shares issuable pursuant to outstanding equity awards). See “Item 6.B. Directors, Senior Management and Employees—Compensation of Officers and Directors—Equity incentive plans. ”

We have never paid cash or non-cash dividends on our share capital, and we do not anticipate paying any cash or non-cash dividends in the foreseeable future.

We have never declared or paid cash or non-cash dividends on our share capital, nor do we anticipate paying any cash or non-cash dividends on our share capital in the foreseeable future. We currently intend to retain all available funds and any future earnings to fund the development and growth of our business. As a result, capital appreciation, if any, of our ordinary shares will be investors’ sole source of gain for the foreseeable future. In addition, Israeli law limits our ability to declare and pay dividends, and may subject our dividends to Israeli withholding taxes and our payment of dividends (out of tax-exempt income) may subject us to certain Israeli taxes, to which we would not otherwise be subject (see “Item 8.A. Financial Information — Consolidated Financial Statements and Other Financial Information — Dividend policy, ” “Item 10.B. Additional Information — Memorandum of Association and Articles of Association—Dividend and liquidation rights” and “Item 10.E. Additional Information — Taxation — Israeli tax considerations and government programs”).

As a foreign private issuer, we are permitted to follow certain home country corporate governance practices instead of otherwise applicable SEC and NASDAQ requirements, which may result in less protection than is accorded to investors under rules applicable to domestic U.S. issuers.

As a foreign private issuer, we are permitted to, and do, follow certain home country corporate governance practices instead of those otherwise required under the Listing Rules of the NASDAQ Stock Market for domestic U.S. issuers. For instance, we follow home country practice in Israel with regard to the quorum requirement for shareholder meetings. As permitted under the Israeli Companies Law, our articles of association provide that the quorum for any meeting of shareholders shall be the presence of at least two shareholders present in person, by proxy or by a voting instrument, who hold at least 25% of the voting power of our shares instead of 33 1/3% of the issued share capital requirement. These quorum requirements for the meeting of our shareholders are lower than is customary for domestic issuers. We may in the future elect to follow home country practices in Israel with regard to other matters, including the formation of compensation, nominating and corporate governance committees, separate executive sessions of independent directors and non-management directors and the requirement to obtain shareholder approval for certain dilutive events (such as for the establishment or amendment of certain equity-based compensation plans, issuances that will result in a change of control of the company, certain transactions other than a public offering involving issuances of a 20% or more interest in the company and certain acquisitions of the stock or assets of another company). Our adoption of home country governance practices as opposed to the requirements that would otherwise apply to a domestic issuer listed on the NASDAQ Global Select Market may provide less protection to you than what is accorded to investors under the NASDAQ rules applicable to domestic issuers.

As a foreign private issuer, we are not subject to the provisions of Regulation FD or U.S. proxy rules and are exempt from filing certain Exchange Act reports.

As a foreign private issuer, we are exempt from the rules and regulations 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 and current reports and financial statements with the Securities and Exchange Commission, or SEC, as frequently or as promptly as U.S. domestic companies whose securities are registered under the Exchange Act, we are permitted to disclose limited compensation information for our executive officers on an individual basis in accordance with home country law and we are generally exempt from filing quarterly reports with the SEC under the Exchange Act.   Moreover, we are not required to comply with Regulation FD, which restricts the selective disclosure of material nonpublic information to, among others, broker-dealers and holders of a company’s securities under circumstances in which it is reasonably foreseeable that the holder will trade in the company’s securities on the basis of the information.  These exemptions reduce the frequency and scope of information and protections to which you may otherwise have been eligible in relation to a U.S. domestic issuer.

We would lose our foreign private issuer status if (a) a majority of our outstanding voting securities were either directly or indirectly owned of record by residents of the United States and (b)(i) a majority of our executive officers or directors were United States citizens or residents, (ii) more than 50 percent of our assets were located in the United States or (iii) our business were administered principally in the United States. Although we have elected to comply with certain U.S. regulatory provisions, our loss of foreign private issuer status would make such provisions mandatory. The regulatory and compliance costs to us under U.S. securities laws as a U.S. domestic issuer may be significantly higher. If we are not a foreign private issuer, we will be required to file periodic reports and registration statements on U.S. domestic issuer forms with the SEC, which are more detailed and extensive than the forms available to a foreign private issuer. We may also be required to modify certain of our policies to comply with accepted governance practices associated with U.S. domestic issuers. Such conversion and modifications will involve additional costs. In addition, we may lose our ability to rely upon exemptions from certain corporate governance requirements on U.S. stock exchanges that are available to foreign private issuers.

  We are an “emerging growth company” and the reduced disclosure requirements applicable to emerging growth companies may make our ordinary shares less attractive to investors.

We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, and we take advantage of certain exemptions from various requirements that are applicable to other public companies that are not “emerging growth companies.” Most of such requirements relate to disclosures that we would only be required to make if we cease to be a foreign private issuer in the future. Nevertheless, as a foreign private issuer that is an emerging growth company, we will not be required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, for up to five fiscal years after the date of our initial public offering.

We will remain an emerging growth company until the earliest of: (a) the last day of our fiscal year during which we have total annual gross revenues of at least $1.0 billion; (b) December 31, 2018, the last day of our fiscal year following the fifth anniversary of the closing of our initial public offering; (c) the date on which we have, during the previous three-year period, issued more than $1.0 billion in non-convertible debt; or (d) the date on which we are deemed to be a “large accelerated filer” under the Exchange Act. When we are no longer deemed to be an emerging growth company, we will not be entitled to the exemptions provided in the JOBS Act discussed above. Investors may find our ordinary shares less attractive as a result of our reliance on exemptions under the JOBS Act , which may contribute to a less active trading market for our ordinary shares and volatility in our share price.

If we are unable to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, or if our internal controls over financial reporting are not effective, investors may lose confidence in the accuracy and the completeness of our financial reports, the reliability of our financial statements may be questioned and our share price may suffer.

We are required to comply with the internal control, evaluation and certification requirements of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, including the requirement to furnish a report by management on the effectiveness of our internal control over financial reporting under Section 404(a). We will also be required to obtain an auditor attestation under Section 404(b) of the Sarbanes-Oxley Act for our annual report for the 2018 fiscal year or otherwise for the 2017 fiscal year if we lose our status as an “emerging growth company” under the JOBS Act during that period. To maintain the effectiveness of our disclosure controls and procedures and our internal control over financial reporting, we will need to continue implementing and enhancing our financial reporting and management systems, procedures and controls to manage our business effectively and support our growth in the future. The process of evaluating our internal control over financial reporting has required, and will continue to require, an investment of substantial time and resources, including by our Chief Executive Officer, Chief Financial Officer and other members of our senior management. The determination and any remedial actions required could divert internal resources and could result in us incurring additional costs that we did not anticipate, including the hiring of outside consultants. Additionally, irrespective of compliance with Section 404, any failure of our internal control over financial reporting could result in an adverse opinion from our auditors, call into question the reliability of our financial statements and harm our reputation, thus adversely affecting our share price.

Our U.S. shareholders may suffer adverse tax consequences if we are characterized as a passive foreign investment company.

Generally, if for any taxable year 75% or more of our gross income is passive income, or at least 50% of the average quarterly value of our assets (which may be determined in part by the market value of our ordinary shares, which is subject to change) are held for the production of, or produce, passive income, we would be characterized as a passive foreign investment company, or PFIC, for U.S. federal income tax purposes. Based on our gross income and gross assets, we do not believe that we were classified as a PFIC for the taxable year ended December 31, 2016. There can be no assurance that we will not be considered a PFIC for 2017 or any future taxable year.  PFIC status is determined as of the end of the taxable year and depends on a number of factors, including the value of a corporation’s assets and the amount and type of its gross income. Furthermore, because the value of our gross assets is likely to be determined in large part by reference to our market capitalization, a decline in the value of our ordinary shares may result in our becoming a PFIC. If we are characterized as a PFIC, our U.S. shareholders may suffer adverse tax consequences, including having gains realized on the sale of our ordinary shares treated as ordinary income, rather than a capital gain, the loss of the preferential rate applicable to dividends received on our ordinary shares by individuals who are U.S. Holders (as defined in “Item 10.E. Additional Information — Taxation — U.S. federal income tax consequences”), and having interest charges apply to distributions by us and the proceeds of share sales. Certain elections exist that may alleviate some of the adverse consequences of PFIC status and would result in an alternative treatment (such as mark-to-market treatment) of our ordinary shares; however, we do not intend to provide the information necessary for U.S. holders to make qualified electing fund elections if we are classified as a PFIC. See “Item 10.E. Additional Information — Taxation — Passive foreign investment company consequences.”

We have incurred and could continue to incur increased costs as a result of operating as a public company, and our management has been and may continue to be required to devote substantial time to new compliance initiatives.

We completed our initial public offering in 2013 and, as a public company whose ordinary shares are listed in the United States, we have incurred and will continue to incur significant accounting, legal and other expenses, including costs associated with our reporting requirements under the U.S. Securities Exchange Act of 1934, as amended, or the Exchange Act. We could also incur additional costs associated with corporate governance requirements, including requirements under Section 404 and other provisions of the Sarbanes-Oxley Act, as well as rules implemented by the SEC and the NASDAQ Global Select Market, and provisions of Israeli corporate law applicable to public companies. Laws and regulations affecting public companies also make it more difficult or costly for us to obtain certain types of insurance, such as director and officer liability insurance. These rules and regulations could continue to increase our legal and financial compliance costs and make some activities more time-consuming and costly.

Changes in the laws and regulations affecting public companies will result in increased costs to us as we respond to their requirements. These laws and regulations could make it more difficult or more costly for us to obtain certain types of insurance, including director and officer liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. The impact of these requirements could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, our board committees or as executive officers. We cannot predict or estimate the amount or timing of additional costs we may incur in order to comply with such requirements.

  

Risks primarily related to our operations in Israel

Our headquarters, manufacturing and other significant operations are located in Israel and, therefore, our results may be adversely affected by political, economic and military instability in Israel.

Our headquarters, manufacturing and principal research and development facilities are located in northern Israel. In addition, the majority of our key employees, officers and directors are residents of Israel. Accordingly, political, economic and military conditions in Israel may directly affect our business. Since the establishment of the State of Israel in 1948, a number of armed conflicts have taken place between Israel and its neighboring countries. Any hostilities involving Israel or the interruption or curtailment of trade between Israel and its trading partners could adversely affect our operations and results of operations. In addition, our operations may be adversely affected by the call-up of certain of our employees, including members of our senior management, to active military service in the case of such hostilities.

During the Second Lebanon War of 2006, between Israel and Hezbollah, a militant Islamic movement, rockets were fired from Lebanon into Israel causing casualties and major disruption of economic activities in northern Israel. An escalation in tension and violence between Israel and the militant Hamas movement (which controls the Gaza Strip) and other Palestinian Arab groups, culminated with Israel’s military campaign in Gaza in December 2008 and again in November 2012 and in July and August 2014 in an endeavor to prevent continued rocket attacks against Israel’s southern towns. It is unclear whether any negotiations that may occur between Israel and the Palestinian Authority will result in an agreement. In addition, Israel faces threats from more distant neighbors, in particular, Iran, an ally of Hezbollah and Hamas , and the militant group known as the Islamic State of Iraq and Syria .

Our commercial insurance does not cover losses that may occur as a result of an event associated with the security situation in the Middle East. Although the Israeli government is currently committed to covering the reinstatement value of direct damages that are caused by terrorist attacks or acts of war, we cannot assure you that this government coverage will be maintained, or if maintained, will be sufficient to compensate us fully for damages incurred. Any losses or damages incurred by us could have a material adverse effect on our business. Any armed conflict involving Israel could adversely affect our operations and results of operations.

Further, our operations could be disrupted by the obligations of personnel to perform military service. As of December 31, 2016, we had 124 employees based in Israel, some of whom may be called upon to perform up to 54 days in each three year period (and in the case of officers, up to 84 days in each three year period) of military reserve duty until they reach the age of 40 (and in some cases, depending on their specific military profession up to 45 or even 49 years of age) and, in certain emergency circumstances, may be called to immediate and unlimited active duty. The number of our employees that were called to military reserve duty in the last three years was 21, one of which was a member of management. Our operations could be disrupted by the absence of a significant number of employees related to military service, which could materially adversely affect our business and results of operations.

Several countries, principally in the Middle East, restrict doing business with Israel and Israeli companies, and additional countries may impose restrictions on doing business with Israel and Israeli companies whether as a result of hostilities in the region or otherwise. In addition, there have been increased efforts by activists to cause companies and consumers to boycott Israeli goods based on Israeli government policies. Such actions, particularly if they become more widespread, may adversely impact our ability to sell our products.

We may become subject to claims for remuneration or royalties for assigned service invention rights by our employees, which could result in litigation and adversely affect our business.

 

 We enter into assignment of invention agreements with our employees pursuant to which such individuals agree to assign to us all rights to any inventions created in the scope of their employment or engagement with us.

 

Under the Israeli Patent Law, 5727-1967, or the Patent Law, inventions conceived by an employee in the course and as a result of or arising from his or her employment with a company are regarded as “service inventions,” which belong to the employer, absent a specific agreement between the employee and employer giving the employee proprietary rights. The Patent Law also provides under Section 134 that if there is no agreement between an employer and an employee as to whether the employee is entitled to consideration for service inventions, and to what extent and under which conditions, the Israeli Compensation and Royalties Committee, or the Committee, a body constituted under the Patent Law, shall determine these issues. Section 135 of the Patent Law provides criteria for assisting the Committee in making its decisions. According to case law handed down by the Committee, an employee’s right to receive consideration for service inventions is a personal right and is entirely separate from the proprietary rights in such invention. Therefore, this right must be explicitly waived by the employee. A decision handed down in May 2014 by the Committee clarifies that the right to receive consideration under Section 134 can be waived and that such waiver can be made orally, in writing or by conduct. The Committee will examine, on a case-by-case basis, the general contractual framework between the parties, using interpretation rules of the general Israeli contract laws. Further, the Committee has not yet determined one specific formula for calculating this remuneration, nor the criteria or circumstances under which an employee’s waiver of his right to remuneration will be disregarded. Similarly, it remains unclear whether waivers by employees in their employment agreements of the alleged right to receive consideration for service inventions should be declared as void in a standard contract. We generally enter into assignment-of-invention agreements with our employees pursuant to which such individuals assign to us all rights to any inventions created in the scope of their employment or engagement with us. Although our employees have agreed to assign to us service invention rights and have specifically waived their right to receive any special remuneration for such service inventions beyond their regular salary and benefits, we may face claims demanding remuneration in consideration for assigned inventions.

 

The government tax benefits that we currently receive require us to meet several conditions and may be terminated or reduced in the future.

Some of our operations in Israel, referred to as “Approved Enterprises” and “Benefited Enterprises,” carry certain tax benefits under the Law for the Encouragement of Capital Investments, 5719-1959, or the Investment Law. Based on an evaluation of the relevant factors under the Investment Law, including the level of non-Israeli investment in our company, we have determined that our effective tax rate to be paid with respect to all of our Israeli operations under these benefits programs is 0%, based on the available level of benefits under the law. Substantially all of our income before taxes can be attributed to these programs. If we do not meet the requirements for maintaining these benefits, they may be reduced or cancelled and the relevant operations would be subject to Israeli corporate tax at the standard rate, which is 24% in 2017 (in 2015 and 2016 the corporate tax rate was 26.5% and 25%, respectively) and as of January 1, 2018 the corporate tax rate will be 23%.   In addition to being subject to the standard corporate tax rate, we would be required to refund any tax benefits that we have already received, as adjusted by the Israeli consumer price index, plus interest and penalties thereon. Even if we continue to meet the relevant requirements, the tax benefits that our current “Approved Enterprise” and “Benefited Enterprises” receive may not be continued in the future at their current levels or at all. If these tax benefits were reduced or eliminated, the amount of taxes that we pay would likely increase, as all of our operations would consequently be subject to corporate tax at the standard rate, which could adversely affect our results of operations. Additionally, if we increase our activities outside of Israel, for example, by way of acquisitions, our increased activities may not be eligible for inclusion in Israeli tax benefit programs. See “Item 10.E. Additional Information — Taxation — Tax benefits under the Law for the Encouragement of Capital Investments, 5719-1959” for additional information concerning these tax benefits.

We received Israeli government grants for certain research and development activities. The terms of those grants require us to satisfy specified conditions and to pay penalties in addition to repayment of the grants upon certain events.

Our research and development efforts were financed in part through grants from the Israeli National Authority for Technological Innovation, or the Innovation Authority (previously known as the Israeli Office of the Chief Scientist or OCS)

 

Even following full repayment of any Innovation Authority grants, we must nevertheless continue to comply with the requirements of the Encouragement of Research, Development and Technological Innovation in the Industry Law, 5744-1984 (formerly known as the Law for the Encouragement of Research and Development in Industry 5744-1984), and related regulations, or collectively, the Innovation Law.

 

When a company develops know-how, technology or products and related services using grants provided by the Innovation Authority, the terms of these grants and the Innovation Law, among others, restrict the transfer outside of Israel of such Innovation Authority-supported know-how (including by a way of license for research and development purposes), the transfer inside Israel of such know-how and the transfer of manufacturing or manufacturing rights of such products, and technologies outside of Israel, without the prior approval of the Innovation Authority. We may not receive those approvals.

 

Even after we repay our grants in full, we will remain subject to the restrictions set forth under the Innovation Law, including:

 

•         Transfer of know-how outside of Israel. Transfer of the know-how that was developed with the funding of the Innovation Authority outside of Israel requires prior approval of the Innovation Authority, and, in certain circumstances, the payment of a redemption fee, which cannot exceed 600% of the grant amount plus interest. Upon payment of such fee, the know-how and the production rights for the products supported by such funding cease to be subject to the Innovation Law.

 

•         Local manufacturing obligation. The terms of the grants under the Innovation Law require that the manufacturing of products resulting from the Innovation Authority funded programs are carried out in Israel, unless a prior written approval of the Innovation Authority is obtained. Such approval may be given in special circumstances and upon the fulfillment of certain conditions set forth in the Innovation Law, including payment of increased royalties. Such approval is not required for the transfer of less than 10% of the manufacturing capacity in the aggregate, and in such event, a notice to the Innovation Authority is required.

 

•         Certain reporting obligations. A recipient of a grant or a benefit under the Innovation Law is required to notify the Innovation Authority of events enumerated in the Innovation Law.

 

These restrictions and requirements for payment may impair our ability to sell our technology assets outside of Israel or to outsource or transfer manufacturing activities with respect to any product or technology outside of Israel; however, they do not restrict the export of our products that incorporate know how funded by the Innovation Authority. Furthermore, the consideration available to our shareholders in a sale transaction involving the actual transfer outside of Israel of technology or know-how developed with funding by the Innovation Authority pursuant to a merger or similar transaction may be reduced by any amounts that we are required to pay to the Innovation Authority. Failure to comply with the requirements under the Innovation Law may subject us to mandatory repayment of grants received by us, together with interest and penalties, as well as expose us to criminal proceedings.

 

We have received grants from the Innovation Authority prior to an extensive amendment to the Innovation Law that came into effect as of January 1, 2016, or the Amendment, which may also affect the terms of existing grants. The Amendment provides for an interim transition period, which has not yet expired, after which time our grants will be subject to terms of the Amendment and the Innovation Authority’s new guidelines, if and when issued. Furthermore, the Innovation Law following the Amendment includes new provisions with respect to sanctions imposed for violations of the Innovation Law. Under the Innovation Law, as amended by the Amendment, the Innovation Authority has the power to modify the terms of existing grants. Such changes, if introduced by the Authority in the future, may impact the terms governing our grants. As of the date of this prospectus supplement, we are unable to assess the effect of such changes, if any, on our business. For additional information see Note 8d of the notes to our consolidated financial statements included elsewhere in this annual report.

Provisions of Israeli law and our amended articles of association may delay, prevent or otherwise impede a merger with, or an acquisition of, us, even when the terms of such a transaction are favorable to us and our shareholders.

Israeli corporate law regulates mergers, requires tender offers for acquisitions of shares above specified thresholds, requires special approvals for transactions involving directors, officers or significant shareholders and regulates other matters that may be relevant to such types of transactions. For example, a tender offer for all of a company’s issued and outstanding shares can only be completed if the acquirer receives positive responses from the holders of at least 95% of the issued share capital. Completion of the tender offer also requires approval of a majority of the offerees that do not have a personal interest in the tender offer, unless at least 98% of the company’s outstanding shares are tendered. Furthermore, the shareholders, including those who indicated their acceptance of the tender offer (unless the acquirer stipulated in its tender offer that a shareholder that accepts the offer may not seek appraisal rights), may, at any time within six months following the completion of the tender offer, petition an Israeli court to alter the consideration for the acquisition. See “Item 10.B. Additional Information — Memorandum of Association and Articles of Association— Acquisitions under Israeli law” for additional information.

Our amended articles of association provide that our directors (other than external directors) are elected on a staggered basis, such that a potential acquirer cannot readily replace our entire board of directors at a single annual general shareholder meeting. This could prevent a potential acquirer from receiving board approval for an acquisition proposal that our board of directors opposes.

Furthermore, Israeli tax considerations may make potential transactions unappealing to us or to our shareholders whose country of residence does not have a tax treaty with Israel exempting such shareholders from Israeli tax. For example, Israeli tax law does not recognize tax-free share exchanges to the same extent as U.S. tax law. With respect to mergers, Israeli tax law allows for tax deferral in certain circumstances but makes the deferral contingent on the fulfillment of a number of c onditions, including, in some cases, a holding period of two years from the date of the transaction during which sales and dispositions of shares of the participating companies are subject to certain restrictions. Moreover, with respect to certain share swap transactions, the tax deferral is limited in time, and when such time expires, the tax becomes payable even if no disposition of the shares has occurred. These provisions could delay, prevent or impede an acquisition of us or our merger with another company, even if such an acquisition or merger would be beneficial to us or to our shareholders.

It may be difficult to enforce a judgment of a U.S. court against us, our officers and directors or the Israeli experts named in this annual report in Israel or the United States, to assert U.S. securities laws claims in Israel or to serve process on our officers and directors and these experts.

We are incorporated in Israel. All but one of our executive officers, all the Israeli experts and all but three of our directors listed in this annual report reside outside of the United States, and most of our assets and most of the assets of these persons are located outside of the United States. Therefore, a judgment obtained against us, or any of these persons, including a judgment based on the civil liability provisions of the U.S. federal securities laws, may not be collectible in the United States and may not be enforced by an Israeli court. It also may be difficult to effect service of process on these persons in the United States or to assert U.S. securities law claims in original actions instituted in Israel. Israeli courts may refuse to hear a claim based on an alleged violation of U.S. securities laws reasoning that Israel is not the most appropriate forum in which to bring such a claim. In addition, even if an Israeli court agrees to hear a claim, it may determine that Israeli law and not U.S. law is applicable to the claim. If U.S. law is found to be applicable, the content of applicable U.S. law must be proven as a fact by expert witnesses, which can be a time - consuming and costly process. Certain matters of procedure will also be governed by Israeli law. There is little binding case law in Israel that addresses the matters described above. As a result of the difficulty associated with enforcing a judgment against us in Israel, it may not be possible to collect any damages awarded by either a U.S. or foreign court.

The rights and responsibilities of our shareholders are governed by Israeli law, which differs in some material respects from the rights and responsibilities of shareholders of U.S. companies.

      The rights and responsibilities of the holders of our ordinary shares are governed by our amended articles of association and by Israeli law. These rights and responsibilities differ in some material respects from the rights and responsibilities of shareholders in U.S.-based corporations. In particular, a shareholder of an Israeli company has a duty to act in good faith and in a customary manner in exercising its rights and performing its obligations towards the company and other shareholders, and to refrain from abusing its power in the company, including, among other things, in voting at a general meeting of shareholders on matters such as amendments to a company’s articles of association, increases in a company’s authorized share capital, mergers and acquisitions and related party transactions requiring shareholder approval. In addition, a shareholder who is aware that it possesses the power to determine the outcome of a shareholder vote or to appoint or prevent the appointment of a director or executive officer in the company has a duty of fairness toward the company. There is limited case law available to assist us in understanding the nature of this duty or the implications of these provisions. These provisions may be interpreted to impose additional obligations and liabilities on holders of our ordinary shares that are not typically imposed on shareholders of U.S. corporations.