Evogene (EVGN) 20-F2020 FY Annual report (foreign)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

For the fiscal year ended December 31, 2020

OR

OR

Commission file number 001-36187

(Exact name of Registrant as specified in its charter)

N/A

(Translation of Registrant's Name Into English)

Israel

(Jurisdiction of incorporation or organization)

13 Gad Feinstein Street, Park Rehovot, Rehovot

P.O.B 4173, Ness Ziona, 7414002, Israel

(Address of principal executive offices)

Ofer Haviv
President and Chief Executive Officer
Telephone: +972-8-931-1900
Facsimile: +972-8-946-6724

Email: Ofer.Haviv@evogene.com

13 Gad Feinstein Street, Park Rehovot, Rehovot

P.O.B 4173, Ness Ziona, 7414002, Israel

(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)

Securities registered or to be registered pursuant to Section 12(b) of the Act:

Securities registered or to be registered pursuant to Section 12(g) of the Act: None.

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None.

 

EVOGENE LTD.

 

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FORM 20-F

ANNUAL REPORT FOR THE FISCAL YEAR ENDED DECEMBER 31, 2020

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 CERTAIN TERMS AND CONVENTIONS

In this annual report, unless the context otherwise requires:

Unless derived from our financial statements or otherwise noted, amounts presented in this annual report are translated at the rate of NIS 3.215 = USD 1.00, the exchange rate between the NIS and the U.S. dollar reported by the Bank of Israel as of December 31, 2020.

This annual report includes other statistical, market and industry data and forecasts which we obtained from publicly available information and independent industry publications and reports that we believe to be reliable sources. Some data is also based on our good faith estimates, which are derived from management’s knowledge of the industry and independent sources. These publicly available industry publications and reports generally state that they obtain their information from sources that they believe to be reliable, but they do not guarantee the accuracy or completeness of the information. Although we believe that these sources are reliable and are not aware of any misstatements regarding the industry data presented in this annual report, we have not independently verified the information contained in such publications. Certain estimates and forecasts involve uncertainties and risks and are subject to change based on various factors, including those discussed under the headings “—Special Note Regarding Forward-Looking Statements” and “Item 3. Risk Factors—D. Risk Factors” in this annual report.

Throughout this annual report, we refer to various trademarks, service marks and trade names that we use in our business. The “Evogene” design logo, “Evogene” and other trademarks or service marks of Evogene Ltd. and its subsidiaries appearing in this annual report are the property of Evogene Ltd. We have several other registered trademarks, service marks and pending applications relating to our computational technologies. Other trademarks and service marks appearing in this annual report are the property of their respective holders. Solely for convenience, the trademarks and trade names in this annual report are referred to without the ® and ™ symbols, but such references should not be construed as any indicator that their respective owners will not assert, to the fullest extent under applicable law, their rights thereto. We do not intend the use or display of other companies’ trademarks and trade names to imply a relationship with, or endorsement or sponsorship of us by, any other companies.

 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

In addition to historical facts, this annual report contains forward-looking statements within the meaning of Section 27A of the Securities Act, Section 21E of the Exchange Act, and the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. We have based these forward-looking statements on our current expectations and projections about future events. Forward-looking statements include information concerning our possible or assumed future results of our business, financial condition, results of operations, liquidity, anticipated growth strategies, anticipated trends in our industry, market size, our potential growth opportunities, plans and objectives. Forward-looking statements include all statements that are not historical facts and can be identified by terms such as “anticipates,” “believes,” “could,” “seeks,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “projects,” “should,” “will,” “would” or similar expressions that convey uncertainty of future events or outcomes and the negatives of those terms.

A number of additional important factors could cause our actual results to differ materially from those indicated by our forward-looking statements, including, but not limited to, those factors described in “Item 3. Key Information—D. Risk Factors,” “Item 4. Information on the Company” and “Item 5. Operating and Financial Review and Prospects.”

You should not rely upon forward-looking statements as predictions of future events. Although we believe that the expectations reflected in our forward-looking statements are reasonable, we cannot guarantee that future results, levels of activity, performance and events and circumstances reflected in the forward-looking statements will be achieved or will occur. All of the forward-looking statements that we have included in this annual report are based on information available to us on the date of this annual report. Except as required by law, we undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events, changes in our expectations or otherwise.

SUMMARY RISK FACTORS

The risk factors described below are a summary of the principal risk factors associated with an investment in us. These are not the only risks we face. You should carefully consider these risk factors, together with the risk factors set forth in Item 3D. of this annual report and the other reports and documents filed by us with the SEC.

PART I

The following tables set forth our selected consolidated financial data. 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 related notes included in this annual report. Historical results are not necessarily indicative of the results that may be expected in the future. Our financial statements have been prepared in accordance with International Financial Reporting Standards, or IFRS, as issued by the International Accounting Standards Board, or IASB.

The selected consolidated statements of profit or loss and other comprehensive income (loss) data for each of the years in the three-year period ended December 31, 2020 and the consolidated statements of financial position data as of December 31, 2019 and December 31, 2020 are derived from our audited consolidated financial statements appearing in this annual report. The consolidated statements of profit or loss and other comprehensive income (loss) data for each of the years ended December 31, 2016 and December 31, 2017 and the consolidated statements of financial position data as of December 31, 2016, 2017 and 2018 are derived from our audited consolidated financial statements that are not included in this annual report.

 

 

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We initiated a new corporate strategy and structure at the beginning of 2018, with the intent to make product development and go-to-market more efficient and to better reflect the individual value of each of our market focused business units. Under the new corporate structure, we operate with Evogene acting as a technology hub and, below it, a growing group of divisions and subsidiaries that benefit from the unique capabilities of Evogene’s Computational Predictive Biology, or CPB platform. Each such subsidiary is responsible for advancing its product development and pipeline, establishing its “go-to-market” strategy via direct sales or through existing and new collaborations, and securing additional financial resources, if and when required. Due to our limited financial resources and other investment considerations, our subsidiaries may obtain financing from external sources. External financing may result in a decrease of our percentage shareholdings in our subsidiaries, which, in turn, may reduce the benefit we (and, indirectly, our shareholders) recognize from value established in such subsidiaries, and potentially negatively affect our results of operations, financial condition, our long-term growth strategy and the value of our shares.

Our success depends on our ability to develop products that have the desired effects: in our agriculture activity, on plants, in our human health activity, on humans, and in our industrial applications activity, on the relevant industrial inputs. Research and development in these industries entails considerable uncertainty. We may spend many years developing product candidates that will never be commercialized. The science underlying the development of our product candidates is highly complex and, although we use innovative approaches, there is no certainty that our discoveries will result in product candidates that satisfy market requirements. Except in our castor oil activity, none of our discoveries and product candidates has completed the development process and become commercially available so far, and may never reach commercialization. If our discoveries and product candidates will not have the desired effects, we and our collaborators may not develop commercial products that are based on them, which could materially and adversely affect our results of operations and our long-term growth strategy.

Our success depends in part on our ability to identify discoveries that will improve crop performance, in our agriculture activity, obtain clinical benefits, in our human health activity, or improve industrial inputs, in our industrial applications activity. To develop these discoveries and product candidates into commercial products, we either license them to collaborators or develop them independently. Pursuant to our collaboration agreements in our agriculture activity, we are usually entitled, subject to certain conditions, to receive royalties on products that are based on, or integrate, these discoveries. In addition, certain of our agreements in our agriculture activity entitle us to upfront fees, research and development payments and milestone payments in the event that specified milestones are met. Except for Casterra’s castor varieties, none of our product candidates has completed the development process and become commercially available, and there can be no guarantee that any of our current or future product candidates will ever reach commercialization. Therefore, we currently do not earn royalties, nor do we have significant sales revenues from the sale of products based on our discoveries and product candidates. Nevertheless, our long-term growth strategy is based in large part on the expectation that such royalties and revenues from product sales will comprise a significant portion of our revenues in the future. If we or our collaborators never commercialize products based on our discoveries, we will not realize revenues from royalties and may not earn a profit on our discoveries, which could materially and adversely affect our results of operations, financial condition and our long-term growth strategy and could cause us to cease operations.

The manner in which we and our collaborators develop our product candidates in our various fields of activity affects the period that will pass until such products are commercialized, if ever. Product candidates based on our discoveries may never become commercialized for any of the following reasons:

Research and development in our fields of activity is expensive and prolonged and entails considerable uncertainty. We may spend many years and dedicate significant financial and other resources developing product candidates that will never be commercialized. The process of discovering, developing and commercializing ag-chemicals, ag-biologicals, seed traits, human microbiome-based therapeutics, medical cannabis products or castor varieties involves several phases and a long development period. The timelines for development of product candidates by us or by our collaborators may extend beyond our expectations for many reasons, such as:

Most of the product candidates we or our collaborators are developing are in early development stages. We have little to no certainty as to which and when, if any, any of these product candidates will eventually reach commercialization. Because of the long product development cycle and the complexities and uncertainties associated with research in our fields of activity, there is significant uncertainty as to whether we will ever generate significant revenues or royalties, if any, from the product candidates that we or our collaborators are developing. For more information on the product development cycle of the product candidates we develop and a description of the phases of development, see the ‘Product Development Cycle’ paragraph under the description of each of our activity divisions and subsidiaries in “Item 4. Information on the Company—B. Business Overview”.

The agriculture markets are highly consolidated and dominated by a relatively small number of large companies. In our agriculture operations, we are currently undertaking collaborations with several of these companies to develop improved seed traits, ag-chemical and ag-biological product candidates. Due to the small number of major companies in this industry, there are limited opportunities for us to grow our business with new collaborators. In addition, if we fail to develop or maintain our relationships with any of our current collaborators, we could not only lose our opportunity to work with that collaborator, but we could also suffer a reputational risk that could impact our relationships with other collaborators in what is a relatively small industry community.

In our agriculture operations, we are currently working either with collaborators or on independent projects to research and develop our different seed trait, ag-chemical and ag-biological product candidates. While we seek to expand our portfolio of product candidates in the future, the research and development required to discover and develop new product candidates is costly, time-intensive and requires significant infrastructure resources. If we are unable to enter into new collaborations, or if we do not have the resources to develop the capabilities or resources necessary to discover and develop such product candidates independently, we may not be able to expand our portfolio of these product candidates, which could have a material adverse effect on our business prospects.

The research and development expenditures of our existing and potential collaborators in the agriculture, human health, and industrial applications markets we operate in may be reduced for reasons beyond our control. For example, a global crisis or economic recession, a decrease in the prices of agricultural commodities, or the consolidation trend in the seeds and ag-chemicals industries may result in decreased research and development expenditures in the markets relevant for our seed trait, ag-biological and ag-chemical product candidates. Such developments may, in turn, adversely impact our ability to maintain or extend our existing collaborations or enter into new collaborations on favorable financial terms. For example, we may not be able to enter into new collaborations under which our collaborators cover our expenses through research and development payments.

We are obligated under our collaboration agreements to perform research activities over a particular period of time. If we fail to perform our obligations under these agreements, in some cases our collaborators may terminate our agreements with them and in other cases our collaborators’ obligations may be reduced and, as a result, our anticipated revenues may decrease. In addition, any of our collaborators may fail to perform their obligations, which may hinder development and commercialization of products containing the product candidates we develop and materially and adversely affect our future results of operations. Furthermore, the various payments we receive from our collaborators are currently our primary source of revenues. If our collaborators do not make these payments, either due to financial hardship, disagreement under the relevant collaboration agreement or for any other reason, our results of operations and business could be materially and adversely affected. If disagreements with a collaborator arise, any dispute with such collaborator may negatively affect our relationship with one or more of our other collaborators and may hinder our ability to enter into future collaboration agreements, each of which could negatively impact our business and results of operations.

We currently face significant competition in the markets in which we operate. The agriculture, human health and industrial applications markets in which we operate are intensely competitive and rapidly changing. Many companies engage in research and development of products in such markets, and speed in getting a new product candidate to market can be a significant competitive advantage. In most segments of our operations, the number of products available to the consumer is steadily increasing as new products are introduced. We may be unable to compete successfully against our current and future competitors, which may result in lower prices and margins and the inability to achieve market acceptance for products containing our discoveries. In addition, many of our competitors have substantially greater financial, marketing, sales, distribution and technical resources than us and some of our collaborators are significantly larger than us and have more experience in research and development, regulatory matters, manufacturing and marketing. We anticipate increased competition in the future as new companies enter these markets and new technologies become available. Our technologies may be rendered obsolete or uneconomical by technological advances or entirely different approaches developed by one or more of our competitors or collaborators, which will prevent or limit our ability to receive any associated research and development payments or generate revenues from the commercialization of our product candidates.

Our majority-owned subsidiary, Lavie Bio, is developing ag-biological product candidates, currently focused mainly on microbial-based bio-stimulants and bio-pesticides, through a novel approach, focused on plant-microbiome relationship. In certain of its ag-biological product programs, Lavie Bio funds its early stages of research and development efforts in order to potentially capture more value, while in others it funds the entire development program towards launch of a commercial product. Lavie Bio’s efforts to develop novel ag-biological product candidates may fail for a variety of reasons, including:

If Lavie Bio’s efforts to develop and commercialize ag-biological product candidates are unsuccessful, our results of operations could be negatively impacted.

Our subsidiary, AgPlenus, is currently developing solutions for crop protection through chemistry, or ag-chemistry. AgPlenus is developing these product candidates through a novel approach, focused on biologically significant proteins called “targets”. AgPlenus’ efforts to develop novel ag-chemical product candidates may fail for a variety of reasons, including:

If AgPlenus’ efforts to develop ag-chemical product candidates are unsuccessful, our results of operations could be negatively impacted.

We are developing seed-trait and insect control product candidates in our internal Ag-Seeds division. Our efforts to develop novel product candidates may fail for a variety of reasons, including:

Furthermore, even if we are able to discover and begin to develop effective product candidates, we may not be successful if we are unable to find collaborators for further development and commercialization of the product candidates. If our efforts to develop seed trait product candidates are unsuccessful, our results of operations could be negatively impacted.

Our subsidiary, Biomica, is developing microbiome-based therapeutic product candidates. Biomica’s efforts to develop its product candidates and develop marketable products may be unsuccessful for a variety of reasons, including the following:

If Biomica’s efforts to develop microbiome-based human therapeutics are unsuccessful, our results of operations could be negatively impacted.

Canonic, our subsidiary, is developing medical cannabis products. Canonic’s efforts to develop and commercialize medical cannabis products may fail for a variety of reasons, including:

If Canonic’s efforts to develop and commercialize medical cannabis products are unsuccessful, our results of operations could be negatively impacted.

Our subsidiary, Casterra, is developing improved, high-yield castor bean seeds for use as a source of non-edible feedstock for industrial uses of castor oil. The supply chain in the market of castor oil for industrial uses is not well established and is evolving. In order for Casterra’s castor bean seeds to be an attractive feedstock for oil for industrial uses, it will need to demonstrate on a commercial scale that its castor beans can reliably be used as a cost-efficient feedstock for castor oil production. Casterra’s efforts to develop castor been seeds for industrial uses may fail for a variety of reasons, including:

Casterra is operating in a new industry, with limited understanding of the dynamics involved in producing and selling castor seeds. Casterra has made initial commercial sales of castor seeds; however, we are unable to foresee as to when significant sales will commence. If Casterra is unable to adequately address any of these challenges, we may not find a market for our castor bean seeds and our results of operations could be materially and adversely affected.

Our majority-owned subsidiary, Lavie Bio, intends to commercialize part of its future ag-biological product portfolio through distribution and retail channels. Lavie Bio has little experience in establishing such channels and may be unsuccessful in doing so. In addition, Lavie Bio will be dependent on its distributers in introducing its products to the market. If Lavie Bio or its distributors are unsuccessful in their efforts to penetrate the market, our revenues and financial results will be adversely affected.

If and when our collaborators launch commercial products containing our licensed discoveries, we will rely on our collaborators to report to us the sales they earn from these products and to accurately calculate the royalties we are entitled to, a process that will involve complicated calculations. Although we seek to address these concerns in our collaboration agreements, such provisions may not be effective. Additionally, we may not be able to achieve our long-term goal of generating revenues from royalties, and in the coming years our revenues will be entirely dependent on fees we earn for our research and development services and milestone payments from our collaborators.

In addition, our ability to generate royalty payments from our collaboration agreements depends on our ability to clearly delineate our intellectual property rights under those agreements. We often license patented discoveries and product candidates to our collaborators, who use them to develop and commercialize products. However, a collaborator may use our intellectual property without our permission, dispute our ownership of certain intellectual property rights or argue that our intellectual property does not cover their marketed product. If a dispute arises, it may result in costly litigation, and our collaborator may refuse to pay us royalty payments while the dispute is ongoing. Furthermore, regardless of any resort to legal action, a dispute with a collaborator over intellectual property rights may damage our relationship with that collaborator, and may also harm our reputation in the industry.

The vast majority of our workforce is involved in research and development. Our business is therefore dependent on our ability to recruit and maintain a highly skilled and educated workforce with expertise in a range of disciplines, including biology, chemistry, plant genetics, agronomics, entomology, mathematics, computer science and other subjects relevant to our operations. The number of qualified and highly educated personnel in the fields upon which our business focuses in Israel, where most of our operations are located, is limited and competition for the services of such persons is intense. Although we have employment agreements with all of our employees, most of these agreements may be terminated upon short notice. The failure to hire and retain skilled and highly educated personnel could limit our growth and hinder our research and development efforts.

We develop certain discoveries and product candidates independent of our collaborators, with a goal of making such discoveries available to collaborators in later phases or developing and commercializing end products. While we believe this will allow us to obtain more favorable license or commercialization terms with respect to such discoveries, product candidates and products, the up-front cost to us of developing programs without a collaborator (and therefore without external funding for the research and development expenditures we incur) in these early phases involves higher risks, since we need to fund the research and development of such programs ourselves. If we are unsuccessful in discovering promising product candidates after having invested significant funds, or if we are unable to find collaborators who are interested in such results and willing to fund subsequent phases of development and commercialization, such failures could have a material and adverse effect on our business, financial condition and results of operations. Regardless of the outcome of our research and development efforts, traditional financing sources such as bank financing or public debt or equity financing, if available to us, could carry with them certain drawbacks, such as imposition of covenants restricting our ability to operate, or substantial dilution to our existing shareholders.

Our business is generally subject to two types of regulations: regulations that apply to how we operate and regulations that apply to products containing our discoveries, product candidates and products. We may fail to comply with all currently applicable regulations, and we may become subject to new or revised regulations or approvals in the future. Furthermore, any violation of these regulations could expose us to civil and criminal penalties.

The relevant regulatory regimes may be particularly onerous; for example, the U.S. federal government’s regulation of biotechnology is divided among the United States Environmental Protection Agency, which regulates activity related to the invention of plant pesticides and herbicides, the United States Department of Agriculture, which regulates the import, field testing and interstate movement of specific technologies that may be used in the creation of transgenic plants, and the United States Food and Drug Administration, or the FDA, which regulates foods derived from new plant varieties. If we or our collaborators are unable to obtain the requisite regulatory approvals or there is a delay in obtaining such approvals as a result of negative market perception or heightened regulatory standards, such product candidates will not be commercialized, which would negatively impact our business and results of operations.

Although Canonic, our subsidiary that develops medical cannabis products currently has not yet launched its first product, our involvement in cannabis-related activity may expose us to legal and reputational risks. Such risks include:

Any of the foregoing factors could adversely affect our business and results of operations

D&O liability insurance is intended to cover the liability of the individuals serving as our directors and management, from losses incurred as a result of such service, our liability to indemnify such individuals for such losses and to protect us from certain securities claims. During the last years, there has been a significant increase in the cost of D&O insurance for smaller, dual-listed public companies such as our Company. These increases have been tied to perceived heightened levels of risk for D&O insurers. Insurers have been increasing their level of compensation (in the form of premiums), which they believe has not been commensurate with the risk being taken by them. In parallel, there has been an increase in the amounts of the deductibles payable by public companies in situations in which an insurable event occurs. In addition, several insurers are restricted from writing policies for companies active in the area of cannabis, which restricts the number of insurers that can provide us with a D&O liability insurance and limits our ability to negotiate the terms of such insurance. If these trends continue, it will increase our operational expenses and have a negative effect on our financial results.

Our computational technologies rely on our IT system to collect and analyze the biological and chemical data we collect and discover. We store significant amounts of data, and to date, have compiled several petabytes of data. There can be no assurance that our back-up storage arrangements will be effective if it becomes necessary to rely on them. Furthermore, 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. Disruption or failure of our IT system due to technical reasons, cyberattacks, natural disasters or other unanticipated catastrophic events, including power interruptions, storms, fires, floods, earthquakes, terrorist attacks and wars could significantly impair our internal development efforts and materially and adversely affect our collaborations, our business and our results of operations.

As we continue to develop our computational technologies and expand our datasets, we may need to update our IT system and storage capabilities. However, if our existing or future IT system does not function properly, or if the IT system proves incompatible with our new technologies, we could experience interruptions in data transmissions and slow response times, preventing us from completing routine research and business activities, which could adversely affect our business and results of operations.

The industries we are engaged in are subject to various factors that make our operations relatively unpredictable from period to period. For example, the testing of our product candidates may be adversely affected by circumstances both caused by us and those that are beyond our control. Factors caused by us include any failure by us or our collaborators to follow proper agronomic practice or suggested protocols for conducting our experiments, and failure to successfully complete such experiments. Factors beyond our control include weather and climatic variations, such as droughts or heat stress, or other factors we are unable to identify. For example, if there was prolonged or permanent disruption to the electricity, climate control or water supply operating systems in our greenhouses or laboratories, the plants and pests on which we test our discoveries and product candidates and the samples we store in freezers, both of which are essential to our research and development activities, would be severely damaged or destroyed, adversely affecting our research and development activities and thereby our business and results of operations. We have experienced these kind of failures in the past for unknown reasons, causing delays in our achievement of milestones and delivery of results, and necessitating that we re-start the trials. Any test failure we may experience is not covered by our insurance policy, and therefore could result in increased cost of the trials and development of our product candidates, which may negatively impact our business and results of operations.

The COVID-19 pandemic, and any other pandemic, epidemic or outbreak of an infectious disease that occurs in the United States, Israel or elsewhere, may adversely affect our business and, if prolonged, could adversely impact our operating results and  financial condition in a significant manner. In December 2019, a novel strain of coronavirus, COVID-19, was identified in Wuhan, China. The COVID-19 pandemic has created macro-economic uncertainty and disruption in the business and financial markets. Many countries around the world, including the United States and Israel, have been taking measures designated to limit the continued spread of the COVID-19 pandemic, including closing workplaces, restricting travel, prohibiting assembling, closing international borders and quarantining populated areas. Employers (including us) are also required to prepare and increase as much as possible the capacity and arrangement for employees to work remotely. We are still assessing and will continue to assess the effect on our business, from the spread of COVID-19 and the actions implemented by the governments of the State of Israel, the United States and elsewhere across the globe.

As the implementation of the above-mentioned measures extends, and as additional measures may be required in the event that the measures already taken prove to be insufficient or ineffective, we may face new and/or increasing concerns that may affect our ability to conduct our business effectively, including, but not limited to, adverse effect on employees’ health, a slowdown and stoppage of work and other activities which are essential and critical for maintaining on-going business activities. Even if the measures taken, or that will be taken, prove themselves to be useful, we, our suppliers and other business partners may recover at different rates, which may also affect our business activities.

The COVID-19 outbreak and mitigation measures also have had and may continue to have an adverse impact on global economic conditions which could have an adverse effect on our business and financial condition, including impairing our ability to raise capital if and when needed. The extent to which COVID-19 impacts our business will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of COVID-19 and the actions to contain COVID-19 or treat its impact, among others.

A certain part of our seed traits activity includes research and development of genetically modified, or GM, seeds. Foods made from such seeds are not accepted by many consumers and in certain countries production of certain GM crops is effectively prohibited, including throughout the European Union, due to concerns over such products’ effects on food safety and the environment. The high public profile of biotechnology agriculture, especially in food production, and lack of consumer acceptance of products to which we have devoted substantial resources could negatively affect our public image and results of operations. For example, the prohibition on the production of certain GM crops in select countries and the current resistance from consumer groups, particularly in Europe, to GM crops not only limits our access to such markets but also has the potential to spread to and influence the acceptance of products developed through biotechnology in other regions of the world and may also influence regulators in other countries to limit or ban production of GM crops, which could limit the commercial opportunities to exploit biotechnology.

GM crops are grown principally in the United States, Brazil and Argentina where there are fewer restrictions on the production of GM crops. If these or other countries where GM crops are grown enact laws or regulations that ban the production of such crops or make regulations more stringent, we could experience a longer product development cycle for our product candidates and may even have to abandon projects related to certain crops or geographies, both of which would negatively affect our business and results of operations and could cause us to have to cease operations. Furthermore, any changes in such laws and regulations or consumer acceptance of GM crops could negatively impact our collaborators, who in turn might terminate or reduce the scope of their collaborations with us or seek to alter the financial terms of our agreements with them.

We have a history of losses, and incurred operating losses of $24.8 million, $21.2 million and $20.0 million for the years ended December 31, 2020, 2019 and 2018, respectively. There is no assurance that our efforts in developing our product candidates will result in commercially successful products. We expect to continue to incur losses in future periods, until we begin earning revenues or royalties on the product candidates we are currently developing and any new product candidates we develop in the future, if at all. Because we will incur significant costs and expenses for these efforts before we obtain any incremental revenues from them, our losses in future periods could be significant. In addition, we may find that these efforts are more expensive than we anticipate or that they do not result in profitability in the time period we anticipate, which would further increase our losses. For example, if governments across the globe continue to implement actions that limit movement and activity, as a result of the COVID-19 pandemic or otherwise, we could face increased costs in order to meet our product development timeline. If we are unable to adequately control the costs associated with operating our business, including our costs of development and sales, we may deplete our cash resources and may be unable to continue to finance our business from our existing cash resources, and, our business, financial condition, operating results and prospects will suffer. For more information concerning our cash resources, please see “Liquidity and Capital Resources” in Item 5.B below.

Most of the licenses we grant our collaborators to our product candidates or to use specific discoveries we have made are exclusive in the area of the license. That means that once these discoveries are licensed to a collaborator, we are generally prohibited from licensing those discoveries to any third party for use in such area. The limitations imposed by these exclusive licenses could prevent us from expanding our business and increasing our exposure to new licensees, both of which could adversely affect our business and results of operations.

Once products integrating our discoveries and product candidates reach commercialization, if ever, product liability claims will be a commercial risk for our business, particularly as some of the products that we develop can be harmful to humans or the environment. Courts have levied substantial damages in the United States and elsewhere against a number of companies in the agriculture and human health industries in past years based upon claims for injuries allegedly caused by the use of their products. Product liability claims against us or our collaborators selling products that contain our product candidates or allegations of product liability relating to products containing our discoveries could damage our reputation, harm our relationships with our collaborators, and materially and adversely affect our business, results of operations, financial condition and prospects. We currently do not have product liability insurance coverage. Any such insurance we may obtain in the future may be expensive and may not cover our potential liability in full. Furthermore, while our collaboration agreements typically require that our collaborators indemnify us for the cost of product liability claims brought against us, such indemnification provisions may not always be enforced, and we may receive no indemnification if our own misconduct led to the claims.

Our office spaces, labs, facilities, and farm are all situated on properties that we lease pursuant to lease agreements, in Israel and in the U.S. Once a lease agreement ends, we may not be able to renew it on favorable terms, or not at all, which may require us to increase our lease payments or take a new lease in another property, adversely affecting our business and results of operations. In addition, a long-term lease may mean no or limited possibility to terminate the lease at will before the completion of the lease period, which may lead to continued holding of an un-needed space or entry into a sub-lease, which may adversely affect our results of operations. For more information regarding our facilities, please see “Item 4. Information on the Company—D. Property, Plants and Equipment.”

Lavie Bio’s research and development facility in St. Louis, Missouri may expose us to some of such operational risks, including:

Failure to manage the market and operational risks associated with international operations effectively could limit the future growth of our business and adversely affect our operating results.

Our operations involve various health and environmental risks. As part of our seed traits operations, we assist in the development of GM crops by inserting new genes into the genomes of certain plants. Though we introduce these genes in order to improve plant traits, we cannot always predict the effect that these genes may have on the plant. In some cases, the genes may render the plant poisonous or toxic, or they may cause the plant to develop other dangerous characteristics that could harm the plant’s surrounding environment. Furthermore, while we comply with relevant environmental laws and regulations, there is a risk that, when testing genetically modified plants, the seeds of these plants may escape the greenhouse or field in which they are being tested and contaminate nearby fields. Poisonous or toxic plants may therefore be inadvertently introduced into the wild, or possibly enter the food production system, harming the people and animals who come in contact with them.

As part of Lavie Bio’s operations, it develops novel product candidates based on microbes in order to improve plants traits. Although microbes exist naturally in the environment, we cannot always predict the effect that microbes have on the plant and its environment. There may be cases where the microbes render the plant poisonous or toxic, or they may cause the plant to develop other dangerous characteristics that could harm the plant’s surrounding environment.

Similar risks are relevant to AgPlenus’ ag-chemicals operations, Canonic’s cannabis operations and Casterra’s castor bean operations.

Laws and regulatory standards and procedures that impact our business are continuously changing. Responding to these changes and meeting existing and new requirements may be costly and burdensome. Changes in laws and regulations may occur that could:

Any of these events could have a material adverse effect on our business, results of operations and financial condition. For example, legislators and regulators have increased their focus on plant biotechnology in recent years, with particular attention paid to GM crops as well as on ag-chemicals.

While none of our product candidates are currently available for sale, other than Casterra’s castor seeds, our future growth relies on our ability and the ability of our collaborators to commercialize and market our product candidates, and any restrictions on such activities could materially and adversely impact our business and results of operations. Any changes in regulations in countries where our product candidates are used could result in our collaborators being unable or unwilling to develop, commercialize or sell products that incorporate our discoveries. In addition, we rely on patents and other forms of intellectual property protection. Legislation and jurisprudence on patent protection in the key target markets where we seek patent protection, such as the United States and the European Union, is evolving and changes in laws could affect our ability to obtain or maintain patent protection for our product candidates. Any changes to these existing laws and regulations may materially increase our costs of operation, decrease our operating revenues and disrupt our business. For more information please see ‘Government Regulation of our Operations’ and ‘Government Regulation of Product Candidates’ paragraphs under the description of each of our activity divisions and subsidiaries under “Item 4. Information on the Company—B. Business Overview.”

Our commercial success depends in part on our ability to obtain and maintain patent protection and trade secret protection for our proprietary computational and experimental technologies, our discoveries and their uses, as well as our ability to operate without infringing upon the proprietary rights of others. If we do not adequately protect our intellectual property, competitors may be able to use our technologies and erode or negate any competitive advantage we may have, which could harm our business and ability to achieve profitability.

While we expect our patent applications to receive approval, we cannot be certain that we will obtain such results. Despite our efforts to protect our proprietary rights, unauthorized third parties may attempt to use, copy or otherwise obtain and market or distribute our intellectual property rights or technology or otherwise develop products or solutions with the same functionality as our solutions. In addition, the laws of some foreign countries provide less protection for proprietary rights than U.S. law. We face the occasional risk, moreover, that third parties may assert copyright, trademark and other intellectual property rights against us. Such claims may result in direct or indirect liability as we have contractually agreed to indemnify certain parties for any damages suffered as a result of infringement by us of any third-party intellectual property rights.

We treat our proprietary computational and experimental technologies, including unpatented know-how and other proprietary information, as trade secrets. We seek to protect these trade secrets, in part, by entering into non-disclosure and confidentiality agreements with any third parties who have access to them, such as our consultants, independent contractors, advisors, corporate collaborators and outside scientific collaborators. We also enter into confidentiality and invention or patent assignment agreements with employees and certain consultants. Any party with whom we have executed such an agreement may breach that agreement and disclose our proprietary information, 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 the outcome is unpredictable. 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 it communicates that technology or information, from using that technology or information to compete with us. If any of our trade secrets were to be disclosed to or independently developed by a competitor, or if we otherwise lose protection for our trade secrets or proprietary know-how, the value of this information may be greatly reduced and our business and competitive position could be harmed.

Filing, prosecuting, maintaining and defending patents on product candidates 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. Consequently, we are unable to prevent third parties from using our inventions in all countries outside the United States, or from selling or importing products made using our inventions in and into the jurisdictions in which we do not have patent protection. Competitors may use our technologies in jurisdictions where we have not obtained patent protection to develop their own products, and we may be unable to prevent such 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 product candidates and our patents and other intellectual property rights may not be effective or sufficient to prevent them from competing in those jurisdictions. Moreover, farmers 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. For example, the practice by some farmers of saving seeds from non-hybrid crops (such as soybeans, canola and cotton) containing biotechnological traits may prevent us from realizing the full value of our intellectual property in countries outside of the United States.

Many companies have encountered significant problems in protecting and defending intellectual property rights in foreign jurisdictions, including China, where we have filed patent applications. 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 and result in substantial risks to us. 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 around the world may be inadequate to obtain a significant commercial advantage from the intellectual property that we develop or license from third parties.

If we or one of our collaborators are sued for infringing the intellectual property rights of a third party, such litigation could be costly and time consuming and could prevent us or our collaborators from developing or commercializing our product candidates.

Our ability to generate significant revenues from our product candidates depends on our and our collaborators’ ability to develop, market and sell our product candidates and utilize our proprietary technology without infringing the intellectual property and other rights of any third parties. In the United States and abroad there are numerous third party patents and patent applications that may be applied toward our proprietary technology, business processes or product candidates, some of which may be construed as containing claims that cover the subject matter of our product candidates or intellectual property. Because of the rapid pace of technological change, the confidentiality of patent applications in some jurisdictions, and the fact that patent applications can take many years to issue, there may be currently pending applications that are unknown to us that may later result in issued patents upon which our product candidates or proprietary technologies infringe. Similarly, there may be issued patents relevant to our product candidates of which we are not aware. These patents could reduce the value of the product candidates we develop or, to the extent they cover key technologies on which we have unknowingly relied, require that we seek to obtain licenses or cease using the technology, no matter how valuable to our business. We may not be able to obtain such a license on commercially reasonable terms. There is a substantial amount of litigation involving patent and other intellectual property rights in the biotechnology industry generally. If any third party patent or patent application covers our intellectual property or proprietary rights and we are not able to obtain a license to it, we and our collaborators may be prevented from commercializing products containing our discoveries.

As the biotechnology industry continues to develop, we may become party to, or threatened with, litigation or other adverse proceedings regarding intellectual property or proprietary rights in our technology, processes or product candidates. Third parties may assert claims based on existing or future intellectual property rights and the outcome of any proceedings is subject to uncertainties that cannot be adequately quantified in advance. Any litigation proceedings could be costly and time consuming and negative outcomes could result in liability for monetary damages, including treble damages and attorneys’ fees if we are found to have willfully infringed a patent. There is also no guarantee that we would be able to obtain a license under such infringed intellectual property on commercially reasonable terms or at all. A finding of infringement could prevent us or our collaborators from developing, marketing or selling a product candidate or force us to cease some or all of our business operations. Even if we are successful in these proceedings, we may incur substantial costs and the time and attention of our management and scientific personnel may be diverted as a result of these proceedings, which could have a material adverse effect on us. Claims that we have misappropriated the confidential information or trade secrets of third parties could similarly have a negative impact on our business.

A significant portion of our intellectual property has been developed by our employees in the course of their employment for 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 decisions of 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 behavior like any other contract. 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 being a depriving provision in a standard contract. All of our employees execute invention assignment agreements upon commencement of employment, in which they assign their rights to potential inventions and acknowledge that they will not be entitled to additional compensation or royalties from commercialization of inventions. 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.

As is the case with other biotechnology companies, our success is heavily dependent on intellectual property, particularly patents. Obtaining and enforcing biotechnology patents involves technological and legal complexity, and is costly, time consuming, and inherently uncertain. In addition, the U.S. Supreme Court has ruled on several patent cases, either narrowing the scope of patent protection available in certain circumstances or weakening the rights 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. Depending on decisions by the U.S. Congress, the federal courts, and the U.S. Patent and Trademark Office, the laws and regulations governing patents could change 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.

A substantial portion of our technologies and intellectual property is protected by trade secret laws. We rely on a combination of patent and other intellectual property laws as well as our employment agreements with our employees and other agreements with our collaborators and third parties to protect and otherwise seek to control access to, and distribution of, our proprietary information. These measures may not prevent disclosure, infringement or misappropriation of our confidential information. Our confidentiality, nondisclosure and assignment agreements or covenants may be breached, and we may not have adequate remedies for such a breach that would effectively prevent the further dissemination of our confidential information. We have limited control over the protection of trade secrets used by our collaborators and could lose future trade secret protection if any unauthorized disclosure of such information occurs. In addition, others may independently discover our trade secrets and proprietary information, and in such cases we could not assert any trade secret rights against such parties. Laws regarding trade secret rights in certain markets where we operate may afford little or no protection of our trade secrets. Failure to obtain or maintain trade secret protection could adversely affect our business, sales and competitive position.

Our employment agreements with key employees, which include executive officers, contain non-compete provisions. These provisions prohibit our key employees, if they cease working for us, from competing directly with us or working for our competitors for one year. Under applicable U.S. and Israeli laws, we may be unable to enforce these provisions. If we cannot enforce the non-compete provisions with our key employees, we may be unable to prevent our competitors from benefiting from the expertise of such employees. Even if these provisions are enforceable, they may not adequately protect our interests. The defection of one or more of our employees to a competitor could materially adversely affect our business, results of operations and ability to capitalize on our proprietary information.

We are incorporated under Israeli law and our principal offices and research and development facilities are located in Israel. Accordingly, political, economic and military conditions in Israel directly affect our business. Since the State of Israel was established in 1948, a number of armed conflicts have occurred between Israel and its Arab neighbors. In recent years there has been an increase in unrest and terrorist activity, and several times since 2005 (when Israel withdrew from the Gaza Strip) conflicts arose due to Hamas’ rocket attacks against Israeli civilian targets, during which Israel responded to rocket attacks by engaging in an armed conflict with Hamas in the Gaza Strip. Our principal place of business is located in Rehovot, Israel, which is approximately 30 miles from the nearest point of the border with the Gaza Strip. There can be no assurance that attacks launched from the Gaza Strip will not reach our facilities, or that hostilities will not otherwise cause a significant disruption to our operations, such as preventing our employees from reaching our facilities and limiting our ability to monitor and otherwise conduct the crop and other experiments we conduct at the facilities.

Several countries still restrict doing business with Israel and Israeli companies, and additional countries may impose restrictions on doing business with Israel and Israeli companies if hostilities in Israel or political instability in the region continues or increases. These restrictions may limit materially our ability to sell our product candidates to companies in these countries. Any hostilities involving Israel or the interruption or curtailment of trade between Israel and its present trading partners, or significant downturn in the economic or financial condition of Israel, could adversely affect our operations and research and development, cause our revenues to decrease and adversely affect the share price of publicly traded companies having operations in Israel, such as ours. Further, the political and security situation in Israel may result in parties with whom we have agreements involving performance in Israel claiming that they are not obligated to perform their commitments under those agreements pursuant to force majeure provisions in such agreements. In addition, there have been increased efforts by activists to cause companies and consumers to boycott Israeli goods for political reasons. Such actions, particularly if they become more widespread, may adversely impact our ability to conduct business.

Furthermore, our business insurance does not cover losses that may occur as a result of events associated with the security situation in the Middle East. Although the Israeli government currently covers the reinstatement value of direct damages that are caused by terrorist attacks or acts of war, we cannot assure that this government coverage will be maintained. Any losses or damages incurred by us could have a material adverse effect on our business and financial condition.

On Israel’s domestic front there is currently a level of unprecedented political instability. The Israeli government has been in a transitionary phase since December of 2018, when the Israeli Parliament, or the Knesset, first resolved to dissolve itself and call for new general elections. In 2019, Israel held general elections twice – in April and September – a third general election was held in March of 2020, and a fourth general election was held in March of 2021. The Knesset, for reasons related to this extended political transition, has failed to pass a budget for the year 2021, and certain government ministries, which may be critical to the operation of our business, are without necessary resources and may not receive sufficient funding moving forward. Given the uncertainty with respect to when the current political stalemate will be resolved, our ability to conduct our business effectively may be adversely affected.

Many Israeli citizens are obligated to perform several days, and in some cases more, of annual military reserve duty each year until they reach the age of 40 (or older, for reservists who are military officers or who hold certain military positions) and, in the event of a military conflict, may be called to active duty. In response to increases in terrorist activity, there have been periods of significant call-ups of military reservists. It is possible that there will be military reserve duty call-ups in the future. Our operations could be disrupted by such call-ups, which may include the call-up of our key employees and members of our management. Such disruption could materially adversely affect our business, financial condition and results of operations.

The Company’s reporting currency is U.S. dollars. In view that a substantial part of our expenses is in NIS, any appreciation of the NIS relative to the U.S. dollar would adversely impact our financial results. If we enter into hedging contracts in the future, we may be unsuccessful in protecting against currency exchange rate fluctuations. See “Item 11. Quantitative and Qualitative Disclosure About Market Risk—Foreign Currency Risk.”

From time to time we hold corporate bonds and government treasury notes denominated in New Israeli Shekels and in U.S. dollars. These investments expose us to the risk of interest rate fluctuations. An increase in Israeli or in U.S. interest rates could cause the fair value of these investments to decrease.

 Our research and development operations have been partly financed through certain governmental grants, which impose certain restrictions on the transfer outside of Israel of the underlying know-how and the manufacturing or manufacturing rights of the underlying products and technologies. As of December 31, 2020, we had received from Israeli National Authority for Technological Innovation, or the IIA, approximately $7.8 million (including accrued interest). We may not receive the required approvals should we wish to transfer the know-how, technology or manufacturing rights related to such government grants outside of Israel in the future or, if we receive such required approvals, they may be subject to certain conditions and payment obligations. See “Item 5. Operating and Financial Review and Prospects—B. Liquidity and Capital Resources—Government Grants.”

We are incorporated in Israel. The majority of our directors and executive officers reside outside the United States and the majority of our assets are located outside the United States. Therefore, it may be difficult for an investor, or any other person or entity, to enforce a U.S. court judgment based upon the civil liability provisions of the U.S. federal securities laws against us or any of these persons in a U.S. or Israeli court, or to effect service of process upon these persons in the United States. Additionally, it may be difficult for an investor, or any other person or entity, to assert U.S. securities law claims in original actions instituted in Israel. Israeli courts may refuse to hear a claim based on a violation of U.S. securities laws on the grounds that Israel is not the most appropriate forum in which to bring such a claim. Even if an Israeli court agrees to hear a claim, it may determine that Israeli law and not U.S. law is applicable to the claim. If U.S. law is found to be applicable, the content of applicable U.S. law must be proved as a fact, 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 addressing the matters described above.

Since we are incorporated under Israeli law, the rights and responsibilities of our shareholders are governed by Israeli law and by our articles of association. These rights and responsibilities differ in some respects from the rights and responsibilities of shareholders of 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 the general meeting of shareholders on certain matters, such as an amendment to the company’s articles of association, an increase of the company’s authorized share capital, a merger of the company and approval of related party transactions that require shareholder approval. A shareholder also has a general duty to refrain from discriminating against other shareholders. In addition, a controlling shareholder or a shareholder who knows that it possesses the power to determine the outcome of a shareholders’ vote or to appoint or prevent the appointment of an office holder in the company has a duty to act in fairness towards the company. However, Israeli law does not define the substance of this duty of fairness. See “Item 6. Directors, Senior Management and Employees—C. Board Practices—Shareholder Duties.” Since Israeli corporate law underwent extensive revisions approximately 18 years ago, the parameters and implications of the provisions that govern shareholder behavior have not been clearly determined. These provisions may be interpreted to impose additional obligations and liabilities on our shareholders that are not typically imposed on shareholders of U.S. corporations.

Certain provisions of Israeli law and our articles of association could have the effect of delaying or preventing a change in control and may make it more difficult for a third party to acquire us or for our shareholders to elect different individuals to our board of directors, even if doing so would be beneficial to our shareholders, and may limit the price that investors may be willing to pay in the future for our ordinary shares. For example, Israeli corporate law regulates mergers and requires that a tender offer be effected when certain thresholds of percentage ownership of voting power in a company are exceeded (subject to certain conditions). Further, Israeli tax considerations may make potential transactions undesirable to us or to some of our shareholders whose country of residence does not have a tax treaty with Israel granting tax relief to such shareholders from Israeli tax. With respect to mergers, Israeli tax law allows for tax deferral in certain circumstances but makes the deferral contingent on the fulfillment of numerous conditions, including a holding period of two years from the date of the transaction during which certain sales and dispositions of shares of the participating companies are restricted. Moreover, with respect to certain share swap transactions, the tax deferral is limited in time, and when such time expires, the tax becomes payable even if no actual disposition of the shares has occurred. See Exhibit 2.1 to this annual report.

Furthermore, under the Encouragement of Research, Development and Technological Innovation in the Industry Law, 5744-1984 (formerly known as the Law for the Encouragement of Research and Development in Industry 5744-1984), and the regulations, guidelines, rules, procedures and benefit tracks thereunder, collectively, the Innovation Law, to which we are subject due to our receipt of grants from the IIA, a recipient of IIA grants such as our company must report to the IIA regarding any change in the holding of any means of control of our company which transforms any non-Israeli citizen or resident into an “interested party”, as defined in the Israeli Securities Law 5728-1968, and that such non-Israeli citizen or resident shall execute an undertaking in favor of IIA, in a form prescribed by IIA.

The market price of our ordinary shares could be highly volatile and may fluctuate substantially as a result of many factors, including:

Although our ordinary shares are listed on Nasdaq, an active trading market on Nasdaq for our ordinary shares may not be sustained. If an active market for our ordinary shares is not sustained, it may be difficult to sell ordinary shares in the U.S.

In addition, the stock markets have recently experienced extreme price and volume fluctuations, including as a result of the COVID-19 pandemic. Broad market and industry factors may materially harm the market price of our ordinary shares, regardless of our operating performance. In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been instituted against that company. If we were involved in any similar litigation, we could incur substantial costs and our management’s attention and resources could be diverted.

Our ordinary shares have been traded on the TASE since 2007, and are currently listed on Nasdaq. Trading in our ordinary shares on these markets will take place in different currencies (U.S. dollars on Nasdaq and NIS on the TASE), and at different times (resulting from different time zones, trading days and public holidays in the United States and Israel). The trading prices of our ordinary shares on these two markets may differ due to these and other factors. Any decrease in the price of our ordinary shares on the TASE could cause a decrease in the trading price of our ordinary shares on Nasdaq or vice versa.

On July 28, 2013, our shareholders approved our plan to transition solely to U.S. reporting standards under the rules and regulations of the SEC. However, should this change in the future, we may become subject to parallel reporting obligations in Israel and the United States. While similar in many respects, certain differences between Israeli and U.S. reporting schemes may impose on us disclosure obligations that are more stringent than those generally applied to foreign private issuers whose securities are listed only in the United States. In addition, a requirement to comply with the separate reporting obligations under U.S. and Israeli securities laws would require additional management attention and could burden us with additional costs.

Changing laws, regulations and standards, in the United States or Israel, relating to corporate governance and public disclosure and other matters, may be implemented in the future, which may increase our legal and financial compliance costs, make some activities more time consuming and divert management’s time and attention from revenue-generating activities to compliance activities. If our efforts to comply with new laws, regulations and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to practice, regulatory authorities may initiate legal proceedings against us and our business may be harmed. Being a publicly traded company in the United States and Israel and being subject to U.S. and Israeli rules and regulations make it more expensive for us to obtain D&O insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These factors could also make it more difficult for us to attract and retain qualified members of our board of directors, particularly to serve on our audit committee, and qualified executive officers.

As a public company whose ordinary shares are listed in the United States, we will continue to incur significant accounting, legal and other expenses, including costs associated with our reporting requirements under the Exchange Act. We also incur additional costs associated with corporate governance requirements, including requirements under Section 404 and other provisions of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, rules implemented by the SEC and the Nasdaq, and provisions of Israeli corporate and securities laws applicable to public companies. The Exchange Act requires that we file annual and certain other reports with respect to our business and financial condition. The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting. These rules and regulations could continue to increase our legal and financial compliance costs, such as the cost of hiring consultants or testing compliance processes, and make some activities more time-consuming and costly. These activities may divert management’s attention from other business concerns, which could have a material adverse effect on our business, financial condition, results of operations and cash flows.

As a foreign private issuer, we are exempt from compliance with 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 certain other reports and financial statements with the SEC as frequently or as promptly as U.S. domestic companies whose securities are registered under the Exchange Act, we are permitted to disclose limited compensation information for our executive officers on an individual basis 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 and leniencies will 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.

As a foreign private issuer whose shares are listed on the Nasdaq Global Market, we are permitted to follow certain home country corporate governance practices instead of those otherwise required under the corporate governance standards for U.S. domestic issuers listed on Nasdaq. We currently follow Israeli home country practices, rather than the requirements under the Nasdaq corporate governance rules, with regard to the (i) quorum requirement for shareholder meetings, (ii) executive sessions for independent directors and non-management directors and (iii) the requirements 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). See “Item 16G. Corporate Governance.” Furthermore, we may in the future elect to follow Israeli home country practices with regard to other matters such as the requirement to have a majority independent board of directors, have a compensation committee and have a nominating committee. Accordingly, our shareholders may not be afforded the same protection as provided under Nasdaq corporate governance rules. Following our home country governance practices as opposed to the requirements that would otherwise apply to a United States company listed on Nasdaq may provide less protection than is accorded to investors of domestic issuers. For further discussion, see “Item 16G. Corporate Governance.”

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 outside the United States. Our loss of foreign private issuer status would make U.S. regulatory 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 would also be required to follow U.S. proxy disclosure requirements, including the requirement to disclose, under U.S. law, more detailed information about the compensation of our senior executive officers on an individual basis. 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 would lose our ability to rely upon exemptions from certain corporate governance requirements on U.S. stock exchanges that are available to foreign private issuers, as described in the previous risk factor above.

If a United States person is treated as owning (directly, indirectly or constructively) at least 10% of the value or voting power of our ordinary shares, such person may be treated as a “United States shareholder” with respect to each “controlled foreign corporation” in our group (if any). If our group includes one or more U.S. subsidiaries, certain of our non-U.S. subsidiaries could be treated as controlled foreign corporations (regardless of whether we are or are not treated as a controlled foreign corporation). A United States shareholder of a controlled foreign corporation may be required to annually report and include in its U.S. taxable income its pro rata share of “Subpart F income”, “global intangible low-taxed income” and investments in U.S. property by controlled foreign corporations, whether or not we make any distributions. An individual that is a United States shareholder with respect to a controlled foreign corporation generally would not be allowed certain tax deductions or foreign tax credits that would be allowed to a United States shareholder that is a U.S. corporation. A failure to comply with these reporting obligations may subject you to significant monetary penalties and may prevent the statute of limitations with respect to your U.S. federal income tax return for the year for which reporting was due from starting. We cannot provide any assurances that we will assist investors in determining whether any of our non-U.S. subsidiaries are treated as a controlled foreign corporation or whether such investor is treated as a United States shareholder with respect to any of such controlled foreign corporations or furnish to any United States shareholders information that may be necessary to comply with the aforementioned reporting and tax paying obligations. A United States investor should consult their own advisors regarding the potential application of these rules to its investment in the ordinary shares.

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 United States federal income tax purposes. According to these rules, a publicly traded non-U.S. corporation may treat the aggregate fair market value of its assets as being equal to the sum of the aggregate value of its outstanding shares, or Market Capitalization, and the total amount of its liabilities. We intend to take the position that the excess of our Market Capitalization plus liabilities over the book value of all of our assets may generally be treated as attributable to non-passive assets. Based on the book value of our assets and liabilities and our Market Capitalization in 2020, we believe that we met the PFIC asset test described above for 2020 and, as a result, we were classified as a PFIC in 2020. Furthermore, because we currently hold, and expect to continue to hold, a substantial amount of cash and cash equivalents and other passive assets used in our business, and because our Market Capitalization is currently below the level necessary to avoid PFIC status for 2021, there is substantial risk we will be classified as a PFIC for the 2021 taxable year as well. However, because PFIC status is determined after the close of each taxable year, we will not be able to determine whether we will be a PFIC for the 2021 taxable year or for any future taxable year until after the close of such year.

U.S. shareholders who held our ordinary shares at any time in 2020 or during any other taxable year in which we are a PFIC may suffer adverse tax consequences, including having gains realized on the sale of our ordinary shares treated as ordinary income, rather than 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. Additional Information—E. Taxation—United States Federal Income Taxation”), and having interest charges apply to distributions by us and the proceeds of share sales. Certain elections may be available that would alleviate some of the adverse consequences of PFIC status and 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. See “Item 10. Additional Information—E. Taxation—United States Federal Income Taxation—Passive Foreign Investment Company Considerations.”

We are required to meet the continued listing requirements of Nasdaq, including those regarding minimum share price. In particular, we are required to maintain a minimum bid price for our listed ordinary shares of $1.00 per share. If we do not meet Nasdaq’s continued listing requirements, Nasdaq could initiate delisting proceedings and our ordinary shares could be delisted. If Nasdaq initiates delisting proceedings or delists our ordinary shares from trading on its exchange, we could face significant material adverse consequences including: reduced liquidity with respect to our ordinary shares; limited amount of news and analyst coverage for our company; reputational damage; diminished investor, supplier and employee confidence; and decreased ability to issue additional securities or obtain additional financing in the future.

 

As a foreign private issuer, we are exempt from compliance with 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 certain other reports and financial statements with the SEC as frequently or as promptly as U.S. domestic companies whose securities are registered under the Exchange Act, we are permitted to disclose limited compensation information for our executive officers on an individual basis 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 and leniencies will 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 are a leading computational biology company aiming to revolutionize life-science product discovery and development across several market segments, including human health, agriculture, and other industrial applications.

Our company was founded on October 10, 1999 as Agro Leads Ltd., a subsidiary of Compugen Ltd. In 2002, our company was spun-off as an independent corporation under the laws of the State of Israel, and changed its name to Evogene Ltd. In 2018 and 2019, we reorganized certain of our divisions into wholly owned subsidiaries of the Company, as described in this annual report.

Our shares have been listed for trading on the TASE since 2007 and were listed for trading on the NYSE commencing with our U.S. initial public offering in November 2013, until December 2016, when we transferred the listing to Nasdaq.

We are registered with the Israeli Registrar of Companies in Jerusalem. Our registration number is 51-283872-3. Our purpose as set forth in our articles of association is to engage in any lawful business. Our principal executive offices are located at 13 Gad Feinstein Street, Park Rehovot, Rehovot P.O.B 4173 Ness Ziona, 7414002, Israel, and our telephone number is +972-8-931-1900.

Our authorized representative in the United States and agent for service of process in the United States, Puglisi & Associates, is located at 850 Library Avenue, Suite 204, Newark, Delaware 19711. Information contained on, or that can be accessed through, our website does not constitute a part of this annual report and is not incorporated by reference herein.

The SEC maintains an internet site, http://www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. Our internet address is www.evogene.com. Neither such internet addresses are a part of this annual report.

Our capital expenditures for fiscal years 2020, 2019 and 2018 amounted to $0.7 million, $0.9 million and $0.4 million, respectively. Our capital expenditures during those years consisted of investments in property, plant and equipment. We anticipate our capital expenditures in fiscal year 2021 to include payments for maintenance and improvements of our facilities in Israel in order to support our activities, which we anticipate we will finance with our currently available cash.

 We are a leading computational biology company aiming to revolutionize life-science product development across several market segments, including human health, agriculture, and other industries. To achieve this mission, we established our unique Computational Predictive Biology, or CPB, platform, leveraging the revolutions in big data and artificial intelligence and incorporating a deep understanding of biology.

Our CPB platform aims to disrupt conventional life-science product discovery and development methodology, currently challenged by inefficiencies, such as long and expensive product development process and low probability of success. By computational selection of the most relevant core components for life-science products, such as microbes, small molecules and genes, and then computational optimization, we are aiming to reduce time, cost and most importantly increase the probability of success to develop life science based products. The company provides these discovery and development capabilities through three dedicated engines: MicroBoost AI for products based on microbes, ChemPass AI for products based on small molecules and GeneRator AI for products based on changes in genetic elements.

The discovery phase, based on product definition, requires the identification and selection of a reasonable number of candidates, for initiating the development phase toward a successful product. The challenge is that the number of possible candidates, from billions to infinity, together with a significant number of criteria that need addressing for a successful product, is extremely complex. This is exactly what the CPB platform and the three engines were designed to address – the prediction of the most promising candidates that indicate true potential for a successful product. Through computationally screening databases, according to specific product criteria, the selection of candidates can be narrowed down to focus on those most promising.

In addition to the selection of the candidates in the discovery phase, the CPB is used in the development phase. In the development phase, the chosen candidates undergo various validation processes on the way to becoming a commercial product with the desired attributes. In this process, the candidate's ability to pass the validation criteria is improved, if needed, by using the technology. The main challenge is to identify the best optimization proposal for the specific attribute without impairing other attributes.

As described above, the mission of the CPB platform is to revolutionize the product discovery and development approach in life science industries by decoding the biological world using computational biology. This platform is the outcome of a decade long, multidisciplinary effort to integrate scientific concepts with big data and the most advanced computational analytics in order to develop predictions of potential product candidates that later undergo experimental validation and optimization toward commercialization. We believe that the uniqueness of our computational prediction approach stems from our ability to successfully address multiple product attributes at the beginning of the discovery process, and during the optimization phase.

These efforts have been enabled by two parallel revolutions taking place in the last decades: (i) the data revolution – allowing the creation of enormous amounts of high-quality biological and chemical data in a cost-effective manner, and (ii) the computational processing revolution – allowing the analysis of data with advanced algorithms such as machine learning and other artificial intelligence methods.

The CPB platform represents a revolutionary approach for the design and prediction of novel products, based on four pillars: first, computationally modeling the specific biological challenges in the discovery and development of each product into pre-defined criteria, based on profound scientific understanding and know-how; second, designing genomic, chemical and microbial databases holding diverse types of curated data specifically aimed at addressing the biological challenges identified; third, developing state of the art computational tailored analytics, including artificial intelligence algorithms, designed to provide more accurate predictions to those challenges; and fourth, screening and validation systems comprised of multiple tailored bioassays to validate the product candidate and to assist in its optimization.

To date, Evogene’s databases leverage multiple sources and types of tailored “big data” in order to support the different research and development activities across the company. Specifically, we focus on four different entities: microbial organisms, microbial genes, small molecules and plant genes. Our information databases on these different entities are rich and highly interconnected, enabling our analysis platforms to maximize their predictive power. Our databases draw in part from the public domain, and in part compile increasing amounts of proprietary data, generated either in-house or received from our collaborators.

The CPB platform is the foundation for Evogene’s three engines boosting the discovery and development of novel life science products: MicroBoost AI, ChemPass AI and GeneRator AI. The unique products obtained with the use of the engines are: microbes; small molecules; and genetic elements, respectively. These engines are utilized by Evogene’s current partners, which mainly consist of the company’s subsidiaries and may be utilized by additional potential partners.

These engines comprised of advanced proprietary computational analysis platforms, offering s unique algorithms and methodologies are designed to address immense numbers of parameters, the respective big data and tailor them in a highly effective manner for a researcher. These computational analysis platforms are designed to deliver innovative solutions to key bottlenecks in the product development process. These platforms increasingly utilize artificial intelligence, machine learning driven approaches and other sophisticated algorithms to provide effective predictions for key questions, such as efficacy and stability. As our predictions undergo validation via dedicated validation systems, this allows us to continuously improve our predictions by feeding back these results into our systems.

MicroBoost AI employs an innovative function-based approach based on a proprietary microbial function catalog for the identification of novel microbial candidates. This engine not only aims to identify candidates with high potential for a specific product, but also pinpoints the biological reasoning behind its selection, improving the chances of the initial microbial candidate to pass the subsequent optimization and development phases.

ChemPass AI combines large, well-organized, searchable database and a set of AI-based algorithms and innovative chemo-informatics tools to search, invent, prioritize and analyze new small molecules prior to their expensive synthesis and testing phase. This platform is used to drive and accelerate the small molecule product development process by using a set of high-end, validated tools and algorithms for virtual screening for the identification of small molecule hits meeting multiple end-product attributes.

GeneRator AI aims to develop life science products via targeting and modifying genetic elements. By using a set of highly advanced AI computational tools and end-to-end discovery and development pipelines, GeneRator AI identifies genomic elements of interest which can be then applied in genome editing, genetic engineering, or as biomarkers and in additional applications.

Our experimental technologies include bioassays as well as screening and validation pipelines (set of bioassays organized in a cascade of tests). They relate to diverse scientific fields including molecular biology and biochemistry, microbiology, organic chemistry, plant tissue culture, plant pathology, greenhouse and field activities. All processes are accompanied by precise data gathering and coordinated by pipeline management and QA.

Our validation and screening systems support the following four key aspects of our unique research and development approach: (i) generating data sets to enable development and proof of concept of tailored computational modules and their prediction performance evaluation; (ii) validating and screening characterizing selected product candidates by the division’s or subsidiary’s scientific teams; (iii) connection between the computational developers and the biological development process of the product and direct acquaintance with the difficulties in its development; and (iv) transforming computational-based recommendation to a physical entity output.

As of December 31, 2020, our research and development activities involve 88 employees amounting to approximately 68% of our total full-time workforce, of which 51 are employed at Evogene and 37 are employed via our subsidiaries. Our staff possesses multidisciplinary and wide-ranging expertise, with employees specializing in biology, chemistry, plant genetics, agronomics, mathematics, computer science and other related fields. 41 of our employees hold a Ph.D.

Furthermore, we have a Scientific Advisory Board composed of representatives from the Faculty of Agriculture of The Hebrew University in Jerusalem, the Weizmann Institute of Science in Rehovot and other global academic institutions, as well as experienced scientists from the industry.

Evogene has two different business models. The first, which was the main business model until 2014, is product development through collaborations. In this business model Evogene engages with a partner for joint development of a defined product, requested by the partner. In this frame, Evogene typically conducts the initial R&D activity, discovery and early stage development, while later stage development and commercialization is conducted by the partner. In this model, Evogene’s potential revenues are:

Until 2014, Evogene engaged in several collaborations of this type with Bayer, Monsanto, DuPont and Syngenta, focused on improving seed traits using genetic modification, or GM, approach.

Evogene’s second business model is rather unique. Starting in 2015, Evogene made a strategic decision that in addition to product development with a partner based on the partner's request, it will begin developing its own product pipelines, each focusing on a specific industrial segment - benefiting from its unique technology. When such a product pipeline reaches a certain level of maturity, the activity is spun into a dedicated subsidiary.  Each subsidiary focusing on continued development of its pipeline and adding new products to its specific market segment, while using Evogene's technology as its core competitive advantage.

Today, Evogene has four main subsidiaries, each focused on a different field of activity. Each subsidiary has its own board of directors, separate management, scientific advisory board and its own R&D and business development teams that focuse on developing its own pipeline and go-to-market. At the same time, each subsidiary benefits from using Evogene’s technology under an exclusive license from Evogene to use the CPB’s discovery and development engines that are relevant to the subsidiary’s field of activity. The terms of these licenses provide that the subsidiary owns the discoveries and product candidates that result from the utilization of the CPB, while Evogene retains all rights to the CPB platform itself. According to the characteristics of the end-market, the subsidiaries can decide to commercialize their products independently or in collaboration with a partner.

Given the broadly applicable capabilities of our technology, as provided through its three engines, we can potentially enhance and improve product development in a variety of life science industries, including human health and agriculture. Today Evogene is applying its MicroBoost AI engine to direct and accelerate the discovery and development of two types of products:  human-microbiome based therapeutics in human health and ag-biological products in agriculture.  The ChemPass AI engine is used for the discovery and development of two types of products:  drugs based on small molecules in human health, and ag-chemicals, such as herbicides and insecticides, in agriculture. GeneRatorAI engine is applied for the discovery and development of three types of products:  medical cannabis in human health, improved seed traits in agriculture, and improved castor varieties to support the castor oil production industry.

Evogene continuously evaluates new substantial industries with well-recognized development road-blocks for which we can leverage our capabilities and assets for the development of next-generation products. We select the most suitable markets to focus on, based on a number of criteria, including: (i) market size; (ii) a well-recognized, unmet need for next-generation products; (iii) an understanding of the scientific or technical road-blocks that prevent others from developing next-generation products; and (iv) most importantly, the expectation that our CPB platform and unique approach provide a significant competitive advantage in addressing these road-blocks.

Currently being evaluated is the initiation of discovery and development of life-science based products in various new fields, such as:

Most of Evogene’s activities have been transferred to dedicated subsidiaries, only the seed traits activity in the field of agriculture, is currently organized as an internal division in Evogene. In Human health there are two subsidiaries: Biomica, focusing on microbiome-based therapeutics, and Canonic, focusing on medical cannabis products. In Agriculture there are two subsidiaries: Lavie Bio focusing on ag-biologicals and AgPlenus focusing on ag-chemicals. In other industries there is one subsidiary, Casterra, focusing on Ag-solutions for castor oil production.

Except for initial seed sales under our Casterra activity, our activities are still in the development stages and no products have been commercialized based on our discoveries. Our revenues consist primarily of research and development payments under our strategic collaborations in the field of seed traits and ag-chemical products. A breakdown of our revenues by business activity and geographic markets for each of the last three financial years is provided in “Item 5. Operating and Financial Review and Prospects—Key Measures of Our Performance—Revenues.” In the future, we expect that we and our subsidiaries will receive milestone payments and royalty revenues under such collaborations, as well as revenues from the sale of end-products or commercialization of product candidates.

In 2021, through our subsidiaries or directly, we expect to continue to develop our product pipelines and initiate new collaborations with an increased focus on strategic relationships for joint product development. We also expect to continue to evolve our organization, and to continue to examine new areas in which additional value can be created in a relatively short time.

The following are major occurrences and developments in the Company during 2020 and until the date of this annual report, reflecting advancement in all areas of activity:

In light of historical and current needs to improve crop productivity while maintaining sustainability and food quality, technological inventions have been incorporated into agriculture since the dawn of humanity. During the last decade, the biological world has witnessed a dramatic increase in the availability of data and scientific understanding, which is used to drive agricultural product innovation. This increase in the availability of data and scientific understanding has primarily been a result of the introduction of new technologies that facilitate the rapid generation of quality data at a significantly lower cost. As a result, the key opportunity, and challenge, for enhancing crop productivity has shifted from the generation of quality data to data integration and the analysis of large volumes of data.

In 2015, we initiated our activity for developing ag-biological products as a division within Evogene and early in 2019 it was organized under Lavie-Bio Ltd., an independent company that upon establishment was wholly owned by Evogene.

Lavie Bio aims to improve food quality, sustainability and agricultural productivity through the introduction of microbiome-based ag-biologicals. Ag-biologicals are externally-applied products from biological sources, such as microbial (micro-organisms) and naturally derived biochemistries, designed to improve crop productivity. A sub-segment within the microbial biologicals is the “microbiome”, the microbial population living close or within the plant or other organisms, such as pests, which is a promising source for novel ag-biologicals.

Lavie Bio is focused on developing two main types of products: (i) bio-pesticides, which are ag-biologicals for crop protection, addressing biotic stresses such as insects, diseases and weeds and (ii) bio-stimulants, which are ag-biologicals for crop enhancement, directly impacting crop yield or abiotic stress tolerance.

In August 2019, we announced that Corteva Agriscience had invested in Lavie Bio. The transaction included the exchange of all shares of Corteva’s wholly owned subsidiary Taxon Biosciences along with a US$10 million equity investment by Corteva in Lavie Bio in consideration of approximately 28% of Lavie Bio’s equity. The assets of Taxon Biosciences include, among others, a large microbial collection and product candidate pipeline. During 2020, Lavie Bio integrated these assets into its microbial collection, technology platform, and pipeline.

Companies in this market can be generally divided into three groups: (i) major seed and ag-chemical companies, such as BASF, Bayer, ChemChina and Corteva, with internal research and development units dedicated to development of ag-biological products, (ii) small to mid-size biotech companies specializing in ag-biologicals with their own product development programs, and (iii) academic and agricultural research institutions that pursue research activities in the field, typically focusing on early stage activities.

Lavie Bio has defined three main models for market access:

To date, Lavie Bio has not commenced commercialization and has not yet generated significant revenues. In the longer term, as its product candidates advance through development and to the extent that they are commercialized, Lavie Bio expects revenues from direct sales under the ‘direct market access’ model as well as milestone payments and royalty payments from products developed and commercialized under the ‘indirect market access’ model and the ‘precision optimization collaboration’ model. Lavie Bio expects the launch of its first product under the ‘direct market access’ model, of a spring wheat bio-stimulant product, by 2022.

Lavie Bio's approach is focused on 'Biology Driven Design' for the discovery, optimization and development of effective, stable and cost-effective microbial-based ag-biologicals. Lavie Bio’s approach is based on converging the plant, microbial and environmental factors to decode their complex interactions in order to enable the amplification of the positive, elimination of the negative and retrieval of lost interactions within the biological system.

We estimate that developing an ag-biological product based on microbial sources takes, on average, between six to eight years. The length of the process may vary depending on several factors, such as product type, target market and applicable regulatory or registration regime, type of application, type of natural source serving as active ingredient, as well as number of active ingredients within the final products, which impacts the development activities required to reach a commercially viable product.

The development process for microbial-based ag-biologicals is generally divided into four steps, or phases, which include discovery, pre-development, development, pre-commercialization, and ending with registration approval and commercial launch. As this is a relatively young industry, the process is not yet well established and standardized and the below outline is established based on our experience and estimations.

The following table sets forth Lavie Bio’s main product development programs³:

In respect to its Bio-stimulants 1 program for spring wheat, in December 2020, Lavie Bio announced that LAV211 was advancing into the pre-commercial phase, following field trials in target locations, meeting development criteria and outperforming trial controls, which included competitor benchmarks. Additionally, LAV211 received product registration approval during 2020 in North Dakota and Montana, key target markets for growing spring wheat. Additional commercial scale trials are planned for 2021, in preparation for product launch planned for 2022. Lavie Bio intends to evaluate potential expansion of LAV211 to additional crops.

Corteva (originally with DuPont-Pioneer)

In July 2017, Evogene entered into a multiyear collaboration with DuPont Pioneer (now Corteva, following the merger of Dow Chemicals and DuPont in September 2017 and the establishment of Corteva as the agriculture division of the merged DowDuPont entity), for the research and development of novel microbial bio-stimulant seed treatments for the improvement of corn productivity globally. Following the establishment of Lavie Bio, the collaboration agreement was assigned from Evogene to Lavie Bio. Under the agreement, Lavie Bio is entitled to milestone payments for advancement of candidate strains, and royalties from product sales. This collaboration helped in establishing the relationship with Corteva, which matured into Corteva’s investment in Lavie Bio.

Corteva and Lavie prioritized certain product programs to be executed by Lavie Bio, and Lavie Bio committed to allocate a certain part of its research and development budget to these programs. In addition, Corteva’s investment in Lavie Bio was accompanied by the provision to Corteva of certain rights to obtain future commercial licenses to Lavie Bio’s candidate products, mainly in corn and soy.

Lavie Bio does not significantly rely upon any sources of raw materials for its operations.

In general, the regulatory landscape in the evolving field of ag-biological products is still developing. As a result, it may face additional changes in the next few years. Complexity of regulatory processes varies between bio-stimulants and bio-pesticides and between regulatory organizations.

In the U.S., the key focus market for the ag-biological products Lavie Bio is currently developing, the Animal and Plant Health Inspection Service within the Department of Agriculture, or USDA APHIS, is responsible for importation and field release permits for ag-biological products, and the U.S. Environmental Protection Agency, or EPA, is in charge of the registration of plant protection products. Most U.S. states also require certain registration processes for such products, which vary among states. Both U.S. and European regulators are in the process of establishing a more defined regulation process for bio-stimulants. Under current EPA guidance, bio-stimulants are regarded as plant inoculants, which currently does not require any regulatory action at the federal level, but requires registration at the state level. Bio-pesticides require registration at both federal and the state level.

In the European Union, bio-stimulants are currently regulated as fertilizers, and bio-pesticides are regulated and registered as plant protection products.

In 2015, we initiated our activity for developing ag-chemical products as a division within Evogene, and in 2018, we announced that it had been organized under AgPlenus Ltd., a separate company, wholly owned by Evogene upon establishment. AgPlenus aims to design effective and sustainable crop protection products (crop protection refers to the science and practice of managing risks of weed, plant diseases, and insects that damage agricultural crops and forestry) by leveraging predictive biology and chemistry. AgPlenus’ activities focus on herbicides, with a strong focus on novel modes-of-action, or MoAs, and on insecticides, focusing on new sites-of-action, or SoAs.

According to industry publications, the crop protection chemicals market was estimated at approximately $63 billion in 2019 and is expected to grow to over $90 billion by 2026.⁴ Lack of available solutions for pest control and increasing resistance to existing crop protection solutions lead to a pressing need for novel crop protection products. However, due to current technological limitations and increasing regulatory requirements, the development of crop protection products is lengthy, complicated and expensive.

The ag-chemical market, as described above, can be classified into four key groups of companies: (i) major seed and ag-chemical companies, such as BASF, Bayer, ChemChina and Corteva, with internal research and development units dedicated to development of ag-chemical products, (ii) small to mid-size ag-chemical companies, mainly Japanese companies focused on the Japanese market, that develop crop protection products, (iii) small to mid-size biotech companies that undertake new approaches to research and development of novel crop protection products, and (iv) academic and agricultural research institutions, typically focusing on early stage activities.

AgPlenus’ business model is based on two commercialization avenues:

Commercialization of advanced product candidates– when product candidates advance to what is referred to in the industry as a Lead, at the end of the discovery stage, or an Optimized Lead, at the end of the lead optimization stage, these product candidates gain increased commercialization value.

Early stage collaborations – enter early stage collaborations, providing a tailored product offering per partner and market, in order to build long-term relationships in the industry and to mitigate the risk associated with building an independent pipeline.

Currently, AgPlenus’ revenues are derived from research and development payments under early stage collaborations. In the longer term we expect that: (i) as AgPlenus’ product candidates advance through development in our partner’s pipelines, and to the extent that they are commercialized by its collaboration partners, revenues will include milestone payments and royalty payments, or to the extent that they are sold, revenues may include significant one-time payments; and (ii) as its internal pipeline product candidates further advance, AgPlenus will be able to reach higher value revenue-sharing deals.

AgPlenus’ approach is based on the disruption of the traditional methods of ag-chemical discovery and optimization by implementing a target-based approach for identifying and developing novel herbicides and insecticides with new MoAs or SoAs to address the growing resistance of weeds and insects to existing products. AgPlenus utilizes Evogene’s CPB platform’s capabilities, namely the ChemPass AI engine dealing in small molecule discovery and development, as well as advanced technologies and know-how, to drive chemical discovery with the target of ultimately developing new herbicides and insecticides that display new MoAs or SoAs.

AgPlenus’ approach begins with the computational and research-driven identification of protein ‘targets’, which are proteins that are essential to the function of performance of the relevant weed or insect. Following the identification and validation of such targets, we identify candidate Hits, which are chemical compounds that potentially inhibit these targets. We screen candidate hits to identify those displaying effect on weeds or insects of focus. Hits displaying confirmed activity in the initial validation screens enter the Hit-to-Lead process, which includes computational optimization and additional, more advanced, validation experiments. In addition, these capabilities are also used independently of each other to discover new Hits for known targets, to optimize an existing Hit-to-Lead and to optimize a commercial molecule.

The product development cycle for the development of ag-chemical products is generally comprised of several stages, described as follows:

Discovery stage

Lead optimization

Pre-development stage

Development, Regulation & Registration stage

The following table sets forth AgPlenus’ main internal product development programs:

Corteva – Herbicides

In March 2020, AgPlenus entered into a multi-year collaboration with Corteva for the discovery and development of novel herbicides. Under the terms of the collaboration agreement, AgPlenus and Corteva will work together to optimize herbicide product candidates originating from AgPlenus’ pipeline. Successful candidates from this collaboration are expected to be further developed by Corteva.

Pursuant to the agreement, Corteva obtained a worldwide, royalty-bearing, exclusive license to use and modify chemical compounds identified under the collaboration to develop and commercialize weed control products containing such compounds. Under the terms of the agreement, AgPlenus is entitled to research and development payments, milestone payments upon achievement of certain development milestones as well as royalty payments from sales of products developed under the collaboration.

BASF SE (BASF) – Insecticides

In May 2018, Evogene announced that we entered into a two-year collaboration with BASF for the development of novel insecticides based on new binding areas, or SoAs. Following the establishment of AgPlenus, the collaboration was assigned from Evogene to AgPlenus. Under the terms of the agreement, in the initial phase of the collaboration, we utilized our biology-driven computational methods to identify potential novel compounds that act on new proteins binding sites. Compounds we discover enter BASF’s proprietary insecticides discovery platform for efficacy screening and testing and to validate the chemistry’s ability to modulate the respective target proteins.

Pursuant to the agreement, BASF obtains a worldwide, royalty-bearing, exclusive license to use and modify chemical compounds that we identify under the collaboration to develop and commercialize weed control products containing such compounds. Under the terms of the agreement, we are entitled to milestone payments upon achievement of certain development milestones. Commercial arrangements concerning further development and commercialization are subject to further agreement between the parties.

BASF SE (BASF) – Herbicides

In December 2015, Evogene entered into a multi-year collaboration with BASF for the discovery and development of novel herbicides. Under the terms of the collaboration agreement, we utilized our biology-driven computational discovery approach to identify potential candidate chemicals for novel herbicides while BASF used its proprietary advanced plant platform to screen the candidate chemicals in order to experimentally validate their biological effects on weeds. Following the establishment of AgPlenus, the collaboration was assigned from Evogene to AgPlenus. Following termination of the research efforts, the collaboration has ended in March 2021.

AgPlenus is seeking patent protection for intellectual property rights covering its leading product candidates.

AgPlenus’ activities are performed at labs in Israel and are regulated by the provisions of several Israeli governmental agencies. Violation of these regulations may expose us to criminal or civil actions and may impose liability on us.

Regulatory approvals are required prior to the commercialization and importation of ag-chemical products in most countries. Most of the key target markets where AgPlenus anticipates its collaborators to sell products containing its compounds, including the U.S., the European Union, Brazil and Argentina, will require such regulatory approvals prior to the commercialization of such products. Pursuant to AgPlenus’ collaboration agreements, its collaborators are responsible for product regulation.

Among other regulatory requirements, our collaborators may need to test new active ingredients for assessment of potential effects on mammals. These include tests on acute toxicity, carcinogenicity, mutagenicity and reproduction. The results of these tests may impact the chemistry and formulation development stages.

In order to sell a crop protection ag-chemical product in most countries, both the product and its active ingredient first need to be registered. This process may require the submission of over 100 toxicology and ecotoxicology studies, as well as detailed information on the chemistry of the active ingredient and the product. In the United States, collaborators may need to seek regulatory approval from the EPA, which regulates the marketing and use of new plant pesticides and herbicides. In addition, in Brazil, the commercialization of ag-chemical products is regulated by Anvisa, the federal agency in charge of evaluating pesticide health risks. The approval process involves data collection and analysis, environmental impact assessments and public hearings on certain products, and is similarly costly and time-intensive.

AgPlenus does not significantly rely upon any sources of raw materials for its operations.

The activities of this division are divided into three categories: (i) yield & abiotic stress tolerance – increase crop performance and productivity by enhancing yield, tolerance to abiotic stresses such as drought, heat and salinity and fertilizer use efficiency; (ii) disease resistance – increase crop resistance to diseases such as fungi and nematodes; and (iii) insect control – increase crop tolerance to pests.

In general, we utilize several biotechnology approaches with the goal of improving seed traits, including: (i) genome editing technologies, enabling deletion or modification of specific genomic regions in the crop's genome without inserting foreign DNA to the plant, (ii) genetic modification of plants, which involves the direct manipulation of a plant’s genome by inserting a gene into the plant’s DNA, and (iii) advanced breeding methods, whereby plants with favorable characteristics are selectively crossed through genomic-guided breeding schemes.

In recent years, the CRISPR technology is considered to have the potential to revolutionize the product development of new seed traits, while overcoming environmental and other challenges, and is expected to expand the global crop industry by $110 billion between now and 2025 with an expected growth of 25%⁷.

According to industry publications, in 2020 the GM seeds market size was estimated at approximately $27.9 billion and is projected to reach to $45 billion by 2027. The GMO crops and seeds market in the U.S. is estimated at US$7.5 billion in the year 2020, while China is forecast to reach a projected market size of US$10 billion by the year 2027⁸. The market potential for traits addressing plant insects and diseases was estimated to be between $7.5 billion to $8.5 billion, out of which the commercial value of insect control products was approximately $4.5 billion.⁹

In the Ag Seeds activity, we collaborate with seed companies in the development of improved seed traits. Our partners include world-leading seed companies, including Bayer and Corteva, as well as regional seed companies such as Tropical Melhoramento & Genética S/A, or TMG. Typically, under these collaborations we perform the discovery phase, during which we discover and validate candidate trait-improving genetic elements. Subsequently, our collaborators, under license from us, test and further develop these discoveries in their product development pipelines, starting Phase I, with the goal of introducing them into commercial crop seeds. For more information on the product development pipeline, please see “— Product Development Pipeline” below.

In most cases, we expect to generate revenue from our collaboration agreements at two different points: first, we expect to receive milestone payments when certain specified results are achieved, such as when a product candidate containing our traits is submitted for regulatory approval; second, we expect to receive royalty payments once a commercial product containing our traits is launched into the market. Under several collaboration agreements, we also receive research and development service payments to cover the costs of our research.

In the Ag-Seeds division, we currently generate revenues from research and development payments for our activities. All of our product development programs under our Ag-Seeds activity are currently either in the Discovery or in Phase I stages. For more information on our product development programs in this field, see “— Product Development Programs.”

The division uses our expertise in plant and bacterial science and genomics to improve commercial seed traits. Evogene’s proprietary CPB platform, specifically, the GeneRator AI and MicroBoost AI engines, validation techniques and other capabilities enable us to identify and optimize promising genetic elements that have the potential to improve our traits of interest in target crops.

We have accumulated substantial scientific knowledge on plant, diseases and insect mechanisms associated with yield, abiotic stress, fertilizer use efficiency, disease resistance traits and insect control traits. We maintain a large proprietary genomic data from over 200 different plant species as well as large microbial data tailored for insect and disease control. We have also established proprietary plant, disease and insect validation systems.

 The length of the process of developing and integrating seed traits may vary depending on the technology being applied, the complexity of the trait and the type of crop involved. The development process for seed traits is typically divided into discrete steps, or phases, as follows:

As indicated, the estimated timeframes of phase duration are based on our experience and estimates according to available information. The total development time for a particular product may be longer or shorter than the duration presented above depending on a range of factors.

The following table sets forth our key product development programs in the segment of yield & abiotic stress tolerance seed traits under development with our collaborators:

__________

 

The following table sets forth our key product development programs in the segment of disease resistance traits, under development with our collaborators:

The following table sets forth our key product development programs in the segment of insect control traits, under development with our collaborators or as internal product development programs:

Bayer (originally with Monsanto)

In August 2008, we entered into a Collaboration and License Agreement with Monsanto (now Bayer, following the completion of the acquisition of Monsanto by Bayer in June 2018 and a later assignment of the agreement from Monsanto to Bayer CropScience LP), which was amended in November 2011, October 2013, and in May 2020.

Pursuant to the agreement, Monsanto funded a research program under which we identified and optimized genes with the potential to improve yield and abiotic stress tolerance in corn, soybean, cotton and canola, and candidate genes have entered Phase I in Monsanto's product development pipeline. In July 2017, we announced completion of candidate gene discovery stage in this collaboration.

As part of the October 2013 amendment of the agreement, we applied our computational technologies in the field of biotic stress to identify genes providing resistance to Fusarium, a type of fungi that is a main pathogen responsible for Stalk Rot disease in corn (a widespread, yield-reducing disease). In July 2017, we announced that we had reached an important milestone in the collaboration with the demonstration of positive Fusarium resistance results with Evogene-discovered genes. In July 2019, we announced that the collaboration was being refocused on the identification of genome editing targets for evaluation against a broad range of corn diseases.

We have granted Monsanto an exclusive, royalty-bearing, worldwide license under our patents and know-how to commercially exploit and conduct research on the genes and other genetic elements we discovered under the collaboration, in the specified crops. Monsanto provided us with research and development payments, and undertook to provide us with development milestone payments, if and when our product candidates reach significant milestones in its product development pipeline, as well as royalty payments on any sales or other transfers of products it develops containing our licensed genes. 

A Multinational Consumer Goods Company

In October 2014, we entered a Collaboration Agreement with a multinational consumer goods company, focusing on improving yield in a certain field crop through non-GM methods. In the framework of the collaboration, we identified genes with the potential to improve the desired trait in the target crop when the expression of such genes in the plant is modified.

We granted the partner an exclusive worldwide license to the genes we identified and the varieties we delivered under the collaboration. The agreement provides for milestone payments by the partner upon achievement of certain development milestones and does not provide for payment of royalties to us.

Corteva (Originally with DuPont-Pioneer)

In 2011, we entered a multi-year research and development collaboration with DuPont-Pionner (now Corteva, following the merger of Dow Chemicals and DuPont in September 2017), to improve resistance to Asian Soybean Rust, or ASR, a devastating fungal disease in soybean. We amended and expanded the agreement in October 2013. Pursuant to this collaboration, we identified relevant genes having the potential to improve in-plant resistance to ASR.

DuPont holds a worldwide, royalty-bearing, exclusive license to develop and commercialize soybean products containing our licensed genes. Our compensation under the agreement is in the form of milestone payments and royalty payments based on the sales of resulting products. According to the agreement, each party funded its expenses in performing its activities using its own resources and a grant from the Israel-U.S. Binational Industrial Research and Development Foundation, or BIRD.

Rahan Meristem

In 2007, we entered into a multi-year collaboration with Rahan Meristem, or Rahan, with the target of developing banana varieties expressing tolerance to Black Sigatoka, the most damaging disease threatening commercial banana plantations. The agreement focuses on identifying and developing genes targeting this trait in bananas. Together with Rahan, we have identified candidate genes, while transformation to banana plants and further validation in infected areas is conducted by Rahan.

Pursuant to the agreement, Rahan holds an exclusive license to develop and commercialize banana products containing genes identified under the collaboration, while we are entitled to royalty payments from sales by Rahan of commercial products containing such genes.

TMG

In December 2018, we entered into a multi-year collaboration and license agreement with TMG, a major Brazilian developer and marketer of soybean varieties, for the development of nematode-resistant soybean varieties using genome editing technologies. Under the agreement, we identified genomic elements for editing to attribute nematode resistance in soybean and perform such edits on TMG’s commercial soybean germplasm. In turn, TMG validates the efficacy of the edited soybean varieties in greenhouse assays and field trials in Brazil and for incorporation in its breeding pipeline.

Under the collaboration and license agreement, TMG obtained a worldwide, royalty-bearing license to incorporate genome edits originating from the collaboration in its soybean varieties. Evogene, on the other hand, obtains a non-exclusive, royalty-bearing license to commercialize such genome edits and soybean lines, subject to certain exclusivity restrictions. According to the agreement, each party is entitled to receive royalty payments from the other party when the products of the collaboration are commercialized. In addition, Evogene is entitled to success-based payments upon achievement of pre-defined development milestones.

In most of the key target markets where we anticipate our collaborators will sell seeds containing our traits, including the United States, the European Union, Brazil and Argentina, regulatory approvals are required prior to the commercialization and importation of biotechnologically enhanced seeds. Additional regulatory approvals are required in countries importing grain produced from seeds containing our traits, such as China, India and certain countries in the European Union. Pursuant to our collaboration agreements in the field of seed traits, our collaborators are typically responsible for applying for all requisite regulatory approvals prior to commercialization of the product candidates we develop with them.

The regulatory status of products developed via genome editing technologies is currently defined in most countries with the exception of the EU. In the United States, de-regulatory approvals are required by the USDA prior to field testing of genomic edited seeds. Several ‘non-regulated organism’ approvals have been issued by the USDA as well as the regulatory authorities of Japan and Argentina for products that are being commercialized or under development.

The business of the AgSeeds division is subject to regulation related to agriculture, health and the environment. To operate, we must obtain various permits and licenses from government authorities and municipalities in jurisdictions where we are active, and we must maintain our compliance with the terms of those permits, licenses and other government standards as necessary. These laws and regulations, particularly in relation to biotechnology, are not fully settled, but continue to evolve in order to keep pace with technological advances.

Our operations are carried out mainly in Israel and accordingly are regulated by the Israeli Ministry of Agriculture and Rural Development, or ISARD, and more specifically by the ISARD’s Plants Protection and Inspection Services. Our activities are subject to various laws, regulations, orders and procedures, which require us, among other things, to obtain permits for conducting experiments on genetically enhanced plants and to satisfy special conditions determined by the ISARD regarding the growing procedures of such seeds and plants. Violation of these regulations may expose the company to criminal penalties. Pursuant to these regulations, we are also obligated to obtain separate permits to own and operate our greenhouses and testing fields in Israel and we are routinely inspected by ISARD.

Our AgSeeds division does not significantly rely upon any sources of raw materials for our operations.

In 2017, we decided to leverage our capabilities in computational biology towards the area of human health with the establishment of Biomica. In 2019, we expanded our activity in this area with the establishment of Canonic.

In 2017, we established Biomica, a subsidiary focused on the discovery and development of innovative human microbiome-based therapeutics. The human microbiome is an array of more than 100 trillion microorganisms that live on and in our bodies, creating a community of symbiotic, commensal and pathogenic bacteria, all of which call the human body home. These microbes have numerous beneficial functions relevant to supporting life, such as digesting food, preventing disease-causing pathogens from invading the body, and synthesizing essential nutrients and vitamins. Numerous studies have shown the connection between the human microbiome and various medical disorders, and the search for microbiome therapies and treatments is a rapidly growing focus for biotherapeutics research and development.

Biomica focuses on the development of human-microbiome based therapies utilizing either rationally-designed microbial consortia or small molecule approaches for (i) immuno-oncology and (ii) gastrointestinal inflammatory, or GI related disorders (iii) antimicrobial resistance, or AMR, an antibiotic resistant bacteria.

Biomica’s product development is currently focused in three main markets:

In oncology, checkpoint inhibitor antibodies, including those targeting the programmed cell death protein/ligand 1, or PD-1/PD-L1 pathways, block the tumor’s ability to suppress the immune response. They have significantly improved the treatment of many cancers. The cancer immunotherapy market size was estimated at $84 billion in 2018 and is expected to reach a market size of $243 billion by 2026¹⁰

Even in cancers, where checkpoint inhibition is considered the frontline standard of care, a significant percentage of the patients do not respond to PD-1 + CTLA-4 inhibitor combination and part of responders relapse within a few years. In all approved cancer indications, agents with differentiated immune mechanisms of action may be complementary to checkpoint inhibitors by both augmenting existing effects and testing alternative pathways of immunotherapy in checkpoint inhibitor non-responsive tumor types and patients.

Given a growing body of literature, it is becoming increasingly clear that modulation of the gut microbiota may represent a novel and important adjunct to current anti-cancer therapeutic modalities.

The biotechnology and pharmaceutical industries are characterized by rapid growth and a dynamic landscape of proprietary therapeutic candidates. The development and commercialization of new drug and biologic products is highly competitive and is characterized by rapid and substantial technological development and product innovations. While we believe that our computational platform and microbial drug candidates, coupled with our resources and industry expertise, give us a competitive advantage in the field, we face competition from a variety of institutions, including larger pharmaceutical companies with more resources. Specialty biotechnology companies, academic research institutions, governmental agencies, as well as public and private institutions are also potential sources of competitive products and technologies.

In both inflammatory diseases and oncology, we anticipate intensifying competition as new therapies are approved and advanced technologies become available. Many of our competitors, either alone or with strategic partners, have considerably greater financial, technical, and human resources than we do.

Significant competition exists in the immuno-oncology and inflammatory diseases field, where we are developing our first drug candidates in oncology and IBD. Although our rationally-designed microbial consortium approach is unique relative to most other existing or investigational therapies in immuno-oncology, we will need to compete with all currently or imminently available therapies within the indications where our development is focused. Although there is a wide range of potentially competitive mechanisms, possible synergies between these and rationally-designed microbial consortia will also be evaluated.

Our goal (through Biomica) is to become a leading biopharmaceutical company developing and commercializing microbiome therapeutics to address significant unmet medical needs, through strategic collaborations with world-leading pharmaceutical companies.

Biomica aims to identify unique microbiome-based therapeutic entities through multilayered analysis and integration of high resolution big-data originating from the human gut microbiome. Employing a holistic approach, we combine a profound understanding of the microbiome and its functions and their intricate relations with the human host.

Biomica’s approach relies on a multi-layered analysis of omic and clinical / phenotypic data using an extensive nexus of modules in four key areas: (i) creation of microbial classifications – enabling high-resolution taxonomy analysis of the microbial community down to the strain level, (ii) identification of microbial functions – functional-level microbial community analysis profiling microbial genes, pathways and metabolites, (iii) identification of host genomics – profiling of patients' genomic information (genetics and expression patterns), and (iv) clinical data – integrate relevant phenotypic and physiological information manifested in patient.

Biomica’s discovery and development efforts are powered by the predictive, high resolution, integrative selection of microbes, or PRISM, platform, which is part of the MicroBoost AI engine, powered by Evogene’s CPB platform. PRISM is a proprietary metagenomics analysis platform for functional genomics profiling, utilizing internal comprehensive databases. These databases have been specifically developed to allow the processing of large amounts of sequencing data, obtain high-resolution profiling of microbial communities both at the taxonomic and the functional levels, and correlate them with specific clinically relevant host expression and phenotypic profiles, enabling us to achieve each of the below analyses:

In addition to its comprehensive computational solutions to profile the microbiome, Biomica also utilizes Evogene's CPB platform, specifically the ChemPass AI engine, for virtual screening of small molecular inhibitors to specifically target bacterial proteins of interest. This platform combines the physiochemical requirements for binding a specific protein target and utilizes a comprehensive proprietary database of roughly 200 million small-molecules for the discovery of potential therapeutics.

Biomica expects to continue to advance its pipeline, and in 2021 the company is expecting to initiate proof of concept, first in human study in its Immuno-oncology program, and to extend its pre-clinical study work in the IBD program.

 

BMC128 is an optimized consortium, which consists of four bacterial strains derived from Biomica’s BMC121 and BMC127 (rationally-designed consortia that were identified using our computational analysis and predictive capabilities designed to enhance an anti-tumor immune activity). BMC128 is a rationally-designed live biotherapeutic product, comprised of unique bacterial strains, natural inhabitants of the human intestinal tract, that harbor specific functional capabilities with the potential to enhance immunological therapeutic responses and facilitate anti-tumor immune activity though multiple biological processes.

 

During 2020, Biomica continued the pre-clinical studies of BMC128, obtaining positive results and initiated scale-up development of the first GMP batch production of its drug candidate. The treatment with BMC128 both prior to and in combination with Immune Checkpoint Inhibitors, or ICI, demonstrated significantly improved anti-tumor activity in mice. Treatment with BMC128 prior to and in combination with the administration of ICI, significantly reduced tumor volume and increased animal survival compared to ICI therapy alone. Moreover, treatment with BMC128 affected several immunological factors, including specific immune-cells populations known to be involved in tumor destruction. BMC128 has been advancing to the GMP production stage following the successful completion of the initial R&D stage of drug product development and manufacturing, conducted by Biose Industrie (Aurillac, France).

For IBD – using our computational predictive biology capabilities Biomica identified BMC321 & BMC322, two rationally-designed microbial consortium with potential anti-inflammatory activity in IBD. During 2020, preliminary work has validated the anti-inflammatory activity of these strains and their potential as novel therapeutic modality for IBD.

 

For IBS – we utilize proprietary data from several clinical trials conducted in the U.S. to develop a novel microbiome based drug. Biomica aims to push the barriers posed by existing therapies and address the underlying cause of the disorder, rather than the symptoms, using bacteria/bacterial-associated factors affecting symptoms and underlying pathophysiology.

CDI – Using our microbiome therapeutics platform, we are developing a small-molecule drug candidate (BMC201), designed to target the main toxin secreted by the bacterium and hence repair dysbiosis in the colonic microbiome in the setting of primary or recurrent CDI. BMC201 is being developed as an orally available drug.

MRSA – Biomica initiated a collaboration with the Weizmann Institute of Science to develop a selective treatment against antibiotic resistant strains of Staphylococcus aureus infection, in a microbiome focused approach. The company has in-licensed Prof. Ada Yonath’s, Nobel Prize laureate, work and discoveries in high-resolution crystal structure of the large ribosomal subunit of the pathogenic Staphylococcus aureus for the design and development of new types of selective, narrow spectrum antibiotics agents.

We aim to protect the proprietary intellectual property that we believe is important to our Biomica business, including seeking international patent protection for our product candidates and promptly file patent applications for new commercially valuable inventions of our Biomica business. We also rely on trade secrets to protect aspects of our Biomica business that we do not consider appropriate for patent protection. Our success with Biomica will depend on our ability to obtain and maintain patent and other proprietary protection for commercially important technology, inventions and know-how related to our business, as well as defend and enforce any patents that we may obtain.

Biomica does not significantly rely upon any sources of raw materials for its operations.

In April 2019, we announced the establishment of Canonic Ltd., focusing on the development and commercialization of precise and stable medical cannabis products for better therapeutic effects using computational biology.

The global legal cannabis market is forecasted to reach $42 billion in 2024¹⁹. In 2019 the industry saw an increase of approximately 45.7% in market size compared to 2018, reaching approximately $14.9 billion. In North America alone, the size of this market increased to greater than $13 billion in 2019 and is estimated to reach $37 billion in 2024¹⁵. The global legal cannabis market is rapidly growing due to changes in regulatory acceptance and is divided into recreational and medical products. The market segment attributed to medical cannabis products is estimated at 60% of the overall market²⁰.

In Israel alone, the Israeli Ministry of Health reported more than 80,000 medical cannabis patients at the end of 2020¹⁷, which we estimate to correlate to an approximate market size of $260 million per year. According to industry estimations, the number of patients is estimated to triple by 2025¹⁸.

Canonic has identified three main challenges in this market:

We believe that Canonic’s combination of assets and capabilities in the use of artificial intelligence, together with deep understanding of plant genomics and analysis of big data, can address these challenges.

In view of Canonic’s current stage of operations, its competitors include plant genomics companies aiming to improve the properties of medical cannabis varieties. When Canonic reaches commercialization of its products, its competitors will include also companies commercializing medical cannabis products.

Canonic aims to market its medical cannabis products under its own label to pharmacies and distributors in Israel. After establishing its brand in the Israeli market, Canonic intends to expand its activities to Europe and North America, where it may collaborate with local partners.

Canonic is focused on the development of precise and stable medical cannabis products based on proprietary cannabis varieties with unique genomic profiles. Leveraging Evogene's GeneRator AI engine, Canonic utilizes advanced breeding technologies in order to improve the properties of cannabis varieties.

Canonic has established a unique cannabis database, which is based on its diverse genetic collection, and is identifying and developing cannabis varieties that exhibit desired plant attributes. In addition, Canonic integrates pre-clinical data collected from trials performed with its genetic collection. These trials are conducted in parallel to the breeding program and support the company’s product development to achieve unique genomic profile for better therapeutic effects.

Canonic's product development efforts include the following main stages:

Canonic has two product families under development.

In December 2020 Canonic entered an agreement with Telcann Ltd, a licensed Israeli medical cannabis cultivator, for the provision of plant growth services in Israel. Under the agreement, Canonic expects to deliver a first batch of its medical cannabis seedlings to Telcann during 2021, originating from Canonic’s propagation farm. These seedlings are expected to be grown to maturity, harvested and processed by Telcann and later transferred to a third-party GMP production facility for further processing and preparation for marketing.

 

In February 2021 Canonic entered a collaboration agreement with Cannbit Ltd, a subsidiary of Tikun Olam-Cannbit Ltd., a leading Israeli medical cannabis company, for joint development of novel medical cannabis products. The development of the new products will be performed at Canonic’s R&D facility and will be based on cannabis strains that both companies will contribute to the collaboration. According to the agreement, each company will have full commercial rights to the products arising from the collaboration, and there will be cross royalties by each to the other company.

In March 2021, Canonic entered into agreements for the production and distribution in Israel of Canonic’s medical cannabis products with Tikun Olam Production (Israel) and Tikun Olam Supply and Distribution (Israel).

According to the production agreement, Tikun Olam Production (Israel) will produce Canonic’s medical cannabis products at its factory complying with good manufacturing practices of the Israeli Medical Cannabis Agency, or IMC-GMP, standards using Canonic’s raw materials. The agreement is not exclusive for either party and consideration paid will be based on the scope of production and related services provided. The agreement is for a period of two years or the production of products from 700kg of raw material, whatever is the earliest.

According to the distribution agreement, Tikun Olam Supply and Distribution (Israel) will distribute in Israel Canonic’s medical cannabis products, through its distribution channels, on a consignment basis to its or other licensed pharmacies, under the Canonic brand. The initial term of the agreement is 18 months. Consideration to be paid by Canonic will be based on a percentage of sales and for related services.

Canonic expects its intellectual property to include three layers: (i) Evogene's existing patent portfolio regarding the use of plant genes for the improvement of plant traits and the development of genetic markers, which is licensed exclusively to Canonic for cannabis; (ii) plant variety protection rights to be filed for cannabis varieties developed by Canonic; and (iii) intellectual property relating to the therapeutic attributes of active compounds within the cannabis plant, resulting from pre-clinical and potentially clinical trials to be conducted by Canonic.

Canonic does not significantly rely upon any sources of raw materials for its operations.

Currently, all of Canonic’s cultivation activities are performed under controlled environments, which permit cultivation year round, although in wintertime crop yield and active compound concentration may be effected.

All cannabis related activities in Israel (including R&D, cultivation, manufacturing and distribution) are regulated by the Israeli Medical Cannabis Agency, or IMCA. Every company with cannabis-related activity in Israel is subject to the IMCA’s regulation and is required to obtain annually the relevant IMCA certifications for its activities. Relevant certifications may include one or more of the following: (i) Good Security Practice, or GSP, (ii) Good Agriculture Practice, or GAP, (iii) Good Manufacturing Practice, or GMP, (iv) Good Distribution Practice, or GDP, (v) Good Consumption Practice, or GCP, and (vi) Good Waste Disposal Practice, or GWDP²¹, depending on the specific activity undertaken by the company. In order to be eligible for a certain certification, a company may be required to obtain certain preliminary approvals or licenses.

Canonic operates under the IMCA’s guidelines and currently has received GSP certification, approval for its R&D work plan, as well as GAP certification for its propagation farm. In addition, Canonic has obtained relevant possession licenses and seed import permits.

Under the guidelines of the IMCA, medical cannabis can be manufactured and marketed in Israel and exported to countries that permit the import of cannabis. However, the export of propagation material from Israel remains illegal. Main potential target markets include Europe and North America. In Europe, each country establishes its own regulations. In North America, Canada has legalized cannabis for both medical and recreational use. In the U.S. regulation is established out on a state by state basis, while under federal law, the use and possession of cannabis remains illegal.

In 2007, we initiated our activities related to castor beans, which were in 2012 organized under Evofuel, a wholly owned subsidiary, which changed its name to Casterra Ag, or Casterra, in 2019. Casterra focuses on the development of an integrated solution – agricultural-technical growth protocols for castor cultivation for the production of castor oil to be used for industrial uses, such as bio-polymers and lubricants. Casterra’s integrated agricultural solution includes breeding of advanced high-yielding castor bean varieties that are non-GM and agricultural growth protocols compatible with a mechanical harvesting solution exclusively available to Casterra’s customers. Our target market is Brazil, where large scale castor agriculture and industry are well established.

Casterra’s competition includes a few other relatively small companies that supply castor seeds to growers worldwide.

Casterra’s business model is to sell proprietary improved castor seed varieties, together with targeted agro-technical growth protocols, to castor growers. These seed varieties and growth protocols are adapted and targeted to localized characteristics. Casterra’s offering includes: (i) high yielding varieties with plant structure suitable for mechanized harvest; (ii) best practices and recommendations to growers for growing castor efficiently in large scale; and (iii) advanced compatible mechanical harvest solution.

Fantini s.r.l.

In October 2018, Casterra announced a breakthrough achieved in the mechanical harvesting of castor beans with Fantini s.r.l., a leading manufacturer and distributor of agricultural equipment. The lack of an available solution for mechanical harvesting has been a major challenge in the conversion of castor to a fully modernized commercial crop, and the combination of the Fantini s.r.l Harvester with Casterra’s proprietary varieties demonstrated significant improvement in yield loss in field trials. The harvester is commercialized by Fantini s.r.l to Casterra’s global partners.

Casterra’s policy is to register relevant castor varieties in the destination territories. To date we have registered several of our varieties in several Latin America countries including Brazil.

Casterra’s activities in Israel in the field of seeds are regulated by the Israeli Ministry of Environmental Protection. Pursuant to these regulations, we are required, among other things, to (i) obtain toxins permits, which allow us to conduct experiments using “hazardous materials,” as such term is defined in the applicable regulations, and (ii) follow specific rules regarding waste disposal. Violation of these regulations may expose the company to criminal penalties, administrative sanctions and responsibility to compensate those injured for any environmental damages.

All seed production designated for export to our partners is subject to field and warehouse inspection by the regulator in the country of destination for compliance with the local regulations, including sampling and inspection for pests and diseases.

Casterra does not significantly rely upon any sources of raw materials for our operations.

As of the date of this report, we held directly and indirectly the percentage indicated of the outstanding capital stock of the following significant subsidiaries:

Our principal facility is located in Rehovot, Israel and consists of 3,209 square meters (approximately 34,500 square feet) of leased office space accommodating our corporate offices and our molecular, microbial and crop protection labs. The lease for these offices will expire on December 31, 2021, and we hold an option to renew such lease for an additional 36 months. A portion (262 square meters, or approximately 2,820 square feet) of the leased office space is subleased to two unaffiliated companies.

We perform most of our testing in plants, or in-planta testing, at our “Evogene Farm”, located on two adjacent lots that we lease outside Rehovot. The first lease covers approximately 13,500 square meters (or approximately 145,000 square feet) of land, and expires on July 21, 2025, and we hold an option to renew such lease for an additional 36 months. The second lease covers approximately 10,000 square meters (approximately 108,000 square feet) of land and expires on May 14, 2021, and we hold an option to renew such lease for an additional 60 months.

The Evogene Farm contains greenhouses, which are used for various in-planta experiments of the company and its subsidiaries. During 2019, we converted part of the Evogene Farm to a designated area for cannabis greenhouse as part of the activities of Canonic, our subsidiary which is focused on the area of medical cannabis. In addition, the Evogene Farm contains warehouses, office facilities and seed banks. From March 2018 through March 2020, we subleased a portion of the Evogene Farm to an agriculture-tech start-up company.

In 2015, we established a research and development facility in the Bio-Research and Development Growth (BRDG) Park, developed by Wexford Science & Technology, a BioMed Realty Company, at the campus of the Donald Danforth Plant Science Center in St. Louis, Missouri. We signed a six year lease, expiring November 1, 2021 and covering approximately 5,745 square feet lab facility. Starting March 2020, the facility accommodates the activities of Lavie Bio Inc., a wholly owned subsidiary of our subsidiary Lavie Bio. A portion of the leased space, comprising approximately 1,200 square feet of lab and office space, is subleased to a biotech company since December 2017, under a sublease agreement expiring October 29, 2021.

Unless otherwise stated, all of our facilities are fully utilized. We have no material tangible fixed assets apart from the leased properties described above.

We are a leading computational biology company aiming to revolutionize life-science product development across several market segments, including human health, agriculture, and other industries. To achieve this mission, we established our unique CPB platform, leveraging the revolutions in big data and artificial intelligence and incorporating a deep understanding of biology.

Our CPB platform aims to disrupt conventional life-science product discovery and development methodology, currently challenged by inefficiencies. By computational selection of the most relevant core components for life-science products, such as microbes, small molecules and genes, and then computational optimization, we are aiming to reduce time, cost and most importantly increase the probability of success to develop life science based products. The company provides these discovery and development capabilities through three dedicated engines: MicroBoost AI for products based on microbes, ChemPass AI for products based on small molecules and GeneRator AI for products based on changes in genetic elements.

Given the broadly applicable capabilities of our technology, as provided through its three engines, we can potentially enhance and improve product development in a variety of life science industries, including human health and agriculture. Today Evogene is applying its MicroBoost AI engine to direct and accelerate the discovery and development of two types of products:  human-microbiome based therapeutics in human health and ag-biological products in agriculture.  The ChemPass AI engine is used for the discovery and development of two types of products:  drugs based on small molecules in human health, and ag-chemicals, such as herbicides and insecticides, in agriculture. GeneRatorAI engine is applied for the discovery and development of three types of products: medical cannabis in human health, improved seed traits in agriculture, and improved castor varieties to support the castor oil production industry.

Evogene has two different business models. The first, which was the main business model until 2014, is product development through collaborations. In this business model Evogene engages with a partner for joint development of a defined product, requested by the partner. In this frame, Evogene conducts the initial R&D activity, discovery and early stage development, while later stage development and commercialization are conducted by the partner. We believe that Evogene’s second business model is rather unique. Starting in 2015, Evogene made a strategic decision, that in addition to product development with a partner based on the partner's request, it will begin developing its own product pipelines, each focusing on a specific industrial segment - benefiting from its unique technology. When such a product pipeline reaches a certain level of maturity, the activity is spun into a dedicated subsidiary.  Each subsidiary focuses on continued development of its pipeline and adding new products to its specific market segment, while using Evogene's technology as its core competitive advantage.

Most of Evogene’s activities have been translated to dedicated subsidiaries. Only the seed traits activity in the field of agriculture, is currently organized as an internal division in Evogene. In Human health there are two subsidiaries: Biomica, focusing on microbiome-based therapeutics, and Canonic, focusing on medical cannabis products. In Agriculture there are two subsidiaries: Lavie Bio focusing on ag-biologicals and AgPlenus focusing on ag-chemicals. In other industries there is one subsidiary, Casterra, focusing on ag-solutions for castor oil production.

Our revenues are principally derived from research and development payments under our collaboration agreements and related arrangements with our collaborators. Some of our agreements with collaborators also provide for success-based payments, such as milestone payments paid by our collaborators upon the occurrence of certain specified events and royalty revenues based on the sales or transfer of products our collaborators develop that contain, or are based on, our discoveries, which we license to them. We have not yet generated revenues from royalty payments.

We have entered into share purchase agreements with Monsanto (now Bayer) and Bayer, which were signed in contemplation of our collaboration agreements with them. We attribute the proceeds from arrangements under these agreements to the value of our ordinary shares issued to Monsanto and Bayer at the time of the investments as well as to the services we perform under the collaboration agreements. As a result, we recognized in 2018 as revenues the excess payment, which is the consideration these investors paid for our ordinary shares over the market value of our ordinary shares traded on the TASE at the time of the investment. We did not record such revenues for the years ended December 31, 2019 or 2020.

The following table presents a breakdown of net revenues by operating segment for the periods indicated.

The following table presents net revenues by geographic breakdown of customers as a percentage of our total net revenues for the periods indicated. This data refers to the location of the customer and does not take into consideration the location of the end-user (to the extent it is different).

Cost of revenues primarily consists of development costs incurred in conjunction with our collaborations, which include: salaries and related personnel costs (including share-based compensation in 2018) for our research and development employees working on the collaborations; payments to third party suppliers that assist us in producing genomic data; and the cost of disposable materials (such as seeds, laboratory supplies, fertilizer, water and soil). Cost of revenues also includes operational overhead costs such as: depreciation of our property, plant and equipment (in 2018); costs related to leasing and operating our office and laboratory facilities and greenhouses; and expenses related to retaining advisors, who primarily consist of biological experts.

Research and Development Expenses, net: Research and development expenses primarily consist of costs related to our internal or independent research and development activities, as opposed to development costs incurred in connection with our collaborations (which are included in cost of revenues). These independent activities of ours include the further development of our product pipeline, enhancement and expansion of our CPB platform and improvement of our computational, scientific and validation technologies, know-how and capabilities used by our subsidiaries and product divisions. Research and development costs include: salaries and related personnel costs (including share-based compensation); payments to third party suppliers, mainly with respect to producing genomic data, field-trials and pre-clinical studies carried out by third parties; cost of disposable materials; expenses associated with participation in professional conferences; operational overhead costs, which include costs related to leasing and operating our office, laboratory facilities and greenhouses; depreciation of property, plant and equipment; and amortization of intangible assets. Expenses related to our intellectual property, such as legal and other costs associated with patent applications, are also included as research and development expenses.

General and Administrative Expenses: General and administrative expenses mainly consist of: salaries and related personnel costs (including share-based compensation) for our general and administrative employees; expenses related to HR activities and employee benefits and welfare; expenses for consulting, insurance, legal, D&O liability insurance, and professional services; and other expenses associated with being a U.S. publicly listed company. We expect that our general and administrative expenses will remain at the current level during 2021.

In view of the COVID-19 pandemic, which has disrupted our operations since March 2020, we adjusted our work plans and budget, reducing and delaying certain activities. The impact of these changes has been minimal and by the end of 2020 we had resumed our full activities. With respect to 2021, we expect that the impact of the COVID-19 pandemic on our operations (assuming the pandemic to be at the level today) will be minimal.

Financing income primarily consists of: interest income on our cash bank deposits and securities; income related to a revaluation of the marketable securities we hold, which consist of money market funds, corporate bonds and government treasury notes; and foreign currency exchange income.

Financing expenses primarily consist of: issuance expenses and revaluation of pre-funded warrants issued as part of our November 2020 $12 million fundraising; expenses related to bank charges and commissions; expenses related to a revaluation of the marketable securities we hold; interest expense for our operating lease liability; and foreign currency exchange expense. The interest due on government grants is also considered a financial expense and is recognized beginning on the date on which we receive the grant until the date on which the grant is expected to be repaid.

 

We do not generate taxable income in Israel, as we have historically incurred operating losses resulting in carryforward tax losses totaling approximately $139 million as of December 31, 2020, to be carried forward indefinitely to future tax years. Accordingly, we do not expect to pay taxes in Israel for the foreseeable future, until we have taxable income after the full utilization of our carryforward tax losses.

Our U.S. subsidiaries, Evogene Inc., Lavie Bio Inc., Lavie Bio Tec Inc., Taxon Biosciences Inc.  and AgPlenus Inc. are subject to U.S. income taxes. In 2020, the tax rates applicable to those companies were approximately 21% and 6.5% (federal tax and state tax, respectively, where those companies operate).

We divide our operations into three operating segments – Agriculture, Human Health and Industrial applications, as follows:

The following table presents our revenues and operating loss by segment for the periods presented:

The following table sets forth our overall results of operations (on an unsegmented basis) for the years ended December 31, 2018, 2019 and 2020. The below discussion of our results of operations omits a comparison of our results for the years ended December 31, 2018 and 2019. In order to view that discussion, please see “Item 5. Operating and Financial Review and Prospects—A. Operating Results—Comparison of Period-to-Period Results of Operations” in our Annual Report on Form 20-F for the year ended December 31, 2019, which we filed with the SEC on April 27, 2020.

 

Cost of revenues increased by $0.3 million, or 100.0%, to $0.6 million for the year ended December 31, 2020 from $0.3 million for the year ended December 31, 2019. The increase was primarily related to our activities under our collaboration agreements.

 

Gross profit increased by $0.1 million, or 25.0%, to $0.5 million for the year ended December 31, 2020 from $0.4 million for the year ended December 31, 2019, due to the combined impact of changes in our revenues and cost of revenues, as described above.

Research and Development Expenses, Net. Research and development expenses increased by $1.5 million, or 9.5%, to $17.3 million for the year ended December 31, 2020 from $15.8 million for the year ended December 31, 2019. This increase was attributable to (a) payments made to third parties for (i) pre-clinical studies conducted for Biomica, (ii) field trials conducted in target locations for Lavie Bio and (b) non-cash expenses of amortization of share-based compensation.

Business Development Expenses. Business development expenses increased by $0.7 million, or 35%, to $2.7 million for the year ended December 31, 2020 from $2 million for the year ended December 31, 2019. This increase was attributable to non-cash expenses of amortization of share-based compensation.

General and Administrative Expenses. General and administrative expenses increased by $1.5 million, or 39.5%, to $5.3 million for the year ended December 31, 2020 from $3.8 million for the year ended December 31, 2019. This increase was attributable to (a) the impact of an industry-wide increase in the cost of D&O liability insurance and (b) non-cash expenses of amortization of share-based compensation.

Financing Income. Financing income decreased by $1.0 million, or 38.5%, to $1.6 million for the year ended December 31, 2020 from $2.6 million for the year ended December 31, 2019. This decrease was attributable to interest income on marketable securities and the change in their fair value. The marketable securities were sold during 2020.

Financing Expenses. Financing expenses increased by $2.4 million, or 400%, to $3.0 million for the year ended December 31, 2020 from $0.6 million for the year ended December 31, 2019. This increase was attributable to non-cash expenses related to the revaluation of pre-funded warrants in 2020.

For the years ended December 31, 2020 and 2019, we recorded insignificant amounts for taxes on income in Israel and an insignificant amount of taxes with respect to U.S. subsidiaries.

The amount of our overall loss increased by 37.2% to $26.2 million for the year ended December 31, 2020, from $19.1 million for the year ended December 31, 2019. This increase reflected the cumulative effect of all of the above-described line items from our consolidated statements of comprehensive loss.

Our accounting policies affecting our financial condition and results of operations are more fully described in our consolidated financial statements included elsewhere in this annual report. The preparation of our financial statements requires management to make judgments, estimates and assumptions that affect the amounts reflected in the consolidated financial statements and accompanying notes, and related disclosure of contingent assets and liabilities. We base our estimates upon various factors, including past experience, where applicable, external sources and on other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions, and could have a material adverse effect on our reported results.

In many cases, the accounting treatment of a particular transaction, event or activity is specifically dictated by accounting principles and does not require management’s judgment in its application, while in other cases, management’s judgment is required in the selection of the most appropriate alternative among the available accounting principles, that allow different accounting treatment for similar transactions.

We recognize revenues when the control over the goods or services is transferred to the customer. The transaction price is the amount of the consideration that is expected to be received based on the contract terms, excluding amounts collected on behalf of third parties (such as taxes).

We have entered into research collaboration and license agreements under which we grant to our collaborators an exclusive license to intellectual property rights for the development and commercialization of our proprietary product candidates. The agreements contain multiple performance obligations, including funding from periodic payments for research and development services, payments based on achievement of specified milestones and royalties on sales of products sold by our collaborators that include the licensed traits.

Revenues from research and development services as part of our research collaboration and license agreements are recognized over time, during the period the customer simultaneously receives and consumes the benefits provided by our performance. Recognition of the service is throughout the services period and is determined based on the proportion of actual costs incurred for each reporting period to the estimated total costs, subject to the enforceable rights. We charge our customers based on payment terms agreed upon in specific agreements. When payments are made before or after the service is performed, we recognize the resulting contract asset or liability.

 

Revenues from milestone events stipulated in the agreements are recognized upon the occurrence of event or achievement of the milestone specified in the agreement.

We account for share-based compensation in accordance with the fair value recognition provision of IFRS guidance on share-based compensation. Under these provisions, share-based compensation is measured at the grant date based on the fair value of the award and is recognized as an expense, net of estimated forfeitures, over the requisite service period, which is generally the vesting period of the respective award. Share-based compensation expense was $4.1 million, $1.6 million and $1.7 million in 2020, 2019 and 2018, respectively. We selected the binomial option-pricing model as the most appropriate method for determining the estimated fair value of our share-based compensation. The determination of the grant date fair value of options using an option-pricing model is affected by estimates and assumptions regarding a number of complex and subjective variables. These variables include the estimated period of time that we expect employees to hold their options, the expected volatility of our share price over the expected term of the options (estimated using historical data from prior years, including historical forfeiture rates), share option exercise and cancellation behaviors, risk-free interest rates, expected dividend yields (assumed to be zero as we have historically not paid and do not intend to pay dividends on our ordinary shares) and the price of our ordinary shares. In addition, our compensation expense is affected by our estimate of the number of awards that will ultimately vest. In the future, if the number of equity awards that are forfeited by employees is lower than expected, the expense recognized in future periods will be higher.

Government grants received from the IIA are recognized as a liability if future economic benefits are expected from the projects that will result in royalty-bearing sales.

A liability for a grant is first measured at fair value using a discount rate that reflects a market rate of interest. The difference between the amount of the grant received and the fair value of the liability is accounted for as a government grant and recognized as a reduction of research and development expenses. After initial recognition, the liability is measured at amortized cost using the effective interest method. Royalty payments we make to repay the grant are treated as a reduction of the liability. If no economic benefits are expected from the research activity, the grant receipts are recognized as a reduction of research and development expenses, in which case, the royalty obligation is treated as a contingent liability.

There is uncertainty regarding the estimates of future cash flows and the estimate of the capitalization rate that is used for determining the amount of the liability recognized. At the end of each reporting period, we evaluate whether there is reasonable assurance that the liability recognized, in whole or in part, will not be repaid (since we will not be required to pay royalties) based on the best estimate of future sales, and if so, the appropriate amount of the liability is recognized as a reduction of research and development expenses.

 

We cannot readily determine the interest rate implicit in our operating lease for our principal facility in Rehovot, Israel.  We therefore use our incremental borrowing rate, IBR, to measure lease liabilities. The IBR is the rate of interest that we would have to pay to borrow over a similar term, and with a similar security, the funds necessary to obtain an asset of a similar value to the right-of-use asset in a similar economic environment. The IBR therefore reflects what we ‘would have to pay’, which requires estimation when no observable rates are available or when they need to be adjusted to reflect the terms and conditions of the lease.

 

We estimate the IBR using observable inputs (such as market interest rates) when available and we are required to make certain entity-specific estimates (such as the Company's stand-alone credit rating).

On August 6, 2019, Corteva Inc. invested in the Company's agriculture biologicals subsidiary, Lavie Bio, by way of a contribution of all Corteva’s holdings in its wholly owned subsidiary Taxon Biosciences, which included several intangible assets, and payment of an amount of $10 million in cash.

The fair value of intangible assets received through the Corteva investment is determined upon initial recognition by either one of three traditional methods in valuating an asset. These methods include the market approach, the income approach and the cost approach. The pipeline products and potential products were valued by applying the income approach and the Microorganisms collection was valued using the cost approach.

The Company’s significant estimates in this analysis included, but were not limited to, future cash flow projections, the weighted average cost of capital, the terminal growth rate, and the tax rate. The Company believes the current assumptions and estimates utilized were both reasonable and appropriate.  Future cash flow estimates are, by their nature, subjective and actual results may differ materially from the Company’s estimates.  If the Company’s ongoing estimates of future cash flows are not met, the Company may have to record impairment charges in future periods.  The Company’s estimates of future cash flows are based on current regulatory and economic climates, recent operating results, and planned business strategy. These estimates could be negatively affected by changes in federal, state, or local regulations or economic downturns.

Tax regulations have a material impact on our business, particularly in Israel where we have our headquarters. The following summary describes the current tax structure applicable to companies in Israel, with special reference to its effect on us.

Israeli companies are generally subject to corporate tax on their taxable income. In 2020, the corporate tax rate was 23%. Capital gains derived by an Israeli company are generally subject to tax at the prevailing regular corporate tax rate.

The Law for the Encouragement of Industry (Taxes), 5729-1969, generally referred to as the Industry Encouragement Law, provides several tax benefits for an “Industrial Company”.

The Industry Encouragement Law defines an “Industrial Company” as an Israeli resident company which was incorporated in Israel, of which 90% or more of its income in any tax year, other than income from certain government loans, is derived from an “Industrial Enterprise” owned by it and located in Israel. An “Industrial Enterprise” is defined as an enterprise that is held by an Industrial Company whose principal activity in a given tax year is industrial production.

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

Eligibility for benefits under the Industry Encouragement Law is not contingent upon the approval of any governmental authority. We believe that we currently qualify as an Industrial Company within the meaning of the Industry Encouragement Law. There can be no assurance that we will continue to qualify as an Industrial Company or that the benefits described above will be available in the future.

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

The Investment Law was significantly amended effective April 1, 2005 (which we refer to as the 2005 Amendment), further amended as of January 1, 2011 (which we refer to as the 2011 Amendment) and further amended as of January 1, 2017 (which we refer to as the 2017 Amendment). Pursuant to the 2005 Amendment, tax benefits granted in accordance with the provisions of the Investment Law prior to its revision by the 2005 Amendment remain in force but any benefits granted subsequently are subject to the provisions of the 2005 Amendment. Similarly, the 2011 Amendment introduced new benefits to replace those granted in accordance with the provisions of the Investment Law in effect prior to the 2011 Amendment. However, companies entitled to benefits under the Investment Law as in effect prior to January 1, 2011 were entitled to choose to continue to enjoy such benefits, provided that certain conditions are met, or elect instead irrevocably to forego such benefits and have the benefits of the 2011 Amendment apply. The 2017 Amendment introduced new benefits for Technological Enterprises, alongside the existing tax benefits.

On October 24, 2010, we received a tax ruling from the Israel Tax Authority, according to which, among other things, our activity has been qualified as an “industrial activity”, as defined in the Investment Law and is also eligible to tax benefits as a Beneficiary Enterprise, which will apply to the turnover attributed to such enterprise. The benefit period under this tax ruling ended in 2018, and since we did not generate any taxable income in tax year 2018, we were not entitled to any tax benefits under this tax regime.

In addition, we have reviewed and evaluated the implications and effect of the benefits under the 2011 and 2017 Amendments, and, while potentially eligible for such benefits, we have not yet chosen to be subject to the tax benefits introduced by the 2011 or the 2017 Amendments.

Our working capital requirements generally reflect the growth in our business and have historically been provided by cash raised from our investors, payments from our collaborators and government grants. As of December 31, 2020, we had cash and short term bank deposits of $48.2 million, of which $20.9 million were attributable to equity financing, net, and working capital of $42.1 million, which is calculated by subtracting our current liabilities from our current assets. As of December 31, 2020, we had $3.7 million of outstanding long-term indebtedness related to government grants.

We expect that our working capital and capital investment needs will be funded for the foreseeable future mainly by our cash and cash equivalents and bank deposits we hold as well as from payments from our collaborators. Currently, our principal uses of cash are to fund our operations. In the future, cash may serve us in effecting M&A transactions for achieving inorganic growth in our different segments of operation. We believe that our existing cash and cash equivalents and short-term bank deposits as of December 31, 2020, together with the amount of $28 million raised through an ATM offering during January and February 2021, will be sufficient to meet our projected cash requirements for at least 12 months.

To the extent that existing cash, and cash equivalents and short-term bank deposits are insufficient to fund our future activities, we may need to raise additional funding through debt and equity financing. Additional funds may not be available when we need them on terms that are acceptable to us, or at all. The negative impact of the ongoing Coronavirus outbreak on economies and financial markets worldwide may adversely impact on our ability to raise additional funds for our operations, if and when needed.

If adequate funds are not available to us on a timely basis, we may be required to delay, limit, scale back or cease our research and development activities, establishment and maintenance of sales and marketing capabilities or other activities that may be necessary to commercialize our product candidates.

The following table presents the major components of net cash flows used in or provided by (as applicable) operating, investing and financing activities for the periods presented. For a discussion of our net cash flows for the year ended December 31, 2018, please see “Item 5. Operating and Financial Review and Prospects— B. Liquidity and Capital Resources— Cash Flows” in our Annual Report on Form 20-F for the year ended December 31, 2019, which we filed with the SEC on April 27, 2020: