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As filed with the Securities and Exchange Commission on September 23, 2013

Registration No. 333-            

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form F-1

REGISTRATION STATEMENT

UNDER THE SECURITIES ACT OF 1933

 

 

Evogene Ltd.

(Exact Name of Registrant as Specified in its Charter)

 

 

 

State of Israel    2870    Not Applicable

(State or Other Jurisdiction of

Incorporation or Organization)

  

(Primary Standard Industrial

Classification Code Number)

   (I.R.S. Employer Identification No.)

Evogene Ltd.

13 Gad Feinstein Street

Park Rehovot P.O.B 2100

Rehovot 76121

Israel

+972-8-931-1900

(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)

 

 

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Copies to:

 

Joshua G. Kiernan, Esq.

Colin J. Diamond, Esq.

White & Case LLP

1155 Avenue of the Americas

New York, New York 10036

Tel: 212-819-8200

Fax: 212-354-8113

 

Dan Shamgar, Adv.

Mike Rimon, Adv.

Meitar Liquornik Geva Leshem

Tal

16 Abba Hillel Road

Ramat Gan 52506, Israel

Tel: +972-3-610-3100

Fax: +972-3-610-3111

 

Phyllis G. Korff, Esq.

Yossi Vebman, Esq.

Skadden, Arps, Slate, Meagher
& Flom LLP

4 Times Square

New York, New York 10036

Tel: 212-735-3000

Fax: 212-735-2000

   Aaron M. Lampert, Adv.
Goldfarb Seligman & Co.

98 Yigal Alon Street

Tel Aviv 67891, Israel

Tel: +972-3-608-9999

Fax: +972-3-608-9909

Approximate date of commencement of proposed sale to the public: As soon as practicable after effectiveness of this registration statement.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.   ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.   ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.   ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.   ¨

 

 

CALCULATION OF REGISTRATION FEE

 

 

 

Title of Each Class of

Securities to be Registered

 

Proposed

Maximum Aggregate

Offering Price (1)(2)

  Amount of
Registration Fee

Ordinary shares, par value NIS 0.02

  $60,000,000   $8,185

 

 

(1)   Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o) under the Securities Act of 1933.
(2)   Includes shares granted pursuant to the underwriters’ option to purchase additional shares.

 

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

SUBJECT TO COMPLETION, DATED SEPTEMBER 23, 2013

PRELIMINARY PROSPECTUS

 

LOGO

             Shares

Evogene Ltd.

Ordinary Shares

$         per share

 

 

We are selling              ordinary shares. This is our initial public offering in the United States. We have applied to have the ordinary shares listed on the New York Stock Exchange under the symbol “EVGN.” Our ordinary shares are listed on the Tel Aviv Stock Exchange, or TASE, under the symbol “EVGN.” On September 18, 2013, the last reported sale price of our ordinary shares on the TASE was NIS 51.18, or $14.47, per share (based on the exchange rate reported by the Bank of Israel on such date, which was NIS 3.54 = $1.00), giving prospective effect to the 1-for-2 reverse share split of our ordinary shares, which is to be effected immediately prior to the completion of this offering. The estimated initial public offering price is between $         and $         per share.

We are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act and will therefore be subject to reduced reporting requirements.

 

 

Investing in our ordinary shares involves risks. See “ Risk Factors ” beginning on page 9.

None of the Securities and Exchange Commission, the Israeli Securities Authority or any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

 

 

      

Per Share

    

Total

Public offering price

     $                          $                    

Underwriting discounts and commissions(1)

     $                          $                    

Proceeds to us (before expenses)

     $                          $                    

 

(1) See “Underwriting” for a description of the compensation payable to the underwriters.

The underwriters expect to deliver the ordinary shares to purchasers on or about                     , 2013. We have granted the underwriters an option to purchase up to              additional ordinary shares to cover over-allotments.

 

Credit Suisse

Deutsche Bank Securities

 

 

 

Oppenheimer

Piper Jaffray

                 , 2013


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LOGO


Table of Contents

 

TABLE OF CONTENTS

 

     Page  

S UMMARY

     1   

R ISK F ACTORS

     9   

S PECIAL N OTE R EGARDING F ORWARD -L OOKING S TATEMENTS

     31   

P RICE R ANGE OF O UR O RDINARY S HARES

     32   

U SE OF P ROCEEDS

     33   

D IVIDEND P OLICY

     34   

C APITALIZATION

     35   

D ILUTION

     36   

S ELECTED C ONSOLIDATED F INANCIAL D ATA

     38   

M ANAGEMENT S D ISCUSSION AND A NALYSIS OF F INANCIAL C ONDITION AND R ESULTS OF O PERATIONS

     40   

I NDUSTRY O VERVIEW

     59   

B USINESS

     69   
     Page  

M ANAGEMENT

     106   

P RINCIPAL S HAREHOLDERS

     123   

C ERTAIN R ELATIONSHIPS AND R ELATED P ARTY T RANSACTIONS

     125   

D ESCRIPTION OF S HARE C APITAL

     126   

S HARES E LIGIBLE FOR F UTURE S ALE

     132   

T AXATION AND G OVERNMENT P ROGRAMS

     133   

U NDERWRITING

     144   

N OTICE TO C ANADIAN R ESIDENTS

     148   

L EGAL M ATTERS

     150   

E XPERTS

     150   

E NFORCEABILITY OF C IVIL L IABILITIES

     150   

W HERE Y OU C AN F IND A DDITIONAL I NFORMATION

     151   

I NDEX TO C ONSOLIDATED F INANCIAL S TATEMENTS

     F-1   

 

Neither we nor the underwriters have authorized anyone to provide information different from that contained in this prospectus, any amendment or supplement to this prospectus or in any free writing prospectus prepared by us or on our behalf. Neither we nor the underwriters take any responsibility for, and can provide no assurance as to the reliability of, any information other than the information in this prospectus and any free writing prospectus prepared by us or on our behalf. Neither the delivery of this prospectus nor the sale of our ordinary shares means that information contained in this prospectus is correct after the date of this prospectus. This prospectus is not an offer to sell or the solicitation of an offer to buy these ordinary shares in any circumstances under which such offer or solicitation is unlawful.

Unless derived from our financial statements or otherwise noted, New Israeli Shekel, or NIS, amounts presented in this prospectus are translated at the rate of $1.00 = NIS 3.54, the exchange rate reported by the Bank of Israel as of September 18, 2013.

 

 

Until                     , 2013 (25 days after the date of this prospectus), all dealers that buy, sell or trade our ordinary shares, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers’ obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

 

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SUMMARY

This summary highlights selected information contained elsewhere in this prospectus. This summary does not contain all the information that you should consider before deciding to invest in our ordinary shares. You should read the entire prospectus carefully, including “Risk Factors” and our consolidated financial statements and notes to those consolidated financial statements, before making an investment decision. In this prospectus, the terms “Evogene,” “we,” “us,” “our” and “the company” refer to Evogene Ltd. and its subsidiary, Evofuel Ltd.

Our Business

We are a plant genomics company that uses a comprehensive and integrated technology infrastructure to enhance seed traits underlying crop performance and productivity through biotechnology and advanced breeding methods. We have strategic collaborations with world-leading agricultural companies, primarily to develop traits for improved yield and abiotic stress tolerance (such as improved tolerance to drought, heat and salinity) and biotic stress resistance (such as resistance to disease, pests and insects). Our products are focused on essential crops, including corn, soybean, wheat, rice and cotton, which, according to Phillips McDougall’s 2011 Seed Industry Overview report, account for over 70% of the value of the global seeds market. We also apply our technology infrastructure to two additional fields: (i) agriculture chemicals (“ag-chemical”) and (ii) seeds focusing on second generation feedstock for biodiesel, both of which have not yet generated revenue and are in the development stage.

The field of plant genomics, or the science of understanding and analyzing plant genomes to identify and impact biological elements affecting trait performance, continues to evolve. Agricultural product innovation is increasingly driven by the ability to analyze data, in order to make direct discoveries and gain insights into key underlying biological phenomena of such products. The seed and ag-chemical industry has witnessed a dramatic increase in the availability of genomic data. This is primarily as a result of the introduction of new technologies that facilitate rapid generation of such data at a significantly lower cost. As a result, the key opportunity, and challenge, for plant trait improvement has shifted from data generation to data integration and analysis of large volumes of data.

We believe that our competitive advantage is based on our continuously enhanced proprietary discovery and development infrastructure. This infrastructure is capable of integrating and analyzing vast amounts of data, through the use of proprietary computational technologies comprised of advanced algorithms and predictive methodologies. Our computational technologies are a key part of our broad technology infrastructure that also integrates extensive scientific expertise, public and proprietary genomic data and plant validation systems. Our proprietary gene identification capabilities, which are scalable and adaptable to a large variety of crops and traits, together with our highly educated and experienced multidisciplinary team of scientists, are, we believe, unique in the industry.

We currently generate revenues primarily through research and development and milestone payments as traits move through development phases, and in the future we expect to receive royalty revenues upon commercialization of products containing traits that we help our collaborators to develop. To date, we have identified and filed patents for over 4,000 novel genes and genomic components for the improvement of key traits, hundreds of which are under development in our collaborators’ pipelines. We believe that the extension and renewal of some of our main collaboration agreements highlight the value ascribed to our performance, our capabilities and our proprietary technology infrastructure.

We have collaboration agreements with most of the world’s leading seed and ag-chemical companies, including subsidiaries or affiliates of Monsanto Company, or Monsanto, Bayer AG, or Bayer, E.I. du Pont de Nemours and Company, or DuPont, and Syngenta AG, or Syngenta. Our collaborations with these companies are

 

 

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aimed at introducing improved seed traits into key commercial crops. Among our collaborators, Monsanto and Bayer are also key shareholders in our company, holding approximately 8.7% and 4.6% of our ordinary shares as of June 30, 2013, respectively.

We also aim to apply our technology infrastructure to two additional fields: ag-chemical and seeds focusing on second generation feedstock for biodiesel. For the ag-chemical market, we are focusing on the discovery of new biologically significant proteins called “targets” based on genes we identify that enable the development of herbicides with novel mechanisms to mitigate weed resistance. We also intend to use our proprietary discovery and development infrastructure to develop chemical molecules as crop enhancers that, when applied to crops, would improve yield and abiotic stress tolerance. To date, we have not yet entered into any collaboration agreements in our ag-chemical operations. For the biodiesel market, we are focusing on the development of improved, high-yielding, non-edible castor bean seeds as an economically viable alternative feedstock for the production of biodiesel with a reduced environmental footprint.

As of June 30, 2013, we employed 188 employees, of which approximately 78% are involved in research and development and 48 hold a Ph.D. degree. Our multi-disciplinary team includes experts in biology, chemistry, plant genetics, agronomics, mathematics, computer science and other related fields.

We have been listed for trading on the Tel Aviv Stock Exchange, or TASE, since 2007, are headquartered in the agricultural and biotech hub of Rehovot, Israel, and have field testing activities in Israel, Brazil and Argentina.

Our Strengths

We believe we are strategically positioned to capitalize on the fundamental need to increase agricultural yields in highly attractive end-markets such as food, feed and biofuel. Our competitive strengths include:

A leading position in the field of plant genomics. Since our company’s formation in 2002, we have established a powerful integrated infrastructure that we believe is unique in our industry for understanding plant genomics, addressing some of the key challenges in agriculture productivity. The infrastructure combines our know-how in plant genomics with our proprietary technologies and processes that span data integration and analysis, field experiments and plant validation. This infrastructure allows us to identify, prioritize and validate over 1,000 genes per year.

Innovative proprietary computational technologies, capable of efficiently integrating and analyzing vast amounts of complex genomic data. Our proprietary computational technologies have demonstrated the capability of addressing the current focus of the seed industry – data analysis – by integrating and comprehensively analysing vast amounts of public and proprietary data, covering more than 200 plant species, enabling us to identify and prioritize genes and genomic components aimed at improving key plant traits.

A partner of choice for industry leaders. We have over ten collaborations with five of the seven leading global seed and ag-chemical companies, focusing on the development of traits involving yield and abiotic stress and biotic stress for key crops in their product portfolios such as corn, soybean and wheat. Under these existing collaborations, hundreds of genes we identified are currently undergoing early testing in our collaborators’ pipelines. Two of our key collaborators, Monsanto and Bayer, have made significant equity investments in our company and have entered into more than one collaboration agreement with us.

A balanced and scalable business model. We currently generate revenues primarily through research and development and milestone payments; in the long term, we expect to also receive significant revenues from sales royalties generated by our collaborators upon commercialization of products. However, because the development

 

 

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cycle of products is lengthy, any revenue from royalty payments may not be earned before six years, if at all. We benefit from a business model in which, pursuant to most of our existing collaboration agreements, a significant part of our operating costs are borne by our collaborators. We self-fund our initial research and development costs in selected projects, with the goal of capturing a larger share of our collaborators’ future revenues.

Diversified product portfolio and multiple paths of commercialization. Our innovative and adaptable technology infrastructure, scientific and computational expertise, and our close links to major companies in the seed and ag-chemical industry allow us to benefit from multiple business opportunities in the agriculture markets. Our more than ten different collaborations cover a portfolio of 20 products tailored to address specific traits and crops. In addition, our expertise in plant genomics and flexible computational technologies will allow us to address new commercial opportunities in the ag-chemical and biodiesel markets.

Broad intellectual property portfolio, claiming protection for thousands of key genes impacting valuable key traits. In the past ten years we have established a broad intellectual property portfolio that includes more than 20 patent families, over 180 national filings and over 30 granted patents covering thousands of key genes and genomic components impacting valuable key traits.

Industry Background

Improving Plant Performance

The seed and ag-chemical industry continues to seek sustainable and economically viable solutions to feed the world’s growing and increasingly prosperous population. While the demand for grain is increasing, production is constrained due to finite arable land and water resources, climate variability, increasingly resilient weeds and insects, depletion of soil nutrients and diseases that impair crop yields.

In order to address these growing challenges, farmers need solutions to increase and maintain crop productivity. A fundamental way to improve plant productivity and performance is through the use of plant genomics. Plant genomics is the science of understanding and analyzing plants to modify biological elements which are responsible for traits that govern plant yield, tolerance to abiotic stress factors (such as drought and heat) and biotic stress factors (such as pests and diseases). Through plant genomics, researchers can identify and influence target genes and other genomic components that affect trait performance, which are then used in the development of (i) enhanced seeds and (ii) novel crop protection ag-chemicals.

(i) Enhanced seeds

There are two primary methods to improve plant performance through the use of genomic technologies in the development of seeds:

Biotechnology or genetic modification . Use of genomic technologies for the development of seeds in which genes that impact specific traits are introduced to the plant through genetic insertion. Such seeds are referred to as genetically modified (“GM”), or biotech seeds.

Advanced breeding . Use of genomic technologies to identify specific DNA sequence variations (such as single-nucleotide polymorphisms, or SNPs), linked to a particular trait. This allows breeders to determine which parent plants with favorable characteristics should be crossed to enhance desired native traits in the next generation.

As of today, the two major traits commercially available for a limited number of crops in the biotech seeds market are herbicide tolerance and resistance to insects. Factors expected to drive future growth include the application of advanced breeding and biotechnology in additional crops, such as rice and wheat, introduction of new target traits, such as durability to abiotic stress, and adoption of biotechnology crops by additional countries.

 

 

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(ii) Crop protection ag-chemicals

The market for crop protection ag-chemicals has grown by approximately 40% since 2007 to an estimated $47 billion in 2012, according to Phillips McDougall’s 2013 Industry Presentation on the Global Agrochemical and Seed Markets. Crop protection ag-chemicals, which as a group are referred to as “pesticides” or “crop protection products,” include herbicides (to control weeds), fungicides (to prevent and treat fungal diseases) and insecticides (to minimize damage caused by insects). In recent years, the rate of introduction of novel ag-chemicals has been steadily declining largely due to higher development costs and strict regulation, which in turn has led to the further acceleration of pest resistance to existing ag-chemicals.

Farmers and ag-chemical companies have therefore been seeking new solutions to mitigate pest resistance. This includes the use of plant genomic data to identify and target essential biological processes and leveraging this data for the discovery and development of novel herbicides with new mechanisms to cope with the growing resistance of weeds.

The Market for Biofuels

Biofuel demand in ground, aviation and maritime transportation has been steadily growing in past years, representing a market opportunity of approximately $140 billion in 2011, according to Ken Research’s 2012 Global Biofuel Market Outlook. The market is mainly driven by a need for increasing energy independence, reducing susceptibility to fluctuating oil prices and environmental concerns. At present, production of biodiesel, an alternative to diesel fuel derived from plant oil, relies on edible crops, such as soybean and canola, considered first generation feedstocks. Rising commodity prices and concerns surrounding the long-term sustainability of diverting food feedstock for biodiesel use has hindered widespread adoption of these alternative fuels, setting the stage for the demand of second generation feedstock for biodiesel. There is an increasing need to identify feedstock sources which would be: (i) economically viable; (ii) scalable and (iii) sustainable.

Our Growth Strategy

Our goal is to extend our market experience in improving plant productivity and performance using plant genomics. To achieve that goal we intend to pursue the following strategies.

Expand our innovative technologies in plant genomics. We intend to enhance our competitive advantage by further investing in our technology infrastructure and research and development capabilities .

Continue to advance our existing collaborations in seed traits. We are focused on executing and advancing our existing collaborations in order to expedite our genes and genetic components towards commercialization with a view to generating significant milestone and royalty revenues.

Extend and expand our seed trait project portfolio. We plan to continue to leverage our scalable and adaptable infrastructure, plant genomics expertise and close relationships with agriculture industry leaders.

Capture an additional share of the value chain by increasing self-funded research and development . In the future, we intend to complement our revenue streams by selectively self-funding a larger portion of our direct initial research and development costs, with the goal of capturing a larger share of our collaborators’ future revenues.

Further develop and commercialize our ag-chemical operations. We are leveraging our know-how and computational technologies to position our company at the forefront of discovery and innovation in ag-chemicals.

 

 

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Further develop and commercialize the activities of our subsidiary Evofuel . We intend to further develop our castor bean seed operations as a second generation feedstock for biodiesel.

Risk Factors

Investing in our ordinary shares involves risks. You should carefully consider the risks described in “Risk Factors” beginning on page 9 before making a decision to invest in our ordinary shares. If any of these risks actually occurs, our business, financial condition or results of operations would likely be materially adversely affected. In such case, the trading price of our ordinary shares would likely decline, and you may lose all or part of your investment. The following is a summary of some of the principal risks we face:

 

   

We have a history of losses, and incurred operating losses of $(3.1 million), $(3.2 million) and $(2.0 million) for the years ended December 31, 2012, 2011 and 2010, respectively, and $(2.1 million) and $(1.1 million) in the six months ended June 30, 2013 and 2012, respectively. We may never achieve or maintain profitability.

 

   

We may not be successful in developing commercial products.

 

   

We derive substantially all of our current revenues from our strategic collaborations, most significantly with Monsanto and Bayer, and the termination or non-renewal of these collaborations would have a material adverse effect on our results of operations.

 

   

Our product development cycle is lengthy and uncertain, and it may take at least six years, if at all, before the first seeds containing our traits complete the development process and become commercially available.

 

   

Consumer and government resistance to genetically modified organisms may negatively affect our public image and reduce sales of plants containing our traits.

Corporate Information

Our principal executive offices are located at 13 Gad Feinstein Street, Park Rehovot P.O.B. 2100, Rehovot 76121 Israel, and our telephone number is +972 (8) 931-1900. Our website address is www.evogene.com. Information contained on, or that can be accessed through, our website does not constitute a part of this prospectus and is not incorporated by reference herein. We have included our website address in this prospectus solely for informational purposes. We are a limited liability corporation, and we operate under the Israeli Companies Law 5759-1999. Our agent for service of process in the United States is              .

Throughout this prospectus, 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. appearing in this prospectus 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 prospectus are the property of their respective holders.

 

 

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THE OFFERING

 

Ordinary shares offered by us

             ordinary shares (or              if the underwriters exercise their option to purchase additional shares in full).

 

Ordinary shares to be outstanding after this offering

                ordinary shares (or              if the underwriters exercise their option to purchase additional shares in full).

 

Use of proceeds

We intend to allocate the net proceeds from this offering to our different areas of activity as follows:

1. Seed Traits:

 

  We estimate the total investment in our seed traits operation will be approximately 50% of our net proceeds from this offering, after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

2. Ag-Chemicals:

We estimate the total investment in our ag-chemical operation will be approximately 28% of our net proceeds from this offering, after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

 

  3. Evofuel:

We estimate the total investment in our Evofuel operation will be approximately 22% of our net proceeds from this offering, after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

 

  We will have broad discretion in the way that we use the net proceeds from this offering. See “Use of Proceeds”

 

Risk factors

See “Risk Factors” and other information included in this prospectus for a discussion of factors you should carefully consider before deciding to invest in our ordinary shares.

 

Tel Aviv Stock Exchange symbol and proposed NYSE symbol

“EVGN.”

The number of ordinary shares to be outstanding after this offering is based on 18,879,987 ordinary shares outstanding as of June 30, 2013. The number of ordinary shares to be outstanding after this offering excludes 3,885,861 ordinary shares that were reserved for issuance under our equity incentive plans as of June 30, 2013, of which 2,653,759 shares were issuable upon exercise of options that had been granted and remained outstanding at a weighted average exercise price of $6.79 per share. See “Management—Option Plans.”

Unless otherwise indicated, this prospectus:

 

   

assumes an initial public offering price of $         per ordinary share, the midpoint of the estimated initial public offering price range set forth on the cover page of this prospectus;

 

   

gives effect to a 1-for-2 reverse share split of our ordinary shares that will be effected immediately prior to the completion of this offering; and

 

   

assumes no exercise of the underwriters’ option to purchase up to an additional              ordinary shares from us.

 

 

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SUMMARY CONSOLIDATED FINANCIAL DATA

The following tables set forth our summary consolidated financial data. You should read the following summary consolidated financial and other data in conjunction with “Selected Consolidated Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this prospectus. 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.

The summary consolidated statements of comprehensive income data for each of the years in the three-year period ended December 31, 2012 are derived from our audited consolidated financial statements appearing elsewhere in this prospectus. The summary consolidated statements of comprehensive income data for the six months ended June 30, 2012 and 2013 and the consolidated balance sheet data as of June 30, 2013 have been derived from our unaudited interim condensed consolidated financial statements included elsewhere in this prospectus. Results from interim periods are not necessarily indicative of results that may be expected for the entire year.

 

     Year Ended December 31,     Six Months Ended
June 30,
 
     2010     2011     2012     2012     2013  
                       (unaudited)  
     (in thousands, except per share and share data)        

Consolidated Statements of Comprehensive Income:

          

Revenues

   $ 12,563      $ 14,901      $ 17,072      $ 8,287      $ 8,934   

Cost of revenues

     5,811        8,247        9,552        4,483        4,688   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     6,752        6,654        7,520        3,804        4,246   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Research and development

     5,544        6,384        7,252        3,308        4,666   

Business development

     1,062        1,136        1,159        544        532   

General and administrative

     2,123        2,317        2,235        1,069        1,197   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     8,729        9,837        10,646        4,921        6,395   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating loss

     (1,977     (3,183     (3,126     (1,117     (2,149

Financial income

     724        5,023        972        510        776   

Financial expenses

     (5,717     (1,195     (294     (76     (989
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before taxes on income

     (6,970     645        (2,448     (683     (2,362

Taxes on income

     —          —          74        52        —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ (6,970   $ 645      $ (2,522   $ (735   $ (2,362
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Basic and diluted net income (loss) per share

   $ (0.48   $ 0.04      $ (0.14   $ (0.04   $ (0.12
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average number of ordinary shares used in computing basic income (loss) per share(1)

     14,824,703        17,505,136        18,421,568        18,328,598        18,817,847   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average number of ordinary shares used in computing diluted income (loss) per share(1)

     14,824,703        18,731,118        18,421,568        18,328,598        18,817,847   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

Basic net income (loss) per share is computed based on the weighted average number of ordinary shares outstanding during each period. Diluted net income (loss) per share is computed based on the weighted

 

 

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average number of ordinary shares outstanding during each period plus dilutive potential equivalent ordinary shares considered outstanding during the period, in accordance with IAS 33, “Earnings per Share.”

 

     As of June 30, 2013  
     Actual      As Adjusted(1)  
            (unaudited)  
     (in thousands)  

Consolidated Balance Sheet Data:

     

Cash and cash equivalents

   $ 16,884       $                

Marketable securities

     33,657      

Trade receivables

     1,853      

Total assets

     62,004      

Deferred revenues and other advances

     6,507      

Total liabilities

     14,705      

Working capital(2)

     44,921      

Shareholders’ equity

     47,299      

 

(1) Adjusted amounts give effect to the issuance and sale of              ordinary shares by us in this offering at an assumed initial public offering price of $         per ordinary share, the midpoint of the estimated initial public offering price range set forth on the cover page of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses payable by us.
(2) Working capital is defined as total current assets minus total current liabilities.

 

 

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RISK FACTORS

This offering and an investment in our ordinary shares involve a high degree of risk. You should consider carefully the risks described below and all other information contained in this prospectus, before you decide to buy our ordinary shares. If any of the following risks actually occurs, our business, financial condition and results of operations could be materially and adversely affected. In that event, the trading price of our ordinary shares would likely decline and you might lose all or part of your investment.

Risks Related to Our Business and Our Industry

We may not be successful in developing commercial products.

Our success depends in part on our ability to identify genes that will improve selected crop traits. These genes are licensed to our collaborators to develop and commercialize seeds that contain the genes. It may take at least six years, if at all, before the first seeds complete the development process and become commercially available. Certain of our agreements entitle us to annual research and development payments and milestone payments in the event that specified milestones are met. While we currently do not earn royalties from the sale of seeds containing our seed traits, our long-term growth strategy is based in part on the expectation that such royalties will comprise a significant portion of our revenues in the future. Pursuant to our collaboration agreements, we are usually entitled to receive royalties on any product that integrates a trait over which we hold a patent for either an agreed upon duration of time or until our patent on the trait expires. If seeds that contain our traits are never commercialized, we will not receive revenues from royalties on the products and may not earn a profit on the traits we develop, which could materially and adversely affect our results of operations and our long-term growth strategy.

Seeds containing the traits that we develop may never become commercialized for any of the following reasons:

 

   

our traits may not be successfully validated in the target plants;

 

   

our traits may not have the desired effect sought by our collaborators on the relevant crop;

 

   

we may fail to satisfy relevant milestones under the agreements with our collaborators;

 

   

our collaborators may be unable to obtain the requisite regulatory approvals for the seeds containing our traits;

 

   

our competitors may launch competing or more effective seed traits or seeds;

 

   

a market may not exist for seeds containing our traits or such seeds may not be commercially successful;

 

   

our collaborators may be unable to fully develop and commercialize products containing our seed traits or may decide, for whatever reason, not to commercialize such products; and

 

   

we may be unable to patent our traits in the necessary jurisdictions.

We derive substantially all of our current revenues from our strategic collaborations, most significantly with Monsanto and Bayer, and the termination or non-renewal of these collaborations would have a material adverse effect on our results of operations.

We have entered into multiple collaboration agreements and related arrangements, most significantly with Monsanto and Bayer, under which we currently generate revenues through research and development payments, up-front payments, milestone payments and revenues from shares purchased at a premium. Monsanto and Bayer are expected to continue to account for a substantial amount of our revenues for the next few years. In particular, revenues from Monsanto accounted for 70.1%, 70.6% and 74.3% of our total revenues in the years ended December 31, 2012, 2011 and 2010, respectively, and 65.8% and 73.3% of our total revenues in the six months ended June 30, 2013 and 2012, respectively. Revenues from Bayer accounted for 24.1%, 23.4% and 4.2% of

 

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our total revenues in the years ended December 31, 2012, 2011 and 2010, respectively and 31.9% and 25.9% in the six months ended June 30, 2013 and 2012, respectively. Our current agreement with Monsanto was signed in 2008 and was extended in November 2011, and the collaboration period of the extended agreement ( i.e. , the period of active computational discovery efforts, separate from validation efforts that may follow) is scheduled to expire in August 2014. Monsanto has an option to extend the collaboration period of the agreement for two additional years at its sole discretion. This option expires on February 1, 2014. We entered into two separate multi-year collaboration agreements with Bayer, the first covering rice in April 2009, the collaboration period under which expired in April 2012, and the second covering wheat in December 2010, the collaboration period under which is scheduled to expire in January 2016. In addition, as of June 30, 2013, Monsanto and Bayer held approximately 8.7% and 4.6% of our outstanding equity, respectively. See “Business—Key Collaborations.” We are substantially dependent on Monsanto and, to a lesser extent, on Bayer and our other collaborators to pay us annual research and development fees and milestone fees upon the occurrence of certain milestone events. The termination or non-renewal of our agreements with Monsanto and Bayer, including if Monsanto decides not to exercise its option to extend the collaboration period under our agreement with them by February 1, 2014 (and if Monsanto does not otherwise enter into a new collaboration agreement with us) would have a material adverse effect on our business, financial condition, results of operations and prospects.

There are only a few companies in our seed and ag-chemical market, and we rely on a limited number of collaborators to develop and commercialize products containing our seed traits.

The seed and ag-chemical market is highly consolidated and dominated by a relatively small number of large companies. For example, according to Phillips McDougall’s 2012 Industry Presentation on the Global Seed Market, in 2012, only five agricultural and seed companies, Monsanto, DuPont, Syngenta, Bayer and Limagrain, controlled more than 60% of market value in the global seed market. We are currently undertaking collaborations with these companies to develop improved seeds. Due to the small number of companies in our market, 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.

We are currently working either with collaborators or on independent projects to research and develop 20 different seed traits. While we seek to expand our portfolio of traits in the future, the research and development required to discover and develop new traits is costly, time-intensive and requires significant infrastructure resources. Therefore, in order to discover and develop new traits, we must either enter into new collaborations with seed and ag-chemical companies or develop the traits ourselves, independent of any collaborators. If we are unable to enter into new collaborations, or if we do not have the resources to develop the capabilities necessary to discover and develop new seed traits independently, we may not be able to expand our portfolio of traits, which could have a material adverse effect on our business prospects.

Our product development cycle is lengthy and uncertain, and we may never earn royalties on the sale of products containing our seed traits.

Research and development in the seed and ag-chemical and larger agriculture industries is expensive and prolonged and entails considerable uncertainty. We may spend many years and dedicate significant financial and other resources, including the proceeds of this offering, developing products that will never be commercialized. Our process of discovering, developing and commercializing a seed trait through either genetic modification or advanced breeding involves several phases, and we estimate that it will take seven to thirteen years from discovery to commercialization of a product containing our seed trait.

We currently have 20 seed traits under development with our collaborators, most of which are in Discovery and Phase I, with one product in Phase II. See “Business—Product Development Cycle—Seed Trait Product Development Cycle” for a description of these phases. It may take at least six years, if at all, before the first

 

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products containing our seed traits complete the development process and become commercially available, however we have little to no certainty as to which, if any, of these products will eventually reach commercialization. Because of the long product development cycle and the complexities and uncertainties associated with chemical and biotechnological research, there is significant uncertainty as to whether we will ever generate significant royalties from the products that we are developing.

We or our collaborators may fail to perform obligations under the collaboration agreements.

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 traits we develop and materially and adversely affect our future results of operations. Furthermore, the various payments we receive from our collaborators are 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.

Our collaborators have significant resources and development capabilities and may develop their own products that compete with or negatively impact the advancement or sale of products utilizing the traits we develop and license to them.

While we protect the traits we develop and license to our collaborators through both legal and contractual provisions, any of our collaborators could develop or pursue competing products and traits that may ultimately prove more commercially viable than the traits we develop. Our collaborators are significantly larger than us and may have substantially greater resources and development capabilities. The development or launch of a competing product by a collaborator may adversely affect the advancement and commercialization of any competing traits we develop and any associated research and development payments, milestone and royalty payments.

We are working to develop novel ag-chemical products, and our efforts to enter this market may be unsuccessful.

In addition to our seed trait business, we are currently developing solutions for crop protection and enhancement through chemistry, or ag-chemistry. We may use a significant portion of the proceeds of this offering to invest in the infrastructure and ongoing research needed for this operation. Although our computational technology PoinTar is designed to develop such ag-chemical products, and although we continue to develop additional technologies, we still need to compile the data that our technologies need to analyze in order to discover and develop new products. We are developing these products through a novel approach, focused on biologically significant proteins called “targets,” which is similar to certain approaches pharmaceutical companies undertake to develop new drugs. We currently do not have any collaborators for our ag-chemical products, and therefore are currently funding our data-collection and research and development efforts relating to our ag-chemical products ourselves. Our efforts to develop novel ag-chemical products may fail for a variety of reasons, including:

 

   

Our failure to compile a sufficient amount of data and to develop the technological tools necessary to discover and develop any ag-chemical products;

 

   

Our failure to enter into collaborations similar to those in our seed trait activity;

 

   

The failure of our relatively novel target-based approach to lead to an effective product; and

 

   

Our failure to obtain sufficient funding to fully execute our ag-chemical business plan.

 

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Furthermore, even if we are able to discover and develop an effective product, it may not be successful if we are unable to find collaborators to undertake the advanced stages of product development and to market and commercialize the product. If our efforts to develop ag-chemical products are unsuccessful, our results of operations could be negatively impacted.

Evofuel, our wholly owned subsidiary that develops seeds for biodiesel, may not be successful for a number of reasons.

Our wholly owned subsidiary Evofuel is currently developing improved, high-yield castor bean seeds to be used as a source of non-edible feedstock for the biodiesel market and other industries. We may use a significant portion of the proceeds of this offering to invest in the infrastructure needed for this operation, which has not yet generated revenues from seed sales. The renewable energy market in general and the biodiesel market more specifically are not well established and are evolving. Furthermore, the biodiesel market faces continuing competition from traditional petroleum-based fuels, and demand for biodiesel fluctuates with changing oil and gas prices. Although our castor bean development and production is targeted to produce biodiesel, biodiesel has historically been produced from soybean, rapeseed and corn. Accordingly, in order for us to be successful, we will need to demonstrate on a commercial scale that castor beans can reliably be used as a cost-efficient feedstock for biodiesel production. We will also need to show that the production cost and sales price of castor bean-based biodiesel are competitive with those of traditional oil and gas.

The success of these operations will largely depend on our ability to address several unique challenges, including:

 

   

the high cost of producing castor bean grains, requiring a potentially expensive investment across the entire castor bean value chain ( e.g. , sowing, cleaning and transporting);

 

   

the health and environmental risks posed by the castor bean seed, which contains a naturally occurring poison called ricin;

 

   

any regulatory concerns related to sales of castor beans, particularly related to the import of such beans and the potential effects of ricin;

 

   

the amount of suitable land available to grow the necessary quantity of castor bean plants;

 

   

the risk that farmers may decide not to grow “second season” replacement crops such as the castor bean;

 

   

the ability to produce castor bean in a high throughput mechanized manner; and

 

   

the sustainability of our production and the biodiesel end-product.

In addition, we have no prior experience operating as a seed company. We will therefore be operating in a new industry, with little knowledge of the dynamics involved in producing and selling seeds.

We are working to design improved castor bean seeds and address each of these issues so that we are able to grow a sufficient and sustainable amount of castor bean plants at a low cost. We have entered into strategic collaborations with SLC Agricola S.A., or SLC Agricola, one of Brazil’s largest producers of soybean, cotton and corn, and T6 Industrial S.A., or T6, a leading Argentinian biodiesel producer, which we expect will eventually facilitate commercialization of the castor beans we are currently developing. We are unable to foresee when significant sales will commence, and we do not expect to start selling seeds for at least three years. Furthermore, there can be no assurance that our collaborations with SLC Agricola or T6 will ultimately result in a commercialized castor bean seed. If we are unable to adequately address any of these issues, we may not find a market for our castor bean seeds and our results of operations could be materially and adversely affected.

Even if we are entitled to royalties from our collaborators, we may not actually receive these royalties, or we may experience difficulties in collecting the royalties that we believe we are entitled to.

After our collaborators launch commercial products containing our licensed genes, we will need to rely on the good faith of our collaborators to report to us the sales they earn from these products and to accurately

 

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calculate the royalties we are entitled to, a process that will involve complicated and difficult 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.

We depend on our key personnel and, if we are not able to attract and retain qualified scientific and business personnel, we may not be able to grow our business or develop and commercialize our products.

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, mathematics, computer science and other subjects relevant to our operations. For example, approximately 25% of our staff holds a Ph.D. The number of qualified and highly educated personnel in Israel, where all 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 have recently begun to develop certain traits independent of our collaborators, and we may need to finance the cost of the initial development phase of such trait discovery ourselves.

Currently, our business plan is based primarily on the development of traits in collaboration with our collaborators through all six phases of the discovery-development-commercialization process. We have, however, recently begun to develop certain traits independent of our collaborators and are developing such traits on our own during the discovery phase, and may also undertake such independent discovery efforts during the Phase I or “proof of concept” phase, with a goal of making such traits available to collaborators during later phases, once we have identified what we believe to be promising traits. While we believe that this will allow us to negotiate more favorable license terms with respect to such traits, the up-front cost to us of developing traits 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 traits ourselves. We intend to use a portion of the proceeds from this offering to fund such independent research and trait discovery projects. If we are unsuccessful in discovering promising traits after having invested significant funds, or if we are unable to find collaborators who are interested in such traits 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.

Our business is subject to various government regulations and, if we or our collaborators are unable to obtain the necessary regulatory approvals, we may not be able to continue our operations.

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 seed traits. We apply for and maintain the regulatory approvals necessary for our operations, particularly those covering our field trials, while our collaborators apply for and maintain regulatory approvals necessary for the commercialization of products containing our seed traits. More recently, regulators have implemented delays in approving genetically engineered crops due to environmental concerns and negative publicity. Since our operations and the field trials for our seed traits currently only occur in Israel, only Israeli regulations govern our operations. We believe that our current activities are compliant with all currently applicable Israeli regulations, however we may become subject to new or revised regulations or approvals in the future. Furthermore, any violation of these regulations could expose us to criminal penalties.

The large-scale field trials that our collaborators conduct during advanced stages of product development are subject to regulations similar to those we are subject to. Pursuant to our collaboration agreements, our collaborators also apply for the requisite regulatory approvals prior to commercialization of products containing our seed traits. In most of our key target markets, including the United States and the European Union, regulatory approvals must be received prior to the importation of transgenic products. These regulatory regimes may be

 

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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, which regulates foods derived from new plant varieties. None of our seed traits is currently being tested in large-scale field trial or is in the regulatory approval development stage. Once products containing our seed traits reach these stages, however, if 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 products will not be commercialized, which would negatively impact our business and results of operations.

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

Our computational technologies rely on our IT system to collect and analyze the genomic data we discover. We store significant amounts of data, and as of June 30, 2013, we had compiled over 500 terabytes of data. Although we are developing back-up storage for our stored 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.

As we continue to develop our computational technologies and expand our genomic 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. Furthermore, disruption or failure of our IT system due to technical reasons, natural disaster or other unanticipated catastrophic events, including power interruptions, storms, fires, floods, earthquakes, terrorist attacks and wars could significantly impair our ability to deliver data related to our projects to our collaborators on schedule and materially and adversely affect the outcome of our collaborations, our relationships with our collaborators, our business and our results of operations.

Development of our seed traits, particularly during our field trials, may be adversely affected by circumstances caused by us and those beyond our control.

The seed and ag-chemical industry is subject to various factors that make its operations relatively unpredictable from period to period. Our field tests may be adversely affected by circumstances both caused by us and those beyond our control. Factors caused by us include any failure by us or our collaborators to follow proper agronomic practice or suggested protocols for growing the model validation plants and crops for our field trials, and failure to identify and address diseases, insects and pests, such as birds that may eat the seeds we are evaluating. 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 on which we are testing our traits 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 also experienced crop failures in the past for then-unknown reasons, causing delays in our achievement of milestones and delivery of results, and necessitating that we re-start the field trials. Any field test failure we may experience is not covered by our insurance policy, and therefore could result in increased cost of the field trials and development of our seed traits, which may negatively impact our business and results of operations.

 

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Consumer and government resistance to genetically modified organisms may negatively affect our public image and reduce sales of plants containing our traits.

We are active in the field of biotech research and development in seeds and crop protection, including genetically modified 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 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. 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 products 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. 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 operating losses and negative cash flow, and we may never achieve or maintain profitability.

We have a history of losses, and incurred operating losses of $(3.1 million), $(3.2 million) and $(2.0 million) for the years ended December 31, 2012, 2011 and 2010, respectively, and $(2.1 million) and $(1.1 million) in the six months ended June 30, 2013 and 2012, respectively. Although we are currently developing 20 distinct seed traits, there can be no assurance that these traits will result in commercially successful products. We expect to continue to incur losses in future periods, until we begin earning royalties on the products we are currently developing and any new seed traits we develop in the future, which may not occur for at least six years, 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. If we are unable to adequately control the costs associated with operating our business, including our costs of development and sales, our business, financial condition, operating results and prospects will suffer.

The licenses we grant to our collaborators to use the genes we discover for specified traits in certain crops are exclusive. This limits our opportunities to license the genes that target the same traits in the same crop to more than one collaborator.

The licenses we grant our collaborators to use the genes we discover and patent in certain crops are exclusive. That means that once genes are licensed to a collaborator in a specified crop or crops, we are generally prohibited from licensing those genes to any third party. For example, in the Bayer Wheat Agreement, as defined herein, we are broadly prohibited from collaborating on both GM trait discovery and advanced breeding for wheat, irrespective of the trait, with any party other than Bayer. 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.

 

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Competition in seed traits and seeds is intense and requires continuous technological development. If we are unable to compete effectively, our financial results will suffer.

We currently face significant competition in the markets in which we operate. The markets for seed traits and ag-chemicals are intensely competitive and rapidly changing. Many companies engage in research and development of seed traits and ag-chemicals, and speed in getting a new product to market can be a significant competitive advantage. As an example, some of our competitors have enhanced research and development budgets allocated for seeds that are more significant than our budget. In most segments of the seed and ag-chemical market, the number of products available to the consumer is steadily increasing as new products are introduced. At the same time, an increasing number of products are coming off patent and are thus available to generic manufacturers for production. We may be unable to compete successfully against our current and future competitors, which may result in price reductions, reduced margins and the inability to achieve market acceptance for products containing our traits. In addition, many of our competitors have substantially greater financial, marketing, sales, distribution and technical resources than us and some of our collaborators have more experience in research and development, regulatory matters, manufacturing and marketing. We anticipate increased competition in the future as new companies enter the market and new technologies become available. Our technology may be rendered obsolete or uneconomical by technological advances or entirely different approaches developed by one or more of our competitors, which will prevent or limit our ability to generate revenues from the commercialization of our technology.

We may be required to pay royalties to employees who develop inventions that have been or will be commercialized by us, even if the rights to such inventions have been assigned to us and the employees have waived their rights to royalties or other additional compensation.

Under the Israeli Patents Law, 5727-1967, if there is no agreement that prescribes whether, to what extent and on what conditions an employee is entitled to remuneration from commercialization of an invention developed by or with the contribution of such employee, then such matter is decided by a government-appointed compensation and royalties committee established under the Patents Law. In a decision issued in February 2010, the committee raised (but did not answer) the question whether the waiver by an employee of the right to receive remuneration from the commercialization of such invention is enforceable. The committee stated that such waiver is not necessarily enforceable, since the entitlement to royalties from future commercialization of such invention may be deemed a basic labor law protective right that may not be waived. A subsequent decision of the Israeli Supreme Court from August 2012 left this question unresolved. If such waiver is not enforceable, then an employee may be entitled to seek a determination by the committee that royalties from the commercialization of such invention are payable to the employee by the employer despite the waiver. A significant portion of our intellectual property (including our patents) has been developed by our employees in the course of their employment for us. 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. However, given the foregoing uncertainty with respect to the enforceability of a waiver of the right to future royalties, we may be required to pay royalties to our employees who have invented intellectual property that we have commercialized, which in turn may have a material adverse effect on our results of operations.

Our success depends on our ability to protect our intellectual property and our proprietary technologies.

Our commercial success depends in part on our ability to obtain and maintain patent protection and trade secret protection for our proprietary computational technologies, our traits 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.

 

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If we are unable to protect the confidentiality of our trade secrets, the value of our technology could be materially adversely affected and our business would be harmed.

We treat our proprietary computational 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 they communicate such 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.

Changes in laws and regulations to which we are subject, or to which we may become subject in the future, may materially increase our costs of operation, decrease our operating revenues and disrupt our business.

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:

 

   

impair or eliminate our ability to research and develop our products, including validating our products through field trials;

 

   

increase our compliance and other costs of doing business through increases in the cost to patent or otherwise protect our intellectual property or increases in the cost to our collaborators to obtain the necessary regulatory approvals to commercialize and market the products we develop with them;

 

   

require significant product redesign or systems redevelopment;

 

   

render our products less profitable, obsolete or less attractive compared to competing products;

 

   

affect our collaborators’ willingness to do business with us;

 

   

reduce the amount of revenues we receive from our collaborators through milestone payments or royalties; and

 

   

discourage our collaborators from offering, and consumers from purchasing, products that incorporate our traits.

Any of these events could have a material adverse effect on our business, results of operations and financial condition. Legislators and regulators have increased their focus on plant biotechnology in recent years, with particular attention paid to GM crops. Because our current products are primarily in the initial discovery and proof of concept development phase, the only GM-related regulations that currently affect our business are related to our validation trials in Israel. We believe that we are currently in compliance with Israeli regulations related to growing GM crops in Israel; however, if these regulations change, our validation trials may become costly and burdensome and could require us to relocate our trials outside of Israel or even change our business model to have our collaborators perform validation trials.

While none of our products are currently available for sale, our future growth relies on the ability of our collaborators to commercialize and market our products, and any restrictions on such activities could materially and adversely impact our business and results of operations. Any changes in regulations in countries where GM crops are grown or exported into could result in our collaborators being unable or unwilling to develop,

 

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commercialize or sell products that incorporate our traits. 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 products. Any changes to these existing laws and regulations may materially increase our costs of operation, decrease our operating revenues and disrupt our business. See “Business—Regulation.”

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

As is the case with other biotech companies, our success is heavily dependent on intellectual property, particularly patents. Obtaining and enforcing biotech 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 in recent years, 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.

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

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 our biotechnological traits has prevented and may continue to 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.

 

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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 products.

Our ability to generate significant revenues from our products depends on our and our collaborators’ ability to develop, market and sell our products 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 developed traits, some of which may be construed as containing claims that cover the subject matter of our products 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 traits we develop or the genetically modified plants containing our traits 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 biotech 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 traits.

As the agricultural biotech 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 developed traits. 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 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.

We and our collaborators may disagree over our right to receive payments under our collaboration agreements, potentially resulting in costly litigation and loss of reputation.

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 genes or other intellectual property to our collaborators, who use or will use such intellectual property to develop and commercialize seeds with improved traits. 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.

We have not yet registered our trademarks. Failure to secure those registrations could adversely affect our business.

We have not yet filed applications to register our trademarks and those applications may be rejected or not be allowed for registration, and registered trademarks may not be successfully obtained, maintained or enforced.

 

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We are given an opportunity to respond to those rejections, but we may not be able to overcome such rejections. In addition, in the U.S. Patent and Trademark Office and in comparable agencies in many foreign jurisdictions, third parties are given an opportunity to oppose pending trademark applications and to seek to cancel registered trademarks. Opposition or cancellation proceedings may be filed against our trademarks, and our trademarks may not survive such proceedings. If we do not secure registrations for our trademarks, we may encounter more difficulty in enforcing them against third parties than we otherwise would, which could adversely affect our business.

We may be required to pay substantial damages as a result of product liability claims for which insurance coverage is not available.

Once products integrating our seed traits reach commercialization, product liability claims will be a commercial risk for our business, particularly as we are involved in the supply of biotechnological products, some of which can be harmful to humans and the environment. Courts have levied substantial damages in the United States and elsewhere against a number of companies in the agriculture industry 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 seed traits or allegations of product liability relating to seeds containing traits developed by us 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 do not have product liability insurance coverage. 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 employment agreements with our employees and other agreements with our collaborators and third parties may not adequately prevent disclosure of trade secrets, know-how and other proprietary information.

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.

We may be adversely affected by the current economic environment.

Our ability to obtain financing, invest in and grow our business, and meet our financial obligations depends on our operating and financial performance, which in turn is subject to numerous factors. In addition to factors specific to our business, prevailing economic conditions and financial, business and other factors beyond our control can also affect our business and ability to raise capital. We cannot anticipate all of the ways in which the current economic climate and financial market conditions could adversely impact our business.

 

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We may not be able to fully enforce covenants not to compete with our key employees, and therefore we may be unable to prevent our competitors from benefiting from the expertise of such employees.

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.

Our operations are subject to various health and environmental risks associated with our use, handling and disposal of potentially toxic materials.

As part of our seed trait 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.

The requirements of being a public company may strain our resources and distract our management, which could make it difficult to manage our business, particularly after we are no longer an “emerging growth company.”

Following the completion of this offering, we will be required to comply with various regulatory and reporting requirements, including those required by the Securities and Exchange Commission, or the SEC. Complying with these reporting and regulatory requirements will be time consuming, result in increased costs to us and could have a negative effect on our business, results of operations and financial condition.

As a public company, we will be subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act, and the requirements of the Sarbanes-Oxley Act of 2002, as amended, or the Sarbanes-Oxley Act. These requirements may place a strain on our systems and resources. The Exchange Act requires that we file annual and current reports with respect to our business and financial condition. The Sarbanes-Oxley Act requires that we maintain effective disclosure controls and procedures and internal controls over financial reporting. To maintain and improve the effectiveness of our disclosure controls and procedures, we will need to commit significant resources, hire additional staff and provide additional management oversight. We will be implementing additional procedures and processes for the purpose of addressing the standards and requirements applicable to public companies. 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 an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act, or the “JOBS Act,” we may take advantage of certain temporary exemptions from various reporting requirements including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act (and the rules and regulations of the SEC thereunder). These exemptions will cease to apply by no later than the last day of our fiscal year following the fifth anniversary of the completion of this offering, and we expect to incur additional expenses and devote increased management effort toward ensuring compliance with them. We cannot predict or estimate the amount of additional costs we may incur as a result of becoming a public company or the timing of such costs.

 

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Risks Related to Our Ordinary Shares and the Offering

An active, liquid and orderly trading market for our ordinary shares may not develop in the United States, the price of our ordinary shares may be volatile, and you could lose all or part of your investment.

Prior to this offering, there has been no public market in the United States for our ordinary shares. The initial public offering price of our ordinary shares in this offering will be based, in part, on the price of our ordinary shares on the Tel Aviv Stock Exchange, or the TASE, and determined by negotiation among us and the representatives of the underwriters. This price may not reflect the market price of our ordinary shares following this offering and the price of our ordinary shares may decline. In addition, the market price of our ordinary shares could be highly volatile and may fluctuate substantially as a result of many factors, including:

 

   

actual or anticipated fluctuations in our results of operations;

 

   

variance in our financial performance from the expectations of market analysts;

 

   

announcements by us or our competitors of significant business developments, changes in relationships with our collaborators, acquisitions or expansion plans;

 

   

our involvement in litigation;

 

   

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

 

   

failure to publish research or the publishing of inaccurate or unfavorable research;

 

   

market conditions in our industry and changes in estimates of the future size and growth rate of our markets;

 

   

changes in key personnel;

 

   

the trading volume of our ordinary shares; and

 

   

general economic and market conditions.

An active trading market on the New York Stock Exchange, or NYSE, for our ordinary shares may never develop or may not be sustained following this offering. If an active market for our ordinary shares does not develop, it may be difficult to sell your ordinary shares in the United States.

In addition, the stock markets have recently experienced extreme price and volume fluctuations. 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.

As a foreign private issuer whose shares are listed on the Tel Aviv Stock Exchange, we intend to follow certain home country corporate governance practices instead of certain NYSE corporate governance requirements.

As a foreign private issuer, in reliance on NYSE’s corporate governance rules, which permits a foreign private issuer to follow the corporate governance practices of its home country, we will be permitted to follow certain Israeli corporate governance practices instead of those otherwise required under the NYSE corporate governance standards for U.S. domestic issuers. As of the consummation of this offering, we intend to follow the NYSE corporate governance standards for domestic issuers, except with respect to the matters described in this risk factor. Our articles of association provide that the quorum for any meeting of shareholders shall be the presence of at least two shareholders present in person, by proxy or by a voting instrument, who hold at least 25% of the voting power of our shares. As permitted under the Israeli Companies Law, or the Companies Law, for an adjourned meeting at which a quorum is not present at the end of half an hour following the time fixed for the

 

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meeting, the meeting may generally proceed so long as at least one shareholder is present, regardless of the voting power held by him, her or it. We also intend to follow certain home country practices in Israel in lieu of complying with certain other NYSE corporate governance requirements, including separate executive sessions of independent directors and non-management directors and the requirement to obtain shareholder approval for certain dilutive events (such as for the establishment or amendment of certain equity-based compensation plans, issuances that will result in a change of control of the company and issuances of more than 1% of our outstanding shares or voting power to our affiliates). Accordingly, our shareholders will not be afforded the same protection as provided under NYSE 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 NYSE may provide less protection than is accorded to investors of domestic issuers. See “Management—NYSE Listed Company Manual and Home Country Practices.”

Our ordinary shares will be traded on more than one market and this may result in price variations.

Our ordinary shares have been traded on the TASE since 2007, and we intend to apply to have our ordinary shares listed on NYSE. Trading in our ordinary shares on these markets will take place in different currencies (U.S. dollars on NYSE 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 NYSE.

As a foreign private issuer we will not be subject to U.S. proxy rules and will be exempt from filing certain Exchange Act reports.

As a foreign private issuer, we will be exempt from the rules and regulations under the Exchange Act related to the furnishing and content of proxy statements, and our officers, directors, and principal shareholders will be exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the Exchange Act. In addition, we will not be required under the Exchange Act to file annual and current reports and financial statements with the SEC as frequently or as promptly as domestic companies whose securities are registered under the Exchange Act, and we will generally be exempt from filing quarterly reports with the SEC under the Exchange Act.

In addition, we would lose our foreign private issuer status if a majority of our directors or executive officers are U.S. citizens or residents and we fail to meet additional requirements necessary to avoid loss of foreign private issuer status. Although we have elected to comply with certain U.S. regulatory provisions, our loss of foreign private issuer status would make such provisions mandatory. The regulatory and compliance costs to us under U.S. securities laws as a U.S. domestic issuer may be significantly higher. If we are not a foreign private issuer, we will be required to file periodic reports and registration statements on U.S. domestic issuer forms with the SEC, which are more detailed and extensive than the forms available to a foreign private issuer. We may also be required to modify certain of our policies to comply with good governance practices associated with U.S. domestic issuers. Such conversion and modifications will involve additional costs. In addition, we may lose our ability to rely upon exemptions from certain corporate governance requirements on U.S. stock exchanges that are available to foreign private issuers.

We may be subject to parallel reporting obligations in Israel and the United States, which may impose on us more stringent disclosure obligations than is customary for foreign private issuers whose securities are listed only in the United States.

As an Israeli public company with ordinary shares that are traded on the TASE, we have filed Hebrew language periodic and immediate reports with, and have furnished information to, the TASE and the Israeli Securities Authority, or the ISA, since the consummation of the initial public offering of our shares on the TASE in 2007. Prior to the commencement of this offering, we intend to convene a special meeting of our shareholders to be held shortly prior to completion of this offering, in order to solicit, among other things, the approval of our

 

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shareholders for a transition solely to U.S. reporting standards upon listing on the NYSE in accordance with an applicable exemption under the Israeli Securities Law, 5728-1968, and the regulations promulgated thereunder, or the Israeli Securities Law.

To the extent that we do not receive such approval of our shareholders, upon consummation of this offering we will become subject to separate reporting schemes of the Israel Securities Law and the Exchange Act. While similar in many respects, certain differences between these 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. For example, while the execution of a term sheet for a material transaction is generally not reportable by a foreign private issuer under the Exchange Act, such an event must be immediately reported to the TASE. Such disclose requirements might hamper our ability to freely conduct our operations, compared to other foreign private issuers whose securities are listed only in the United States. In addition, if we wish to engage in a capital market or another material transaction in which we are required to disclose certain information in one jurisdiction (whether Israel or the United States) that we are not required or willing to disclose under the securities laws of the other jurisdiction at the same time or at all, we may need to change the timing or form of such capital raising or other material transaction. Because we will be listed in different jurisdictions and operate in different geographic markets, we may sometimes not present information regarding our operations on a uniform basis. Accordingly, we may not present certain data under one set of securities laws that is typically presented under the other set of securities laws, thereby leading to a disparity of information between investors and shareholders in the two jurisdictions, which could cause a disparity of share prices and thereby present the opportunity for arbitrage in trading in our ordinary shares. Finally, if we do not receive the shareholders’ approval described above, the requirement to comply with the separate reporting obligations under U.S. and Israeli securities laws will require management attention and will burden us with additional costs.

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

Generally, if for any taxable year 75% or more of our gross income is passive income, or at least 50% of the average quarterly value of our assets (which may be determined in part by the market value of our ordinary shares, which is subject to change) are held for the production of, or produce, passive income, we could 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 (“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 (“Goodwill”) may generally be treated as a non-passive asset to the extent attributable to our non-passive activities. Based on certain estimates of our gross income and gross assets, our intended use of proceeds of this offering, and the nature of our business, we do not expect that we will be classified as a PFIC for the taxable year ending December 31, 2013; however, 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 the value of our gross assets is likely to be determined in large party by reference to the market prices of our securities, we could be classified as a PFIC for a given taxable year if our Market Capitalization were to decrease significantly.

If we are characterized as a PFIC, our United States shareholders may suffer adverse tax consequences, including having gains realized on the sale of our ordinary shares treated as ordinary income, rather than a capital gain, the loss of the preferential rate applicable to dividends received on our ordinary shares by individuals who are U.S. Holders (as defined in “Taxation and Government Programs—United States Federal Income Taxation”), and having interest charges apply to distributions by us and the proceeds of share sales. If we are characterized as a PFIC, 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 if we are classified as a PFIC. See “Taxation and Government Programs—United States Federal Income Taxation—Passive Foreign Investment Company Considerations.”

 

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We are an “emerging growth company” and we cannot be certain whether the reduced requirements applicable to emerging growth companies will make our ordinary shares less attractive to investors.

We are an “emerging growth company,” as defined in the JOBS Act, and we may take advantage of certain exemptions from various requirements that are applicable to other public companies that are not “emerging growth companies.” For so long as we remain an “emerging growth company,” we will not be subject to the provision of Section 404(b) of the Sarbanes-Oxley Act that requires that our independent registered public accounting firm to provide an attestation report on the effectiveness of our internal control over financial reporting. This may increase the risk that we will fail to detect and remedy any weaknesses or deficiencies in our internal control over financial reporting. We have also elected to include three years of audited financial statements and selected financial data. In general, these reduced reporting requirements may allow us to refrain from disclosing information that you may find important. We have irrevocably elected not to avail ourselves of the election to delay adopting new or revised accounting standards until such time as those standards apply to private companies. Nevertheless, as a foreign private issuer that is an emerging growth company, we will not be required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act for up to five fiscal years after the date of this offering. We will remain an emerging growth company until the earliest of: (a) the last day of our fiscal year during which we have total annual gross revenues of at least $1.0 billion; (b) the last day of our fiscal year following the fifth anniversary of the completion of this offering; (c) the date on which we have, during the previous three-year period, issued more than $1.0 billion in non-convertible debt; or (d) the date on which we are deemed to be a “large accelerated filer” under the Exchange Act. When we are no longer deemed to be an emerging growth company, we will not be entitled to the exemptions provided in the JOBS Act. We cannot predict if investors will find our ordinary shares less attractive as a result of our reliance on exemptions under the JOBS Act. If some investors find our ordinary shares less attractive as a result, there may be a less active trading market for our ordinary shares and our share price may be more volatile.

The market price of our ordinary shares could be negatively affected by future sales of our ordinary shares.

After this offering, we will have              ordinary shares outstanding. If we or our shareholders sell substantial amounts of our ordinary shares, either on the TASE or on NYSE, or if there is a public perception that these sales may occur in the future, the market price of our ordinary shares may decline. We, together with our directors, officers and our significant shareholders, in the aggregate beneficially owning     % of our outstanding ordinary shares as of June 30, 2013, have agreed with the underwriters of this offering not to sell any ordinary shares, other than the shares offered through this prospectus, for a period of 180 days following the date of this prospectus.

The ordinary shares we are offering for sale in this offering and the 18,879,987 ordinary shares that are outstanding as of June 30, 2013, will be freely tradable in the United States immediately following this offering. As a result, except for the 3,813,113 ordinary shares that are the subject of lock-up agreements entered into by the holders thereof in connection with this offering, all of our outstanding shares are available for sale on the TASE and NYSE without restriction.

We have broad discretion in the use of the net proceeds from this offering and may not use them effectively.

We intend to allocate the net proceeds from this offering to our different areas of activity, including by implementing computational platforms that will shorten development time and time-to-market for particular traits in our seed traits operation, investing in chemical screening and handling capabilities and additional facilities under our ag-chemical operation, and establishing seed manufacturing facilities for worldwide commercialization under our Evofuel operation. Our management may not apply the net proceeds in ways that ultimately increase the value of your investment. They will have broad discretion in the application of the use of proceeds from this offering, and you will be relying on the judgment of our management regarding the

 

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application of these proceeds. If we do not invest or apply the net proceeds from this offering in ways that enhance shareholder value, we may fail to achieve expected financial results, which could cause the price of our ordinary shares to decline. See “Use of Proceeds.”

We have not yet determined whether our existing internal controls over financial reporting systems are compliant with Section 404 of the Sarbanes-Oxley Act, and we cannot provide any assurance that there are no material weaknesses or significant deficiencies in our existing internal controls.

Pursuant to Section 404 of the Sarbanes-Oxley Act and the related rules adopted by the SEC and the Public Company Accounting Oversight Board, starting with the second annual report that we file with the SEC after the consummation of this offering, our management will be required to report on the effectiveness of our internal control over financial reporting. In addition, once we no longer qualify as an “emerging growth company” under the JOBS Act and lose the ability to rely on the exemptions related thereto discussed above, our independent registered public accounting firm will also need to attest to the effectiveness of our internal control over financial reporting under Section 404. We have not yet commenced the process of determining whether our existing internal controls over financial reporting systems are compliant with Section 404 and whether there are any material weaknesses or significant deficiencies in our existing internal controls. This process will require the investment of substantial time and resources, including by our Chief Financial Officer and other members of our senior management. As a result, this process may divert internal resources and take a significant amount of time and effort to complete. In addition, we cannot predict the outcome of this determination and whether we will need to implement remedial actions in order to implement effective control over financial reporting. The determination and any remedial actions required could result in us incurring additional costs that we did not anticipate. Irrespective of compliance with Section 404, any failure of our internal controls could have a material adverse effect on our stated results of operations and harm our reputation. As a result, we may experience higher than anticipated operating expenses, as well as higher independent auditor fees during and after the implementation of these changes. If we are unable to implement any of the required changes to our internal control over financial reporting effectively or efficiently or are required to do so earlier than anticipated, it could adversely affect our operations, financial reporting and/or results of operations and could result in an adverse opinion on internal controls from our independent auditors.

We will incur increased costs as a result of registering our ordinary shares under the Exchange Act and our management will be required to devote substantial time to compliance and new compliance initiatives.

As a public company in the United States, we will incur additional significant accounting, legal and other expenses that we did not incur before this offering. We also anticipate that we will incur costs associated with the requirements under Section 404 and other provisions of the Sarbanes-Oxley Act. We expect these rules and regulations to increase our legal and financial compliance costs, introduce new costs, such as additional stock exchange listing fees and shareholder reporting, and to take a significant amount of management’s time. The implementation and testing of such processes and systems may require us to hire outside consultants and incur other significant costs.

In addition, 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. We also expect that being a publicly traded company in the United States and being subject to U.S. rules and regulations will make it more expensive for us to obtain director and officer liability 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.

 

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Risks Relating to Our Incorporation and Location in Israel

Conditions in Israel could adversely affect our business.

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. Although Israel has entered into various agreements with Egypt, Jordan and the Palestinian Authority, there has been an increase in unrest and terrorist activity, which began in September 2000 and has continued with varying levels of severity into 2013. In mid-2006, Israel was engaged in an armed conflict with Hezbollah in Lebanon, resulting in thousands of rockets being fired from Lebanon and disrupting most day-to-day civilian activity in northern Israel. Starting in December 2008, for approximately three weeks, Israel engaged in an armed conflict with Hamas in the Gaza Strip, which involved missile strikes against civilian targets in various parts of Israel and negatively affected business conditions in Israel. A similar conflict arose due to Hamas missile attacks against Israeli civilian targets in November 2012. 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, principally in the Middle East, 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 products 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 us.

In addition, 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 you 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.

Our operations may be disrupted by the obligations of personnel to perform military service.

As of June 30, 2013, we had 188 full-time and 73 part-time employees, all of whom were based in Israel. Our employees in Israel, including executive officers, may be called upon to perform up to 36 days (and in some cases more) of annual military reserve duty until they reach the age of 45 (and in some cases, up to 49) and, in emergency circumstances, could be called to active duty. In response to increased tension and hostilities, since September 2000 there have been occasional call-ups of military reservists, including in connection with the mid-2006 war in Lebanon and the December 2008 and November 2012 conflicts with Hamas, and it is possible that there will be additional call-ups in the future. Our operations could be disrupted by the absence of a significant number of our male employees related to military service or the absence for extended periods of one or more of our key employees for military service. Such disruption could materially adversely affect our operations, business and results of operations.

The tax benefits that are available to us require us to continue to meet various conditions and may be terminated or reduced in the future, which could increase our costs and taxes.

Our Israeli facilities have the status of an “Approved Enterprise” and “Beneficiary Enterprise” under the Israeli Law for the Encouragement of Capital Investments, 1959, or the Investment Law, which makes us eligible

 

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for certain tax benefits under that law. For example, we are exempt from corporate tax for a period of two years and are subject to a reduced corporate tax rate of between 10% to 25% for the remainder of the benefits period, depending on the level of foreign investment in the company in each year.

In order to remain eligible for the tax benefits of an Approved Enterprise and Beneficiary Enterprise, we must continue to meet certain conditions stipulated in the Investment Law and its regulations, as amended, and in a tax ruling we received in October 2010, or the Tax Ruling. If we do not meet these requirements, we may not be eligible to receive tax benefits and we could be required to refund any tax benefits that we may receive in the future, in whole or in part, with interest. Further, the tax benefits available under the Investment Law may be terminated or reduced in the future. If these tax benefits are terminated, our Israeli taxable income would be subject to regular Israeli corporate tax rates. The standard corporate tax rate for Israeli companies in 2012 and 2013 is 25% (was previously 24% in 2011 and 25% in 2010), rising to 26.5% for the 2014 tax year and thereafter. See “Taxation and Government Programs—Israeli Tax Considerations and Government Programs—General Corporate Tax Structure in Israel.”

Additionally, if we increase our activities outside of Israel (for example, through acquisitions) our expanded activities might not be eligible for inclusion in future Israeli tax benefit programs. Finally, in the event of a distribution of a dividend from the income that will be tax exempt under the Investment Law, in addition to withholding tax at a rate of 20% (or a reduced rate under an applicable double tax treaty), we will be subject to tax at the corporate tax rate applicable to our Approved Enterprise’s and Beneficiary Enterprise’s income on the amount distributed in accordance with the reduced corporate tax applicable to such profits. See “Taxation and Government Programs—Israeli Tax Considerations and Government Programs—Law for the Encouragement of Capital Investments, 5719-1959.”

Exchange rate fluctuations between the U.S. dollar and the NIS may negatively affect our earnings and we have not hedged against such fluctuations.

Most of our revenues are denominated in U.S. dollars. The percentage of our revenues denominated in U.S. dollars accounted for 72%, 71% and 78% of our revenues in 2012, 2011 and 2010, respectively, and 68% and 74% in the six months ended June 30, 2013 and 2012, respectively. We incur expenses primarily in NIS, however, and our expenses in NIS accounted for 90%, 90% and 89% of our expenses in 2012, 2011 and 2010, respectively, and 91% of our expenses in each of the six months ended June 30, 2013 and 2012. As a result, any appreciation of the NIS relative to the U.S. dollar would adversely impact our profitability due to the portion of our expenses that are incurred in NIS. As of June 30, 2013, we did not have any hedging arrangements in place to protect our exposure to foreign currency fluctuations. If we choose to do so in the future, we may be unsuccessful in protecting against currency exchange rate fluctuations. Future currency exchange rate fluctuations could adversely affect our profitability. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Quantitative and Qualitative Disclosure About Market Risk—Foreign Currency Risk.”

We have received Israeli government grants for certain of our research and development activities. The terms of these grants may require us to satisfy specified conditions in order to develop and transfer technologies supported by such grants outside of Israel. In addition, in some circumstances, we may be required to pay penalties in addition to repaying the grants.

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 June 30, 2013, we had received approximately $4.1 million (approximately NIS 14.8 million) of such grants, on which interest of approximately $0.8 million (approximately NIS 2.9 million) had accrued as of such date. We may not receive the required approvals should we wish to transfer this know-how, technology or manufacturing rights outside of Israel in the future or, if we receive such required approvals, they may be subject to certain conditions and payment obligations. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Government Grants.”

 

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

We are incorporated in Israel. None of our directors and executive officers is a resident of the United States, and the Israeli experts named in this prospectus are located in Israel. 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. See “Enforceability of Civil Liabilities.”

Your rights and responsibilities as our shareholder will be governed by Israeli law, which may differ in some respects from the rights and responsibilities of shareholders of U.S. corporations.

Since we are incorporated under Israeli law, the rights and responsibilities of our shareholders are governed by our articles of association to be effective following this offering, or our “articles of association,” and Israeli law. 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 “Management—Approval of Related Party Transactions Under Israeli Law—Shareholder Duties.” Since Israeli corporate law underwent extensive revisions approximately 12 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.

Provisions of Israeli law may delay, prevent or make undesirable an acquisition of all or a significant portion of our shares or assets.

Israeli corporate law regulates mergers and requires that a tender offer be effected when more than a specified percentage of shares in a company are purchased. 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 “Description of Share Capital—Acquisitions Under Israeli Law.”

 

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Under Israeli law, our two external directors have terms of office of three years. In addition, according to the provisions of our articles of association, any amendment to the number of members appointed to our board of directors will require at least 75% of the votes cast. Additionally, the election of members to our board of directors will be staggered, meaning that every year only a portion of the members of our board of directors are subject to election. See “Management—Board of Directors.”

Furthermore, under the Encouragement of Industrial, Research and Development Law, 5744-1984, to which we are subject due to our receipt of grants from the Office of the Chief Scientist of the Israeli Ministry of Industry, Trade and Labor, or OCS, a recipient of OCS grants such as us must report to the applicable authority of the OCS any change in the holding of the means of control of our company which transforms any non-Israeli citizen or resident into a direct interested party in our company. The OCS Guidelines interpretation issued by the OCS provides that prior OCS approval is required for such change in the holding of the means of control.

These 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 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.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

We make forward-looking statements in this prospectus that are subject to risks and uncertainties. These forward-looking statements include information about possible or assumed future results of our business, financial condition, results of operations, liquidity, plans and objectives. In some cases, you can identify forward-looking statements by terminology such as “believe,” “may,” “estimate,” “continue,” “anticipate,” “intend,” “should,” “plan,” “expect,” “predict,” “potential,” or the negative of these terms or other similar expressions. The statements we make regarding the following matters are forward-looking by their nature:

 

   

our expectation regarding the future growth of the seed and ag-chemical market and larger agriculture market;

 

   

our ability to adapt to continuous technological change in our industry;

 

   

our ability to maintain our collaboration agreements with our current collaborators;

 

   

our ability to enter into new collaboration agreements and expand our research and development to new traits and crops;

 

   

our ability to pursue a new business model in which we pay for our own research and development costs and enter into collaboration agreements only in the later stages of product development;

 

   

our expectation regarding the commercial trait value of our key products in yield and abiotic stress and biotic stress;

 

   

our expectation regarding regulatory approval of products developed by our collaborators;

 

   

our expectation that products containing our seed traits will be commercialized and we will earn royalties from the sales of such products;

 

   

our ability to successfully develop our ag-chemical operations, enter into collaboration agreements to develop ag-chemical products and eventually commercialize ag-chemical products;

 

   

our ability to successfully develop improved castor bean seed varieties that serve as a viable alternative second generation feedstock for biodiesel;

 

   

our ability to maintain and recruit knowledgeable or specialized personnel to perform our research and development work;

 

   

our ability to assemble, store, integrate, and analyze significant amounts of public and proprietary genomic data;

 

   

our ability to improve our existing computational technologies and plant validation systems and to develop and launch new computational technologies and validation systems, including PoinTar; and

 

   

our ability to patent the genes that we identify and to protect our trade secrets and proprietary know-how.

The preceding list is not intended to be an exhaustive list of all of our forward-looking statements. The forward-looking statements are based on our beliefs, assumptions and expectations of future performance, taking into account the information currently available to us. These statements are only predictions based upon our current expectations and projections about future events. There are important factors that could cause our actual results, levels of activity, performance or achievements to differ materially from the results, levels of activity, performance or achievements expressed or implied by the forward-looking statements. In particular, you should consider the risks provided under “Risk Factors” in this prospectus.

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

 

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PRICE RANGE OF OUR ORDINARY SHARES

Our ordinary shares have been trading on the TASE under the symbol “EVGN” since 2007. No trading market currently exists for our ordinary shares in the United States. We intend to apply to have our ordinary shares listed on the NYSE under the symbol “EVGN.”

The following table sets forth, for the periods indicated, the reported high and low closing sale prices of our ordinary shares on the TASE in NIS and U.S. dollars (giving prospective effect to the 1-for-2 reverse share split of our ordinary shares, which is to be effected immediately prior to the completion of this offering).

 

     NIS    $
     Price Per Ordinary Share    Price Per Ordinary Share
           High                Low                High                Low      

Annual:

                   

2013 (through September 18, 2013)

       51.18          36.34          14.47          9.73  

2012

       39.00          29.58          10.31          7.43  

2011

       42.40          25.20          12.02          7.10  

2010

       40.80          25.40          11.46          6.55  

2009

       31.40          12.86          8.45          3.31  

2008

       24.38          7.85          6.73          2.06  

Quarterly:

                   

Third Quarter (through September 18, 2013)

       51.18          41.44          14.47          11.41  

Second Quarter 2013

       46.24          37.52          12.54          10.51  

First Quarter 2013

       41.42          36.34          11.13          9.73  

Fourth Quarter 2012

       39.00          31.82          10.31          8.20  

Third Quarter 2012

       35.16          29.58          8.97          7.43  

Second Quarter 2012

       35.96          31.84          9.13          8.20  

First Quarter 2012

       34.48          29.60          9.28          7.82  

Fourth Quarter 2011

       33.68          27.66          8.88          7.28  

Third Quarter 2011

       33.62          25.20          9.86          7.10  

Second Quarter 2011

       38.90          31.56          11.23          9.06  

First Quarter 2011

       42.40          35.10          12.02          9.86  

Fourth Quarter 2010

       40.80          33.82          11.46          9.35  

Third Quarter 2010

       35.80          25.60          9.63          6.59  

Second Quarter 2010

       38.48          25.40          10.39          6.55  

First Quarter 2010

       40.38          27.94          10.66          7.40  

Fourth Quarter 2009

       31.40          24.50          8.38          6.48  

Third Quarter 2009

       28.84          23.08          7.41          6.06  

Most Recent Six Months:

                   

September 2013 (through September 18, 2013)

       51.18          47.12          14.47          13.22  

August 2013

       47.86          42.22          13.18          11.86  

July 2013

       44.42          41.44          12.31          11.61  

June 2013

       46.24          42.44          12.54          11.78  

May 2013

       42.22          37.52          11.47          10.51  

April 2013

       40.10          38.06          11.07          10.51  

March 2013

       41.42          37.76          11.13          10.22  

On September 18, 2013, the last reported sale price of our ordinary shares on the TASE was NIS 51.18 per share, or $14.47 per share (based on the exchange rate reported by the Bank of Israel on such date, which was NIS 3.54= $1.00).

As of September 18, 2013, we had two holders of record of our ordinary shares in the United States. The number of record holders is not representative of the number of beneficial holders of our ordinary shares, as the shares of all shareholders who hold shares on the TASE are recorded in the name of our Israeli share registrar, Bank Leumi Le’Israel Registration Company Ltd.

 

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USE OF PROCEEDS

We estimate that our net proceeds from this offering will be approximately $             million, or approximately $             million if the underwriters exercise in full their option to purchase additional ordinary shares, based upon an assumed initial public offering price of $         per ordinary share, the midpoint of the estimated initial public offering price range set forth on the cover page of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses payable by us. A $1.00 increase (decrease) in the assumed public offering price would increase (decrease) the net proceeds we receive from this offering by $             million.

Proceeds are planned to be allocated to our different areas of activity as follows:

 

  1. Seed Traits:

 

  a. Expedite time to market: we intend to invest in the implementation of our computational platforms in order to shorten the development time for particular traits, and ultimately the time to market.

 

  b. Extend and expand our seed trait project portfolio and technological capabilities: we intend to expand our seed traits project portfolio into new traits and new crops and thus increase the potential for significant collaborations generating potentially significant revenues. In addition, we intend to establish new validation and data generation capabilities, primarily for biotic stress traits.

 

  c. Capture an additional share of the value chain by increasing self-funded research and development: we intend to complement our revenue streams by selectively self-funding a larger portion of our direct initial research and development costs.

 

  d. Establishing technology infrastructure in new territories, in addition to our existing infrastructure in Israel: we intend to diversify and broaden our data generation activities, research capabilities and personnel in new geographic sites.

We estimate the total investment in our seed traits operation will be approximately 50% of our net proceeds from this offering, after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

 

  2. Ag-Chemicals:

Develop and expand our ag-chemical operations : We intend to establish capabilities and facilities in order to be at the forefront of discovery and innovation in ag-chemicals, such as herbicides and crop enhancers. This includes investment in new computational discovery platforms, plant validation systems and infrastructure for chemical screening and handling. We estimate the total investment in our ag-chemical operation will be approximately 28% of our net proceeds from this offering, after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

 

  3. Evofuel:

Further develop and commercialize our Evofuel activities: We intend to invest in up-scaling our field trial activities towards commercialization of castor seeds, including establishment of seed production and marketing capabilities. Under these efforts, we intend to pursue new territories and markets. In addition, we intend to expand our research and development relating to the next generation of castor seeds. We estimate the total investment in our Evofuel operation will be approximately 22% of our net proceeds from this offering, after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

We may also use a portion of the net proceeds to make acquisitions or investments in complementary companies or technologies, although we do not have any agreement or understanding with respect to any such acquisition or investment at this time. We will have broad discretion in the way that we use the net proceeds from this offering.

 

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DIVIDEND POLICY

Since our inception, we have not declared or paid any cash or other form of dividends on our ordinary shares. We currently intend to retain any earnings for use in our business and do not currently intend to pay cash dividends on our ordinary shares. Dividends, if any, on our outstanding ordinary shares will be declared by and subject to the discretion of our board of directors. Even if our board of directors decides to distribute dividends, the form, frequency and amount of such dividends will depend upon our future operations and earnings, capital requirements and surplus, general financial condition, contractual restrictions and other factors our board of directors may deem relevant.

In addition, the distribution of dividends may be limited by Israeli law, which permits the distribution of dividends only out of distributable profits. See “Description of Share Capital—Articles of Association—Dividend and Liquidation Rights.” In addition, if we pay a dividend out of income derived during the tax exemption period from the portion of the Company’s facilities that have been granted Approved Enterprise status, we may be required to recapture the deferred corporate tax with respect to the amount distributed. See “Taxation and Government Programs—Israeli Tax Considerations and Government Programs—Law for the Encouragement of Capital Investments, 5719-1959.”

 

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CAPITALIZATION

The following table sets forth our total capitalization, together with our cash, cash equivalents and marketable securities, as of June 30, 2013, as follows:

 

   

on an actual basis; and

 

   

on an as adjusted basis to reflect the issuance and sale of ordinary shares in this offering at an assumed initial public offering price of $         per ordinary share, the midpoint of the estimated initial public offering price range set forth on the cover page of this prospectus, after deducting underwriting discounts and commissions and the estimated offering expenses payable by us and a 1-for-2 reverse share split of our ordinary shares that will be effected immediately prior to the completion of this offering.

You should read this information in conjunction with our consolidated financial statements and the related notes appearing at the end of this prospectus and the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section and other financial information contained in this prospectus.

 

     As of June 30, 2013  
     Actual     As adjusted  
           (unaudited)  
     (in thousands)  

Cash, cash equivalents and marketable securities

   $ 50,541      $                
  

 

 

   

 

 

 

Liability to the Office of the Chief Scientist

   $ 3,629      $     

Ordinary shares, par value NIS 0.02 per share; 150,000,000 shares authorized, actual and as adjusted; 18,879,987 shares issued and outstanding, actual;          shares issued and outstanding, as adjusted

     103     

Additional paid-in capital

     92,147     

Put option

     (7,764  

Reserve—transaction with a former controlling shareholder

     1,156     

Accumulated deficit

     (38,343  
  

 

 

   

 

 

 

Total shareholders’ equity

     47,299     
  

 

 

   

 

 

 

Total capitalization

   $ 50,928      $     
  

 

 

   

 

 

 

A $1.00 increase (decrease) in the assumed initial public offering price of $         per ordinary share, would increase (decrease) the as adjusted amount of each of cash and cash equivalents, additional paid-in capital, total equity and total capitalization by approximately $         million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

 

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DILUTION

If you invest in our ordinary shares in this offering, your ownership interest will be immediately diluted to the extent of the difference between the initial public offering price per share and the net tangible book value per ordinary share after this offering. Our net tangible book value as of June 30, 2013 was $2.51 per ordinary share.

After giving effect to the sale of ordinary shares that we are offering at an assumed initial public offering price of $             per share, the midpoint of the estimated initial public offering price range set forth on the cover page of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses payable by us, our net tangible book value on an adjusted basis as of June 30, 2013 would have been $             per ordinary share. This amount represents an immediate decrease in net tangible book value of $             per ordinary share to our existing shareholders and an immediate increase in net tangible book value of $             per ordinary share to new investors purchasing ordinary shares in this offering. We determine dilution by subtracting the as adjusted net tangible book value per share after this offering from the amount of cash that a new investor paid for an ordinary share.

The following table illustrates this dilution:

 

Assumed initial public offering price per share

      $                

Net tangible book value per share as of June 30, 2013

   $ 2.51      

Increase per share attributable to this offering

     
  

 

 

    

As adjusted net tangible book value per share after this offering

     
     

 

 

 

Dilution per share to new investors in this offering.

      $     
     

 

 

 

A $1.00 increase (decrease) in the assumed initial public offering price of $             per ordinary share, the midpoint of the estimated initial public offering price range set forth on the cover page of this prospectus, would increase (decrease) the as adjusted amount of each of cash, cash equivalents and short-term investments, share capital, share premium, additional paid-in capital, total equity and total capitalization by approximately $             million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

If the underwriters exercise their option to purchase additional ordinary shares in full in this offering, the as adjusted net tangible book value after the offering would be $             per share, the decrease in net tangible book value per share to existing shareholders would be $             and the increase in net tangible book value per share to new investors would be $             per share, in each case assuming an initial public offering price of $             per ordinary share, the midpoint of the estimated initial public offering price range set forth on the cover page of this prospectus.

The following table summarizes, as of June 30, 2013, the differences between the number of shares purchased from us, the total consideration paid to us in cash and the average price per share that directors or senior management and their respective affiliates paid during the past five years, on the one hand, and new investors are paying in this offering, on the other hand. The calculation below is based on an assumed initial public offering price of $             per share before deducting underwriting discounts and commissions and estimated offering expenses payable by us.

 

     Shares Purchased     Total Consideration     Average Price
Per Share
 
     Number    Percent     Amount      Percent    

Directors and senior management and their respective affiliates

               $                             $                

New investors

            
  

 

  

 

 

   

 

 

    

 

 

   

Total

        100        100  
  

 

  

 

 

   

 

 

    

 

 

   

 

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The foregoing tables and calculations exclude 3,885,860 ordinary shares reserved for issuance under our equity incentive plans as of June 30, 2013 of which 2,653,759 exercisable and outstanding options to purchase ordinary shares had been granted at a weighted average exercise price of $6.79 per share.

To the extent any of these outstanding options is exercised, there will be further dilution to new investors. To the extent all of such outstanding options had been exercised as of June 30, 2013, the as adjusted net tangible book value per share after this offering would be $            , and total dilution per share to new investors would be $            .

If the underwriters exercise their option to purchase additional shares in full:

 

   

the percentage of ordinary shares held by existing shareholders will decrease to approximately     % of the total number of our ordinary shares outstanding after this offering; and

 

   

the number of shares held by new investors will increase to             , or approximately     % of the total number of our ordinary shares outstanding after this offering.

 

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SELECTED CONSOLIDATED FINANCIAL DATA

The following tables set forth our selected consolidated financial data. You should read the following selected consolidated financial data in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this prospectus. 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 IFRS, as issued by the International Accounting Standards Board.

The selected consolidated statements of comprehensive income data for each of the years in the three-year period ended December 31, 2012 are derived from our audited consolidated financial statements appearing elsewhere in this prospectus. The selected consolidated statements of comprehensive income data for the six months ended June 30, 2012 and 2013 and the consolidated balance sheet data as of June 30, 2012 and 2013 have been derived from our unaudited interim condensed consolidated financial statements included elsewhere in this prospectus. Results from interim periods are not necessarily indicative of results that may be expected for the entire year.

 

     Year Ended December 31,     Six Months Ended
June 30,
 
     2010     2011     2012     2012     2013  
                       (unaudited)  
     (in thousands, except per share and share data)  

Consolidated Statements of Comprehensive Income:

          

Revenues

   $ 12,563      $ 14,901      $ 17,072      $ 8,287      $ 8,934   

Cost of revenues

     5,811        8,247        9,552        4,483        4,688   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     6,752        6,654        7,520        3,804        4,246   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Research and development

     5,544        6,384        7,252        3,308        4,666   

Business development

     1,062        1,136        1,159        544        532   

General and administrative

     2,123        2,317        2,235        1,069        1,197   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     8,729        9,837        10,646        4,921        6,395   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating loss

     (1,977     (3,183     (3,126     (1,117     (2,149

Financial income

     724        5,023        972        510        776   

Financial expenses

     (5,717     (1,195     (294     (76     (989
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before taxes on income

  

 

(6,970

 

 

645

  

 

 

(2,448

 

 

(683

 

 

(2,362

Taxes on income

     —         —         74        52        —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ (6,970   $ 645      $ (2,522   $ (735   $ (2,362
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Basic and diluted net income (loss) per share

  

 

$

 

(0.48

 

  $ 0.04      $ (0.14   $ (0.04   $ (0.12
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average number of ordinary shares used in computing basic income (loss) per share(1)

  

 

14,824,703

  

 

 

17,505,136

  

 

 

18,421,568

  

   
18,328,598
  
 

 

18,817,847

  

  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average number of ordinary shares used in computing diluted income (loss) per share(1)

     14,824,703        18,731,118        18,421,568        18,328,598        18,817,847   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Basic net income (loss) per share is computed based on the weighted average number of ordinary shares outstanding during each period. Diluted net income (loss) per share is computed based on the weighted average number of ordinary shares outstanding during each period plus dilutive potential equivalent ordinary shares considered outstanding during the period, in accordance with IAS 33, “Earnings per Share.”

 

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     As of June 30,  
     2012      2013  
     (unaudited)  
     (in thousands)  

Consolidated Balance Sheet Data:

     

Cash and cash equivalents

   $ 11,558       $ 16,884   

Marketable securities

     30,643         33,657   

Short-term deposits

     10,600         —     

Trade receivables

     3,911         1,853   

Total current assets

     57,393         53,967   

Deferred revenues and other advances

     10,401         6,507   

Total liabilities

     17,015         14,705   

Working capital(1)

     49,361         44,921   

Shareholders’ equity

     48,361         47,299   

 

(1) Working capital is defined as total current assets less total current liabilities.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with our consolidated financial statements and the related notes included elsewhere in this prospectus. This discussion contains forward-looking statements that are subject to known and unknown risks and uncertainties. Actual results and the timing of events may differ significantly from those expressed or implied in such forward-looking statements due to a number of factors, including those set forth in the section entitled “Risk Factors” and elsewhere in this prospectus. You should read the following discussion in conjunction with “Special note regarding forward-looking statements” and “Risk Factors.” We have prepared our financial statements in accordance with IFRS, as issued by the International Accounting Standards Board.

Company Overview

We are a plant genomics company that uses a comprehensive and integrated technology infrastructure to enhance seed traits underlying crop performance and productivity through biotechnology and advanced breeding methods. We have strategic collaborations with world-leading agricultural companies, primarily to develop traits for improved yield and abiotic stress tolerance (such as improved tolerance to drought, heat and salinity) and biotic stress resistance (such as resistance to disease, pests and insects). Our products are focused on essential crops, including corn, soybean, wheat, rice and cotton, which, according to Phillips McDougall’s 2011 Seed Industry Overview report, account for over 70% of the value of the global seeds market. We also apply our technology infrastructure to two additional fields: (i) ag-chemical and (ii) seeds focusing on second generation feedstock for biodiesel, both of which have not yet generated revenues and are in the development stage.

We were founded in 2000 as a division of Compugen Ltd., or Compugen and spun-off as an independent company in January 2002. The following are the key milestones in our technological, business and financial development as a plant genomics company:

 

   

In March 2003, we completed the first closing of our initial private placement, raising $2.0 million.

 

   

In 2006, we launched our initial computational technology for gene identification and prioritization, the ATHLETE version 1.0.

 

   

In 2006 and 2007, we started licensing the genes we identify to leading seed companies, which include:

 

   

Biogemma, with which we began a collaboration focused on developing drought tolerance corn in July 2006;

 

   

Bayer, which in June 2007 we entered into a collaboration agreement focused on increasing productivity in rice;

 

   

Monsanto, entering into a collaboration in September 2007 to improve nitrogen use efficiency in corn, soybean, cotton and canola; and

 

   

Pioneer Hi-Bred International, a subsidiary of DuPont, with which we commenced a collaboration in October 2007 to improve yield and tolerance to abiotic stress in corn and soybean.

 

   

In June 2007, we completed an initial public offering in Israel and listed our ordinary shares on the Tel Aviv Stock Exchange.

 

   

In August 2008, we entered into our first broad, multi-year collaboration agreement, with a five-year collaboration period, with Monsanto focusing on improving yield, nitrogen use efficiency and abiotic stress tolerance in corn, soybean, cotton and canola.

 

   

In June 2009, we entered into a collaboration agreement with Syngenta Biotechnology, Inc., or Syngenta, to address the key biotic trait of resistance to soybean cyst nematodes.

 

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In November 2009, we completed a substantial increase of our research and development and administrative facilities and personnel, adding 15 greenhouses for our validation systems and expanding our computational and laboratory facilities, supporting our growing cooperative activities.

 

   

In December 2010, we entered into our broad, multi-year collaboration agreement with Bayer to develop improved wheat varieties, focusing on increased yield, drought tolerance and fertilizer use efficiency.

 

   

In January 2011, our first genes were advanced to Phase II development as part of our collaboration with Biogemma, commenced in 2006, for improving yield and drought tolerance in corn.

 

   

In mid-2011, we launched EvoBreed , our computational technology for discovery of certain DNA sequences (such as genetic markers and single-nucleotide polymorphisms or SNPs) to enhance plant breeding.

 

   

In November 2011, we entered into a collaboration with DuPont aimed at improving soybean rust resistance. This was our first collaboration that includes self-funding of our research and development activities, with higher potential royalties.

 

   

In November 2011, we extended our 2008 collaboration agreement with Monsanto one additional year and expanded it to add our Gene2Product computational technology to our research and development efforts.

 

   

In January 2012, we established Evofuel Ltd., our wholly owned subsidiary incorporated in Israel, to focus on developing improved castor bean seeds that can be used as advanced second generation feedstock for biodiesel. Evofuel has pre-commercial collaborations with SLC Agricola in Brazil and T6 in Argentina to develop its products for these markets.

 

   

In January 2013, we launched Gene2Product , our computational technology for improving trait efficacy in developing biotech seed products.

Our business focuses on three distinct operations: seed traits, ag-chemicals and seeds focusing on second generation feedstock for biodiesel. We currently generate all of our revenues from our seed trait business, and these revenues are principally derived from our collaboration agreements and related arrangements with our collaborators. Our products are currently in the development stage, and we may use a significant portion of the proceeds of this offering to invest in the infrastructure and ongoing research needed for these operations.

We currently participate in more than ten collaboration agreements that cover 20 different products in various stages of development. Through these collaborations with some of the world’s leading agricultural companies, such as Monsanto, Bayer, DuPont and Syngenta, we have developed a balanced and scalable business model. We currently generate revenues from our collaboration agreements through both research and development services payments covering the costs of our gene identification and validation efforts, and milestone payments received upon achieving certain specified results. Our collaboration agreements with these companies also usually provide that we are entitled to receive milestone payments and royalties on any seeds that our collaborators commercialize that integrate a trait we have licensed to our collaborators. While we currently do not earn royalties from the sale of any such seeds, we expect to begin earning revenues from royalties in at least six years, and our long-term growth strategy is based in part on the expectation that such royalties will comprise a significant portion of our future revenues. The termination or non-renewal of our agreements with Monsanto and Bayer, including if Monsanto decides not to exercise its option to extend the collaboration period under our agreement with them by February 1, 2014 (and if Monsanto does not otherwise enter into a new collaboration agreement with us), would have a material adverse effect on our business, financial condition, results of operations and prospects.

 

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Components of Statements of Comprehensive Income

Revenues

Our revenues are principally derived from our collaboration agreements and related arrangements with our collaborators. A substantial majority of our current collaboration agreements focus on developing traits to be integrated into seeds through genetic modification (“GM”); our GM projects therefore generate the majority of our revenues from research and development services. The other component of our seed trait operations, advanced breeding, generates only a small portion of our revenues from research and development services. Revenues from our major collaborators, Monsanto and Bayer, accounted together for 94% of our revenues for the year ended December 31, 2012, of which Monsanto accounted for 70% and Bayer accounted for 24% of our total revenues. Monsanto and Bayer accounted together for 98% of our revenues for the six months ended June 30, 2013 of which Monsanto accounted for 66% and Bayer accounted for 32% of our total revenues. See “Business—Key Collaborations.” Under our collaboration agreements and related arrangements, our revenues are paid to us in the following four different forms of payments:

Periodic Payments for Research and Development Services

Periodic payments for research and development services are payments we receive primarily on a quarterly basis from our collaborators as consideration for the research and development services we provide them. Revenues from periodic payments for research and development services performed under our collaboration agreements amounted to $12.6 million and accounted for 70.1% of our total revenues for the year ended December 31, 2012, and $6.8 million, or 76.2%, in the six months ended June 30, 2013. As we have not yet entered into any collaborations for our operations in ag-chemical or seeds focusing on second generation feedstock for biodiesel, we have yet to generate any revenues from these operations.

Up-front Payments

We also derive a portion of our revenues from up-front payments made under our agreements with Monsanto and Bayer. Up-front payments primarily represent payments we receive upon entering into collaboration agreements for research and development services. These up-front payments are recognized as revenues over the duration of the relevant contract based on the proportion of actual costs incurred for each reporting period to the estimated total costs of the collaboration. Revenues derived from up-front payments under our agreements with Monsanto and Bayer amounted to approximately $1.0 million and accounted for approximately 5.6% of our total revenues for the year ended December 31, 2012, and $0.5 million, or 5.7%, in the six months ended June 30, 2013.

Share Purchases

We also entered into share purchase agreements with Monsanto 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 recognize as revenues the excess payment, which is the consideration investors paid for our ordinary shares over the market value of our ordinary shares traded on the TASE at the time of the investment. This excess payment is recognized as revenues beginning on the date of the investment, for the duration of the contract based on the proportion of actual costs incurred for each reporting period to the estimated total costs of the collaboration. We also recorded revenues with respect to Monsanto’s put option. We recognized as revenues the fair value of the put option with Monsanto throughout the term of the agreement, based on the proportion of actual costs incurred for each reporting period to the estimated total costs of the collaboration. See “Business—Share Purchase Agreements.” Total revenues from the excess amounts on the purchase of our ordinary shares by Monsanto and Bayer as well as the Monsanto put option amounted to $3.2 million and accounted for approximately 18.5% of our total revenues for the year ended December 31, 2012, and $1.6 million, or 18.1%, in the six months ended June 30, 2013.

 

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Milestone Payments

We also derive, to a lesser extent at this stage of our business, a portion of our revenues from milestone payments paid by our collaborators upon the occurrence of certain specified events pursuant to the agreements with our collaborators. These milestone payments accounted for approximately 5.8% of our total revenues for the year ended December 31, 2012, but for none of our revenues for the six months ended June 30, 2013.

Our agreements with collaborators also provide for royalty payments based on the sales or transfer of products our collaborators develop that contain the traits we discover and license to them. The calculation of royalties varies by collaboration, and is typically based on the value that the trait we provide adds to the end product. For example, the royalties we expect to be entitled to receive pursuant to our collaborations with Monsanto and Bayer will be a percentage of the commercial value conferred by the trait we provide on the end product Monsanto or Bayer sells. Pursuant to our collaboration with Rasi Seeds, however, our royalties will be a percentage of the commercial value conferred by the trait we provide on the end product in addition to a percentage of the net revenues of the end product. We have not yet generated revenues from such royalties, and may not commence generating significant royalties for at least six years.

Cost of Revenues

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) 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 the depreciation of our plant, property and equipment, operational overhead costs (which include costs related to leasing and operating our office and laboratory facilities and greenhouses) and expenses related to retaining advisors, which primarily consist of biological experts.

Operating Expenses

Research and Development Expenses : Research and development expenses 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 activities include developing and improving our computational, scientific and validation technologies, know-how and capabilities used by our various divisions as well as research and development focused on developing our ag-chemical and seeds focusing on second generation feedstock for biodiesel operations. Research and development costs include salaries and related personnel costs (including share-based compensation), operational overhead costs, which include costs related to leasing and operating our office, laboratory facilities and greenhouses, and depreciation of plant, property and equipment. Expenses related to our intellectual property, such as legal and other costs associated with patent applications, are also included as research and development expenses. We expect that our research and development expenses will continue to increase on an absolute basis as we develop our ag-chemical and seeds focusing on second generation feedstock for biodiesel operations and expand our independent research and development projects.

Business Development Expenses : Business development expenses consist of costs primarily related to maintaining our relationships with our collaborators and establishing new collaborations. These costs include salaries and related personnel costs (including share-based compensation), expenses incident to foreign business travel and legal expenses related to our collaborations. We expect our business development expenses will continue to increase on an absolute basis as we develop our ag-chemical and seeds focusing on second generation feedstock for biodiesel operations and seek collaboration opportunities for those projects.

General and Administrative Expenses : General and administrative expenses include salaries and related personnel costs (including share-based compensation) for our general and administrative employees, consulting,

 

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legal and professional services related to our general and administrative operations and expenses related to HR activities and employee benefits. We expect to incur additional general and administrative costs associated with being a public company in the United States, including compliance under the Sarbanes-Oxley Act and rules promulgated by the SEC.

Financial Income and Expenses

Financial income consists primarily of interest income on our cash bank deposits and securities, foreign currency exchange income and income related to a revaluation of the marketable securities we hold, which consist of corporate bonds and Israeli government treasury notes. Financial expenses consist primarily of expenses related to bank charges, foreign currency exchange expense and associated fees and expenses related to a revaluation of the marketable securities we hold. The interest due on grants received from the OCS is also considered a financial expense, and is recognized beginning on the date we receive the grant until the date on which the grant is expected to be repaid through royalties paid to the OCS. Financial income and expenses also include non-cash financial income and expenses related to revaluations of then-outstanding publicly traded warrants granted upon our initial public offering on the TASE in 2007 based on the change in market price of our ordinary shares. Substantially all of these warrants were exercised and the remainder expired in May 2011.

Taxes on Income

We do not generate taxable income in Israel, as we have historically incurred operating losses resulting in carryforward tax losses totaling $(15.3 million) as of June 30, 2013, to be carried forward indefinitely to future tax years. Accordingly, we do not expect to pay taxes in Israel until we have taxable income after the full utilization of our carryforward tax losses. However, in 2012, we recognized $74 thousand in taxes on income resulting from withholding taxes our collaborators were obligated to withhold from the research and development payments they paid us.

Segment Data

Starting January 1, 2012, following the establishment of our Evofuel subsidiary, we split our operations into two operating segments: Evogene and Evofuel. The two segments perform the following operations:

 

   

Evogene : Our Evogene segment develops technologies to improve plant performance through seed traits and ag-chemicals. Our seed trait operation utilizes our expertise in plant genomics to address yield and abiotic stress and biotic stress traits through the genetic modification or advanced breeding of seeds. Our ag-chemical operation utilizes this expertise to develop novel crop protection and crop enhancement products, including herbicides.

 

   

Evofuel : Our Evofuel segment develops improved species of the castor bean plant for second generation feedstock intended for use in the alternative fuel industry, specifically biodiesel and biojet.

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

 

     Evogene     Evofuel     Total  
     (in thousands)  

Year ended December 31, 2012:

      

Revenues

   $ 17,072      $ —        $ 17,072   

Operating loss

     (1,993     (1,133     (3,126

Six months ended June 30, 2013 (unaudited):

      

Revenues

   $ 8,934      $ —        $ 8,934   

Operating loss

     (1,588     (561     (2,149

Our revenues for the year ended December 31, 2012 and the six months ended June 30, 2013 were generated entirely from the Evogene segment. Our Evogene segment includes revenues generated from our seed

 

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trait operations and costs associated with both our seed trait and ag-chemical operations. We do not currently generate revenues in the Evofuel segment, as Evofuel is still in the development stage. Both of these operating segments recorded losses in 2012 and the six months ended June 30, 2013. The primary drivers of loss for Evofuel in 2012 and the six months ended June 30, 2013 were research and development and business development expenses. We do not expect Evofuel to start generating significant revenues in the near term.

Comparison of Period to Period Results of Operations

The period to period discussions for the year ended December 31, 2012 and the six months ended June 30, 2013 present our results of operations for both operating segments. A period to period comparison is not presented for Evofuel for any period prior to 2012 due to the lack of comparative results.

The following tables set forth our results of operations in dollars and as a percentage of revenues for the periods indicated:

 

     Year Ended December 31,     Six Months Ended
June 30,
 
     2010     2011     2012     2012     2013  
                       (unaudited)  
     (in thousands)  

Consolidated Statements of Comprehensive Income:

          

Revenues

   $ 12,563      $ 14,901      $ 17,072      $ 8,287      $ 8,934   

Cost of revenues

     5,811        8,247        9,552        4,483        4,688   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     6,752        6,654        7,520        3,804        4,246   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Research and development

     5,544        6,384        7,252        3,308        4,666   

Business development

     1,062        1,136        1,159        544        532   

General and administrative

     2,123        2,317        2,235        1,069        1,197   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     8,729        9,837        10,646        4,921        6,395   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating loss

     (1,977     (3,183     (3,126     (1,117     (2,149

Financial income

     724        5,023        972        510        776   

Financial expenses

     (5,717     (1,195     (294     (76     (989
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before taxes on income

     (6,970     645        (2,448     (683     (2,362

Taxes on income

     —          —          74        52       —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ (6,970   $ 645      $ (2,522   $ (735   $ (2,362
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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     Year Ended December 31,     Six Months Ended
June 30,
 
     2010     2011     2012     2012     2013  
                       (unaudited)  
     (as a percentage of revenues)  

Consolidated Statements of Comprehensive Income:

          

Cost of revenues

     46.3     55.3     56     54.1     52.5

Gross profit

     53.7        44.7        44        45.9        47.5   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Research and development

     44.1        42.8        42.5        39.9        52.2   

Business development

     8.5        7.6        6.8        6.6        6   

General and administrative

     16.9        15.5        13.1        12.9        13.4   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     69.5        65.9        62.4        59.4        71.6   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating loss

     (15.7     (21.2     (18.3     (13.5     (24.1

Financial income

     5.8        33.7        5.7        6.2        8.7   

Financial expenses

     (45.5     (8.0     (1.7     (0.9     (11.1
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before taxes on income

     (55.5     4.5        (14.3     8.2        (26.4

Taxes on income

     0        0        0.4        0.6        0   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     (55.5 )%      4.5     (14.7 )%      (8.8 )%      (26.4 )% 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Six Months Ended June 30, 2012 Compared to Six Months Ended June 30, 2013

The following table shows our operating results for the six months ended June 30, 2012 compared to the six months ended June 30, 2013

 

     Six Months Ended
June 30,
 
     2012     2013  
     (unaudited)  
     (in thousands)  

Consolidated Statements of Comprehensive Income:

    

Revenues

   $ 8,287      $ 8,934   

Cost of revenues

     4,483        4,688   
  

 

 

   

 

 

 

Gross profit

     3,804        4,246   
  

 

 

   

 

 

 

Research and development

     3,308        4,666   

Business development

     544        532   

General and administrative

     1,069        1,197   
  

 

 

   

 

 

 

Total operating expenses

     4,921        6,395   
  

 

 

   

 

 

 

Operating loss

     (1,117     (2,149
  

 

 

   

 

 

 

Financial income

     510        776   

Financial expenses

     (76     (989
  

 

 

   

 

 

 

Income (loss) before taxes on income

     (683     (2,362

Taxes on income

     52        —    
  

 

 

   

 

 

 

Net income (loss)

   $ (735   $ (2,362
  

 

 

   

 

 

 

Revenues. Our revenues increased by $0.6 million, or 7.8%, to $8.9 million for the six months ended June 30, 2013 from $8.3 million for the six months ended June 30, 2012. The increase in revenues is mainly attributable to an increase in revenues under the Bayer Wheat Agreement in the six months ended June 30, 2013 as compared to the six months ended June 30, 2012.

 

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Cost of Revenues . Cost of revenues increased by $0.2 million, or 4.6%, to $4.7 million for the six months ended June 30, 2013 from $4.5 million for the six months ended June 30, 2012. This increase is primarily attributable to an increase in salaries and benefits as a result of additional personnel we hired to support the increase in revenues.

Gross Profit . Gross profit increased by $0.4 million, or 11.6%, to $4.2 million for the six months ended June 30, 2013 from $3.8 million for the six months ended June 30, 2012. This increase is primarily a result of the increase in revenues offset by the cost of revenues, each as described above.

Operating Expenses.

Research and Development Expenses. Research and development expenses increased by $1.4 million, or 41%, to $4.7 million for the six months ended June 30, 2013 from $3.3 million for the six months ended June 30, 2012. This increase is primarily attributable to an increase in salaries and benefits as a result of additional employees in the research and development department hired to support our additional independent research and development programs.

Business Development Expenses . Business development expenses decreased by $12 thousand, or 2.2%, to $532 thousand for the six months ended June 30, 2013 from $544 thousand for the six months ended June 30, 2012, primarily due to a decrease in the cost of share-based compensation.

General and Administrative Expenses. General and administrative expenses increased by $0.1 million, or 12%, to $1.2 million for the six months ended June 30, 2013 from $1.1 million for the six months ended June 30, 2012, primarily due to an increase in salaries and benefits and an increase in payments to consultants.

Financial (Income) Expenses, Net. Financial (income) expenses, net increased by $0.6 million, or 149%, to financial expenses, net, of $0.2 million for the six months ended June 30, 2013 from financial income, net, of $(0.4) million for the six months ended June 30, 2012.

Financial Income. Financial income increased by $0.3 million, or 52%, to $0.8 million for the six months ended June 30, 2013 from $0.5 million for the six months ended June 30, 2012. This increase resulted mainly from an increase in interest income on marketable securities.

Financial Expense . Financial expense increased by $0.9 million to $1 million for the six months ended June 30, 2013 from $0.1 million for the six months ended June 30, 2012. The increase resulted mainly from a decrease in the fair market value of marketable securities we hold.

 

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Year Ended December 31, 2011 Compared to Year Ended December 31, 2012

The following table shows our operating results for the year ended December 31, 2011 compared to the year ended December 31, 2012.

 

     Year Ended December 31,  
         2012             2011      
     (in thousands)  

Consolidated Statements of Comprehensive Income:

    

Revenues

   $ 17,072      $ 14,901   

Cost of revenues

     9,552        8,247   
  

 

 

   

 

 

 

Gross profit

     7,520        6,654   
  

 

 

   

 

 

 

Research and development

     7,252        6,384   

Business development

     1,159        1,136   

General and administrative

     2,235        2,317   
  

 

 

   

 

 

 

Total operating expenses

     10,646        9,837   
  

 

 

   

 

 

 

Operating loss

     (3,126     (3,183
  

 

 

   

 

 

 

Financial income

     972        5,023   

Financial expenses

     (294     (1,195
  

 

 

   

 

 

 

Income (loss) before taxes on income

     (2,448     645   

Taxes on income

     74        —     
  

 

 

   

 

 

 

Net income (loss)

   $ (2,522   $ 645   
  

 

 

   

 

 

 

Revenues. Our revenues increased by $2.2 million, or 14.6%, to $17.1 million for the year ended December 31, 2012 from $14.9 million for the year ended December 31, 2011. The increase in revenues resulted primarily from an increase in revenues from Monsanto, which increased by $1.5 million, or 13.7%, to $12.0 million for the year ended December 31, 2012 from $10.5 million for the year ended December 31, 2011, as a result of the extension of our collaboration agreement with Monsanto in November 2011. The increase in revenues was also attributable to an increase in revenues under the Bayer Wheat Agreement in 2012 as compared to 2011.

Cost of Revenues . Cost of revenues increased by $1.3 million, or 15.8%, to $9.5 million for the year ended December 31, 2012 from $8.2 million for the year ended December 31, 2011. This increase is primarily attributable to an increase in salaries and benefits resulting from the hiring of additional employees and payments to additional suppliers and consultants hired in 2012, both due to our increased staffing needs as a result of additional projects with Monsanto, Bayer and DuPont during 2012, and an increase in depreciation expenses, partially off-set by a decrease in the cost of share-based compensation.

Gross Profit . Gross profit increased by $0.9 million, or 13.0%, to $7.5 million for the year ended December 31, 2012 from $6.7 million for the year ended December 31, 2011. This increase is primarily a result of an increase in revenues partially off-set by an increase in the cost of revenues, each as described above.

Operating Expenses.

Research and Development Expenses. Research and development expenses increased by $0.9 million, or 13.6%, to $7.3 million for the year ended December 31, 2012 from $6.4 million for the year ended December 31, 2011. This increase is primarily attributable to an increase in salaries and benefits as a result of additional research and development employees hired in 2012 compared to 2011 to support our additional research and development programs in 2012, partially off-set by a decrease in the cost of share-based compensation.

 

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Business Development Expenses . Business development expenses increased by $23 thousand, or 2.0%, to $1.2 million for the year ended December 31, 2012 from $1.1 million for the year ended December 31, 2011. This increase is primarily attributable to an increase in salaries and benefits for two additional business development employees in 2012, partially off-set by a decrease in the cost of share-based compensation and a decrease in fees paid to legal consultations.

General and Administrative Expenses. General and administrative expenses decreased by less than $100,000, or 3.5%, to $2.2 million for the year ended December 31, 2012 from $2.3 million for the year ended December 31, 2011. General and administrative expenses decreased primarily due to a decrease in the cost of share-based compensation, partially off-set by an increase in salaries and benefits paid to additional employees hired during the course of 2012.

Financial Income, Net. Financial income, net decreased by $3.2 million, or 82.2%, to $0.7 million for the year ended December 31, 2012 from $3.8 million for the year ended December 31, 2011.

Financial Income. Financial income decreased by $4.0 million, or 80.6%, to $1.0 million for the year ended December 31, 2012 from $5.0 million for the year ended December 31, 2011. This decrease is primarily attributable to a decrease of $3.7 million in financial income on revaluation of warrants. For the year ended December 31, 2011, we recorded $3.7 million of non-cash financial income related to an accounting revaluation of outstanding publicly traded warrants granted upon our initial public offering on the TASE in 2007 based on the change in market price of our ordinary shares. For the year ended December 31, 2012, we did not record any financial income related to revaluation of warrants as substantially all of these warrants were exercised and the remainder expired in May 2011. The decrease in financial income also derives from a decrease in the net change in the fair value of marketable securities we hold, which consist of corporate bonds and Israeli government treasury notes, and a decrease in interest income due to a decrease in interest rates.

Financial Expense . Financial expense decreased by $0.9 million, or 75.4%, to $0.3 million for the year ended December 31, 2012 from $1.2 million for the year ended December 31, 2011. Financing expense decreased primarily as a result of a decrease in expenses in respect of a change in foreign currency exchange rates in 2011.

Taxes on Income. Although we did not pay any taxes in Israel on our income for the years ended December 31, 2012 and 2011 as a result of our loss carryforwards, we recorded taxes on income in the amount of $74 thousand for the year ended December 31, 2012 as a result of taxes our collaborators were obligated to withhold from the payments we received from them during 2012.

 

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Year Ended December 31, 2010 Compared to Year Ended December 31, 2011

The following table shows our operating results for the year ended December 31, 2010 compared to the year ended December 31, 2011.

 

     Year Ended December 31,  
         2011             2010      
     (in thousands)  

Consolidated Statements of Comprehensive Income:

    

Revenues

   $ 14,901      $ 12,563   

Cost of revenues

     8,247        5,811   
  

 

 

   

 

 

 

Gross profit

     6,654        6,752   
  

 

 

   

 

 

 

Research and development

     6,384        5,544   

Business development

     1,136        1,062   

General and administrative

     2,317        2,123   
  

 

 

   

 

 

 

Total operating expenses

     9,837        8,729   
  

 

 

   

 

 

 

Operating loss

     (3,183     (1,977

Financial income

     5,023        724   

Financial expenses

     (1,195     (5,717
  

 

 

   

 

 

 

Net income (loss)

   $ 645      $ (6,970
  

 

 

   

 

 

 

Revenues. Our revenues increased by $2.3 million, or 18.6%, to $14.9 million for the year ended December 31, 2011 from $12.6 million for the year ended December 31, 2010. The increase in revenues resulted mainly from an increase in payments from Bayer, due to the execution of the Bayer Wheat Agreement in December 2010, which increased by $3.0 million, or 587%, to $3.5 million for the year ended December 31, 2011 from $0.5 million for the year ended December 31, 2010. The increase also resulted from an increase in revenues from Monsanto, which increased by $1.2 million, or 12.8%, to $10.5 million for the year ended December 31, 2011 from $9.3 million for the year ended December 31, 2010. This increase resulted from an extension to our collaboration with Monsanto in November 2011. These increases are partially off-set by a decrease of $1.5 million in revenues from Biogemma derived from one-time research and development services payments received in 2010 to cover our prior research and development efforts, to $0.7 million for the year ended December 31, 2011 from $2.1 million for the year ended December 31, 2010.

Cost of Revenues . Cost of revenues increased by $2.4 million, or 41.9%, to $8.2 million for the year ended December 31, 2011 from $5.8 million for the year ended December 31, 2010. Cost of revenues primarily increased as a result of an increase in salaries and benefits due to the hiring of additional personnel and payments to suppliers and consultants relating to an increase in projects with collaborators. Excluding the one-time revenues from Biogemma in 2010 against which there were no corresponding costs, the increase in cost of revenues was in line with the increase in revenues for the same period.

Gross Profit . Gross profit decreased by $0.1 million, or 1.5%, to $6.7 million for the year ended December 31, 2011 from $6.8 million for the year ended December 31, 2010. This decrease is primarily a result of the increase in revenues and cost of revenues, as described above.

Operating Expenses.

Research and Development Expenses. Research and development expenses increased by $0.8 million, or 15.2%, to $6.4 million for the year ended December 31, 2011 from $5.6 million for the year ended December 31, 2010. This increase is primarily attributable to an increase in salaries and benefits for research and development employees due to the hiring of additional research and development personnel and an increase in depreciation

 

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expenses, partially off-set by a decrease in expenses paid for suppliers hired by our research and development department and the cost of share-based compensation related to research and development employees.

Business Development Expenses . Business development expenses increased by $74 thousand, or 7.0%, to $1.14 million for the year ended December 31, 2011 from $1.06 million for the year ended December 31, 2010. This increase is primarily attributable to an increase in salaries and benefits for business development employees due to the hiring of additional business development personnel, partially off-set by a decrease in the cost of share-based compensation related to business development employees.

General and Administrative Expenses. General and administrative expenses increased by $0.2 million, or 9.1%, to $2.3 million for the year ended December 31, 2011 from $2.1 million for the year ended December 31, 2010. This increase is primarily attributable to an increase in salaries and benefits paid to management and other general and administrative employees due to the hiring of additional general and administrative personnel, partially off-set by a decrease in the expenses related to share-based compensation for management and other general and administrative employees.

Financial Income and Expenses, Net. Financial income and expenses, net increased by $8.8 million, or 176.7%, to income of $3.8 million for the year ended December 31, 2011 from an expense of $5.0 million for the year ended December 31, 2010.

Financial Income. Financial income increased by $4.3 million, or 593.8%, to $5.0 million for the year ended December 31, 2011 from $0.7 million for the year ended December 31, 2010. This increase is primarily attributable to an increase of $3.7 million in financial income on revaluation of warrants. For the year ended December 31, 2011, we recorded $3.7 million of non-cash financial income related to revaluation of outstanding publicly traded warrants granted upon our initial public offering on the TASE in 2007 based on the change in market price of our ordinary shares. For the year ended December 31, 2010, we recorded $5.4 million of non-cash financial expense related to revaluation of these warrants. The change derived from the change of the market price of our ordinary shares on the TASE. The increase in financial income also derives from an increase in the net change in the fair value of marketable securities we hold, partially off-set by a decrease in income derived from currency revaluations.

Financial Expense . Financial expense decreased by $4.5 million to $1.2 million for the year ended December 31, 2011 from $5.7 million for the year ended December 31, 2010. Financial expense decreased primarily due to a decrease of $5.4 million in non-cash financial expense related to revaluation of outstanding publicly traded warrants granted upon our initial public offering on the TASE in 2007 based on the change in market price of our ordinary shares. For the year ended December 31, 2011, we recorded $3.7 million of non-cash financial income related to revaluation of these warrants, whereas for the year ended December 31, 2010, we recorded $5.4 million of non-cash financial expense related to revaluation of these warrants. The change derived from the change of the market price of our ordinary shares at TASE. The decrease was partially offset by an increase in expenses derived from currency revaluations.

Liquidity and Capital Resources

Our working capital has generally been provided by cash raised from our investors, payments from our collaborators and grants received from OCS and the Canada-Israel Industrial Research and Development Foundation, or CIIRDF. As of June 30, 2013, we had cash and cash equivalents and marketable securities of $50.5 million and working capital of $44.9 million, which is calculated by subtracting our current liabilities from our current assets. As of June 30, 2013, we had $3.6 million of outstanding indebtedness related to the grants received from the OCS. Our principal uses of cash are to fund our operations, the largest component of which is cost of revenues associated with the research and development expenses related to our collaborations. We believe that our existing cash and cash equivalents and the net proceeds to us from this offering will be sufficient to fund our operations for at least the next 12 months. We also expect to continue receiving grants from OCS and CIIRDF in the future.

 

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Cash Flows

The following table presents the major components of net cash flows used in and provided by operating, investing and financing activities for the periods presented:

 

     Year Ended December 31,     Six Months Ended
June 30,
 
     2010     2011     2012     2012     2013  
           (unaudited)  
     (in thousands)        

Net cash provided by (used in) operating activities

   $ (2,840   $ 2,133      $ (1,888   $ (3,721   $ (3,302

Net cash provided by (used in) investing activities

     (14,497     (30,582     18,485        8,745        (4,271

Net cash provided by (used in) financing activities

     1,353        25,576        1,111        (1     178   

Exchange rate differences—cash and cash equivalents

     (111     (782     89        70        17   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

   $ (16,095   $ (3,655   $ 17,797      $ 5,093      $ (7,378
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash Provided by (Used in) Operating Activities

Cash provided by (used in) operating activities consists primarily of net income or loss adjusted for certain non-cash items. Adjustments to net income or loss for non-cash items include depreciation and amortization, cost of share-based compensation and financing expenses. In addition, operating cash flows are impacted by changes in operating assets and liabilities, principally deferred revenues, prepayments, trade receivables, other receivables, trade payables and other payables.

Cash flows used in operating activities for the six months ended June 30, 2013 were $3.3 million and resulted primarily from ($2.4 million) in net loss, a decrease of $2.2 million in deferred revenues, decreases of $0.8 million in trade payables and other payables and an increase in trade receivables by $0.3 million, primarily offset by $1.0 million in depreciation and amortization expenses, $0.6 million in share based compensation expenses and by $0.6 million in interest received during the six months ended June 30, 2013.

Cash flows used in operating activities for the year ended December 31, 2012 were $1.9 million and resulted primarily from ($2.5 million) in net loss reduced by $1.8 million in depreciation and amortization expenses, $1.2 million of share-based compensation, $1.2 million in increases in trade payables and other payables and $0.9 million in interest received, and primarily offset by a decrease of $3.3 million in deferred revenues and by a $0.7 million increase in trade receivables.

Cash provided by operating activities decreased by $4.0 million from 2011 to 2012. Net cash provided by operating activities was $2.1 million for the year ended December 31, 2011 and were generated primarily from $0.6 million in net income adjusted up by $1.4 million in depreciation and amortization expenses, $2.1 million in expenses related to share-based compensation, a $1.3 million decrease in trade receivables and $1.1 million in interest received, and adjusted down by $3.8 million in net financing income and $0.9 million in deferred revenues.

Cash Provided by (Used in) Investing Activities

Cash provided by investing activities was $8.8 million for the six months ended June 30, 2012 and cash used in investing activities was $4.3 million for the six months ended June 30, 2013. The change from cash provided by investing activities in the six months ended June 30, 2012 to cash used in investing activities in the six months ended June 30, 2013 primarily resulted from a decrease in proceeds from bank deposits and an increase in net acquisitions of marketable securities.

The majority of our investment activities have historically been related to the acquisition of property, plant and equipment and the purchase and sale of marketable securities. Cash used in investing activities was

 

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$14.5 million and $30.6 million for the years ended December 31, 2010 and December 31, 2011, respectively, and cash provided by investing activities was $18.5 million for the year ended December 31, 2012. The change from cash used in investing activities in 2010 and 2011 to cash generated by investing activities in 2012 derives primarily from an increase in proceeds from bank deposits and an increase in net proceeds from the sale of marketable securities.

Cash Provided by Financing Activities

Cash provided by financing activities was $0.2 million for the six months ended June 30, 2013 and cash used in financing activities was $1.0 thousand for the six months ended June 30, 2012. Cash provided by financing activities derives primarily from payments related to the exercise of options.

Cash provided by financing activities was $1.1 million, $25.6 million and $1.4 million for the year ended December 31, 2012, 2011 and 2010, respectively, and primarily resulted from payments related to the issuance of shares in 2011 and exercise of options in 2012, 2011 and 2010.

Government Grants

Our research and development efforts are financed, in part, through grants from the OCS, the Israel-U.S. Binational Industrial Research and Development Foundation, or BIRD, and CIIRDF. From our inception through 2012, we received grants totaling $4.8 million from the OCS and repaid royalties on sales of products derived from the research financed by such grants of $1.4 million, grants totaling $0.7 million from BIRD, out of which we repaid $0.4 million in 2012 and grants totaling $0.2 million from CIIRDF, which we have not yet paid any royalties on. As of December 31, 2012, we had seven active research grants under which we were receiving funding: five from the OCS, one from BIRD and one from the CIIRDF. We have applied to receive additional grants to support our research and development activities in 2013, none of which has been approved yet.

Under the Israeli R&D Law, royalties on the revenues derived from sales of products or services developed in whole or in part using grants from the OCS are due to the Israeli government, generally at a rate between 3.0% and 5.0%. The rate of the royalties payable to the Israeli government varies by the length of time a product has generated sales revenues. During the first three years of sales of products developed as a result of the OCS grants, we are required to pay royalties of 3.0% of the sales of such products, and from the fourth year on, we are required to pay royalties of 3.5% of such sales, in all cases, up to 100% of the amount of grants received by us from the OCS plus interest at the London Interbank Offered Rate, or LIBOR. In addition to paying any royalty due, we must abide by other restrictions associated with receiving such grants under the R&D Law. These restrictions may impair our ability to outsource development of products containing our traits, engage in change of control transactions or otherwise transfer our know-how outside Israel and may require us to obtain the approval from the OCS for certain actions and transactions and pay additional royalties and other amounts to the OCS.

Our BIRD grant is a joint development with DuPont to research and develop improvements to soybean rust resistance. Under the BIRD program, the grant will be repaid either (a) within 66 months from the original grant date, provided we do not generate royalties from the project and DuPont decides to continue the project or (b) through royalties at a rate of 5% of revenues of the products developed through the project or 30% of the revenues generated by the advanced technology developed through the project, in an amount of up to 150% of the total grant received. Should we choose to abandon the project, we will not be obligated to repay the grant, however we will also not be permitted to use the intellectual property developed during the project.

The CIIRDF grant was also provided as part of a joint project with Saskatchewan Wheat Pool Inc., operating under the name of Viterra, to develop canola with improved yield and abiotic stress tolerance. This grant will be repaid from income resulting from the commercialization of a product developed pursuant to the grant project, at a rate of 2.5% of royalties on sales of such product, in an amount up to 100% of the total grant

 

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received. Alternatively, we may repay the grant as royalties of 2.5% of the income we receive from licensing the product developed pursuant to the grant. Payment of such royalties is not required if commercial revenues are not generated as a result of the project.

See “Risk Factors—Risks Relating to Our Incorporation and Location in Israel—We have received Israeli government grants for certain of our research and development activities. The terms of these grants may require us to satisfy specified conditions in order to manufacture products and transfer technologies supported by such grants outside of Israel. We may be required to pay penalties in addition to repayment of the grants.”

Contractual Commitments and Contingencies

Our significant contractual obligations and commitments as of December 31, 2012 are summarized in the following table:

 

     Payments Due by Period  
     2013      2014      2015      2016      2017      2018      Total  
     (in thousands, unaudited)  

Trade payables

   $ 1,416       $ —         $ —         $ —         $ —         $ —         $ 1,416   

Other payables(1)

     3,139         —           —           —           —           —           3,139   

Liabilities in respect of grants from the Chief Scientist(2) (undiscounted)

     745         501         605         511         525         1,175         4,062   

Non-cancellable operating leases(3)

     467         431         383         22         —           —           1,303   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 5,767       $ 932       $ 988       $ 533       $ 525       $ 1,175       $ 9,920   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Consists of liabilities to employees for salaries and related personnel costs and accrued expenses to suppliers. Approximately $2.5 million of this amount was paid at the beginning of 2013.
(2) Consists of the projected royalty payments of 3-3.5% on revenues derived from research and development projects that were funded in part by grants received from the OCS.
(3) Consists of non-cancelable operating leases for the Company’s office space and motor vehicles.

Off-Balance Sheet Arrangements

We do not currently engage in off-balance sheet financing arrangements. In addition, we do not have any interest in entities referred to as variable interest entities, which includes special purpose entities and other structured finance entities.

Application of Critical Accounting Policies and Estimates

Our accounting policies affecting our financial condition and results of operations are more fully described in our consolidated financial statements included elsewhere in this prospectus. 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,

 

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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 believe that the accounting policies discussed below are critical to our financial results and to the understanding of our past and future performance as these policies relate to the more significant areas involving management’s estimates and assumptions. We consider an accounting estimate to be critical if: (1) it requires us to make assumptions because information was not available at the time or it included matters that were highly uncertain at the time we were making our estimate; and (2) changes in the estimate or different estimates that we could have selected may have had a material impact on our financial condition or results of operations.

Revenue Recognition

We recognize revenues when such revenues and the costs incurred or to be incurred in respect of the transaction can be measured reliably and when it is probable that the economic benefits associated with the transaction will flow to us.

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

We assess the criteria for recognition of revenue related to up-front payments and multiple components of revenue as outlined by IAS 18, Revenue. Judgment is necessary to determine the period over which we will satisfy our obligations related to up-front payments, when revenue components can be recognized separately and how to allocate the related consideration for each revenue component.

Revenues from periodic payments for research and development services are recognized throughout the services period based on the proportion of actual costs incurred for each reporting period to the estimated total costs of the collaboration, subject to the enforceable rights. Up-front payments received upon entering into the license and collaboration agreements, in exchange for the transfer of our patented genes to licensees, are also recognized as revenues over the duration of the relevant contract based on the proportion of actual costs incurred for each reporting period to the estimated total costs of the collaboration.

Revenues from milestone events, which are contingent upon the occurrence of certain events specified in the collaboration agreement, are recognized as revenues when the milestones, as defined in the particular agreement, are achieved.

Share-Based Compensation

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.

We selected the binomial option pricing model as the most appropriate method for determining the estimated fair value of our share-based compensation. The resulting cost of an equity incentive award is recognized as an expense over the requisite service period of the award, which is usually the vesting period. We recognize compensation expense over the vesting period using the graded vesting attribution method, which results in an accelerated recognition of compensation costs, and we classify these amounts in the consolidated statements of comprehensive income based on the department to which the related employee reports.

 

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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, share option exercise and cancellation behaviors, risk-free interest rates and expected dividend yields, which are estimated as follows:

 

   

Expected term. The expected term was estimated using historical data from prior years, including historical forfeiture rates.

 

   

Share price volatility. The expected share price volatility was based on the average historical price volatility of our shares on the TASE.

 

   

Risk-free interest rate. The risk-free interest rate is based on the yields of non-index-linked Bank of Israel treasury bonds with maturities similar to the expected term of the options for each option group.

 

   

Dividend yield. We have historically not paid and do not intend to pay dividends on our ordinary shares. We have therefore assumed a dividend yield of zero.

If any of the assumptions used in the binomial model changes significantly, share-based compensation for future awards may differ materially compared with the awards granted previously.

The following table presents the weighted-average assumptions used to estimate the fair value of options granted during the periods presented:

 

    Year Ended December 31,     Six Months Ended June 30,
    2010     2011     2012     2012    

2013

                     

(unaudited)

Expected volatility of the share prices

    25-65%        33-69%        25-65%        32-65%     

—  %

Expected term of options (in years)

    4.12           4.27           4.12           4.27         —     

Risk-free interest rate

    1.87-6.81%        3.01-6.93%        1.87-6.81%        2.26-6.81%     

—  %

Dividend yield

    0%        0%        0%       
0%
  
 

—  %

Weighted average share price

    NIS 17.99 / $4.67           NIS 15.82 / $4.14           NIS 17.99 / $4.67           NIS 17.41 / $4.44        

NIS —     

Government Grants

Government grants are recognized when there is reasonable assurance that we will receive the grants and that we will comply with the attached conditions. Research and development grants received from the OCS, BIRD and CIIRDF are recognized upon receipt as a liability if future economic benefits are expected from the project that will result in royalty-bearing sales.

A liability for the 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 the related 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

 

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(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 reduced with a corresponding reduction in research and development expenses.

Quantitative and Qualitative Disclosure About Market Risk

Foreign Currency Risk

Most of our revenues are denominated in U.S. dollars. The percentage of our revenues denominated in U.S. dollars accounted for 72.1%, 72.2% and 77.8%, of our revenues in the year ended December 31, 2012, 2011 and 2010, respectively, and 68.0% and 73.9% of our revenues in the six months ended June 30, 2013 and 2012, respectively. We incur expenses primarily in NIS, however, and our expenses in NIS accounted for 89.8%, 90.3%, and 89.0%, of our expenses in the year ended December 31, 2012, 2011 and 2010, respectively, and 91.1% and 91.5% of our expenses in the six months ended June 30, 2013 and 2012, respectively. As a result, any appreciation of the NIS relative to the U.S. dollar would adversely impact our profitability due to the portion of our expenses that are incurred in NIS. As of June 30, 2013, we did not have any hedge arrangements in place to protect our exposure to foreign currency fluctuations.

The following table presents information about the changes in the exchange rates of the NIS against the U.S. dollar:

 

Period

   Change in Average Exchange Rate of the NIS against
the U.S. dollar (%)
 

Six months ended June 30, 2013

     (3.5

2012

     7.8   

2011

     (4.1

2010

     (4.9

Our exposure related to exchange rate changes on our net asset position denominated in currencies other than USD varies with changes in our net asset position. Net asset position refers to financial assets, such as trade receivables and cash, less financial liabilities, such as trade payable and other payables. The impact of any such transaction gains or losses is reflected in finance expenses. Our most significant exposure relates to a potential change in the exchange rates of the U.S. dollar and the NIS. Assuming a 10% decrease in the U.S. dollar relative to the NIS, and assuming no other change, our finance expenses would have increased by $0.3 million in each of 2010 and 2011, decreased by $37,000 in 2012, and increased by $61,000 in the six months ended June 30, 2013 due to our positive current net asset position denominated in U.S. dollars in 2010 and 2011, and the six months ended June 30, 2013 and our negative current net asset position denominated in U.S. dollars in 2012.

Our results of operations are also impacted by currency translation gains and losses on monetary assets and liabilities, primarily cash deposits, denominated in currencies other than the U.S. dollar. Such gains or losses only impact the dollar value of our non-dollar denominated cash deposits and result from changes in reported values due to exchange rate fluctuations between the beginning and the end of reporting periods. Due to the limited amount of non-dollar denominated cash deposits, the amount of finance expenses recorded has been relatively insignificant.

Commodity Price Risk

Operating in the agribusiness sector, changes in certain commodity prices may affect our reported operating results and cash flows. We currently are not exposed to commodity price risks, however the prospects of our wholly owned subsidiary Evofuel will depend on biofuel and oil and natural gas prices, and the royalties we may receive from our collaborators on the sales and transfers of GM seeds containing the traits we develop could be affected by fluctuations in seed commodity prices. As of June 30, 2013, we did not have any hedge arrangements in place to protect our exposure to commodity price fluctuations.

 

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New and Revised Financial Accounting Standards

The JOBS Act permits emerging growth companies such as us to delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have irrevocably elected not to avail ourselves of this and, therefore, we will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.

 

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INDUSTRY OVERVIEW

We are a plant genomics company using proprietary computational tools to develop solutions that improve crop productivity. Our company operates principally in the seed and ag-chemical industry through the analysis of genomic data to identify and develop seed traits associated with increased productivity utilizing both biotechnology and advanced breeding methods. In addition, we intend to use these tools to enable the development of novel ag-chemicals for crop protection and enhancement, and we are also developing high-yielding castor bean seeds as a second generation feedstock for biodiesel. We believe that these markets represent large revenue opportunities, driven by a variety of macro trends and technological developments in the agriculture industry.

 

   

The market for seeds was estimated to be $37.6 billion in 2012, of which biotech seeds represented 49%, or $18.5 billion, according to Phillips McDougall’s March 2013 Seed Insight newsletter.

 

   

The market for crop protection ag-chemicals was estimated to be $47.3 billion in 2012, according to Phillips McDougall’s 2013 Industry Presentation on the Global Agrochemical and Seed Markets.

 

   

Global biodiesel consumption was estimated at 422.4 thousand barrels per day in 2011, according to Ken Research’s 2012 Global Biofuel Market Outlook.

We believe these market trends and the industry trends described below have enabled us to expand our relationships with our existing collaborators, which in turn has increased our revenues from $12.6 million in the year ended December 31, 2010 to $17.1 million in the year ended December 31, 2012. The growth in the market for seeds and crop protection has also enabled us to enter into new collaborations with companies in the seed and ag-chemical industry that are seeking to improve crop productivity. We have not yet entered into any collaboration agreements in our ag-chemical operations. Because we are in the developmental stages, we have incurred operating losses of $(3.1 million), $(3.2 million) and $(2.0 million) for the years ended December 31, 2012, 2011 and 2010, respectively, and $(2.1 million) and $(1.1 million) in the six months ended June 30, 2013 and 2012, respectively. While we expect to continue to incur operating losses in the near term, we expect that these market trends will continue to drive the growth of our business and increase revenue in the long term. We expect that the market and industry trends will enable our growth, both by potentially expanding our relationships with existing collaborators and by creating opportunities to enter into new collaborations. However, we cannot provide any assurance that these market trends will continue or that we will be successful in taking advantage of these trends. See “Risk Factors.”

Agriculture Industry Trends

The agriculture industry continues to seek sustainable and economically viable solutions to feed the world’s growing and increasingly prosperous population. Population growth and prosperity are fueling increased demand for grain, however production is constrained in meeting that demand due to finite arable land and water resources, climate variability, increasingly resilient weeds and insects, depletion of soil nutrients and diseases that impair crop yields.

In order to address these growing challenges, farmers need solutions to increase and maintain crop productivity. Seed and ag-chemical companies are therefore increasingly seeking innovative agricultural technologies such as development of high-yield seeds and more effective crop protection ag-chemicals. Such technologies are expected to continue to play a significant role in maintaining the supply-demand balance.

 

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Growing Global Demand for Grain

The global demand for major grains (corn, soybean, wheat, rice and barley) is expected to continue to rise steadily, driven by population growth and increasing demand for more protein-rich diets. According to a 2013 Global Commodities Forecast from Business Monitor International, global demand is estimated to have increased 23% from 2000 to 2011, reaching 2.3 billion tons, and is expected to reach approximately 2.7 billion tons in 2017 representing a further increase of 14%.

Global demand for major grains

 

 

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Source: Business Monitor International Global Commodities Forecast (April 2013)

Increasing population. The global population is projected to rise from approximately 7.0 billion people in 2012, to 9.4 billion people by 2050, according to the United States Census Bureau’s Demographic Overview Report. Most of this growth is expected to occur in developing countries, whose populations are expected to reach nearly 8.1 billion people by 2050. Population growth is the primary cause of increased grain demand.

Changing diets. In addition, rising levels of income, particularly in emerging markets, are expected to drive demand for higher protein diets, such as meat and dairy. For example, increased consumption of meat has a major effect on the demand for grains as the production of one kilogram of beef, pork or poultry requires multiple kilograms of grain feed. Global demand for meat is expected to increase by 1.1% per annum from 2005/2007 to 2050, according to the 2012 report, “World agriculture towards 2030/2050” by the Food and Agricultural Organisation of the United Nations (“FAO”), in comparison to approximately 0.8% of annual population growth, according to the United States Census Bureau.

 

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Limited Grain Supply

Finite land available for agriculture . Despite rising demand for grain, there is limited growth potential in arable land available for cultivation. According to the FAO’s 2012 report, “World agriculture towards 2030/2050”, within approximately 13.3 billion hectares of global dry land area, 4.5 billion hectares is suitable for agriculture. According to the same report, in 2005 to 2007 more than 1.5 billion hectares were cultivated. In addition, according to the 2011 Organisation for Economic Co-operation and Development (“OECD”)-FAO Agricultural Outlook, the cultivated land per capita declined at 1.5% p.a. from 1970 to 2008.

Hectares per capita, global

 

 

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Source: OECD-FAO Agricultural Outlook (2011)

Climate variability and limited water supply. Farmers must also manage risks associated with climate variability and detrimental natural events. These include both cyclical weather fluctuations, such as mild to moderate changes in temperature and precipitation, and major natural events such as droughts and storms. For example, according to a 2012 news release by the United States Department of Agriculture, or USDA, in 2012 the United States experienced the most severe and extensive drought in at least 25 years with 80% of agricultural land affected.

Weeds, insects and disease . The presence of weeds, insects and diseases also harms crop yields. According to a 2009 Media Centre release by the FAO, $95 billion worth of global food production is lost annually to weeds, $46 billion to insects and $85 billion to diseases. Weeds reduce yield by competing with crops for water, light and nutrients, and can interfere with harvest operations and increase production costs, while insects and disease can severely affect crop yield and quality.

 

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The Supply—Demand Gap

Over the last five decades, demand for food has been largely met by increasing crop yield as a result of innovations in agricultural technology, such as ag-chemicals and enhanced seeds, as well as a gradual increase in cultivated land. However, along with the decline in arable land per capita, the rate of yield improvement provided by current agricultural technologies is slowing and may not be sufficient to provide future food security.

 

Indexed area and production trends(a)

  

10-year rolling average change in yield(b)

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   LOGO

 

(a)    Reflects yield of corn, wheat, rice and barley crops. Yield defined as metric ton of crop produced per hectare.

  

 

(b)    Reflects 10 year rolling average yield of corn, wheat, rice and barley crops.

Source: USDA, Foreign Agricultural Service’s Production, Supply and Distribution Database (2013)    Source: USDA, Foreign Agricultural Service’s Production, Supply and Distribution Database (2013)

Enhancing and accelerating agricultural productivity in a sustainable manner is a central component of achieving global food and nutrition security. According to the Global Harvest Initiative’s 2010 Global Agricultural Productivity Report, Total Factor Productivity (TFP), which represents the ratio of agricultural outputs (gross crop and livestock output) per input (land, labor, livestock, fertilizer and machinery) will need to grow at an annual rate of 1.75% per year to meet the global demand for agricultural output in 2050. This will need to be addressed by continued improvements in technology and productivity.

Improving Plant Productivity

In order to address the supply-demand gap, farmers need to rely on innovative technologies that are aimed at improving plant productivity and field performance. Plant performance is impacted by various plant characteristics and traits that can be divided into three major categories:

 

   

Yield and abiotic stress tolerance traits govern plant yield per unit area, yield stability over varying environmental conditions and tolerance to environmental stress factors, such as drought and fertilizer utilization;

 

   

Biotic stress tolerance traits govern plant resistance to living organisms such as insects, diseases and fungi, as well as herbicides;

 

   

Quality traits govern the plant’s taste, shelf life, oil quality and nutrient content.

A fundamental way to improve plant productivity and performance is through the use of plant genomics. Plant genomics is the science of understanding and analyzing plants to modify biological elements which are responsible for traits. Through plant genomics, researchers can identify and influence target genes and other genomic components that affect trait performance, which are then used in the development of (i) enhanced seeds and (ii) novel crop protection ag-chemicals.

 

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(i) Enhanced Seeds

There are two primary methods to improve plant performance through the use of genomic technologies in the development of seeds.

Biotechnology or genetic modification . Use of genomic technologies for the development of seeds in which genes that impact specific traits are introduced to the plant through genetic insertion. These genes are identified and sourced from either the same plant, other plants or another organism and are introduced to the plant through the gene insertion into the plant’s DNA. Such seeds are referred to as genetically modified (“GM”) or biotech seeds. Biotechnology provides for a wider range of traits in a plant and usually results in more substantial seed trait improvement compared to advanced breeding.

Advanced breeding . Breeding is the enhancement of desired native traits by pairing between two plant lines from the same plant species. Advanced breeding is the use of genomic technologies to identify specific genomic markers, such as single-nucleotide polymorphisms (or SNPs), linked to a particular trait. This allows breeders to determine which parent plants with favorable characteristics should be crossed to enhance desired traits in the next generation. Seeds produced from advanced breeding are referred to as conventional seeds.

The global seed market grew at 7.8% CAGR since 2001 to reach $37.6 billion in 2012, with the biotech seeds market the major driver, growing at an 18.8% CAGR in the same period to reach $18.5 billion in 2012, accounting for 49% of the total seeds market, according to Phillips McDougall’s March 2013 Seed Insight newsletter. As of today, the two major traits which are commercially available in the biotech seeds market are herbicide tolerance and resistance to insects. However, the seeds companies are investing substantial resources to develop additional traits. According to estimates from the 2012 Global Status of Commercialized Biotech/GM Crops report, prepared by the International Services for the Acquisition of Agri-Biotech Applications (“ISAAA”), the savings and added economic value for farmers globally since the initial adoption of biotech applications in plants between 1996 and 2011 was estimated at approximately $98 billion.

 

Global value of seed market ($bn) & penetration of biotech seeds (%)

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Source: Phillips McDougall, Seed Insight, March 2013

 

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To date, the two main commercial biotech crops are corn and soybean, which together accounted for 60% of the global seeds market in 2012.

 

Total seed market, by crop (2011)

  

Biotech seed market, by crop (2011)

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Source: Phillips McDougall 2011 Seed Industry Overview (June 2012)    Source: Phillips McDougall 2011 Seed Industry Overview (June 2012)

Biotech seeds comprise a global industry, with 28 countries growing biotech crops in 2012 and a further 31 allowing imports, according to the ISAAA’s 2012 Global Status of Commercialized Biotech/GM Crops report. To date, the United States, Brazil and Argentina have accounted for the majority of volume with 106.1m hectares out of 170.3m hectares utilized for biotech crops in 2012, while the cultivation of biotech crops in the European Union has not been widely accepted due to regulation and negative public market perception.

 

Area of total crops, by country (2012)

  

Area of biotech crops, by country (2012)

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Source: USDA, Foreign Agricultural Service’s Production, Supply and Distribution Database (2013)    Source: ISAAA Global Status of Commercialized Biotech/GM Crops (2012)

Factors expected to drive future growth include the application of advanced breeding and biotechnology in additional crops such as rice and wheat, introduction of new target traits, such as durability to abiotic stress, and adoption of biotechnology crops by additional countries.

Product development for enhanced seeds

Biotech seeds. Producing biotech seeds requires trait development and commercial plant biotechnology, in addition to significant research and development capital, intellectual property protection and regulatory testing. The research and development process for biotech crops is complex and time consuming, requiring extensive application of technology in data analysis and field trials. The process of identification and development can take eight to 13 years before commercialization, depending on both the complexity of the trait and the type of crop involved. Total development costs on average typically reach approximately $140 million per gene addressing a specific trait in a specific crop, according to a Consultancy Study for Crop Life International conducted by Phillips McDougall in 2011.

 

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Conventional seeds. The product development process of enhancing desired native traits through advanced breeding includes identification of SNPs, validation in field trials and commercial launch of a seed product containing the trait. This process primarily differs from the development of biotech seeds in later phases of development wherein the process involved in receiving regulatory approval is far more comprehensive and lengthy in biotech seeds than in conventional seeds.

Major seed companies have declared their goal to significantly increase crop yield to meet the growing needs of the world population. For instance, Monsanto has indicated that it plans to double the yield in its core crops by 2030. These companies are increasingly focused on developing seeds with new target traits to improve yield and durability to abiotic stress, such as drought and heat. For example, Monsanto expects to commercially launch the first biotech drought tolerance trait in corn seed in 2013. In addition, these companies invest significant resources to broaden technological solutions for resistance to biotic stress such as nematodes, fungi and different plant diseases, in order to address the increasing resistance of pests to existing products, as reported by farmers. Such solutions include introducing seed traits with innovative mechanisms to cope with these pests, as well as new products to cope with different kinds of living organisms, such as nematodes, diseases and fungi.

According to Phillips McDougall’s 2013 Industry Presentation on the Global Agrochemical and Seed Markets, the total investment in seeds and traits by the major seed companies (Monsanto, DuPont, Syngenta, BASF, Dow and Bayer) was more than $3 billion in 2011. These companies often collaborate with specialized research and development companies that have complementary technological capabilities and expertise. Gene identification and early stage trials are often performed by such research and development companies on behalf of, and prior to, further development and commercialization by seed companies.

(ii) Crop Protection Ag-chemicals

The market for crop protection ag-chemicals has grown by approximately 40% since 2007 to an estimated $47 billion in 2012, according to Phillips McDougall’s 2013 Industry Presentation on the Global Agrochemical and Seed Markets. Ag-chemical products contain formulations of one or more chemicals designed to target an essential biological process within pests and prevent them from affecting agricultural crops. Crop protection ag-chemicals, which as a group are referred to as “pesticides” or “crop protection products,” include herbicides (to control weeds), fungicides (to prevent and treat fungal diseases) and insecticides (to minimize damage caused by insects).

 

Crop protection ag-chemicals

market size ($bn) and growth (%)

  

Crop protection ag-chemical

market breakdown (2011)

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Source: Phillips McDougall Industry Presentation on the Global Agrochemical and Seed Markets (January 2013)    Source: Phillips McDougall Industry Presentation on the Global Agrochemical and Seed Markets (May 2013)

 

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Historically, the market was driven by the introduction of new chemicals which addressed many of the challenges faced by crop growers in handling pests. However, in recent years, the industry has faced a number of challenges including:

 

   

The rate of introduction of novel ag-chemicals has been steadily declining due to high development costs and strict regulation, according to Phillips McDougall’s 2013 Industry Presentation on the Global Agrochemical and Seed Markets. The most extreme example of this is in the herbicides sector, in which there are only approximately 20 existing mechanisms to eradicate weeds, and the last product based on a new mechanism was launched over 20 years ago.

 

   

As a result, farmers are required to use the same product, or a combination of a number of products, repeatedly and in larger quantities and concentrations, against pests. This in turn leads to further acceleration in the development of pest resistance to existing chemicals and results in higher costs to the farmers, limiting the solutions available for the farmer as well in addition to having negative environmental impacts.

We believe that the decline in new mechanisms for eradicating weeds combined with an increase in weed resistance will further drive the growth in the market for crop protection ag-chemicals.

Number of New Pesticide Products Launched Annually

 

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Source: Phillips McDougall, The Global Agrochemical and Seed Markets Industry Developments, January 2013

Number of Species of Weed with Multiple Resistance

 

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Source: Weed Science Society of America, Herbicide Resistance Management Lesson 2011

 

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Farmers and ag-chemical companies have therefore been seeking new solutions to mitigate pest resistance. Accordingly, the science of crop protection is expanding beyond traditional agriculture chemicals to include new technologies to develop more effective ag-chemicals, such as more effective herbicides.

Product development for crop protection ag-chemicals

The process of developing a new crop protection ag-chemical is lengthy and costly, and typically spans ten years and costs on average $260 million to bring a new product to market, according to a 2010 Consultancy Study for Crop Life America and the European Crop Protection Association conducted by Phillips McDougall. Most producers have traditionally relied on a process of trial-and-error which involves screening thousands of chemicals against weeds, insects or any other kind of pests until they find a chemical that is able to eradicate or severely damage the pest. The decrease in the rate of introduction of new crop protection products to the market indicates that this costly approach is becoming less effective to identify and develop new products.

An alternative approach, less employed by the major ag-chemical companies today, involves rational design similar to that utilized in the pharmaceutical industry, which combines elements of both chemistry and biology. This consists of the use of plant genomic data to identify and target essential biological processes and leveraging this data for the discovery and development of complementary crop protection ag-chemicals, thereby potentially increasing the probability of success in identifying and developing novel herbicides with new mechanisms to cope with the growing resistance of weeds.

While the majority of current crop protection ag-chemicals are focused on providing solutions to biotic stresses, as described above, the industry is increasingly expanding into additional application areas such as crop enhancement ag-chemicals. These solutions are focused on developing ag-chemicals which if sprayed on crops, would affect important biological processes and thereby enable those crops to improve yields and resistance to abiotic stresses.

The Market for Biofuels

Biofuel demand in ground, aviation and maritime transportation has been steadily growing in past years, representing a market opportunity of approximately $140 billion in 2011, according to Ken Research’s 2012 Global Biofuel Market Outlook, with new markets, such as biojet fuels for commercial airlines and the US military continuing to emerge and attract new investments in the industry. Similar to traditional fuels, the two main types of biofuels in broad use are bioethanols (based on sugars such as corn and sugar cane) and biodiesels (based on oil based feedstock such as soybean and canola). The market is mainly driven by a need for increasing energy independence, reducing susceptibility to fluctuating oil prices and environmental concerns. Global production of biodiesel reached over 368 thousand barrels per day in 2011.

 

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Source: OECD-FAO Agricultural Outlook (2011)

 

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According to the 2007 McKinsey Quarterly (No. 2), feedstock accounts for the majority of biodiesel production costs. At present, production of biodiesel, an alternative to diesel fuel derived from plant oil, relies on edible crops, such as soybean and canola, considered first generation feedstocks. Rising commodity prices and concerns surrounding the long-term sustainability of diverting food feedstock for biodiesel use has hindered widespread adoption of these alternative fuels, setting the stage for the demand of second generation feedstock for biodiesel. Efforts are being undertaken worldwide to introduce second generation feedstock that will be: (i) economically viable, (ii) scalable and (iii) sustainable ( e.g. , achieving high productivity, with low input requirements and without competing with food crops). While there have been numerous attempts to develop a second generation feedstock ( e.g. , based on jatropha and algae), thus far the commercial success has been limited.

The castor bean plant has unique characteristics which make it a highly suitable potential second generation feedstock for biodiesels. Castor bean is a non-edible, high oil-yielding crop (oil comprises nearly 50% of the castor bean seed), and exhibits high tolerance to harsh environmental conditions, such heat and drought tolerance. Today castor beans are primarily grown in India, China and Brazil in a traditional manner and are mainly used in the biopolymer and lubricant markets. There is a need for advances in castor oil production as the castor market has exhibited unstable supply and price in the past, and has lacked an application of high-quality plant genetics and agronomics. While no commercial attempts have been made to develop castor bean seeds as a feedstock for biodiesel, by applying advanced seed technologies and modern agricultural practices, castor beans could be developed to bear the characteristics of an economically viable and sustainable second generation feedstock for biodiesel.

 

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BUSINESS

Our Business

We are a plant genomics company that uses a comprehensive and integrated technology infrastructure to enhance seed traits underlying crop performance and productivity through biotechnology and advanced breeding methods. We have strategic collaborations with world-leading agricultural companies, primarily to develop traits for improved yield and abiotic stress tolerance (such as improved tolerance to drought, heat and salinity) and biotic stress resistance (such as resistance to disease, pests and insects). Our products are focused on essential crops, including corn, soybean, wheat, rice and cotton, which, according to Phillips McDougall’s 2011 Seed Industry Overview report, account for over 70% of the value of the global seeds market. We also apply our technology infrastructure to two additional fields: (i) ag-chemical and (ii) seeds focusing on second generation feedstock for biodiesel, both of which have not yet generated revenue and are in the development stage.

The field of plant genomics, or the science of understanding and analyzing plant genomes to identify and impact biological elements affecting trait performance, continues to evolve. Agricultural product innovation is increasingly driven by the ability to analyze data, in order to make direct discoveries and gain insights into key underlying biological phenomena of such products. The seed and ag-chemical industry has witnessed a dramatic increase in the availability of genomic data. This is primarily as a result of the introduction of new technologies that facilitate rapid generation of such data at a significantly lower cost. As a result, the key opportunity, and challenge, for plant trait improvement has shifted from data generation to data integration and analysis of large volumes of data.

We believe that our competitive advantage is based on our continuously enhanced proprietary discovery and development infrastructure. This infrastructure is capable of integrating and analyzing vast amounts of data, through the use of proprietary computational technologies comprised of advanced algorithms and predictive methodologies. Our computational technologies are a key part of our broad technology infrastructure that also integrates extensive scientific expertise, public and proprietary genomic data and plant validation systems. Our proprietary gene identification capabilities, which are scalable and adaptable to a large variety of crops and traits, together with our highly educated and experienced multidisciplinary team of scientists, are, we believe, unique in the industry.

We currently generate revenues primarily through research and development and milestone payments as traits move through development phases, and in the future we expect to receive royalty revenues upon commercialization of products containing traits that we help our collaborators to develop. To date, we have identified and filed patent applications for over 4,000 novel genes and genomic components for the improvement of key traits, hundreds of which are under development in our collaborators’ pipelines. We believe that the extension and renewal of some of our main collaboration agreements highlight the value ascribed to our performance, our capabilities and our proprietary technology infrastructure. However, we are still in the development stages, and it may take at least six years, if at all, before the first seeds containing our traits complete the development process and become commercially viable. We have a history of losses and incurred operating losses of $(3.1 million), $(3.2 million) and $(2.0 million) for the years ended December 31, 2012, 2011 and 2010, respectively, and $(2.1 million) and $(1.1 million) for the six months ended June 30, 2013 and 2012, respectively.

We have collaboration agreements with most of the world’s leading seed and ag-chemical companies, including subsidiaries or affiliates of Monsanto, Bayer, DuPont, and Syngenta. Our collaborations with these companies are aimed at introducing improved seed traits into key commercial crops. Among our collaborators, Monsanto and Bayer are also key shareholders in our company, holding approximately 8.7% and 4.6% of our ordinary shares as of June 30, 2013, respectively.

We also aim to apply our technology infrastructure to two additional fields: ag-chemical and seeds focusing on second generation feedstock for biodiesel. For the ag-chemical market, we are focusing on the discovery of

 

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new biologically significant proteins called “targets” based on genes we identify that enable the development of herbicides with novel mechanisms to mitigate weed resistance. We also intend to use our proprietary discovery and development plant infrastructure to develop chemical molecules as crop enhancers that, when applied to crops, would improve yield and abiotic stress tolerance. Although we have not yet entered into collaboration agreements in this area, we currently expect to complete the development of our computational technologies for ag-chemical operations in the next 12 to 18 months, which we believe will increase the likelihood of entering into new collaborations. However, we cannot provide any assurance that we will be successful in developing these computational technologies or in entering into collaborations during this timeframe, if at all.

For the biodiesel market, we are focusing on the development of improved, high-yielding, non-edible castor bean seeds as an economically viable alternative feedstock for the production of biodiesel with a reduced environmental footprint. The success of this operation will depend on our ability to address several unique challenges, including developing effective growth protocols for our castor bean varieties and achieving mechanized harvest capabilities. We do not expect, however, to start selling seeds under this operation for at least three years.

We currently employ 188 employees, of which approximately 78% are involved in research and development and 48 hold a Ph.D. degree. Our multi-disciplinary team includes experts in biology, chemistry, plant genetics, agronomics, mathematics, computer science and other related fields.

We have been listed for trading on the TASE since 2007, are headquartered in the agricultural and biotech hub of Rehovot, Israel, and have field testing activities in Israel, Brazil and Argentina.

Our Strengths

We believe we are strategically positioned to capitalize on the fundamental need to increase agricultural yields in highly attractive end-markets such as food, feed and biofuel. Our competitive strengths include.

A leading position in the field of plant genomics. Since our company’s formation in 2002, we have established a powerful integrated infrastructure that we believe is unique in our industry for understanding plant genomics, addressing some of the key challenges in agriculture productivity. The infrastructure combines our know-how in plant genomics with our proprietary technologies and processes that span data integration and analysis, field experiments and plant validation. This infrastructure allows us to identify, prioritize and validate over 1,000 genes per year in our in-house research center, labs, greenhouses and field locations. Our professional and skilled employee base includes experts in computer science, genetics, agriculture science, molecular biology and other fields. Approximately 78% of our 188 employees as of June 30, 2013 are involved in research and development, and 48 of our employees hold Ph.D. degrees.

Innovative proprietary computational technologies, capable of efficiently integrating and analyzing vast amounts of complex genomic data. Our core competency lies in our advanced proprietary computational tools, which are the cornerstone to our plant genomic capabilities. These proprietary computational technologies are based on advanced algorithms and predictive methodologies for data integration and data analysis. The focus in the seed industry has shifted from data generation to data analysis due to the significant increase in volume and complexity of genomic data. Our computational technologies have demonstrated capability to integrate and comprehensively analyze vast amounts of public and proprietary data, covering more than 200 plant species and in the scope of 500 terabytes, enabling us to identify and prioritize genes and genomic components aimed at improving key plant traits.

A partner of choice for industry leaders. We have collaborations with five of the seven leading global seed and ag-chemical companies, focusing on the development of traits for key crops in their product portfolios such as corn, soybean and wheat. We believe that our ability to identify and validate target genes and genomic components in an efficient and methodological manner is a driver of innovation in our collaborators’ product development pipelines . Two of our key collaborators, Monsanto and Bayer, have made significant equity

 

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investments in our company and have entered into more than one agreement with us, and we believe that our track record of renewing or entering into new collaboration agreements with our collaborators underscores the potential strategic nature of our relationships with most of the world’s leading seed and ag-chemical companies.

A balanced and scalable business model. We currently generate revenues primarily through research and development and milestone payments; in the long term, we expect to also receive significant revenues from sales royalties generated by our collaborators upon commercialization of seeds incorporating genes and genetic components we identify. However, because the development cycle of products is lengthy, any revenue from royalty payments may not be earned before six years, if at all. We benefit from a business model in which, pursuant to most of our existing collaboration agreements, a significant part of our operating costs are borne by our collaborators. We self-fund our initial research and development costs in selected projects, with a goal of capturing a larger share of our collaborators’ future revenues. For example, one of our collaboration agreements with DuPont provides for higher milestone and royalty payments as a consequence of fully self-funded initial costs.

Diversified product portfolio and multiple paths of commercialization. Our innovative and adaptable technology infrastructure, scientific and computational expertise, and our close links to major companies in the seed and ag-chemical industry allow us to benefit from multiple business opportunities in the agriculture markets. Our more than ten different collaborations with world-leading seed and ag-chemical companies cover a portfolio of 20 products tailored to address specific market needs across various traits, such as yield enhancement and disease resistance, in a variety of crops, such as corn, soybean and wheat. Under these collaborations, hundreds of genes we identified are currently undergoing early testing in our collaborators’ pipelines. In addition, our expertise in plant genomics and flexible computational technologies will allow us to address new commercial opportunities in agriculture markets, such as discovery of target proteins in the ag-chemical market; and the development of castor bean seeds for second generation feedstock for the biodiesel market. We believe that both activities represent substantial business opportunities in additional large markets.

Broad intellectual property portfolio, claiming protection for thousands of key genes impacting valuable key traits.  In the past ten years we have established a broad intellectual property portfolio that includes patents covering key traits such as yield and drought tolerance. We have more than 20 patent families, over 180 national filings and over 30 granted patents covering thousands of key genes and genomic components impacting valuable key traits. We believe that our intellectual property portfolio will enable us to benefit from royalty payments in the long-term and maintain our competitive advantage.

Our Growth Strategy

Our goal is to extend our market experience in improving plant productivity and performance using plant genomics. To achieve that goal we intend to pursue the following strategies.

Expand our innovative technologies in plant genomics. We intend to enhance our competitive advantage by further investing in our technology infrastructure and research and development capabilities in order to improve the process of identification and validation of genes and genomic components. Specifically, with respect to our technology infrastructure, we intend to continue to (i) improve our existing computational technologies through the introduction of novel methodologies and more advanced algorithms, as well as the development of new computational technologies, such as our recently launched Gene2Product ; (ii) develop proprietary genomic data through field experiments utilizing advanced technologies, such as systems for collection and integration of field data; and (iii) improve our plant validation capabilities, such as the recent launch of our unique monocot validation system. In addition, we intend to continue investing resources in understanding the basic biological phenomena in plants at the genomic and molecular level.

Continue to advance our existing collaborations in seed traits. We are focused on executing and advancing our existing collaborations by continuing to provide innovative solutions, thereby maintaining high output quality

 

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standards. We strive to work closely with our collaborators throughout the development processes and support them with our technology infrastructure in order to expedite our genes and genetic components towards commercialization with a view to generating significant milestone and royalty revenues from our collaborations. Our efforts with collaborators has resulted in several of them expanding the scope of our existing collaborations over time, for example the extension and expansion of our collaboration with Monsanto in 2011.

Extend and expand our seed trait project portfolio. We plan to continue to leverage our scalable and adaptable infrastructure, plant genomics expertise and close relationships with agriculture industry leaders in order to (i) address new traits, such as insect resistance; (ii) add new crops to our portfolio, such as sugarcane or selected vegetables; and (iii) commercialize new offerings by extending our current collaborations and introducing new technologies into our existing collaborations. For example, in 2009 we commenced collaboration with Bayer to improve yield in rice, and in 2010 initiated a new collaboration with Bayer to improve the yield, nitrogen use efficiency and abiotic stress tolerance of wheat. Similarly, in 2011, Monsanto extended and expanded the collaboration we entered into with them in 2008 to include gene optimization approach using our Gene2Product computational technology in the collaboration projects.

Capture an additional share of the value chain by increasing self-funded research and development. In most of our current collaborations our collaborators fund our direct research and development and associated expenses in the early stages of the discovery process, prior to the delivery and license of genes to our collaborators. We intend to complement our revenue streams by selectively self-funding a larger portion of our direct research and development costs in the initial phases of selected projects and licensing genes to our collaborators at a later stage of the development process, with a goal of capturing a larger share of our collaborators’ future revenues.

Further develop and commercialize our ag-chemical operations. We are leveraging our know-how and computational technologies to position our company at the forefront of the discovery and innovation in ag-chemicals by (i) discovering new modes of action for the development of novel herbicides to mitigate growing weed resistance; (ii) identifying trait-specific chemical active ingredients displaying crop enhancing effects with respect to yield and abiotic stress tolerance; and (iii) leveraging our existing relationships with major seed and ag-chemical companies, such as Bayer and Syngenta, to enter into new collaborations in the ag-chemical sector.

Further develop and commercialize the activities of our subsidiary Evofuel . We intend to further develop our castor bean seed operations towards commercialization. Our key initiatives include: (i) commercializing advanced high yielding castor bean varieties, suitable for commercial production and mechanized harvest; (ii) introducing next generation traits to our castor bean varieties utilizing our genomic technologies; (iii) expanding our existing pre-commercial collaborations with SLC Agricola in Brazil and T6 in Argentina in order to be able to sell our castor beans on a commercial scale; and (iv) seeking new collaborations in additional target markets with key companies.

Our Products

We are a plant genomics company that uses a comprehensive and integrated technology infrastructure to enhance seed traits underlying crop performance and productivity through biotechnology and advanced breeding methods. Our business focuses on three distinct product-driven operations: (i) seed trait (divided into (a) yield and abiotic stress, and (b) biotic stress) (ii) ag-chemical and (iii) seeds focusing on second generation feedstock for biodiesel. We currently generate all of our revenues from our seed trait operations, and a significant majority of our employees are focused on these operations. Our operations in ag-chemicals and seeds focusing on second generation feedstock for biodiesel are in the pre-revenue stage and we have not yet entered into collaboration agreements in the ag-chemical area. We may use a significant portion of the proceeds of this offering to invest in and grow our ag-chemical and seeds focusing on second generation feedstock for biodiesel operations.

 

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Seed Traits

In this field, we use our expertise in plant genomics to improve plant performance through biotechnology and advanced breeding, helping address the global demand for food, feed and fuel. Our proprietary computational technologies, validation techniques and other capabilities enable us to identify promising “candidate” genes and genetic markers, or SNPs ( i.e. , a single-nucleotide polymorphism, which is essentially a DNA sequence variation that occurs when a single nucleotide, a basic gene “building block,” varies from one DNA sequence to another), that have the potential to improve traits of interest, such as yield, drought tolerance, and disease resistance in commercial (or “target”) crops, such as corn, soybean, wheat, rice and cotton. The most promising “candidate” genes will be used to develop improved biotechnological seeds; the SNPs will be used for conventional seeds improved through advanced breeding. We have entered into collaboration agreements with some of the world’s leading seed and ag-chemical companies, including Monsanto, Bayer, DuPont and Syngenta, which license the trait-improving genes that we generate with the goal of introducing these genes into the seeds of commercial crops.

Our seed traits programs specialize in improving plant yield and increasing plant tolerance to abiotic stress (such as drought, heat and salinity) and resistance to biotic stress (such as disease, pest and insect resistance) through both biotechnology and advanced breeding. The use of biotechnology, or the genetic modification of plants, involves the direct manipulation of a plant’s genome by inserting a gene into the plant’s DNA. This method of plant improvement provides for a wider range of traits in a plant and usually results in more substantial seed trait improvement compared to advanced breeding. Under the advanced breeding method, plants with favorable characteristics are selectively crossed through genomic-guided breeding schemes, with the goal of eventually improving seed traits.

Our product development cycle for seed traits is comprised of six phases. See “—Product Development Cycle—Seed Trait Product Development Cycle.” Currently, we specialize in the upstream portion of the development cycle, particularly in the Discovery phase ( i.e. , when candidate genes are identified and validated in model plants). In some cases, we also test candidate genes in target plants, as part of Phase I or “proof of concept.” We license our most promising candidate genes to our collaborators with the intent that they will further develop and commercialize the products.

We have over ten collaboration agreements with world leading seed and ag-chemical companies, covering a portfolio of 20 products tailored to address specific market needs across various traits. Under these agreements, hundreds of genes we have discovered are currently undergoing Phase I testing in our collaborators’ pipelines. In addition, under these collaboration agreements, our collaborators have committed to pay us more than $100 million in the form of research and development and related payments, as well as in the form of purchases of our ordinary shares at a premium. This does not include milestone payments, which we are entitled to when our products advance from phase to phase, or royalties, which we expect to be entitled to once our products are sold to farmers. A substantial majority of our collaborations currently focus on improving traits through biotechnology.

 

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The following table sets forth our products currently under development with our collaborators:

 

Product #

  

Trait

  

Crop

  

Collaborator

      Yield and Abiotic Stress Tolerance*

1

   Yield    Corn    Monsanto, Biogemma (1), DuPont

2

   Yield    Soybean    Monsanto

3

   Yield    Wheat    Bayer (targeting both GM and non-GM products)

4

   Yield    Cotton    Monsanto

5

   Yield    Canola    Monsanto, Viterra

6

   Yield    Rice    Bayer, Rasi Seeds

7

   Abiotic Stress Tolerance    Corn    Monsanto, Biogemma, DuPont

8

   Abiotic Stress Tolerance    Soybean    Monsanto

9

   Abiotic Stress Tolerance    Wheat    Bayer (targeting both GM and non-GM products)

10

   Abiotic Stress Tolerance    Cotton    Monsanto, CIRAD

11

   Abiotic Stress Tolerance    Canola    Monsanto, Viterra

12

   Abiotic Stress Tolerance    Rice    Rasi Seeds, DBN

13

   Nitrogen Use Efficiency    Corn    Monsanto

14

   Nitrogen Use Efficiency    Wheat    Bayer (targeting both GM*** and non-GM products)

15

   Nitrogen Use Efficiency    Cotton    Monsanto

16

   Nitrogen Use Efficiency    Canola    Monsanto

17

   Nitrogen Use Efficiency    Rice    DBN

      Biotic Stress Resistance**

18

   Soybean rust resistance    Soybean    DuPont

19

   Nematode resistance    Soybean    Syngenta

20

   Black sigatoka resistance    Banana    Rahan Meristem

 

(1) Biogemma’s shareholders are Limagrain, RAGT, Euralis, Sofiproteol and Unigrain.
* Yield and a biotic stress tolerance refers to a plant’s yield stability over varying environmental conditions and tolerance to environmental stress factors, such as drought and fertilizer utilization.
** Biotic stress resistance refers to a plant’s disease, pest and insect resistance.
*** I.e., genetic modification.

Based on a 2013 Phillips McDougall analysis, the cumulative annual future revenue potential for seed companies from key traits of significant biotechnology crops that we and our collaborators are developing is estimated at between $5-8 billion.

Yield and abiotic stress

Initiated in 2004, our yield and abiotic stress programs focus on important seed traits that have a direct impact on crop production and productivity. Pursuant to these programs, we seek to identify and prioritize genes capable of, among other things, increasing crop yield per acre of land, improving plants’ yield and abiotic stress tolerance ( i.e. , yield stability over varying environmental conditions and tolerance to environmental stress factors, such as drought and fertilizer utilization). Major seed companies have declared their goal to significantly increase crop yield to meet the growing needs of the world population. For instance, Monsanto has indicated that it plans to double the yield in its main crops by 2030. We believe that our advanced technologies, expertise and know-how position us to play an important role in assisting these companies to achieve the ambitious goal of substantially increasing crop yields in the future.

Since we initiated our yield and abiotic stress programs, we have assembled a substantial scientific knowledge center on plant mechanisms and biological pathways associated with yield and abiotic stress traits. Currently, we generate proprietary genomic data from 15 different plant species, and have two model validation plants that can validate over 1,000 genes annually under different greenhouse and tissue culture validation assays ( i.e. tests designed to analyze plant performance under specific growth conditions, for instance, measuring a plant’s greenhouse seed yield under simulated drought conditions).

 

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Our most significant collaborations in yield and abiotic stress include two multi-year agreements with:

 

   

Monsanto addressing yield, drought tolerance and fertilizer utilization in corn, soybean, cotton and canola through biotechnology. The collaboration period ( i.e. , the period of active discovery efforts, separate from continuing validation efforts or continuing diligence and development obligations) under this agreement is six years and entitles us to approximately $47.4 million in research and development and up-front payments. The collaboration, initiated in 2008, originally focused on gene discovery using our ATHLETE computational technology, but a 2011 expansion of the agreement added new research activities, including the use of our new proprietary computational technology, Gene2Product , for increased trait efficacy; and

 

   

Bayer addressing yield, drought tolerance and fertilizer utilization in wheat through both biotechnology and advanced breeding. The collaboration period under this agreement is five years and entitles us to approximately €17 million in research and development and up-front payments. Our collaboration with Bayer calls for the use of our gene discovery computational technology, ATHLETE , as well as our computational technology for advanced breeding, EvoBreed .

Our agreements with Monsanto and Bayer, through June 30, 2013, have accounted for approximately $48.4 million in revenues, and in the future could lead to substantial royalty payments if Monsanto or Bayer commercialize products that incorporate genes that we license to them. However, because the development cycle of products is lengthy, any revenue from royalty payments may not be earned before six years, if at all.

Additional collaborations in yield and abiotic stress include our agreement with Biogemma, currently our only agreement in Phase II of the product development cycle. Other agreements with Viterra, DuPont, Rasi Seeds and CIRAD are all in either Discovery or Phase I of the product development cycle.

The following table, based on a 2013 Phillips McDougall analysis, sets forth the estimated commercial value (the “Trait Commercial Value”) of key yield and abiotic stress traits in key crops that we and our collaborators are developing. Trait Commercial Value refers to the total revenue potential for seed companies generated from the premium charged on biotechnology seeds (a “Technology Fee”) due to the added value of the improved trait. Projected Trait Commercial Value was calculated by multiplying the estimated number of acres (per country) that could be planted with a particular biotechnology trait by the estimated Technology Fee that will be charged to growers by seed companies.

 

 

Crop

   Trait    Estimated Trait
Commercial
Value ($M) 1
   Key growing countries

Corn

   Yield    1,200-2,000    U.S., Brazil, Argentina
   Abiotic Stress Tolerance    600-700   

Soybean

   Yield    1,000-1,200    U.S., Brazil, Argentina
   Abiotic Stress Tolerance    400-500   

Cotton

   Yield    150-250    U.S., India

Canola

   Yield    <200    Canada, U.S.

Wheat

   Yield    600-900    U.S., Canada

 

1  

The Trait Commercial Value reflects the estimated cumulative value of sales at maturity on an annual basis and is represented by a range derived from Phillips McDougall data. All values are expressed in constant U.S. dollar values in 2013 terms.

 

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A number of factors could potentially reduce the estimated Trait Commercial Value in the future. These include the following factors as well as other factors described in “Risk Factors”:

 

   

Traits may not achieve the desired effect in target plants;

 

   

The function of introduced traits may become less effective over time;

 

   

A market may not exist for certain traits or seeds containing the traits may not be commercially successful;

 

   

Increased consumer or government resistance to genetically modified organisms;

 

   

Failure to obtain regulatory approvals;

 

   

Declining crop prices, which may deter farmers from purchasing genetically modified seeds;

 

   

Adverse economic conditions in the major countries where genetically modified crops are grown; and

 

   

Competitors may launch competing or more effective products, including biological-or chemical-based products.

In recent years, we have continued to expand our technological capabilities, introducing new computational technologies, such as EvoBreed for advanced breeding and Gene2Product for increasing trait efficacy, and launching more advanced versions of our computational technologies, including the launch of ATHLETE version 4 in 2012. Together with new validation technologies and new data-collection tools, we continue to enhance our ability to correctly link candidate genes with specific traits. These capabilities and assets continue to expand as we enter into additional collaborations and pursue new products. For example, we expect to enter into new collaborations focusing on yield and abiotic stress in the upcoming years for new crops, including rice, sugar beet and other vegetables, and new traits, such as cold tolerance.

Biotic stress

Initiated in 2007, our biotic stress programs focus on improving plant resistance to pests, insects and diseases, including nematodes, soil parasites that attack the roots of developing plants, and soybean rust, a severe fungal disease. To perform research activities relating to biotic stress, we leverage a significant amount of the expertise and know-how acquired in our yield and abiotic stress segment. At the same time, we seek to develop unique technological tools and capabilities aimed specifically at biotic stress traits. For example, we recently bolstered our comprehensive genomic database with data relating to plant-to-pathogen interaction, thus further enriching our candidate gene pool with pathogen genes (as distinct from plant genes). We have also adapted our computational technologies to better address biotic stress traits and developed tailored model validation systems to test and confirm candidate gene impact on model plants. As the resistance of pests, insects and diseases increases to existing products that address biotic stress, the seeds industry is seeking more advanced technological solutions to address these resistance issues. We believe that our cutting-edge technologies, expertise and know-how position us to play an important role in assisting the seed and ag-chemical industry in addressing these resistance issues.

To date, we have entered into three collaborations to develop biotic stress products. These include agreements with:

 

   

Syngenta addressing resistance to soybean cyst nematode;

 

   

DuPont addressing resistance to Asian soybean rust; and

 

   

Rahan Meristem addressing resistance to black sigatoka in bananas.

 

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The following table, based on a 2013 Phillips McDougall analysis, sets forth the estimated Trait Commercial Value of key biotic stress traits in key crops that we and our collaborators are developing.

 

Crop

   Trait    Estimated Trait
Commercial

Value ($M) 1
   Key growing
countries
 

Soybean

   Soybean rust resistance    200-400      U.S., Brazil, Argentina   
   Nematode resistance    400-600   

 

1  

The Trait Commercial Value reflects the estimated cumulative value of sales at maturity on an annual basis and is represented by a range derived from Phillips McDougall data. All values are expressed in constant U.S. dollar values in 2013 terms.

In the coming years, we plan to expand our presence in the field of disease and nematode resistance through new collaboration agreements. As we undertake new collaborations under our biotic stress program—some potentially involving new crops such as corn, wheat, rice and cotton—we expect to broaden our genomic datasets, improve our scientific know-how, update our computational technologies, and develop additional tailored validation assays. In addition, we plan on entering the field of insect resistance, and may also focus in the future on bacteria resistance, virus resistance and herbicide tolerance. We anticipate that this strategic expansion into new biotic stress segments will require a substantial investment of resources on our part, and may involve establishing research and testing infrastructure in the United States.

Ag-Chemical

Our ag-chemical operations utilize our core competency in plant genomics to develop novel crop protection and crop enhancement products. We currently focus on the early stages of the product development pipeline, specifically on discovering new herbicides and crop enhancement products. We initiated our ag-chemical operations in 2012 in order to leverage our existing plant genomics assets and capabilities and apply them to the discovery of biologically significant proteins, or “targets,” and chemical compounds. Our understanding of plant genomics and our capabilities in the area of gene discovery enable us to identify novel targets and, in turn, novel chemical compounds that can be used to develop more effective crop protection and crop enhancement products. Our ag-chemical operations are currently in the development stage and are pre-revenue; we have not yet entered into collaborations in this area. While we believe that our capabilities and assets in seed traits will facilitate our entry into the ag-chemical market, we are still developing the computational technologies, validation systems and tailored genomic datasets that will be necessary for ag-chemical operations.

Our current activities in ag-chemicals are dedicated to the discovery of new herbicides and crop enhancement products. Herbicides and crop enhancers share a similar underlying function: both are comprised of chemical compounds that affect target proteins in the plant. In the case of herbicides, the chemical compounds inhibit the target proteins, resulting in plant death; in the case of crop enhancers, however, the chemical compounds are designed to enhance plant performance. We intend to establish a “chemical library,” which we will use when performing high throughput testing of chemicals. These chemicals will be arranged according to the molecular characteristics of the targets that we discover, streamlining the process of identifying the chemicals with most potential to become ag-chemical products.

In the future, we may expand our ag-chemical operation to different products such as insecticides and fungicides. We may also potentially pursue ag-biologicals, which are products made from natural materials and applied as sprays or seed treatments, complementing or replacing ag-chemicals.

 

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The following is a summary of our current ag-chemical activities:

Herbicide discovery

Invasive plants such as weeds are a major cause of crop loss; they outgrow other plants and deprive crops of large amounts of water and nutrients. Extensive use of herbicides, however, has accelerated weed resistance, creating substantial weed-management problems for growers. We are working to develop new herbicides with new mechanisms that can mitigate the challenge of increasing weed resistance.

Most ag-chemical producers have traditionally relied on a process of trial-and-error in developing their herbicides, a process that involves screening thousands of chemicals against plants or weeds, in the hope that some of these chemicals may kill or damage the plant. This trial-and-error process is often referred to within the industry as “spray-and-pray.” Our herbicide discovery program is designed to assist ag-chemical producers in moving beyond the traditional spray-and-pray method of herbicide discovery by implementing a more targeted approach aimed at identifying and developing novel herbicides with new mechanisms to cope with the growing resistance of weeds. We will utilize our expertise in plant genomics, as well as our advanced technologies and know-how, to discover target proteins, ultimately leading to new herbicides that display new mechanisms or “modes of action.” In essence, we intend to follow the same development process we use in our seed traits operations, beginning with the production of large genomic datasets, moving to the analysis of data using our proprietary computational technologies, and ending with the validation of discovered targets in certain plants. Our PoinTar computational technology, which we are developing and aim to launch in 2013, will be our primary tool for novel target discovery. We have also begun to develop a second complementary computational technology capable of identifying chemical compounds that are likely to inhibit discovered targets, and that therefore may serve as the basis of new herbicides.

Crop enhancer discovery

Crop enhancers are ag-chemicals that are capable of improving crop traits such as yield, fertilizer use efficiency and drought tolerance. In this respect, crop enhancers are designed to achieve the same end goal as our yield and abiotic stress products, except through the use of chemistry rather than biotechnology or advanced breeding. We believe the market for crop enhancers is emerging and very promising. Major seed and ag-chemical companies have invested (and are continuing to invest) significant resources in the pursuit of effective crop enhancers. Similar to crop protection products, crop enhancers are comprised of chemicals that bind themselves to a target in the plant, and through the binding trigger can create an improvement in desired plant traits. As with our biotic stress activities, we plan on leveraging the significant expertise and know-how acquired in our yield and abiotic stress segment, including our innovative computational technologies, tailored proprietary data and established validation assays, to discover and develop novel crop enhancement products. We also plan on utilizing the over 3,500 genes that we have identified during our yield and abiotic stress research, focusing especially on key genes identified as high-impact for yield and abiotic stress traits.

Seeds Focusing on Second Generation Feedstock for Biodiesel

Our wholly owned subsidiary, Evofuel Ltd., or Evofuel, develops seeds for second generation feedstock intended for use in the alternative fuel industry. We initiated these operations in 2007, which were spun-off from Evogene in January 2012 to operate as a separate company. We currently focus on the development of advanced high-yielding castor bean varieties which are not genetically modified (“GM”) and that can serve as a feedstock source for biodiesel and biojet. Our target markets will initially be Latin America, particularly Brazil and Argentina, where there are already large and established markets for growing crops used as feedstock for alternative fuels. We have entered into two collaboration agreements with leading domestic companies in these markets, and expect to benefit from their established agriculture production models.

Castor bean is grown today for its high-quality oil, which is used for various products in the bio-polymers and lubricants industries. Though treated as a “low-tech” crop in its key production areas around the world ( e.g. , the castor bean is harvested using traditional techniques such as hand picking), the castor bean plant holds great

 

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promise as a source for the alternative fuel industry: oil comprises nearly 50% of the castor bean seed, and the plant itself contains innate characteristics of heat and drought tolerance. We believe that by leveraging our advanced breeding capabilities and methods to improve castor bean seeds, the improved castor bean and the oil it produces can serve as an economic, scalable, sustainable and suitable second generation feedstock for the biodiesel and biojet fuel industries. We believe that the benefits of using castor bean as second generation feedstock include:

 

   

Economic . We are developing castor bean varieties that we believe will produce a high-yield-per-land (tons/Ha) with low input; that is, our castor bean crop is designed to be entirely rain fed (and not irrigated). We estimate that the improved yield-per-land ratio is aimed at enabling biodiesel production at an equivalent oil price of approximately $50 per barrel, making castor bean-based biodiesel an affordable and competitive commodity. In recent field trials in Brazil, we were able to demonstrate that our castor bean crop showed improved yields compared to crops grown by local farmers.

 

   

Scalable . We are developing castor bean varieties that can be harvested in a fully mechanized, efficient manner, and that are thus suitable for cultivation on a commercial scale. We have already engaged a leading agricultural machinery company to cooperate on development of mechanized harvest capabilities for castor bean crops. In addition, we have formulated a number of different key agronomic practices for the efficient growth and cultivation of the castor bean, including the use of castor bean as a rotation crop with soybean.

 

   

Sustainable and suitable . A 2010 life-cycle analysis we commissioned from Symbiotic Engineering found that, assuming the enhanced projected yield of our castor bean plant, castor bean biodiesel production and use in Brazil reduces net greenhouse emissions by more than 75% compared to conventional fossil fuel, indicating the castor bean’s potential suitability as a sustainable alternative fuel source. In addition, through a collaboration with the U.S. National Aeronautics and Space Administration, or NASA, and UOP LLC, a Honeywell Company, we successfully demonstrated that castor oil meets the international standards of biojet fuel and is therefore suitable for biojet fuel production.

In addition to pursuing opportunities in the expanding biodiesel market, we anticipate that our improved castor bean varieties will also be useful for businesses in traditional castor oil markets, where the oil is relatively high priced and is used in a range of industrial products such as bio-polymers, lubricants, paints and cosmetics.

In 2010, we entered into a strategic, pre-commercial collaboration with SLC Agricola, a publicly traded Brazilian ag-business that grows 280,000 hectares of soybean, corn and cotton in Brazil. The collaboration, which involves rotating our castor bean seeds with SLC Agricola’s soybean inventory, focuses on developing improved, high-yielding castor bean varieties. In September 2013, we completed our third year of field trials in SLC Agricola’s plantations in northeast Brazil, and we expect to begin advanced product development and pre-commerical trials in 2014. Our agronomic model in Brazil is based on the practice of “crop rotation,” or the practice of sowing castor bean crops shortly after soybean harvests in order to replenish the soil and preserve its productivity. According to USDA’s Oilseeds and Products Annual Report estimates, in 2012, Brazil had over 27 million hectares dedicated to growing soybean, of which we estimate approximately seven million hectares may be suitable for castor bean growth under the rotation model.

In 2012, we also entered into a pre-commercial collaboration with T6, the leading biodiesel producer in Argentina. The collaboration with T6 aims to develop high-yielding castor bean varieties as a key source for biodiesel production, with Argentina as the target market. Our agronomic model in Argentina, however, is based on growing the castor bean crop in farmlands where food crops are marginally grown, an area that we estimate may be as large as five million hectares. We believe that we stand to benefit from T6’s position as a large-scale producer and exporter of biodiesel, as T6 has a strategic interest in diversifying and reducing the costs of its plant feedstock sources.

Our operations in seeds focusing on second generation feedstock for biodiesel are currently in the development stages and we have not yet sold seeds or generated revenues from these operations. We expect that

 

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sales will not commence for at least three years, however, we cannot guarantee that we will begin marketing and selling a product within this timeframe. Among other benchmarks, we believe that we will be able to begin commercializing our castor bean seeds once we achieve yields on a commercial scale in the target markets and once we have equipment in place for mechanized harvesting on a commercial scale.

Business Model

Our business model is primarily based on collaborations with seed and ag-chemical companies, where we mostly participate in the upstream innovative phases while downstream activities would be undertaken by our collaborators. We generate revenues primarily through annual research and development and milestone payments, and we expect to generate revenues from royalty payments once a commercial product containing our technology is sold.

Seed Traits

Under our current collaboration agreements for seed traits products, we usually conduct the upstream “Discovery” phase, which includes identification of candidate genes or SNPs that can improve the target traits, as well as validation of the candidate genes in our model plant systems. The genes and SNPs we identify are licensed to our collaborators, who continue to evaluate and further develop them, by, among other things: transforming the genes into the target crop and field trial testing of the transformed target crop; advanced testing of the genes or SNPs in elite genetic material; obtaining regulatory approval for a product containing the licensed genes or SNPs; and finally, commercializing a product with the improved traits. Our collaborators are usually required to reach certain development milestones within agreed-upon timeframes in order to retain their license to a gene.

Under our broad, multi-year agreements with our collaborators, we and our collaborators define the “field” on which we will collaborate on an exclusive basis during the collaboration period. The “field” includes specific trait(s), crop(s) and technology(s) ( e.g. , biotechnology or advanced breeding). For example, under our collaboration with Bayer, we granted Bayer an exclusive license in a “field” that consists of (i) the improvement of yield and abiotic stress tolerance, (ii) in wheat, (iii) using biotechnology and advanced breeding technologies, (iv) for a period of five years.

We currently generate revenues from our seed traits operations through research and development payments to cover the costs of our research and development activities and milestone payments received upon the achievement of certain specified results in our collaborator’s pipeline, for example when a candidate gene or SNP advances a phase in the product development cycle, or when a product containing the genes or SNPs is submitted for regulatory approval. We also expect to generate royalty payments once a commercial product containing our genes or SNPs is launched by a collaborator. Currently, in most of our existing collaboration agreements in which our collaborator funds the discovery phase, the standard royalty range is between 5% and 12%. Royalty payments are usually calculated as a percentage of the premium charged on the sale of the seeds containing our licensed genes or SNPs compared to the sale of similar seeds without the genes or SNPs. However, because the development cycle of products is lengthy, any revenue from royalty payments may not be earned before six years, if at all. These royalty payments are usually calculated as a percentage of the premium charged on the sale of the seeds containing our licensed genes or SNPs compared to the sale of similar seeds without the genes or SNPs.

With respect to selected traits, we intend to increase our share of our collaborators’ future revenues through larger future milestone and royalty payments from our collaborators by either (i) self-funding a larger portion of our direct research and development costs in the Discovery phase, or (ii) capturing an additional share of the product development value chain by sharing the development costs with our collaborators beyond the Discovery phase. Currently, in our existing collaboration agreements in which we fund the discovery phase, the standard royalty range is between 8% and 18%. Royalty payments are usually calculated as a percentage of the premium

 

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charged on the sale of the seeds containing our licensed genes or SNPs compared to the sale of similar seeds without the genes or SNPs. We expect the cost-sharing model to generate even greater royalty ranges than the self-funding model. For example, as part of our 2011 collaboration with DuPont, aimed at developing soybean varieties that are resistant to soybean rust, we agreed to finance our initial research and development activities in return for improved commercial terms in later stages. Additionally, we hold a contractual option with DuPont to co-invest in the development costs of a product up to the date of its commercial launch for even greater royalty percentages.

Ag-Chemical

We have not yet entered into any collaboration agreements in our ag-chemical operations. As with our seed trait activities, we anticipate that our activities in the ag-chemical market will focus on the initial research and development phases of the product development cycle. In essence, when developing a herbicide, we intend to discover and validate targets that, when inhibited, result in plant death; in a parallel process, we also intend to identify chemical compounds capable of inhibiting these targets. The chemical compounds that most effectively and consistently inhibit the targets may serve as a basis for new herbicides.

We expect to complete the development of our computational technologies for ag-chemical operations (including the PoinTar platform used for identifying novel targets) in 12 to 18 months, which we expect will facilitate our ability to enter into new collaboration agreements in this area. However, we cannot provide any assurance that we can complete these computational technologies or enter into new collaborations in this timeframe, if at all.

We anticipate that our business model for our ag-chemical operations will be similar to the business model in our seed traits operations.

Seeds Focusing on Second Generation Feedstock for Biodiesel

Through Evofuel, we expect to generate revenues from seed sales to various agriculture companies and large-scale seed growers. Although we will focus initially on the markets in Brazil and Argentina, we plan on eventually expanding our seed sales to other markets around the world.

Currently, as part of our research and development activities in seeds, we collaborate with companies that have the potential to become our future seeds customers, such as SLC Agricola and T6. We expect that these collaborations, which have not yet generated revenues and are currently in the early stages of developing a seed product, will facilitate eventual commercialization of improved seeds, once we have a product ready for launch. Furthermore, once we are able to commercialize our own seed product, we may decide to advance our activities further down the value chain. For example, we may enter into collaborations with leading agribusinesses to establish and operate large-scale production projects, covering thousands of hectares of farmland, for the commercialization of castor bean grain ( i.e. , castor bean seeds from which the oil has been extracted).

We currently do not expect to begin selling seeds under our Evofuel operation for at least three years.

Technology Infrastructure

We believe that we have achieved a unique position in the seed and ag-chemical industry through our ability to effectively integrate and analyze massive amounts of complex genomic data for the purpose of improving plant performance. Our technology infrastructure facilitates all of our product-driven operations: seed traits, ag-chemicals and seeds focusing on second generation feedstock for biodiesel. This infrastructure, which is highly flexible and synergistic, provides us with the means of integrating our plant genomics core competencies. Specifically, our technology infrastructure is comprised of four enablers that are key to our leading position in plant genomics: (i) plant science know-how and expertise, continuously enriched through advances in our

 

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discovery programs as we address new traits and crops; (ii) vast amounts of data generated in-house or collected from public sources, tailored to support hypotheses we develop based on our scientific know-how; (iii) computational technologies that integrate, assemble and mine the vast amount of genomic data; and (iv) validation systems and assays in various plants, used to validate the discoveries made through our computational technologies.

We continuously strive to improve and expand our technological capabilities. Since our initiation in 2002, we believe that we have developed valuable computational technologies containing unique features that cannot be found elsewhere in our industry. We intend to continue investing in our research capabilities in order to expand our technological capabilities in plant genomics and continue to provide innovative solutions to our collaborators.

Science and Know-how

Our research and development activities involve 147 employees as of June 30, 2013, amounting to approximately 78% of our total full-time workforce. Our staff possesses multidisciplinary and wide-ranging expertise, with employees specializing in biology, chemistry, plant genetics, agronomics, mathematics, computer science and other related fields. Additionally, 48 of our employees hold a Ph.D. Our physical research and development facilities are located near the agricultural and biotech hub in Rehovot, Israel, and we benefit from continuing professional relationships with members of the agriculture and plant-science academy. Furthermore, we employ 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 institutions of higher learning.

Our internal research and development activities are divided into three groups. Our first group develops our technological infrastructure to facilitate ongoing projects, including our computational technologies, our technologies to harvest genomic and phenotypic data and our validation systems. Our second group manages our trait discovery programs that focus on identifying genes, SNPs and other DNA fragments pursuant to our collaboration agreements or internal independent research projects. Researchers in this group develop the hypotheses that guide our trait discovery programs, design the type and scope of genomic data generation, determine data-mining queries run on our computational technologies and decide the type of model plant validation to be used. Our third group, upon the instruction of the second group, executes our trait discovery programs, which include genomic data generation and integration, computational discovery, gene cloning and insertion into plants and model system validation.

We are constantly improving our scientific skillset and know-how. As we enter into new collaborations involving new traits and new crops, we are able to leverage our existing know-how and enrich our genomic knowledge and capabilities. We also intend to leverage this know-how to expand our operations into new markets in which we currently do not operate, as we did when we commenced our ag-chemical operations in 2012.

Genomic Databases

The past decade has witnessed an explosion of genomic-related data, greatly expanding the reach of plant genomics. To successfully manage and data-mine the large and complex range of information presently available, we continue to develop increasingly sophisticated data-processing tools capable of synthesizing the information and enabling new discoveries and insights. While our genomic databases draw in part on the public domain (primarily from academic institutions and research publications), we are compiling increasing amounts of proprietary data, generated either in-house or received from our collaborators. Our database covers over 200 plant species, and accounts for various data types, including phenotypic ( i.e. , data related to a plant’s observable characteristics, morphology, development and physiological properties) and genotypic ( i.e. , data from the molecular level, derived from DNA, RNA or other sources).

 

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Our in-house data generation activities are able to support up to 40 experiments and field trials a year based on 15 different crops. In those trials, plants can undergo a dozen different treatments during the growing seasons, producing data that supports or refutes our trait researchers’ scientific hypotheses. For example, to support a discovery effort for drought-tolerant genes in corn, we may design specific experiments for a variety of crops, such as corn, wheat and sorghum, and test their resistance to different stress conditions. By pursuing parallel yet related experiments, we improve our ability to identify, in the computational discovery stage, key genes that are triggered in crops under stress. We expect to continue to expand the scale of our data-generation activities: for example, the large-scale wheat trials that we are conducting in Israel involve our most extensive and wide-ranging data-collection efforts to date, comprised of approximately 200 wheat lines, numerous testing conditions and hundreds of thousands of data points.

We also rely on our large seed bank with an inventory of approximately 60 species and sub-species of seeds and more than 4,000 imported seed lines. All together, we are able to record more than two million phenotypic data points directly from the field each year. For example, through the use of our Phenomix computational tool, we are able to collect, store and integrate phenotypic data directly from surveillance of field trials, evaluating crop behavior in controlled environments that closely resemble the growth conditions existing in commercial agriculture. This tool combines a number of modified sensors, digital imaging cameras and other devices to create a real-time and direct field-to-computer research channel.

To organize and process the vast amount of information available to us, we have developed a sophisticated internal IT system of central processing unit clusters and over 670 processing cores, capable of storing and analyzing the more than 500 terabytes of data that we have collected and generated to date. We also continue to pursue and develop innovative approaches to data transmission and storage.

Using field trials and advanced technologies for the collection and integration of different data types, we intend to continue developing and expanding our proprietary genomic database. We are focusing in particular on compiling the data for the “chemical library” we are designing to be used in conjunction with PoinTar for our ag-chemical operations.

Computational Technologies

We believe that the key to future innovation in the seed and ag-chemical industry has shifted from data creation to data integration and data analysis, focusing on the ability to harness and mine the vast amounts of genomic data that has become available over the last decade. Our computational technologies, utilized for data integration and analysis, are central to our operation as a plant genomics company, and we believe that we are positioned at the forefront of this shift in industry focus. We have developed advanced proprietary computational technologies comprised of novel algorithms and methodologies, which are designed to handle immense amounts of data. For example, our ATHLETE technology assembles and mines genomic data on millions of genes, resulting in tens to hundreds of genes that we are able to predict will be “key” genes for improving a desired trait. Each of our computational technologies includes a stage of database assembly, whereby any “junk” data is removed and a reliable, comprehensively detailed and integrated through building a structured gene-centric database. The next stage of each technology includes mining the database through hundreds of queries that utilize various methodologies and algorithms.

We believe the key features of our computational technologies are:

 

   

Novel : Substantially all of the methodologies and tools utilized by our computational technologies were developed in-house and are proprietary and unique in the industry.

 

   

Reliable : We apply our methodologies and statistical tools to meaningfully sort the data we receive and have quality assurance processes to ensure the reliability of the outputs we generate.

 

   

Flexible : Our computational technologies are not restricted to a certain crop or trait, and thus permit us to continuously focus on new crops and traits and enter new fields in plant genomics that foster product innovation.

 

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Learning : As we generate new information related to our discovery efforts and validation results, our computational technologies are able to integrate this information and generate new computational solutions. We also continuously monitor and improve the performance of our existing tools and expand our capabilities.

 

   

Efficient : In our experience, in most cases, a period of only six to nine months is required to complete the discovery process for “key” genes, SNPs or other DNA fragments.

We intend to continue to improve our existing computational technologies through novel methodologies and enhanced algorithms and to develop new technologies, both of which we expect will allow us to address new plant genomics fields and the arising needs of seed and ag-chemical industry pipelines. Where appropriate, we may also enter agreements with third parties to bolster our technological capabilities.

We today operate and develop the following computational technologies:

ATHLETE

The ATHLETE computational technology was launched in 2006 and is our central computational technology for plant gene identification, comprised of unique algorithmic tools and novel data-mining concepts that allow generation of rapid and reliable lists of genes relevant to a target trait.

Using this technology, we are able to capture and dissect vast amounts of genomic data types from various plant species and other species and engage in the efficient discovery and prioritization of hundreds of genes linked to desired traits. Fundamentally, ATHLETE relies on statistical analysis and biological rationales to determine whether a certain gene is linked to a desired plant trait, facilitating the use of the gene to develop biotech-based traits. This technology is a gene-centric tool that links all available data relevant to a gene in a single assembled database. Such data includes available information on the gene’s biological activity, its molecular characteristics, and any available correlation between the gene’s phenotype and its activity on the molecular level. The data also includes the same type of information for similar genes in other plant species. Through hundreds of queries, the system is able to prioritize the genes linked to a desired trait. ATHLETE is one of our most versatile technological tools as well; we apply this tool to different traits and crops, all according to the needs of our various internal programs and collaboration agreements.

ATHLETE is the computational technology used in most of our collaborations, including our broad, multi-year collaborations with Monsanto and Bayer. Though our ATHLETE technology is already capable of cutting-edge data processing and analysis, we are continuing to make improvements and introduce new features to this technology, creating a faster and more efficient analytical tool. We have improved various aspects of ATHLETE since the launch of the technology in 2006; we launched version 4 in April 2012 and expect to launch version 5 later this year.

Gene2Product

The Gene2Product technology was launched in 2013, although components of the tool have been used since 2010. Gene2Product is a unique integrated computational technology to develop biotechnology seed traits—by high throughput optimization of selected gene function in a target crop (which we refer to as “mode of use”). This technology complements our ATHLETE technology: efficacy of a gene depends not only on the presence or absence of the gene of interest, which is determined by ATHLETE , but also on the optimization of the gene with other factors related to the mode of use of such gene, which is determined by Gene2Product . Such factors include the choice of gene variant for the crop of interest, the interaction of the gene with other genes, the tissues in which the gene is expressed, the level and/or pattern of expression of the gene and the gene’s performance under changing environmental conditions. Gene2Product is designed to improve trait efficacy for certain genes identified (for example by ATHLETE ) through the following tools:

 

   

PlaNet (Plant Network), which improves trait efficacy when approaching complex traits, such as yield, by predicting appropriate combinations of the identified gene with additional genes, designed to jointly

 

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impact the trait when combined, and prioritize possible combinations with respect to their ability to improve a given trait;

 

   

GeneSpec (Gene Spectrum), which selects the preferred variants for the selected gene of interest for the crop of interest by identifying and classifying, up to 1,000 possible variants per gene, through the use of novel algorithms, according to sequence-function and other relationships;

 

   

Repack (Regulation Package), which predicts the regulation mode for the selected gene that will provide the optimal expression pattern, including predicting where in the plant the expression would be beneficial and where it would be undesired in respect of tissue, organ, timing, level of expression and other aspects that can impact trait efficacy; and

 

   

GeneDex (Gene Index), currently under development, which predicts functional robustness of the selected gene across different genetic backgrounds and environmental conditions, providing multiple relative index scores for each gene predicting such gene’s contributions with respect to each trait of interest across different combinations of such variables.

EvoBreed

The EvoBreed computational technology was launched in 2010. EvoBreed is our computational technology for discovery of SNPs, to enhance advanced plant breeding, designed to offer reliable correlations between genetic data and plant phenotype. Like ATHLETE , EvoBreed specializes in comprehensive cross analysis, tapping into the extensive genomic datasets we have collected. The result is a prediction of SNP-to-trait association. The ultimate purpose of EvoBreed is to enable plant breeders to design optimal crosses between breeds, enhancing a desired trait or set of traits, allowing for logical and insightful breeding decisions, to accelerate and correct the breeding process from start to end.

PoinTar

We are currently developing a computational technology for our ag-chemical division, PoinTar, which we aim to launch this year. This tool will specialize in the identification of targets (proteins) for development of ag-chemicals such as herbicides. This technology is target-centric and integrates data aimed to predict the potential impact that a target, when inhibited, would have on a weed. In addition to integrating the tools available in ATHLETE , PoinTar addresses the structural characteristics of a target in order to predict the target’s likelihood of binding to a small chemical molecule for use as a herbicide.

Validation Systems

Efforts to improve traits of interest in key crops require both the predictive tools of our computational technologies and the experimental tools of our validation systems, which allow us to test the actual performance of our predictions in plants. Such validation efforts typically begin with model plant systems, utilizing Arapidopsis and Brachypodium , which offer a faster and more efficient high throughput means of initially evaluating and prioritizing candidate genes, SNPs and other DNA fragments. Initial testing in model plants can usually provide a result within one year, whereas validation in target crops such as corn usually requires two to three years. Once the prioritized genes pass proof of concept in the model plants, they then undergo further validation in the target crops.

Our validation systems, which employ state-of-the-art facilities and techniques, allow high throughput and efficient plant validation of over 1,000 new genes per year. We primarily use our validation systems to evaluate genes for yield, drought tolerance and nitrogen use efficiency, however, we have also developed validation systems for other traits, such as our Arapidopsis -based validation for nematode resistance. The plant validation process is cross-disciplinary, requiring the use of molecular biology and plant transformation facilities, extensive greenhouse trials, and the application of advanced imaging and data-analysis techniques. Our candidate genes are first identified in silico ( i.e. , via computer) using our advanced computational technologies. These genes are then cloned and transformed (or transferred) into model plants, which, due to their short life cycles, well-known

 

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genomes and ease of cultivation, offer an efficient way of assessing gene impact. We use Arabidopsis as our model plant for dicots ( i.e. , a plant with two embryonic seed leaves such as soybean, canola, cotton and sunflower) and Brachypodium as our model plant for monocots ( i.e. , plants with a single embryonic seed leaf such as corn, rice and wheat). We are able to validate over 1,000 genes per year using the Arabidopsis model plant, with 16 types of experiments utilizing both our greenhouses and tissue-culture validation techniques. Through our recently launched Brachypodium system, we are able to additionally test over 100 genes per year through six types of experiments that take place in our greenhouses. We believe that we are the only company that has a high throughput Brachypodium model plant validation system.

Our molecular labs and tissue-culture facilities employ automated equipment and state-of-the-art technologies, greatly increasing our output of viable candidate genes. The bulk of the validation process, however, is conducted across our 34 cutting-edge GM greenhouses on 24,600 square meters (or approximately 264,800 square feet) of farmland. Our greenhouses have the capacity to accommodate over 15 established experiments at any given time. Each experiment involves dozens of genes and hundreds of model plants to allow for statistically meaningful results. In addition, each greenhouse is rigorously controlled for temperature, irrigation, light, nitrogen, salinity and other variables, allowing for controlled testing, monitoring and continuous year-round growth. Data from the plants are routinely acquired during the greenhouse trials and automatically fed into a statistical analysis system. The results are then evaluated by our trait researchers in order to prioritize the most promising genes.

In certain cases, certain prioritized genes are introduced into target crops and assessed in field trials following experiments in model plants. We operate field trial sites in various locations in Israel and collaborate with local partners to achieve more rapid and comprehensive field-test results.

We intend to continue to improve our plant validation capabilities by developing validation systems for new traits, improving the capacity and quality of our current validation systems and generally enhancing our facilities and quality assurance competencies. Where appropriate, we may also enter agreements with third parties to bolster our plant validation capabilities. For example, in 2013, we entered into an agreement with Plant Array for the use of Plant Array’s computer-based technology for high throughput screening. During the term of the agreement, we agreed to provide Plant Array with management support and access to a greenhouse as the technology is further tested.

Key Collaborations

Our seed trait projects are conducted through collaborations with leading seed and ag-chemical companies, with whom we share the development process of improving plant performance. In most cases, we generate revenue from our collaboration agreements at three different points: first, we usually receive research and development services payments to cover the costs of our research, including our gene discovery and validation efforts; second, we receive milestone payments when certain specified results are achieved, such as when a candidate gene progresses to a later phase in the product development cycle, or when a product containing our traits is submitted for regulatory approval; finally, we expect to receive royalty payments once a commercial product containing our traits is launched into the market. Royalty payments will generally be made for the longer of a specified number of years after product launch, or for the duration of our applicable patents in the United States.

Our principal collaborations are with Monsanto and Bayer which together accounted for 94% of our revenues for the year ended December 31, 2012, of which Monsanto accounted for 70% and Bayer accounted for 24% of our total revenues. Monsanto and Bayer, accounted together for 98% of our revenues for the six months ended June 30, 2013, of which Monsanto accounted for 66% and Bayer accounted for 32% of our total revenues. We also entered into share purchase agreements with Monsanto and Bayer, and a portion of the amounts paid under each of the share purchase agreements were considered to be advances under each of the collaboration agreements with Monsanto and Bayer. See “—Share Purchase Agreements.” We also have collaborations with other leading seed and ag-chemical companies, including DuPont, Syngenta and Biogemma, as well as companies such as Rahan Meristem, Rasi Seeds, CIRAD, Viterra, Zeraim Gedera and CDB Technologies. These additional collaborations do not currently account for a material portion of our revenues.

 

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Monsanto

2008 Collaboration Agreement, Amended and Restated in 2011

(i) Background and Duties

In August 2008, we entered into a Collaboration and License Agreement with Monsanto. This agreement was amended and restated in November 2011 to extend and expand the original agreement executed in 2008. This agreement, which we refer to as the “Monsanto Collaboration Agreement,” represents a significant portion of our current revenues. Pursuant to the terms of the Monsanto Collaboration Agreement, Monsanto funds a research program in which we apply two different proprietary computational technologies: (i) ATHLETE , our computational gene discovery technology, used in this case to identify genes with the potential to improve yield, nitrogen use efficiency and abiotic stress tolerance in corn, soybean, cotton and canola, and (ii) Gene2Product , our computational gene optimization technology, used to improve gene performance through recommendations on how to use the genes we identify in the target crop ( e.g. , corn). All of the genes that we discover are to be tested and validated by us in our model plants. The collaboration period under the Monsanto Collaboration Agreement ( i.e. , the period of active computational discovery efforts, separate from validation efforts that may follow) is six years, scheduled to expire in August 2014, and is followed by more than a year of validation activities. The collaboration period is subject to extension for two additional years if Monsanto exercises an extension option by February 1, 2014.

(ii) License Grants

Under the terms of the Monsanto Collaboration Agreement, we have granted Monsanto an exclusive, royalty-bearing, worldwide license under our patents and know-how to commercially exploit and conduct research on (i) the genes we discover and patent under the collaboration, and (ii) the recommendations stemming from our gene-optimization activity under the collaboration, each solely for transgenic applications in the specified crops. In addition, we have granted Monsanto certain ancillary research and development licenses, including, among others, a non-exclusive license to use the genes we generate and patent and the recommendations under our gene-optimization activity for research purposes in certain plant species specified under the agreement. As part of its consideration for these license grants, Monsanto agreed to provide us with research and development services payments, development milestone payments upon the occurrence of certain milestone events, and royalties based on the value added to each product as a result of either incorporating our licensed genes, or of applying our licensed recommendations under the gene-optimization activity. Royalty payments will generally be made for a specified number of years after product launch, or for the duration of our applicable patents in the United States.

In addition to the licenses we have granted to Monsanto, we have agreed for the duration of the research program under the Monsanto Collaboration Agreement (x) to not license or otherwise transfer to any third party the right to use in the specified crops for any transgenic application: (i) any gene we discover for the specified traits or (ii) any recommendation we make under our gene-optimization activity for the specified traits, and (y) to not engage or pursue any collaboration or other activity with a goal of (i) discovering genes that confer the specified traits in the specified crops for any transgenic application, or (ii) formulating recommendations with respect to gene-optimization for the specified traits in the specified crops for any transgenic application.

(iii) Diligence Obligations

We and Monsanto both have minimum diligence obligations under the Monsanto Collaboration Agreement: our diligence obligations surround (i) the discovery and research of candidate genes, and (ii) the discovery and research of recommendations using our gene-optimization technology, while Monsanto is obligated to test a specified number of these genes and recommendations for the purpose of ultimately developing and commercializing products containing the genes. For example, we have agreed to perform a minimum number of computational discovery efforts (or “generation rounds”) and deliver a minimum number of genes to Monsanto.

 

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A failure by us to meet our diligence obligations may have the effect of eliminating or reducing certain Monsanto diligence obligations, and diligence failures by Monsanto may result in the termination of certain of its licenses. While Monsanto has certain diligence obligations under the Agreement, there is no express requirement that it actually commercialize any products using the genes that we license to it.

The effects of failures by either party to perform other obligations under the Monsanto Collaboration Agreement are limited to impacts on particular rights and obligations under the agreement, and do not give rise to a general right to terminate the agreement entirely. For example, in the event of certain uncured breaches by Monsanto, some of the licenses we have granted to it would remain in effect, while others would terminate. In the event that we breach certain provisions of the Monsanto Collaboration Agreement and fail to cure these breaches, Monsanto’s licenses remain in effect but it may elect to cease further research activity, stop making annual research and data-generation payments for the relevant project, and have no further diligence obligations with respect to the project.

(iv) Change in Control

In the event that we experience a change of control, the majority of provisions under the Monsanto Collaboration Agreement would remain in full force and effect. However, if we come under the control of one of Monsanto’s competitors: (i) the research portion of the Monsanto Collaboration Agreement may be terminated either fully or in part by Monsanto, and if it is not terminated, we become subject to increased diligence obligations; and (ii) the timing of certain milestone payments and the duration of certain royalty payments due to us under the agreement may also be affected.

(v) Consideration and Costs

As of June 30, 2013, we had received approximately $37.6 million in research payments under the Monsanto Collaboration Agreement. This includes an up-front payment of $5 million paid upon entering into the agreement, as well as annual data generation and periodic research and development service payments. Between now and the completion of our research and development activities under the collaboration ( i.e. , our active discovery efforts, our continuing validation efforts and our continuing diligence obligations), which is scheduled to occur in 2015, and in the event that Monsanto does not exercise its extension option, we expect to receive an additional $12 million in research and development services payments from Monsanto. Although we have not yet begun to earn milestone payments or royalty payments, and may never earn such milestone payments or royalty payments, Monsanto also is obligated under the Monsanto Collaboration Agreement to provide us with royalty payments on any sales or other transfers of products it develops containing our licensed genes. These royalty payments are generally calculated as a percentage of the premium charged on the sale of the seeds containing our licensed genes compared to the sale of similar seeds without the genes. In addition, if Monsanto exercises its option to extend the initial research term for an additional two years, Monsanto will pay us a fee of $6 million for the extension of our exclusivity undertakings (described above) as well as an additional $26 million in research and development services payments during the extension period.

In August 2008, Monsanto purchased 1,636,364 of our ordinary shares at a price per share of $11.00, for an aggregate investment of $18.0 million. Prior to the completion of this offering, Monsanto held approximately 8.7% of our outstanding equity. In addition, we hold an irrevocable put option, exercisable beginning February 2014 until August 2014, pursuant to which we can require Monsanto to purchase 500,000 additional ordinary shares at a price per share of $24.00 for an additional aggregate investment of $12.0 million. However, in the event that Monsanto exercises its option to extend the Monsanto Collaboration Agreement for two additional years, then the put option allows us to require Monsanto to purchase only 214,286 additional ordinary shares at a price per share of $28.00 for an additional aggregate investment of $6.0 million.

 

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2007 Collaboration Agreement

We entered into our first collaboration agreement with Monsanto in September 2007. Under this agreement, structured according to an earlier business model, we granted Monsanto certain research licenses and an option to obtain an exclusive, royalty-bearing license to one or more of a group of genes with the potential to improve nitrogen use efficiency in corn, soybean, cotton and canola. While the period for Monsanto to evaluate the candidate genes in target crops was originally set to expire in September 2012, we and Monsanto mutually agreed to an extension of this period into 2013, and Monsanto has subsequently exercised its rights under the agreement to extend this period through January 2014. As of today, we have completed the performance of our obligations and are no longer performing any significant research under this agreement. This agreement accounts for only a very small percentage of our current revenues.

Bayer

2010 Collaboration Agreement

(i) Background and Duties

We currently have two research and development agreements with Bayer CropScience LP, an affiliate of Bayer CropScience AG, or Bayer. The later of the two agreements with Bayer is the collaboration agreement entered into in December 2010, which we refer to as the “Bayer Wheat Agreement.” This agreement focuses on the improvement of yield, nitrogen use efficiency, and abiotic stress tolerance of wheat. Pursuant to this agreement, and upon Bayer’s request, the parties may agree to expand the scope of research to any other trait in wheat. The initial term of the research period under the Bayer Wheat Agreement— i.e. , the period of active computational gene and SNP discovery—is five years, expiring January 2016. The agreement also gives Bayer an option to extend the agreement for an additional year or, under certain conditions, to terminate the agreement in full or in part prior to the conclusion of the research period.

As in most of our collaboration efforts, the Bayer Wheat Agreement involves the use of our ATHLETE computational technology to identify and prioritize candidate genes with the potential to improve specified traits in wheat through the application of our proprietary technologies. More uniquely, however, the Bayer Wheat Agreement also requires the application of EvoBreed , our computational technology for advanced breeding applications, which is used to identify SNPs capable of enhancing individual plant features and ultimately leading to enhanced traits. The genes that we discover undergo model plant validation.

(ii) License Grants

Under the Bayer Wheat Agreement, we granted Bayer an exclusive, worldwide, royalty-bearing license under certain of our patents and know-how to use, solely in wheat, certain genes and SNPs we identify during the collaboration in order to grow, commercialize and sell wheat products containing those genes or SNPs. We also agreed that during the collaboration period we would not: (i) license to any third party the right to use any of our patented genes or any of our SNPs in wheat for any transgenic or breeding application in wheat, regardless of trait; or (ii) undertake any discovery rounds that intentionally target genes or SNPs that may improve the specified traits specifically in wheat in collaboration with or for the benefit of any third party. However, we may freely license our genes to any third party for use in any crop other than wheat, and similarly may freely use our wheat datasets and any other Evogene datasets with respect to crops other than wheat for any and all purposes.

(iii) Diligence Obligations

Pursuant to the Bayer Wheat Agreement, both we and Bayer are subject to certain minimum diligence obligations, which relate to our respective responsibilities under the agreement: our own diligence obligations surround the discovery and research of candidate genes, as well as the discovery of candidate SNPs; Bayer’s diligence obligations require Bayer to evaluate a specified number of genes and SNPs for the purpose of

 

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ultimately developing and commercializing products containing the genes or SNPs. For example, by the conclusion of each year in which we undertake an ATHLETE discovery round, we are obligated to provide Bayer with a certain minimum number of reports reviewing the candidate genes that we have identified as having the potential to improve the target traits in wheat. Similarly, following each EvoBreed discovery round, we are obligated to provide Bayer with a certain number of reports reviewing the candidate SNPs that we have identified as having the potential to improve a target trait. For its part, Bayer is obliged under the Bayer Wheat Agreement to introduce a minimum number of our genes and SNPs into wheat plants and to perform field trials using the genes and SNPs that we deliver, with the goal of ultimately developing, launching and marketing commercial products containing our licensed genes and SNPs.

Various provisions under the Bayer Wheat Agreement lay out the consequences of either party’s failure to perform its diligence obligations. Absent certain extenuating circumstances, if we fail or are delayed in delivering the specified number of gene or SNP reports, we may have to complete and deliver the missing deliverables over an extended timeframe at no additional cost to Bayer, or reimburse Bayer for the applicable research fees paid in respect of such deliverables. Under certain circumstances, Bayer may also be able to terminate the research and development program under the agreement. If, on the other hand, Bayer does not fulfill its obligations, including its development obligations, within the relevant timeframes under the agreement, Bayer may lose its license to the relevant genes, or for SNPs, Bayer’s license to the relevant SNPs may become non-exclusive.

(iv) Change in Control

If we experience a change of control, the Bayer Wheat Agreement would remain in effect. However, if we come under the control of a Bayer competitor, Bayer may elect to terminate the research and development collaboration, including all of our activities under the collaboration. In such a case, Bayer would no longer have to provide us with annual research payments.

(v) Consideration and Costs

As of June 30, 2013, we had received approximately €7.6 million in research payments under the Bayer Wheat Agreement including an up-front payment upon entering the Bayer Wheat Agreement. Bayer also agreed to make certain annual research and development services payments during the collaboration period in addition to milestone payments upon the achievement of agreed-upon results. Between now and the completion of our research and development activities under the collaboration, which, subject to a right of earlier termination, is scheduled to occur in 2017, we are due to receive €10.7 million in research and development services payments. In the event that Bayer launches commercial wheat products containing one or more of our licensed genes or SNPs, Bayer will have an obligation to provide us with royalty payments based on the additional sales value conferred by the improved crop trait we identify for Bayer. Under our agreement, Bayer is required to use at least the specified levels of diligence in developing and commercializing the applicable products. Furthermore, Bayer’s royalty obligations run for periods specified based on patent coverage in the applicable country and/or a minimum period post-launch.

In connection with entering into the Bayer Wheat Agreement, in January 2011 Bayer purchased 863,310 of our ordinary shares at a price per share of $13.90, for an aggregate investment of approximately $12 million. Prior to the completion of this offering, Bayer held approximately 4.6% of our outstanding equity.

2009 Collaboration Agreement