Chemomab Therapeutics Ltd. 10-K

Item 9A. Controls and Procedures Management’s Annual Report on Internal Controls Over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over our financial reporting. Internal control over financial reporting is defined in Rules 13a-15(f) and 15d-15(f) promulgated under the Exchange Act as a process designed by, or under the supervision of, our principal executive and principal financial officers and effected by our board of directors, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP and includes those policies and procedures that: • pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;​ • provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that our receipts and expenditures are being made only in accordance with authorizations of our management; and​ • provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.​ Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate. Our management, including our Chief Executive Officer and Chief Financial Officer, assessed the effectiveness of our internal control over financial reporting at December 31, 2019. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework (2013). Based on that assessment under those criteria, management has determined that, as of December 31, 2019, our internal control over financial reporting was effective. Item 9B. Other Information None. 72 PART III Item 10. Directors, Executive Officers and Corporate Governance Our directors and executive officers, their ages and positions as of the date of this Annual Report are as follows: Name Age Position Dr. Frank G. Haluska 61 Chief Executive Officer and Director Jonathan Burgin 58 Chief Financial Officer and Chief Operating Officer Dr. David Kerstein 37 Chief Medical Officer Dr. Ron Knickerbocker 54 Senior Vice President of Clinical Development and Data Sciences Dr. Michal Gilon Ohev-Zion 42 Vice President of Research and Development Sean Daly 48 Vice President of Clinical Operations Salar Roshan 37 Head of Business Development Dennison Veru (1) 59 Interim Chairman Ruth Alon (1)(2) 68 Director Ofer Gonen 46 Director Reginald Hardy (2)(3) 62 Director Dr. Lawrence Howard (1) 66 Director Isaac Kohlberg (2) 68 Director (1) Member of the Audit Committee (2) (3) Member of the Compensation Committee Member of the Nominating and Governance Committee A brief biography of each person who serves as an executive officer and/or director of our Company is set forth below: Dr. Frank G. Haluska has served as our Chief Executive Officer since October 2016. He most recently served as Chief Medical Officer and Senior Vice President of Clinical R&D at ARIAD Pharmaceuticals, Inc. from 2012 to 2016, where he held overall responsibility for clinical development strategy. At ARIAD he led the clinical development and approval of ponatinib (marketed as Iclusig) in the United States, European Union and other territories, as well as the development of brigatinib (marketed as Alunbrig) approved in the United States by the FDA. Dr. Haluska graduated from Harvard College and the University of Pennsylvania School of Medicine, undertook medical training at Massachusetts General Hospital (“MGH”) and the Dana-Farber Cancer Institute (“DFCI”), and a fellowship at the Massachusetts Institute of Technology Center for Cancer Research. He became assistant professor of medicine at Harvard Medical School, and leader of the melanoma research programs at the MGH Cancer Center and the DFCI through the Dana-Farber Harvard Cancer Center. Subsequently he was deputy director of the Tufts New England Medical Center Cancer Center. He served on the board of directors at Elicio Therapeutics, Inc. between June 2017 and October 2019. Jonathan Burgin served as our Chief Financial Officer between June 2011 and June 2012, was our Chief Executive Officer from June 2012 through October 2016, and has served as our Chief Financial Officer and Chief Operating Officer since October 2016. Mr. Burgin was Chief Financial Officer of Radcom Ltd. (Nasdaq: RDCM), a service assurance provider, from 2006 to 2011, and was Chief Financial Officer of XTL Biopharmaceuticals Ltd. (TASE: XTL, Nasdaq: XTLB), a drug development company, from 1999 to 2006. Between 1997 and 1999, he was Chief Financial Officer of YLR Capital Markets Ltd., a publicly-traded Israeli investment bank, and rose to become a Senior Manager at Kesselman & Kesselman, CPA (Israel), the Israeli member of PricewaterhouseCoopers International, Ltd., between 1984 and 1997. He currently serves on the board of directors of Cellect Biotechnology Ltd. (Nasdaq:APOP). Mr. Burgin earned an M.B.A. and a B.A. in accounting and economics from Tel Aviv University and is certified in Israel as a Certified Public Accountant. 73 Dr. David Kerstein has served as our Chief Medical Officer since November 2018. Prior to joining us, Dr. Kerstein served as Senior Medical Director of Oncology Clinical Research at Takeda Pharmaceuticals International Co. (OTCMKTS:TKPHF), a global research and development-driven pharmaceutical company, from February 2017 to November 2018. At Takeda, he was the lung cancer clinical portfolio strategy lead and global clinical lead for the anaplastic lymphoma kinase (“ALK”) inhibitor, brigatinib. From 2014 to 2017, Dr. Kerstein was Medical Director and then Senior Medical Director of Clinical Research at ARIAD Pharmaceuticals, Inc., where he was the medical lead for the brigatinib clinical development program, and led the initial New Drug Application submission and Marketing Authorization Application submissions and approvals for brigatinib. Prior to that, Dr. Kerstein was Director of Clinical Development and Regulatory Affairs at Boston Biomedical, Inc., a wholly-owned subsidiary of Sumitomo Dainippon Pharma Co. Ltd. (OTCMKTS:DNPUF), a Japanese pharmaceutical company, where he led the clinical development of the STAT3 inhibitor napabucasin. Dr. Kerstein received his M.D. from Tufts University School of Medicine and his B.S. in biology, summa cum laude, from Tufts University. Dr. Ron Knickerbocker has served as our Senior VP of Clinical Development and Data Sciences since March 2018. Prior to this, Dr. Knickerbocker led the Biomedical Data Sciences and Information group at ARIAD Pharmaceuticals from 2012 until its acquisition by Takeda Pharmaceutical Company Ltd. in 2017. At ARIAD, he led statistics and data management functions through multiple successful oncology submissions. Prior to this, Dr. Knickerbocker served as a Vice President at Genzyme Corporation from 2004 to 2012, where his positions included leading the biostatistics, data management, and medical writing functions for the transplant/oncology business and global head of biostatistics and statistical programming. From 1999 to 2004, Dr. Knickerbocker was the statistical site head for Pfizer Inc. in Ann Arbor, MI. From 1993 to 1999, he held positions at Eli Lilly and Company, leading projects in women’s health and oncology. He has a B.S. degree in applied mathematics and his M.S. and Ph.D. degrees in statistics from Texas A&M University. Dr. Michal Gilon Ohev-Zion has served as our VP Research and Development since February 2013. She was previously an investigator at the Hebrew University of Jerusalem. She holds B.Sc., M.Sc. and Ph.D. degrees, all in biology, from the Hebrew University of Jerusalem, as well as having performed post-doctoral research there. Sean Daly has served as our Vice President of Clinical Operations since March 2018 and brings more than a decade of experience and an ample network of synergetic relationships to his role. Mr. Daly joined us from ARIAD Pharmaceuticals, where he most recently served as the Vice President of Clinical Operations from 2004 to 2017. Mr. Daly led the clinical operations group at ARIAD for five years, building upon various operational roles held at ARIAD since 2004. In addition to his experience at ARIAD, he has held positions with Wyeth Research (formerly Genetics Institute) and Agouron Pharmaceuticals, Inc. Mr. Daly is a graduate of the University of California at San Diego where he received his B.S. in biochemistry and cell biology. Salar Roshan has served as our Head of Business Development since May 2019. Mr. Roshan leads the development of strategic partnerships and spearheaded the licensing transaction surrounding our pan-RAS and PDE10/β-catenin programs. Mr. Roshan joined us from Curis, Inc., an anti-cancer biotechnology company, where he served as Head of Corporate Development from 2016 to 2019 and was responsible for overseeing all aspects of the company’s corporate and business development strategy. Prior to that, he served as a Portfolio Manager at Baxter Biosciences (between April 2015 and September 2016), where he led a partial spin-off of the company’s R&D division, was responsible for several product launches and oversaw valuation and long range planning for its hemophilia portfolio. Mr. Roshan also held management roles at Ironwood Pharmaceuticals (between June 2013 and March 2015), Millennium Pharmaceuticals (acquired by Takeda Pharmaceutical Co.) (between August 2008 and May 2013), and Genzyme (between August 2006 and August 2008). Mr. Roshan received his M.Sc. in finance and his M.B.A. from Kelley School of Business at Indiana University, and his B.Sc. in biotechnology from Northeastern University. Dennison (Dan) Veru has served as a director since August 2016 and as our Interim Chairman since November 2019. Mr. Veru is Co-Chairman of Palisade Capital Management, an asset management company, and has been its Chief Investment Officer (Institutional) since 2000, with oversight responsibilities for all of Palisade’s investment strategies that trade publicly-traded securities. Mr. Veru previously held a variety of analytical positions at Drexel Burnham Lambert and later at Smith Barney. From 1992 through 1999, Mr. Veru was the President and Director of Research at Awad Asset Management and helped oversee the firm’s growth from start-up to more than $1 billion of small-cap institutional and high net worth assets. Prior to Awad, Mr. Veru held a variety of analytical roles at Drexel Burnham Lambert and later at Smith Barney Harris Upham. In addition to his professional responsibilities, Mr. Veru is a member of the Board of Overseers of the St. Luke’s and Roosevelt Hospital, a member of the finance committee of the Dwight-Englewood School, and a member of the Board of the McCarton School for autistic children. He is a frequent guest on CNBC, Bloomberg News, Fox News and CNN, and also contributes market opinions to various financial publications. Mr. Veru holds a B.A. in government from Franklin & Marshall College. 74 Ruth Alon has served as a director since September 2017. Ms. Alon is the founder and Chief Executive Officer of Medstrada Israel, a venture capital fund focusing on food and nutrition technologies. Between 1997 and 2016, Ms. Alon served as a general partner of Pitango Venture Capital. Prior to her tenure at Pitango, Ms. Alon held senior positions with Montgomery Securities from 1981 to 1987, Genesis Securities, LLC from 1993 to 1996, and Kidder Peabody & Co. from 1987 to 1993, as well as managing her own medical device independent consulting business in San Francisco from 1995 to 1996. Ms. Alon was the founder and chairperson of Israel Life Science Industry, a not-for-profit organization then representing the mutual goals of approximately 700 Israeli life science companies. She is also the co-founder of IATI, Israel Advanced Technology Industries, an umbrella organization for all high-tech and life sciences companies in Israel. She has a B.A. in economics from The Hebrew University of Jerusalem, Israel and an M.B.A. from Boston University. Ofer Gonen has served as a director since November 2019. Mr. Gonen is the Chief Executive Officer of CBI, a company that is publicly traded in Israel. Mr. Gonen has served as the Chief Executive Officer of CBI since 2016, having served previously as a Vice President since 2003. He serves as a director of MediWound Ltd. (Nasdaq: MDWD), Gamida Cell Ltd. (Nasdaq: GMDA) and several other companies. Previously, Mr. Gonen served as the general manager of Biomedical Investments and as a partner at Arte Venture Group. Mr. Gonen also previously served as a member of our board of directors from 2015 to 2017. Mr. Gonen holds a B.Sc. in Physics, Mathematics and Chemistry from the Hebrew University of Jerusalem and an M.A. in Economics and Finance from Tel Aviv University. Reginald Hardy has served as a director since August 2016. Mr. Hardy is the co-founder and Chairman of Brickell Biotech, Inc. (“Brickell”), a pharmaceutical company focused on developing novel drugs for the treatment of skin diseases. Mr. Hardy served as Brickell’s Chief Executive Officer from inception in 2009 through 2018. Prior to Brickell, he was the co-founder and President of Concordia Pharmaceuticals, Inc., an oncology drug development company acquired by Kadmon Corporation in 2011. From 1992 to 1998, he was a co-founder and the president of SANO Corporation, a pharmaceutical company focused on the development of novel transdermal drug delivery systems, that was acquired by Elan Corporation in 1998. Prior to SANO, Mr. Hardy held various corporate roles with IVAX Corporation, Key Pharmaceuticals, and Hoechst-Roussel Pharmaceuticals, Inc. He earned his B.S. in pharmacy from the University of North Carolina, Chapel Hill and an M.B.A. from the University of North Carolina, Greensboro. Dr. Lawrence Howard has served as a director since September 2016 and served as Chairman of our board of directors from February 2017 to November 2018. He has been a Senior Managing Director of Hudson Ventures since 1996. After practicing medicine from 1981 to 1988, he co-founded Presstek, Inc., a graphic arts technology company whose market value grew from $12 million to over $800 million under his direction. Dr. Howard served as President and Chief Executive Officer of Presstek from 1987 until 1992, and served on the Presstek board of directors for over 20 years. He was a Clinical Professor in the Department of Psychiatry at the Morsani College of Medicine at the University of South Florida, and the Entrepreneur-in-Residence and an Adjunct Professor at the University of South Florida Center for Entrepreneurship. In addition, Dr. Howard consulted to The Villages, the largest retirement community in the United States, assisting them in building a “state of the art” healthcare delivery system. He holds a B.S. in animal science from the University of New Hampshire and an M.D. from New York Medical College. Isaac Kohlberg has served as a director since February 2017. He is the Senior Associate Provost and Chief Technology Development Officer at Harvard University. Previously, he was Chief Executive Officer of the Tel Aviv University Economic Corporation and Chief Executive Officer of RAMOT at Tel Aviv University, a technology transfer company. He served as Vice President at New York University Medical Center and Vice Provost of New York University. He also served as the Managing Director of Yeda R&D Company of the Weizmann Institute of Science. Mr. Kohlberg serves on the board of directors of CBI and Elicio Therapeutics, a privately-held biotechnology company of which CBI is a substantial shareholder. Mr. Kohlberg received a diploma in French cultural and historical studies from the University of Strasbourg, an M.B.A. from INSEAD and an LL.B. from Tel Aviv University. 75 Committees of the Board of Directors Our board of directors has established the following committees. Each committee operates in accordance with a written charter that sets forth the committee’s structure, operations, membership requirements, responsibilities and authority to engage advisors. Audit Committee Under the Companies Law, the Exchange Act and Nasdaq rules, we are required to establish an Audit Committee. The responsibilities of an Audit Committee under the Companies Law include identifying and addressing flaws in the business management of the company, reviewing and approving related party transactions, establishing whistleblower procedures, overseeing the company’s internal audit system and the performance of its internal auditor, and assessing the scope of the work and recommending the fees of the company’s independent accounting firm. In addition, the Audit Committee is required to determine whether certain related party actions and transactions are “material” or “extraordinary” for the purpose of the requisite approval procedures under the Companies Law and to establish procedures for considering proposed transactions with a controlling shareholder. In accordance with U.S. law and Nasdaq requirements, our Audit Committee is also responsible for the appointment, compensation and oversight of the work of our independent auditors and for assisting our board of directors in monitoring our financial statements, the effectiveness of our internal controls and our compliance with legal and regulatory requirements. Under the Companies Law and related regulations, the Audit Committee must consist of at least three directors who meet certain independence criteria. Under the Nasdaq rules, we are required to maintain an Audit Committee consisting of at least three independent directors, all of whom are financially literate and one of whom has accounting or related financial management expertise. Each of the members of the Audit Committee is required to be “independent” as such term is defined in Rule 10A-3(b)(1) under the Exchange Act. Our Audit Committee currently consists of Ms. Ruth Alon, Dr. Lawrence Howard and Mr. Dennison Veru. All of the members are independent as defined in the Companies Law, SEC rules and Nasdaq listing requirements. Our board of directors has determined that all members of our Audit Committee meet the requirements for financial literacy under the applicable rules and regulations of the SEC and the Nasdaq rules. Our board of directors has determined that Mr. Veru is an Audit Committee financial expert as defined by the SEC rules and has the requisite financial experience as defined by the Nasdaq rules. Compensation Committee Under both the Companies Law and Nasdaq rules, we are required to establish a Compensation Committee. The responsibilities of a Compensation Committee under the Companies Law include recommending to the board of directors, for ultimate shareholder approval by a special majority, a policy governing the compensation of directors and officers based on specified criteria, reviewing modifications to and implementing such compensation policy from time to time, and approving the actual compensation terms of directors and officers prior to approval by the board of directors. In accordance with U.S. law and Nasdaq requirements, our Compensation Committee is also responsible for the appointment, compensation and oversight of the work of any compensation consultant, independent legal counsel and other advisors retained by the Compensation Committee. 76 The Companies Law and related regulations require the appointment of a Compensation Committee that complies with the requirements of Nasdaq. Under Nasdaq rules, we are required to maintain a Compensation Committee consisting of at least two independent directors; each of the members of the Compensation Committee is required to be independent under Nasdaq rules relating to Compensation Committee members, which are different from the general test for independence of board and committee members. Our Compensation Committee currently consists of Ms. Ruth Alon, Mr. Reginald Hardy and Mr. Isaac Kohlberg. All of the members are independent as defined in the Companies Law and the Nasdaq listing requirements. Corporate Governance and Nominating Committee We have established a Corporate Governance and Nominating Committee, responsible for making recommendations to the board of directors regarding candidates for directorships and the size and composition of the board. In addition, the committee is responsible for overseeing our corporate governance guidelines and reporting and making recommendations to the board concerning corporate governance matters. Under the Companies Law, nominations for director may also, under certain circumstances, be made by shareholders in accordance with the conditions prescribed by applicable law and our articles of association. Our Corporate Governance and Nominating Committee currently consists of Mr. Reginald Hardy, who is independent as defined in the Nasdaq listing requirements. Internal Auditor Under the Companies Law, the board of directors is required to appoint an internal auditor recommended by the Audit Committee. The role of the internal auditor is to examine, among other things, whether the company’s actions comply with applicable law and proper business procedures. The internal auditor may not be an interested party, a director or an officer of the company, or a relative of any of the foregoing, nor may the internal auditor be our independent accountant or a representative thereof. Mr. Joseph Ginossar, CPA, who is the chief executive officer of Fahn Kanne Control Management Ltd. (the Business Risk Services division of Grant Thornton Israel), currently serves as our internal auditor. Section 16(a) Beneficial Ownership Reporting Compliance Section 16(a) of the Exchange Act requires our directors, executive officers and holders of more than 10% of our ordinary shares to file with the SEC reports regarding their ownership and changes in ownership of our equity securities. We believe that all Section 16 filings requirements were met by our officers and directors during 2019. Code of Business Conduct and Ethics We have adopted a Code of Business Conduct and Ethics that includes provisions ranging from restrictions on gifts to conflicts of interest. All of our employees and directors are bound by this Code of Business Conduct and Ethics. Violations of our Code of Business Conduct and Ethics may be reported to the Audit Committee. The Code of Business Conduct and Ethics includes provisions applicable to all of our employees, including senior financial officers and members of our Board of Directors and is posted on our website. We intend to post amendments to or waivers from any such Code of Business Conduct and Ethics. Item 11. Executive Compensation Aggregate Compensation of Directors and Officers The aggregate compensation we paid to our executive officers and directors for the year ended December 31, 2019 was approximately $2.5 million. This amount includes amounts paid, set aside or accrued to provide pension, severance, retirement or similar benefits or expenses, but does not include share-based compensation expenses, or business travel, professional and business association dues and expenses reimbursed to office holders, and other benefits commonly reimbursed or paid by companies in our industry. As of December 31, 2019, options to purchase 3,570,014 ordinary shares granted to our officers and directors were outstanding under our share option plan at a weighted average exercise price of $2.48 per share. 77 Individual Compensation of Officers The table and summary below outlines the compensation granted to our five most highly compensated officers with respect to the year ended December 31, 2019. For purposes of the table and the summary below, “compensation” includes base salary, bonuses, equity-based compensation, retirement or termination payments, benefits and perquisites such as car, phone and social benefits and any undertaking to provide such compensation. Name and Principal Position Salary (1) (USD in thousands) Bonus (2) (USD in thousands) Equity-Based Compensation (3) (USD in thousands) Total (USD in thousands) Dr. Frank G. Haluska Chief Executive Officer $ 492 — $ 595 $ 1,087 Dr. David Kerstein Chief Medical Officer $ 407 $ 50 $ 322 $ 779 Dr. Ron Knickerbocker Senior Vice President of Clinical Development and Data Sciences $ 352 — $ 106 $ 458 Mr. Sean Daly Vice President of Clinical Operations $ 273 — $ 46 $ 319 Mr. Jonathan Burgin Chief Financial and Operating Officer $ 329 — $ 20 $ 349 (1) Salary includes gross salary plus payment by us of social benefits on behalf of the officer. Such benefits may include, to the extent applicable, payments, contributions and/or allocations for risk insurance (e.g., life, or work disability insurance), payments for social security, vacation, medical insurance and benefits, and other benefits and perquisites consistent with our policies. (2) Represents bonuses granted with respect to 2019. (3) Represents the equity-based compensation expenses recorded in our consolidated financial statements for the year ended December 31, 2019, based on the options’ fair value on the grant date, calculated in accordance with applicable accounting guidance for equity-based compensation. For a discussion of the assumptions used in reaching this valuation, see Note 2L to our annual consolidated financial statements included in this Annual Report on Form 10-K. Employment Agreements The material employment terms for Dr. Haluska, our Chief Executive Officer, are as follows: (1) an annual salary of $480,000 ($400,000 until April 30, 2019, when it was amended by a general meeting of our shareholders); (2) an annual bonus, subject to achievement of objectives set by the board of directors, in the target amount of $200,000; (3) payment of nine months’ of salary upon termination (or resignation for a good reason event), a partial annual bonus (pro rata) and partial vesting acceleration of option warrants (and in the case of termination or voluntary resignation with regard to changes in control of the company, a full annual bonus and full vesting acceleration of option warrants); and (4) all employee benefit plans, programs and arrangements, and all fringe benefits and perquisites that are made available to our senior executives, including health insurance coverage in accordance with the terms of our health insurance plan. In total, we have allocated Dr. Haluska options to purchase 2,059,016 ordinary shares in connection with his employment agreement. Of these, options to purchase 562,782, 164,942 and 909,203 ordinary shares vest in four annual tranches from the date of his employment (May 2016) with respective exercise prices of $2.60, $2.90 and $3.67, and options to purchase 422,090 ordinary shares vest in 16 quarterly tranches from the date of approval by our Board with an exercise price of $1.03. Our other employees are employed under the terms prescribed in their respective employment contracts. The employees are entitled to the social benefits prescribed by law and as otherwise provided in their agreements. These agreements each contain provisions standard for a company in our industry regarding non-competition, confidentiality of information and assignment of inventions. We also provide certain of our employees with a company car, which is leased from a leasing company. These contracts provide for notice periods of varying duration for termination of the agreement by us or by the relevant employee, during which time the employee will continue to receive base salary and benefits. 78 Equity Incentive Plans 2011 Share Option Plan On December 19, 2011, our board of directors adopted a share option plan (the “2011 Plan”), to allocate options to purchase our ordinary shares to our directors, officers, employees and consultants, and those of our affiliated companies (as such term is defined under the 2011 Plan), or the Grantees. The 2011 Plan is administered by our board of directors or a committee that was designated by our board of directors for such purpose, or the Administrator. Under the 2011 Plan, we may grant options to purchase ordinary shares (“Options”), under four tracks: (i) Approved 102 capital gains Options through a trustee, which was approved by the Israeli Tax Authority in accordance with Section 102(a) of the Israeli Income Tax Ordinance (“ITO”), and granted under the tax track set forth in Section 102(b)(2) of the ITO, or the Approved 102 Capital Gains Options. The holding period under this tax track is 24 months from the date of allocation of Options to the trustee or such period as may be determined in any amendment of Section 102 of the ITO, or any applicable tax ruling or guidelines; (ii) Approved 102 Earned Income Options through a trustee, granted under the tax track set forth is Section 102(b)(1) of the ITO, or the Approved 102 Earned Income Options. The holding period under this tax track is 12 months from the date of allocation of Options to the trustee or such period as may be determined in any amendment of Section 102 of the ITO; (iii) Unapproved 102 Options (the Options will not be allocated through a trustee and will not be subject to a holding period), or the Unapproved 102 Options; and (iv) 3(i) Options (the Options will not be subject to a holding period). These Options shall be subject to taxation pursuant to Section 3(i) of the ITO, or Section 3(i). Options pursuant to the first three tax tracks (under Section 102 of the ITO) can be granted to our employees and directors and the grant of Options under Section 3(i) can be granted to our consultants and controlling shareholders (a controlling shareholder is defined under the Section 102 of the ITO is a person who holds, directly or indirectly, alone or together with a “relative,” (i) the right to at least 10% of the company’s issued capital or 10% of the voting power; (ii) the right to hold at least 10% of the company’s issued capital or 10% of the voting power, or the right to purchase such rights; (iii) the right to receive at least 10% of the company’s profits; or (iv) the right to appoint a company’s director). Grantees who are not Israeli residents may be granted options that are subject to the applicable tax laws in their respective jurisdictions. We determine, in our sole discretion, under which of the first three tax tracks above the Options are granted and we notify the Grantee in a grant letter, as to the elected tax track. As mentioned above, consultants and controlling shareholders can only be granted Section 3(i) Options. The number of ordinary shares authorized to be issued under the 2011 Plan will be proportionately adjusted for any increase or decrease in the number of ordinary shares issued as a result of a distribution of bonus shares, change in our capitalization (split, combination, reclassification of the shares or other capital change), or issuance of rights to purchase ordinary shares or payment of a dividend. We will not allocate fractions of ordinary shares and the number of ordinary shares shall be rounded up to the closest number of ordinary shares. In the event of a (i) merger or consolidation in which we (in this context, specifically Anchiano Therapeutics Ltd.) is not the surviving entity or pursuant to which the other company becomes Anchiano Therapeutics Ltd.’s parent company or that pursuant to which Anchiano Therapeutics Ltd. is the surviving company but another entity holds 50% or more of Anchiano Therapeutics Ltd. voting rights, (ii) an acquisition of all or substantially all of our ordinary shares, (iii) the sale of all or substantially all Company assets, or (iv) any other event with a similar impact, the Company may exchange all of its outstanding Options granted under the 2011 Plan that remain unexercised prior to any such transaction for options to purchase shares of the successor corporation (or those of an affiliated company) following the consummation of such transaction. Unless otherwise determined by the Administrator, the exercise price of an Option granted under the 2011 Plan will be the average of the market price of the Company’s ordinary shares during the 22 business days prior to the date on which our board of directors authorized the grant of Options; provided, however, that such exercise price cannot be lower than the market price at the close of the trading day at which it was granted by our board of directors. The exercise price will be specified in the grant letter every Grantee received from us in which the Grantee notifies of the decision to grant him/her Options under the 2011 Plan. 79 Unless otherwise determined by the Administrator, the Options granted under the Plan will become vested and may be exercised in 16 equal portions of 6.25% of the total number of Options, at the end of each quarter following the day the Options were granted. Unless otherwise determined by our board of directors, the Options may be exercised for ten years following the date of grant, unless terminated earlier, and as long as the Grantee is employed by the Company (or by an affiliated company), or provides service to the Company (or an affiliated company). The Administrator may, in its absolute discretion, accelerate the time at which Options granted under the 2011 Plan or any portion of which will vest. Unless otherwise determined by the Administrator, in the event that the Grantee’s employment was terminated, not for Cause (as defined in the 2011 Plan), the Grantee may exercise that portion of the Options that had vested as of the date of such termination until the end of the specified term in the grant letter or the 2011 Plan. The portion of the Options that had not vested at such date, will be forfeited and can be re-granted according to the terms of the 2011 Plan. 2017 Equity-Based Incentive Plan On February 22, 2017, our board of directors adopted our 2017 Equity-Based Incentive Plan (the “2017 Plan”), to allocate a variety of share-based awards to our directors, officers, employees, consultants, advisors and service providers, and those of our affiliates (companies that control us, are controlled by us or are under common control with us), or the Participants. The 2017 Plan is currently administered by our board of directors, and may be administered by a committee designated by our board of directors for such purpose, or the Administrator. Under the 2017 Plan, we may grant options to purchase ordinary shares or ADSs, restricted shares or ADSs, restricted share units and other awards based on our ordinary shares, all of which are referred to as Awards. We may grant Awards under the same four tracks as described above with respect to the 2011 Plan, subject to the same conditions as apply for the 2011 Plan. In addition, we may grant incentive stock options and nonqualified stock options to Participants who are residents of the United States, and we may grant awards to Participants who are residents of other countries that comply with the laws of those jurisdictions. The number of ordinary shares authorized to be issued under the 2017 Plan will be proportionately adjusted for any increase or decrease in the number of ordinary shares issued as a result of a distribution of bonus shares, change in our capitalization (split, combination, reclassification of the shares or other capital change), issuance of rights to purchase ordinary shares or payment of a dividend. We will not allocate fractions of ordinary shares and the number of ordinary shares shall be rounded down to the closest number of ordinary shares. In the event of a (i) merger, consolidation, amalgamation or the like with or into another corporation, (ii) an acquisition (including an exchange) of all or substantially all of our ordinary shares, (iii) the sale of all or substantially all of our assets, or (iv) any other event determined by the Administrator to have a similar impact, then – unless otherwise determined by our board of directors in its sole and absolute discretion – any Award then outstanding will be assumed or an equivalent Award shall be substituted by the successor corporation, under substantially the same terms as the Award. The exercise price of an option granted under the 2017 Plan will, in general, be no less than the fair market value of the Company’s ordinary shares on the date of grant, subject to any minimum exercise price prescribed by law. The Administrator determines the vesting provisions for each Award and may, in its sole discretion, accelerate the time at which options granted under the 2017 Plan will vest. Unless otherwise determined by the Administrator, options may be exercised for ten years (five years in the case of an incentive stock option granted to a 10% shareholder), and as long as the Participant is employed by the Company (or by an affiliated company) or provides services to the Company (or an affiliated company). If a Participant’s employment is terminated, other than for cause, the Participant may generally exercise vested options for a limited period following termination. 80 In accordance with the terms of the 2017 Plan, on January 1 of each calendar year during the term of the 2017 Plan, the number of shares available for issuance under the 2017 Plan shall be increased by 4% of the total number of company shares outstanding on December 31 of the immediately preceding calendar year, or such lesser number as shall be determined by the administrator of the plan, subject to adjustments required for recapitalization events. As of February 18, 2020, our board of directors has approved the issuance, under our incentive plans, of options to purchase 3,737,849 ordinary shares currently outstanding at an average exercise price of $2.51 per share. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters The following table sets forth information, as of February 18, 2020, regarding beneficial ownership of our ordinary shares (including ordinary shares represented by ADSs): · each person who is known by us to own beneficially more than 5% of our ordinary shares; · each director; · each executive officer; and · all of our directors and executive officers collectively. Beneficial ownership is determined in accordance with the rules of the SEC. Under these rules, a person is deemed to be a beneficial owner of a security if that person has or shares voting power, which includes the power to vote or to direct the voting of the security, or investment power, which includes the power to dispose of or to direct the disposition of the security. For purposes of the table below, we deem ordinary shares issuable pursuant to options or warrants that are currently exercisable or exercisable within 60 days of the date of this Annual Report on Form 10-K, if any, to be outstanding and to be beneficially owned by the person holding the options or warrants for the purposes of computing the percentage ownership of that person, but we do not treat them as outstanding for the purpose of computing the percentage ownership of any other person. Unless otherwise noted below, each shareholder’s address is c/o Anchiano Therapeutics Ltd., 5 Kiryat Hamada St., PO Box 45032, Jerusalem 9777401 Israel. 81 Shares Beneficially Owned Name of Beneficial Owner Number Percentage (1) Access Industries Holdings LLC (2) 15,829,397 40.08 Clal Biotechnology Industries Ltd. (3) 9,307,662 23.57 Shavit Capital Funds (4) 8,868,546 21.67 Edgewater Partner Holdings Ltd. (5) 1,923,075 5.18 Palisade Medical Equity I, LP (6) 1,882,700 5.07 Directors and executive officers: Dr. Frank G. Haluska (7) 1,443,268 3.75 Jonathan Burgin (8) 139,287 * Dr. David Kerstein (9) 127,500 * Dr. Ron Knickerbocker (10) 85,313 * Dr. Michal Gilon Ohev-Zion (11) 48,014 * Sean Daly (12) 34,073 * Salar Roshan - - Ruth Alon (13) 243 * Ofer Gonen - - Reginald Hardy - - Dr. Lawrence Howard (14) 76,925 * Isaac Kohlberg - - Dennison Veru (15) 1,982,700 5.34 All directors and executive officers as a group (13 persons) 2,089,278 5.37 % * Represents beneficial ownership of less than one percent (1%). (1) Percentage ownership based on 37,099,352 ordinary shares outstanding as of the date of this Annual Report on Form 10-K. (2) The beneficial ownership is based in part on the latest available filing made with the SEC on Schedule 13D/A on January 13, 2020, and consists entirely of (i) the ordinary shares, ADSs and warrants owned directly by CBI and (ii) 6,521,723 ordinary shares represented by 1,304,347 ADSs owned directly by Access Industries Holdings LLC. For more information on Access Industries Holdings LLC and CBI, see footnote (3) below. (3) The beneficial ownership is based in part on the latest available filing made with the SEC on Schedule 13D/A on January 13, 2020, and consists of 6,585,081 ordinary shares, 326,085 ordinary shares represented by 65,217 ADSs and warrants to purchase 2,396,496 ordinary shares. Clal Industries Ltd. owns 47% of the outstanding shares of, and controls CBI. The remaining 53% of CBI’s outstanding shares are publicly-held and listed on the TASE. Clal Industries Ltd. is wholly owned by Access AI Ltd., which is owned by AI Diversified Holdings S.à r.l., which is owned by AI Diversified Parent S.à r.l., which is owned by AI Diversified Holdings Limited (“AIDH Limited”). AI SMS L.P. (“AI SMS”) owns a majority of the equity of AIDH Limited. AIH owns a majority of the equity of AI SMS, and LLC holds a majority of the outstanding voting interests in AIH. Access Industries Management, LLC controls LLC and AIH, and Len Blavatnik controls Access Industries Management, LLC. The address of each of Clal Industries Ltd. and CBI is Triangle Tower, 3 Azrieli Center, Tel Aviv 67023, Israel and the address of each of foregoing other than Clal Industries Ltd. and CBI is 40 West 57th Street, 28th Floor, New York, NY 10019. (4) The beneficial ownership is based in part on the latest available filing made with the SEC on Schedule 13G on January 2, 2020, and consists of 5,034,150 ordinary shares represented by 1,006,830 ADSs and warrants to purchase 3,834,396 ordinary shares. The general partner of Shavit Capital Fund III (US), L.P. and Shavit Capital Fund 3 (Israel), L.P. is Shavit Capital Fund 3 GP, L.P., which is managed by Shavit Capital Management 3 (GP) Ltd. in its capacity as the general partner. The general partner of Shavit Capital Fund IV (US), L.P. and Shavit Capital Fund 4 (Israel), L.P. is Shavit Capital Fund 4 GP, L.P., which is managed by Shavit Capital Management 4 (GP) Ltd. in its capacity as the general partner. The controlling shareholder of Shavit Capital Management 3 (GP) Ltd. and Shavit Capital Management 4 (GP) Ltd. is a company, the controlling shareholder of which is Gary Leibler. Therefore, Mr. Leibler may be deemed to control the investment decisions of the Funds. The address of each of the foregoing other than Mr. Leibler is Jerusalem Technology Park, Building 1B, Box 70, Malha, Jerusalem, 96951 Israel. The address of Mr. Leibler is 4a Gidon Street, Jerusalem 9350604 Israel. 82 (5) Consists entirely of ADSs representing ordinary shares. Edgewater Partner Holdings Ltd. is beneficially owned by Mr. Youqiang Yu, and as such, Mr. Yu may be deemed to beneficially own the ordinary shares beneficially owned by Edgewater Partner Holdings Ltd. The shareholder’s business address is c/o Edgewater Partner Holdings Ltd., Novasage Chambers, Level 2, CCCS Building, Beach Road, Apia, Samoa. (6) The beneficial ownership is based on the latest available filing made with the SEC on Schedule 13D/A on June 26, 2019, and consists of 369,640 ADSs representing 1,848,200 ordinary shares held by Palisade Medical Equity I, LP (“Palisade”) and 6,900 ADSs representing 34,500 ordinary shares held by Dennison Veru, the managing member, co-chairman and chief investment officer of Palisade Capital Management, L.L.C. (“PCM”), Palisade’s investment manager, and a member and president of Palisade Medical Equity Holdings I, L.L.C. (“PMEH”), Palisade’s general partner. In addition, Mr. Veru is a member of our board of directors. For his updated holdings to the best of our knowledge, see footnote (15) below. Palisade is beneficially owned by Alison Berman, the president and chief executive officer of PCM. As such, Ms. Berman may be deemed to beneficially own the ordinary shares beneficially owned by Palisade. The business address of Ms. Berman and Mr. Veru is c/o Palisade Medical Equity, One Bridge Plaza, Suite 695, Fort Lee, NJ 07024. (7) The beneficial ownership is based in part on the latest available filing made with the SEC on Form 3 on January 2, 2020, and consists of 62,112 ordinary shares, warrants to purchase 47,931 ordinary shares, and options to purchase 422,086, 107,593, 16,113, 681,903 and 105,530 ordinary shares exercisable within 60 days of the date of this Annual Report on Form 10-K, with respective exercise prices of $2.60, $2.90, $2.90, $3.67 and $1.03. These options expire respectively on December 18, 2026, May 10, 2027, July 19, 2027, June 28, 2028 and May 20, 2029, respectively. (8) The beneficial ownership is based in part on the latest available filing made with the SEC on Form 3 on January 2, 2020, and consists of options to purchase 3,533, 4,504, 6,000, 68,750 and 56,500 ordinary shares exercisable within 60 days of the date of this Annual Report on Form 10-K, with respective exercise prices of NIS 246.27, NIS 23.44, NIS 12.10, NIS 9.10 and $1.03. These options expire on September 26, 2021, May 10, 2024, April 28, 2025, September 9, 2027 and July 2, 2029, respectively. (9) The beneficial ownership is based in part on the latest available filing made with the SEC on Form 3 on January 2, 2020, and consists entirely of options to purchase ordinary shares exercisable within 60 days of the date of this Annual Report on Form 10-K, with an exercise price of $2.94. These options expire on December 29, 2028. (10) The beneficial ownership is based in part on the latest available filing made with the SEC on Form 3 on January 2, 2020, and consists of options to purchase 47,813 and 37,500 ordinary shares exercisable within 60 days of the date of this Annual Report on Form 10-K, with respective exercise prices of $4.00 and $1.03. These options expire on March 4, 2028 and May 20, 2029, respectively, respectively. (11) The beneficial ownership is based in part on the latest available filing made with the SEC on Form 3 on January 2, 2020, and consists of options to purchase 236, 1,766, 2,252, 3,000, 27,500 and 13,260 ordinary shares exercisable within 60 days of the date of this Annual Report on Form 10-K, with respective exercise prices of NIS 242.03, NIS 86.62, NIS 23.44, NIS 12.10, NIS 9.10 and $1.03. These options expire on March 6, 2021, April 20, 2023, May 10, 2024, April 28, 2025, September 9, 2027 and July 2, 2029, respectively. (12) The beneficial ownership is based in part on the latest available filing made with the SEC on Form 3 on January 2, 2020, and consists of options to purchase 25,313 and 8,760 ordinary shares exercisable within 60 days of the date of this Annual Report on Form 10-K, with respective exercise prices of $4.00 and $1.03. These options expire on March 4, 2028 and May 20, 2029, respectively. (13) The beneficial ownership is based in part on the latest available filing made with the SEC on Form 3 on January 2, 2020, and consists entirely of options to purchase ordinary shares exercisable within 60 days of the date of this Annual Report on Form 10-K, with an exercise price of NIS 9.10. These options expire on September 9, 2027. 83 (14) The beneficial ownership is based in part on the latest available filing made with the SEC on Form 3 on January 2, 2020, and consists of 15,385 ADSs representing 76,925 ordinary shares, based on Dr. Howard’s percentage ownership in Patata Beroa, LLC, which directly holds 92,309 of our ADSs in total . (15) The beneficial ownership is based in part on the latest available filing made with the SEC on Form 3 on January 2, 2020, and consists of 26,900 ADSs representing 134,500 ordinary shares held directly and 369,640 ADSs representing 1,848,200 ordinary shares held by Palisade. Mr. Veru is the co-chairman and Chief Investment Officer of PCM and is a member and president of PMEH. Item 13. Certain Relationships and Related Transactions, and Director Independence Certain Relationships and Related Transactions We have entered into employment agreements with each of our executive officers. Compensation arrangements for our executive officers and directors are described in the sections entitled “Item 11. Executive Compensation” and “Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.” Our Articles of Association permit us to insure each of our directors and officers to the fullest extent permitted by the Companies Law. We have obtained Directors and Officers insurance for our executive officers and directors. All related party transactions are reviewed and approved by the Audit Committee, as required by the Audit Committee Charter. Family Relationships There are no family relationships among directors or executive officers of our Company. Corporate Governance and Independent Directors In compliance with the listing requirements of Nasdaq, we have a comprehensive plan of corporate governance for the purpose of defining responsibilities, setting high standards of professional and personal conduct and assuring compliance with such responsibilities and standards. We currently regularly monitor developments in the area of corporate governance to ensure we are in compliance with the standards and regulations required by Nasdaq. Our board of directors consists of seven directors, of whom four (Ruth Alon, Reginald Hardy, Dr. Lawrence Howard and Dennison Veru) qualify as independent directors under the corporate governance standards of the Nasdaq rules and the independence requirements of Rule 10A-3 of the Exchange Act. Under our articles of association, our board of directors must consist of not less than three and no more than 11 directors. Pursuant to our articles of association, the vote required to appoint a director is a simple majority vote of holders of our voting shares participating and voting at the relevant meeting. In addition, our articles of association allow our board of directors to appoint new directors to fill vacancies which occurred for any reason or as additional directors, provided that the number of board members shall not exceed the maximum numbers of directors mentioned above. The appointment of a director by the board shall be in effect until the following annual general meeting of the shareholders or until the end of his tenure in accordance with our articles of association. Our board of directors may continue to operate for as long as the number of directors is not less than the minimum number of directors mentioned above. In addition, under the Companies Law, our board of directors must determine the minimum number of directors who are required to have financial and accounting expertise. Under applicable regulations, a director with financial and accounting expertise is a director who, by reason of his or her education, professional experience and skill, has a high level of proficiency in and understanding of business accounting matters and financial statements. He or she must be able to thoroughly comprehend the financial statements of the company and initiate discussion regarding the manner in which financial information is presented. In determining the number of directors required to have such expertise, the board of directors must consider, among other things, the type and size of the company and the scope and complexity of its operations. Our board of directors has determined that we require at least one director with the requisite financial and accounting expertise and that Dr. Lawrence Howard, Ms. Ruth Alon, Mr. Reginald Hardy and Mr. Dennison Veru have such expertise. 84 Private Financings In February 2018, CBI , which at the time was our controlling shareholder, extended bridge financing to us in the principal amount of $1.0 million, which was pending completion of the private placement of equity securities described below, and subsequently provided an additional $2.0 million principal amount of bridge financing. The unpaid principal amount of the bridge financing bore annual interest at the rate payable on three-month U.S. Treasury bills. The repayment of the bridge financing was made by deducting the repayment amount from the $5.0 million purchase price of the securities acquired by CBI pursuant to the Securities Purchase Agreement described below. Pursuant to a Securities Purchase Agreement (“SPA”), dated March 29, 2018, between us and the investors identified therein, in June 2018 we issued 5,960,787 ordinary shares, and warrants to purchase an additional 4,768,629 ordinary shares, as well as price protection and certain other rights. The gross proceeds from the sale of the ordinary shares amounted to $22.9 million. As a result of our February 2019 initial public offering, price protection rights included in the SPA were triggered, resulting in the issuance of 8,262,800 ordinary shares and adjustments to the warrants, whereby they can be exercised for 6,207,330 additional ordinary shares, each at a price of $1.932 per share. For information regarding the current shareholdings of Shavit Capital Funds and CBI, see “Item 12—Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.” Information Rights Agreement We entered into an information rights agreement, effective as of December 19 2018, with one of our principal shareholders, CBI. The information rights agreement provides CBI with rights to receive our annual and quarterly financial statements, auditor consent letters and valuation reports, and other information reasonably required by CBI to enable it to prepare its financial statements. The information rights agreement also requires that we provide CBI with information material to the Company and mandated to be disclosed by the requirements applicable to CBI, as well as certain other material information of the Company. The information rights agreement contains customary confidentiality provisions and terminates when CBI, and any company that controls CBI, is no longer required to issue public reports relating to us pursuant to the Exchange Act. Item 14. Principal Accountant Fees and Services The following table sets forth fees billed to us by our independent registered public accounting firm during the fiscal years ended December 31, 2019 and 2018 for (i) services rendered for the audit of our annual financial statements and the review of our quarterly financial statements; (ii) services by our independent registered public accounting firm that are reasonably related to the performance of the audit or review of our financial statements and that are not reported as Audit Fees; (iii) services rendered in connection with tax compliance, tax advice and tax planning; and (iv) all other fees for services rendered. Year Ended December 31, 2019 2018 Audit Fees 255 187 Audit-Related Fees - - Tax Fees 3 3 All Other Fees - - Total 258 190 Policy on Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of Independent Auditors Our Audit Committee has the sole authority to approve the scope of the audit and any audit-related services, as well as all audit fees and terms. The Audit Committee must pre-approve any audit and non-audit services provided by our independent registered public accounting firm. The Audit Committee will not approve the engagement of the independent registered public accounting firm to perform any services that the independent registered public accounting firm would be prohibited from providing under applicable laws, rules and regulations, including those of self-regulating organizations. The Audit Committee will approve permitted non-audit services by our independent registered public accounting firm only if it determines that using a different firm to perform such services will be less efficient or cost-effective. The Audit Committee reviews and pre-approves the statutory audit fees that can be provided by the independent registered public accounting firm on an annual basis. 85 PART IV Item 15. Exhibits and Financial Statement Schedules Exhibit No. Description 1.1 Anchiano Therapeutics Ltd. Amended and Restated Articles of Association (previously filed as Exhibit 3.2 of Amendment No. 4 to our Registration Statement on Form F-1 (File No. 333-229155) as filed with the SEC on February 11, 2019 and incorporated by reference herein). 2.1 Deposit Agreement between Anchiano Therapeutics Ltd., the Bank of New York Mellon as Depositary, and owners and holders from time to time of ADSs issued thereunder (previously filed as Exhibit 4.1 to our Current Report on Form 6-K (File No. 001-38807) as filed with the SEC on February 14, 2019 and incorporated by reference herein). 4.1 Collaboration and License Agreement, dated as of September 13, 2019, by and between Anchiano Therapeutics Inc. and ADT Pharmaceuticals, LLC (previously filed as Exhibit 10.1 to our Current Report on Form 6-K (File No. 001-38807) as filed with the SEC on September 23, 2019 and incorporated by reference herein). 4.4 2011 Incentive Plan for Employees, Officers and Consultants (previously filed as Exhibit 10.6 of our Registration Statement on Form F-1 (File No. 333-229155) as filed with the SEC on January 7, 2019 and incorporated by reference herein). 4.5 Compensation Policy for Officers, dated February 2017 (previously filed as Exhibit 10.7 of our Registration Statement on Form F-1 (File No. 333-229155) as filed with the SEC on January 7, 2019 and incorporated by reference herein). 4.6 2017 Equity-Based Incentive Plan (previously filed as Exhibit 10.8 of our Registration Statement on Form F-1 (File No. 333-229155) as filed with the SEC on January 7, 2019 and incorporated by reference herein). 4.7 Information Rights Agreement between Anchiano Therapeutics Ltd. and Clal Biotechnology Industries Ltd., dated December 19, 2018 (previously filed as Exhibit 10.10 of our Registration Statement on Form F-1 (File No. 333-229155) as filed with the SEC on January 7, 2019 and incorporated by reference herein). 21.1 List of Subsidiaries (filed herewith). 31.1 Certification of the Chief Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended (filed herewith). 31.2 Certification of the Chief Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended (filed herewith). 32.1 Certification of the Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith). 32.2 Certification of the Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith). 101.INS XBRL Instance Document 101.SCH XBRL Taxonomy Extension Schema Document 101.CAL XBRL Taxonomy Extension Calculation Linkbase Document 101.DEF XBRL Taxonomy Extension Definition Linkbase Document 101.LAB XBRL Taxonomy Extension Label Linkbase Document 101.PRE XBRL Taxonomy Extension Presentation Linkbase Document 86 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ANCHIANO THERAPEUTICS LTD. Date: March 17, 2020 By: /s/ Dr. Frank Haluska Dr. Frank Haluska Chief Executive Officer POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Dr. Frank Haluska and Jonathan Burgin , and each of them, as his or her true and lawful attorneys-in-fact and agents, with full power of substitution and re-substitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming that said attorneys-in-fact and agents, or any of them, or their or his or her substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Signature Title Date /s/ Dr. Frank Haluska Chief Executive Officer March 17, 2020 Dr. Frank Haluska (Principal Executive Officer) and Director /s/ Jonathan Burgin Chief Financial and Operating Officer March 17, 2020 Jonathan Burgin (Principal Financial and Accounting Officer) /s/ Dennison Veru Interim Chairman March 17, 2020 Dennison Veru /s/ Ruth Alon Director March 17, 2020 Ruth Alon /s/ Ofer Gonen Director March 17, 2020 Ofer Gonen /s/ Reginald Hardy Director March 17, 2020 Reginald Hardy /s/ Dr. Lawrence Howard Director March 17, 2020 Dr. Lawrence Howard /s/ Isaac Kohlberg Director March 17, 2020 Isaac Kohlberg 87 ANCHIANO THERAPEUTICS LTD. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2019 F- 1 - ANCHIANO THERAPEUTICS LTD. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2019 INDEX Page REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM F-2 CONSOLIDATED FINANCIAL STATMENTS Consolidated Balance Sheets F-3 Consolidated Statements of Operations and Comprehensive Loss F-4 Statements of Changes in Shareholders’ Equity F-5 Consolidated Statements of Cash Flows F-6 Notes to Consolidated Financial Statements F-8 Report of Independent Registered Public Accounting Firm To the Stockholders and Board of Directors Anchiano Therapeutics Ltd. Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of Anchiano Therapeutics Ltd. and subsidiaries (the Company) as of December 31, 2019 and 2018, the related consolidated statements of operations, comprehensive loss, shareholders’ equity, and cash flows for each of the years in the two year period ended December 31, 2019, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the years in the two year period ended December 31, 2019, in conformity with U.S. generally accepted accounting principles. Going Concern The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has suffered recurring losses and cash flow deficits from operations that together with other matters described in the aforesaid note, raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. New Basis of Accounting As discussed in Note 2a to the consolidated financial statements, during 2019 the Company’s financial statements have been prepared in accordance with U.S. generally accepted accounting principles. The Company previously prepared its financial statements in accordance with International Financial Reporting Standards, as issued by the International Accounting Standards Board. Change in accounting principle As discussed in Note 2s to the consolidated financial statements, the Company has changed its method of accounting for leases in 2019 due to the adoption of ASC 842 Leases. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. Somekh Chaikin Certified Public Accountants (Isr.) Member Firm of KPMG International We have served as the Company’s auditor since 2004. Tel Aviv, Israel March 17, 2020 ANCHIANO THERAPEUTICS LTD. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (U.S. dollars in thousands, except share and per share data) December 31 2019 2018 A s s e t s CURRENT ASSETS: Cash and cash equivalents 17,575 7,517 Funds in respect of employee rights upon retirement 228 - Receivables 408 3,403 TOTAL CURRENT ASSETS 18,211 10,920 NON-CURRENT ASSETS: Long-term prepaid expenses 57 1,115 Long-term pledged deposits 130 120 Funds in respect of employee rights upon retirement - 221 Property and equipment, net 158 385 Right-of-use assets 1,199 - TOTAL NON-CURRENT ASSETS 1,544 1,841 TOTAL ASSETS 19,755 12,761 L i a b i l i t i e s CURRENT LIABILITIES: Trade payables 875 396 Other payables 2,296 1,706 Short-term employee benefits 297 644 Liability for employee rights upon retirement 262 - Short-term lease liability 391 - TOTAL CURRENT LIABILITIES 4,121 2,746 LONG-TERM LIABILITIES: Liability for employee rights upon retirement - 210 Long-term lease liability 725 - TOTAL LONG-TERM LIABILITIES 725 210 TOTAL LIABILITIES 4,846 2,956 COMMITMENTS SHAREHOLDERS' EQUITY: Ordinary shares, no par value - authorized 100,000,000 shares; as of December 31,2019 and 2018, respectively; issued and outstanding 37,099,352 and 15,575,682 shares at December 31,2019 and 2018, respectively - - Additional paid-in capital 119,468 87,240 Currency translation differences reserve 872 872 Accumulated deficit (105,431 ) (78,307 ) TOTAL SHAREHOLDERS' CAPITAL EQUITY 14,909 9,805 TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY 19,755 12,761 The accompanying notes are an integral part of these consolidated financial statements F- 3 ANCHIANO THERAPEUTICS LTD. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (U.S. dollars in thousands, except share and per share data) Year ended December 31 2019 2018 OPERATING EXPENSES: Research and development 13,303 7,514 General and administrative 6,245 5,521 Restructuring expenses 3,350 - TOTAL OPERATING EXPENSES 22,898 13,035 FINANCE EXPENSES, NET 4,226 457 LOSS BEFORE INCOME TAX 27,124 13,492 INCOME TAXES, NET - 306 NET LOSS FOR THE YEAR 27,124 13,798 LOSS PER SHARE BASIC AND DILUTED 0.79 1.09 WEIGHTED-AVERAGE NUMBER OF SHARES OUTSTANDING USED IN COMPUTATION OF BASIC AND DILUTED LOSS PER SHARE IN THOUSANDS 34,446 12,634 OTHER COMPREHENSIVE INCOME: Foreign currency translation adjustments - (415 ) TOTAL COMPREHENSIVE LOSS 27,124 13,383 The accompanying notes are an integral part of these consolidated financial statements. F- 4 ANCHIANO THERAPEUTICS LTD. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (U.S. dollars in thousands, except share and per share data) Ordinary shares Additional Currency translation Number of shares Amounts (*) paid-in capital differences reserve Accumulated deficit Total BALANCE AT JANUARY 1, 2018 CHANGES DURING 2018: 9,613,145 - 63,443 457 (64,509 ) (609 ) Issuance of shares and warrants, net 5,960,787 - 21,865 - - 21,865 Exercise of share options 1,750 - 6 - - 6 Share-based compensation - - 1,926 - - 1,926 Other comprehensive income - - - 415 - 415 Net loss for the year - - - - (13,798 ) (13,798 ) BALANCE AT DECEMBER 31, 2018 15,575,682 - 87,240 872 (78,307 ) 9,805 CHANGES DURING 2019: Issuance of shares, net 21,523,670 - 26,500 - - 26,500 Reclassification of warrants due to reassessment (see note 6b) - - (3,628 ) - - (3,628 ) Reclassification of warrants due to modification (see note 6b) - - 8,198 - - 8,198 Share-based compensation - - 1,158 - - 1,158 Net loss for the year - - - - (27,124 ) (27,124 ) BALANCE AT DECEMBER 31, 2019 37,099,352 - 119,468 872 (105,431 ) 14,909 (*) No par value The accompanying notes are an integral part of these consolidated financial statements F- 5 ANCHIANO THERAPEUTICS LTD. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (U.S. dollars in thousands, except share and per share amounts) Year ended December 31 2019 2018 CASH FLOWS FROM OPERATING ACTIVITIES: Net loss for the year (27,124 ) (13,798 ) Adjustments required to reconcile net loss to net cash used in operating activities: Financing costs, net 4,570 709 Depreciation 281 66 Taxes on income - 306 Changes in accrued liability for employee severance benefits, net of retirement fund profit 45 (8 ) Share-based payments 1,158 1,926 Changes in operating asset and liabilities: Decrease (increase) in receivable 2,305 (3,496 ) Increase in trade payables 1,076 287 Decrease (increase) in employee benefits (347 ) 528 Increase (decrease) in other payables 603 (587 ) Decrease (increase) in long-term prepaid expenses 975 (156 ) Net cash used in operating activities (16,458 ) (14,223 ) CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of fixed assets (95 ) (213 ) Net cash used in investing activities (95 ) (213 ) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of ordinary shares and warrants 30,500 22,900 Issuance costs (3,879 ) (2,298 ) Receipt of loan - 4,050 Repayment of loan - (4,033 ) Net cash provided by financing activities 26,621 20,619 INCREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH 10,068 6,183 CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT THE BEGINNING OF THE YEAR 7,637 1,454 CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT THE END OF THE YEAR 17,705 7,637 F- 6 ANCHIANO THERAPEUTICS LTD. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN CASH FLOWS (U.S. dollars in thousands, except share and per share data) Year ended December 31 2019 2018 SUPPLEMENTAL INFORMATION ON INTEREST PAID IN CASH - 11 SUPPLEMENTAL INFORMATION ON TAXES PAID IN CASH 161 244 Reconciliation in amounts on consolidated balance sheets: Cash and cash equivalents 17,575 7,517 Restricted cash 130 120 Total cash and cash equivalents and restricted cash 17,705 7,637 Supplemental disclosure of non-cash investing and financing activities Reclassification of warrants due to reassessment 3628 — Reclassification of warrants due to modification 8,198 — F- 7 ANCHIANO THERAPEUTICS LTD. AND SUBSIDIARIES Notes to Consolidated Financial Statements (U.S. dollars in thousands, except share and per share data) NOTE 1 - NATURE OF OPERATIONS Anchiano Therapeutics Ltd. (the "Company") is a biopharmaceutical company dedicated to the discovery, development, and commercialization of novel, targeted therapies to treat cancer in areas of significant clinical need. Anchiano is developing small-molecule pan-RAS inhibitors and inhibitors of PDE10 and the β-catenin pathway, having discontinued active clinical development of inodiftagene vixteplasmid in November 2019. After a thorough evaluation of the data, the Company determined there was a low probability of surpassing the pre-defined futility threshold at the planned interim analysis of its Phase 2 Codex study, evaluating the gene therapy inodiftagene vixteplasmid in patients with BCG-unresponsive non-muscle-invasive bladder cancer (NMIBC), and announced the discontinuation of the study. The Group took steps to notify study investigators that enrollment and further treatment of patients on trial should stop immediately and is working to close the study (see also Note 5b below). In January 2020, the Board of Directors of the Company approved management’s recommendation to close the Company’s office and laboratories located in Israel. Following the closure of the Israeli facilities, the Company’s sole remaining office will be located in Cambridge, Massachusetts (for details, see Note 10 below). During the last two years, there has been a significant increase in the Company’s activities in the USA, resulting from the Company’s management’s strategic decision to shift its development, financing and ongoing operations from Israel to the USA. The Company is incorporated and registered in Israel. In August 2018, the Company changed its name to Anchiano Therapeutics Ltd. from BioCancell Ltd. The Company's American Depositary Shares ("ADSs"), each representing five ordinary shares of the Company with no par value (the "ordinary shares"), began trading on the Nasdaq Capital Market (“Nasdaq”) in February 2019 under the symbol "ANCN". Its ordinary shares were traded on the Tel Aviv Stock Exchange (“TASE”) between August 2006 and June 2019, at which time the Company voluntarily delisted from the TASE. The Company wholly owns a subsidiary, Anchiano Therapeutics Israel Ltd. (formerly BioCanCell Therapeutics Israel Ltd.), which itself wholly owns a Delaware-incorporated subsidiary, Anchiano Therapeutics, Inc. (formerly BioCanCell USA, Inc.) for the purposes of operating in the United States. This subsidiary is subject to the tax laws of the State of Delaware. The Company is subject to a number of risks including with regard to the successful development of therapeutics, the ability to obtain adequate financing, the ability to obtain FDA approval and reimbursement for any products the Company may develop, protection of intellectual property, fluctuations in operating results, dependence on key personnel and collaborative partners, rapid technological changes inherent in the target markets of any products the Company may develop, product liability , the introduction of substitute products and competition from larger companies. Liquidity The consolidated financial statements have been prepared on a going-concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As shown in the accompanying consolidated financial statements, the Company has incurred losses and cash flow deficits from operations since inception, resulting in an accumulated deficit at December 31, 2019 of $105 million. The Company has financed operations to date primarily through public and private placements of equity securities. The Company anticipates that it will continue to incur net losses for the foreseeable future. The Company believes that its existing cash and cash equivalents will only be sufficient to fund its projected cash needs until the end of 2020. Accordingly, these factors, among others, raise substantial doubt about the Company’s ability to continue as a going concern. To meet future capital needs, the Company would need to raise additional capital through equity or debt financing or other strategic transactions. However, any such financing may not be on favorable terms or even available to the Company. The failure of the Company to obtain sufficient funds on commercially-acceptable terms when needed, would have a material adverse effect on the Company’s business, results of operations and financial condition. The forecast of cash resources is forward-looking information that involves risks and uncertainties, and the actual amount of the Company’s expenses could vary materially and adversely as a result of a number of factors. The Company has based its estimates on assumptions that may prove to be wrong, and the Company’s expenses could prove to be significantly higher than it currently anticipates. F- 8 ANCHIANO THERAPEUTICS LTD. AND SUBSIDIARIES Notes to Consolidated Financial Statements (U.S. dollars in thousands, except share and per share data) NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES: a. Basis of presentation The Company’s financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”). The Company previously prepared its financial statements in accordance with International Financial Reporting Standards (“IFRS”), as issued by the International Accounting Standards Board (“IASB”), as permitted in the United States (“U.S.”) based on the Company’s status as a foreign private issuer as defined by the U.S. Securities and Exchange Commission (the “SEC”). During 2019, the Company determined that it is no longer qualified as a foreign private issuer under the SEC rules. As a result, as of January 1, 2020, the Company is required to comply with all of the disclosure and reporting requirements applicable to U.S. domestic issuers. b. Use of estimates in the preparation of financial statements The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates, judgments and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. The Company evaluates its assumptions on an ongoing basis, including those related to share-based compensation, leases and derivatives. The Company's management believes that the estimates, judgment and assumptions used are reasonable based upon information available at the time they are made. These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the consolidated financial statements, and the reported amounts of expenses during the reporting periods. Actual results could differ from those estimates. F- 9 ANCHIANO THERAPEUTICS LTD. AND SUBSIDIARIES Notes to Consolidated Financial Statements (U.S. dollars in thousands, except share and per share data) NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (continued): c. Functional currency Items included in the financial statements of the Company's entities are measured using the currency of the primary economic environment in which the Company operates. The Company's functional currency from inception through December 31, 2018 was the New Israeli Shekel (“NIS”), as this was the functional currency of its significant operations. Effective January 1, 2019, the Company, as well as its Israeli subsidiary, reassessed its functional currency and determined to change its functional currency to the U.S. dollar (“dollar”, “USD” or “$”) from the NIS. The change in functional currency was accounted for prospectively from January 1, 2019, and the financial statements prior to and including the period ended December 31, 2018 were not restated for the change in functional currency. In late 2018 and the beginning of 2019, the Company went through significant business developments and changes in its economic circumstances, that clearly indicate that the functional currency has changed, beginning January 2019, include the following: · There has been a significant increase in the Company’s activities in the USA, resulting from the Company’s management’s strategic decision to shift its development, financing and ongoing operations from Israel to the USA, as evidenced, inter alia, by the transfer of its operations and development activities, including the Company’s management, to the USA; · The initiation of a pivotal clinical trial in the USA, which was substantially larger than any previous clinical trial performed by the Group, all of which result in a significant increase in expenses and financing dominated in USD relative to other currencies; · The Company’s recent initial public offering on the Nasdaq Capital Market in USD, with additional funding going forward also expected to be denominated in USD. The Nasdaq listing has involved a significant increase in related USD expenses; and · The U.S. subsidiary entering into a license agreement with ADT Pharmaceuticals, LLC (“ADT”), which will be managed solely in dollars (see Note 5c for further details). Moreover, the discontinuation of the Codex study in November 2019 led to the closure of the Group’s Israeli operations (see Note 10 for further details) and the focus of the Company’s resources on programs related to the ADT agreement. In effecting the change in functional currency to the U.S. dollar, as of January 1, 2019, monetary assets and liabilities denominated in foreign currencies have been translated into U.S. dollars using exchange rates in effect at the balance sheet date. Opening balances related to non-monetary assets and liabilities were based on prior period translated amounts, and non-monetary assets acquired and non-monetary liabilities incurred after January 1, 2019 were translated at the approximate exchange rate prevailing at the date of the transaction. Expenses were translated at the approximate exchange rate in effect at the time of the transaction. Foreign exchange gains and losses were included in the consolidated statement of operations and comprehensive loss as foreign exchange gain (loss). The exchange rate on the date of the change became the historical rate for subsequent re-measurement of non-monetary assets and liabilities into USD, the Company’s new functional currency. For periods prior to January 1, 2019, the effects of exchange-rate fluctuations on translating foreign currency monetary assets and liabilities into NIS were included in the statement of operations and comprehensive loss as foreign exchange gain/loss. Expense were translated into USD reporting currency at the balance sheet date at average exchange rates during the period, and assets and liabilities were translated at period-end exchange rates, except for equity transactions, which were translated at historical exchange rates. Translation gains and losses from the application of USD as the Company’s reporting currency, while NIS was the functional currency, are included as part of the cumulative foreign currency translation adjustment, which is reported as a component of shareholders’ equity under accumulated other comprehensive loss. F- 10 ANCHIANO THERAPEUTICS LTD. AND SUBSIDIARIES Notes to Consolidated Financial Statements (U.S. dollars in thousands, except share and per share data) NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (continued): d. Principles of consolidation The consolidated financial statements include the financial statements of Anchiano Therapeutics Ltd. and its wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated upon consolidation. e. Cash and cash equivalents Cash equivalents are short-term, highly-liquid deposits that are not restricted as to withdrawal and are readily convertible to cash with original maturities of three months or less, at the date acquired. f. Restricted cash Restricted cash deposited in an interest-bearing saving accounts which is used as a security for the Company's office rent and car leasing. Cash expected to be restricted for more than one year from the balance sheet date is classified as long-term restricted cash in the consolidated balance sheets. g. Property and equipment: 1) Property and equipment are stated at cost, net of accumulated depreciation and amortization. 2) The Company’s property and equipment are depreciated by the straight-line method on the basis of their estimated useful life. h. Impairment of long-lived assets The Company tests long-lived assets for impairment whenever events or circumstances present an indication of impairment. If the sum of expected future cash flows (undiscounted and without interest charges) of the assets is less than the carrying amount of such assets, an impairment loss would be recognized. The assets would be written down to their estimated fair values, calculated based on the present value of expected future cash flows (discounted cash flows), or some other fair-value measure. i. Derivatives Measurement of derivative financial instruments Derivatives are recognized initially at fair value; attributable transaction costs are recognized in profit or loss as incurred. Subsequent to initial recognition, derivatives are measured at fair value, and changes therein are accounted for by recognizing them in profit or loss, as financing income or expense. Reassessment of derivatives The classification of a contract shall be reassessed at each balance sheet date. If the classification required changes as a result of events during the period, the contract shall be reclassified as of the date of the event that caused the reclassification. There is no limit on the number of times a contract may be reclassified. If a contract is reclassified from permanent or temporary equity to an asset or a liability, the change in fair value of the contract during the period the contract was classified as equity shall be accounted for as an adjustment to shareholders' equity. The contract subsequently shall be marked to fair value through earnings. F- 11 ANCHIANO THERAPEUTICS LTD. AND SUBSIDIARIES Notes to Consolidated Financial Statements (U.S. dollars in thousands, except share and per share data) NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (continued): i. Derivatives (continued) Issuance of parcel of securities The consideration received from the issuance of a parcel of equity securities is allocated according to the relative fair value of the instruments. Direct issuance costs are attributed to the specific securities in respect of which they were incurred, whereas joint issuance costs are attributed to the securities on a proportionate basis according to the allocation of the consideration from the issuance of the parcel, as described above. j. Severance pay The Israeli Severance Pay Law, 1963 (“Severance Pay Law”), specifies that employees are entitled to severance payment following the termination of their employment. Under the Severance Pay Law, the severance payment is calculated as one-month salary for each year of employment (and pro rata for a portion thereof). Under Section 14 of the Severance Pay Law, employees are entitled to monthly deposits, at a rate of 8.33% of their monthly salary, made on behalf of the employee with investment firms or insurance companies. Payments in accordance with Section 14 release the Group from any future severance payments in respect of those employees. As a result, the Group does not recognize any liability for severance pay from the time Section 14 has been adopted with respect to an employee, and the deposits under Section 14 are not recorded as an asset in the Company's balance sheet. For the period during which the Group’s employees in Israel were not subject to Section 14 are accounted for under the Shut Down method of accounting. Accordingly, the Company calculated the liability for severance pay pursuant to the Severance Pay Law based on the most recent salary of these employees, multiplied by the number of years of employment as of the balance sheet date. The Company's liability for these employees is fully provided for via monthly deposits with severance pay funds, insurance policies and accruals. The value of these deposits is recorded as an asset on the Company's balance sheet under Funds in respect of employee rights upon retirement and other short-term assets. k. Contingencies Certain conditions may exist, as of the date of the financial statements, which may result in a loss to the Company but which will only be resolved when one or more future events occur or fail to occur. The Company’s management assesses such contingent liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against the Company or unasserted claims that may result in such proceedings, the Company’s management evaluates the perceived merits of any legal proceedings or unasserted claims as well as the perceived merits of the amount of relief sought or expected to be sought. Management applies the guidance in ASC 450-20-25 when assessing losses resulting from contingencies. If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the estimated liability is recorded as accrued expenses in the Company’s financial statements. If the assessment indicates that a potential material loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, together with an estimate of the range of possible loss if determinable and material, are disclosed. Loss contingencies considered to be remote by management are generally not disclosed unless they involve guarantees, in which case the guarantees are disclosed. F- 12 ANCHIANO THERAPEUTICS LTD. AND SUBSIDIARIES Notes to Consolidated Financial Statements (U.S. dollars in thousands, except share and per share data) NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (continued): l. Share-based compensation Share-based compensation expense related to share awards is recognized based on the fair value of the awards granted. The fair value of each option award is estimated on the grant date using the Black-Scholes-Merton option pricing model. The Black-Scholes-Merton option pricing model requires the input of highly subjective assumptions, including the expected term of the option, the expected volatility of the price of the Company’s ordinary shares and the expected dividend yield of ordinary shares. The assumptions used to determine the fair value of the option awards represent management’s best estimates. These estimates involve inherent uncertainties and the application of management’s judgment. The Company elected to recognize compensation costs for awards conditioned only on continued service that have a graded vesting schedule using the accelerated method based on the multiple-option award approach. Forfeitures are accounted for by estimating the number of awards expected to be forfeited instead of as they occur. m. Research and development Research and development expenses include costs directly attributable to the conduct of research and development programs, including clinical trial and materials, management development of production processes, salaries, wages and incidentals, laboratory rent and maintenance. All costs associated with research and developments are expensed as incurred. Intangible assets that are purchased from others for use in R&D activities in a transaction other than a business combination are capitalized only if they have alternative future use. Otherwise, such assets are expensed. For the two years ended December 31, 2019, the Company did not capitalize any intangible asset purchased at an asset acquisition. n. Patent Costs Costs related to filing and pursuing patent applications are recorded as general and administrative expenses as incurred, since the recoverability of such expenditures is uncertain. F- 13 ANCHIANO THERAPEUTICS LTD. AND SUBSIDIARIES Notes to Consolidated Financial Statements (U.S. dollars in thousands, except share and per share data) NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (continued): o. Income taxes: 1) Deferred taxes Income taxes are computed using the asset and liability method. Under the asset and liability method, deferred income tax assets and liabilities are determined based on the differences between the financial reporting and tax bases of assets and liabilities and are measured using the currently-enacted tax rates and laws. A valuation allowance is recognized to the extent that it is more likely than not that the deferred taxes will not be realized in the foreseeable future. Given the Company’s losses, the Company has provided a full valuation allowance with respect to its deferred tax assets. 2) Uncertainty in income tax The Company follows a two-step approach in recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the available evidence indicates that it is more likely than not that the position will be sustained based on technical merits. If this threshold is met, the second step is to measure the tax position as the largest amount that has more than a 50% likelihood of being realized upon ultimate settlement. p. Loss per share Basic loss per share is computed on the basis of the net loss for the period divided by the weighted-average number of ordinary shares outstanding during the period. Diluted loss per share is based upon the weighted-average number of ordinary shares and of ordinary shares equivalents outstanding when dilutive. Ordinary share equivalents include outstanding stock options which are included under the treasury stock method when dilutive. The following ordinary shares underlying stock options and warrants were excluded from the calculation of diluted net loss per ordinary share, because their effect would have been anti-dilutive for the years presented: Year ended December 31 2019 2018 Outstanding stock options 3,822,374 2,453,767 Warrants 10,975,959 4,768,629 F- 14 ANCHIANO THERAPEUTICS LTD. AND SUBSIDIARIES Notes to Consolidated Financial Statements (U.S. dollars in thousands, except share and per share data) NOTE 2− SIGNIFICANT ACCOUNTING POLICIES (continued): q. Fair value measurement Fair value is based on the price that would be received from the sale of an asset or that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date. In order to increase consistency and comparability in fair value measurements, the guidance establishes a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three broad levels, which are described as follows: Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs. Level 2: Observable prices that are based on inputs not quoted on active markets, but corroborated by market data or active market data of similar or identical assets or liabilities. Level 3: Unobservable inputs are used when little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs. In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible and considers counterparty credit risk in its assessment of fair value. See Note 6c. r. Concentration of credit risks Financial instruments that potentially subject the Company to concentration of credit risk consist principally of cash and cash equivalents, and pledged deposits. The Company deposits cash and cash equivalents with highly-rated financial institutions and, as a matter of policy, limits the amounts of credit exposure to any single financial institution. The Company has not experienced any material credit losses in these accounts and does not believe it is exposed to significant credit risk on these instruments. F- 15 ANCHIANO THERAPEUTICS LTD. AND SUBSIDIARIES Notes to Consolidated Financial Statements (U.S. dollars in thousands, except share and per share data) NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (Continued): s. Newly issued and recently adopted accounting pronouncements: Accounting pronouncements recently adopted 1) In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”). ASU 2016-02 requires lessees to recognize most leases on their balance sheet as a right-of-use (ROU) asset and a lease liability. Leases are classified as either operating or finance based on criteria similar to existing lease accounting, with the classification affecting the pattern and classification of expense recognition in the statement of operations. This standard became effective on January 1, 2019. A modified retrospective transition approach is allowed, applying the new standard to all leases existing at the date of initial application. The Company adopted the new standard on January 1, 2019 using the modified retrospective transition method and has not restated comparative periods. The Company elected the short-term lease recognition exemption for all leases that qualify. This means, for those leases that qualify, that the Company will not recognize ROU assets or lease liabilities, and this includes not recognizing ROU assets or lease liabilities for existing short-term leases of those assets in transition. Instead, the Company will continue to recognize the lease payments for those leases in profit or loss on a straight-line basis over the lease term. Operating-lease ROU assets and liabilities are recognized at the commencement date based on the present value of lease payments over the lease term, while the ROU assets are also adjusted for any prepaid or accrued lease payments. The Company uses its incremental borrowing rate, based on the information available at the commencement date, to determine the present value of the lease payments. F- 16 ANCHIANO THERAPEUTICS LTD. AND SUBSIDIARIES Notes to Consolidated Financial Statements (U.S. dollars in thousands, except share and per share data) NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (continued): s. Newly issued and recently adopted accounting pronouncements (continued): The lease term is the non-cancellable period of the lease plus periods covered by an extension or termination option, if it reasonably certain that the Company will exercise the option. After lease commencement, the Company measures the lease liability at the present value of the remaining lease payments using the discount rate determined at lease commencement (as long as the discount rate hasn’t been updated as a result of a reassessment event). The Company subsequently measures the ROU asset at the present value of the remaining lease payments, adjusted for the remaining balance of any lease incentives received, any cumulative prepaid or accrued rent if relevant and any unamortized initial direct costs. Lease expenses for lease payments are recognized on a straight-line basis over the lease term. Lease terms will include options to extend or terminate the lease when it is reasonably certain that the Company will exercise or not exercise the option to renew or terminate the lease. The most significant effects of adoption relate to: (i) the recognition of approximately $1,199 thousand for ROU assets and $1,116 thousand for lease liabilities on the Company’s balance sheet for its operating leases of real estate, vehicles and equipment (the difference between the additional lease assets and lease liabilities did not impact the retained earnings), and (ii) the requirement to provide significant new disclosures regarding the Company’s leasing activities and to enable users of financial statements to assess the amount, timing and uncertainty of cash flows arising from leases. However, the adoption of this standard does not have a material impact on the Company’s consolidated statements of income and consolidated statements of cash flows. Effects of the initial application of the new standard on the Company’s consolidated balance sheet as of January 1, 2019: Balance at January 1, 2019 based on ASC 842 Balance at January 1, 2019 as reported based on ASC 840 Effect of change ROU assets 1,809 - 1,809 Prepaid expense - 83 83 Lease liabilities 1,726 - 1,726 F- 17 ANCHIANO THERAPEUTICS LTD. AND SUBSIDIARIES Notes to Consolidated Financial Statements (U.S. dollars in thousands, except share and per share data) NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (continued): s. Newly issued and recently adopted accounting pronouncements (continued): Recently Issued Accounting Pronouncements 2) In June 2018, the FASB issued ASU No. 2018-07, Improvements to Nonemployee Share-Based Payment Accounting, which simplifies the accounting for share-based payments granted to non-employees for goods and services and aligns most of the guidance on such payments to the non-employees with the requirements for share-based payments granted to employees. The guidance will be effective for the Company beginning January 1, 2020, and interim periods therein, using a modified retrospective approach. Early adoption is permitted. The Company adopted the guidance as of January 1, 2018, and the adoption did not have a material impact on the Company’s consolidated financial statements. 3) In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement, which modifies the disclosure requirements on fair value measurements in Topic 820. After the adoption of ASU 2018-13, an entity will no longer be required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy; the policy for timing of transfers between levels; the valuation processes for Level 3 fair value measurements; The guidance will be effective for the Company beginning January 1, 2020, and interim periods therein. The amendments on changes in unrealized gains and losses should be applied prospectively for only the most recent period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented on their effective date. Early adoption is permitted, and an entity also is permitted to early adopt any removed or modified disclosures on issuance of ASU 2018-13, and delay adoption of the additional disclosures until their effective date. After adopting ASU 2018-13, the Company’s financial statements will include fewer disclosures about fair value measurements; however, the Company does not expect the adoption of ASU 2018-13 to otherwise have a material effect on its consolidated financial statements. In July 2017, the FASB issued ASU 2017-11, Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815): Accounting for Certain Financial Instruments with Down Round Features. The amendments of this ASU update the classification analysis of certain equity-linked financial instruments, or embedded features, with down round features, as well as clarify existing disclosure requirements for equity-classified instruments. When determining whether certain financial instruments should be classified as liabilities or equity instruments, a down round feature no longer precludes equity classification when assessing whether the instrument is indexed to an entity’s own stock. ASU 2017-11 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, and early adoption is permitted, including adoption in an interim period. ASU 2017-11 provides that upon adoption, an entity may apply this standard retrospectively to outstanding financial instruments with a down round feature by means of a cumulative- effect adjustment to the opening balance of accumulated deficit in the fiscal year and interim period adoption. The Company has early adopted ASU 2017-11 retrospectively. NOTE 3 – CASH AND CASH EQUIVALENTS: Year ended December 31 2019 2018 In US dollars: Cash 9,349 1,315 Cash equivalents 7,451 6,000 In New Israeli Shekels: Cash 775 202 17,575 7,517 Cash equivalents are comprised of short-term bank deposits with original maturities of three months or less, at the date acquired. F- 18 ANCHIANO THERAPEUTICS LTD. AND SUBSIDIARIES Notes to Consolidated Financial Statements (U.S. dollars in thousands, except share and per share data) NOTE 4 - LEASES : The Group leases facilities, labs offices and cars for use in its operations, which are classified as operating leases. In addition to rent, the leases may require the Group to pay directly for fees, insurance, maintenance and other operating expenses. In January 2018, the Group signed an agreement to rent a laboratory and offices in Jerusalem’s Har Hotzvim industrial zone through May 2023. The Group has an option to extend the agreement by another five years. The annual rent (including management fees) is approximately $382 thousand and is linked to the Israeli CPI. Pursuant to the agreement, bank guarantees of $113 thousand were provided to the property owner. In January 2020, the agreement was modified such that it will terminate on October 31, 2020 and the Company will pay rent until that date. In November 2013, the Group signed a rental agreement with the Development & Management of Jerusalem Industrial Zones Administration Ltd. in the Edmund J. Safra High-Tech Village in Givat Ram, Jerusalem, which was extended until December 2019. The total annual rent was approximately $65 thousand. Under the agreement, a bank guarantee of $18 thousand was provided to the property owner. In May 2018, Anchiano Therapeutics, Inc. signed a new agreement to rent space for offices in Cambridge, Massachusetts, until December 2021. The annual rent is approximately $140 thousand. The lease term and the discount rate related to Company’s operating lease right-of-use assets and related lease liabilities are as follows: December 31, 2019 Weighted-average remaining lease term (in years) 3.2 Weighted-average discount rate 3.5 The components of lease expense and cash flows were as follows (in thousands): December 31, 2019 Fixed payment and variable payments that depend on an index or rate 571 Supplemental cash flow information related to operating leases was as follows: Year ended December 31, 2019 Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from operating leases 571 Right-of-use assets obtained in exchange for new operating lease liabilities 73 F- 19 ANCHIANO THERAPEUTICS LTD. AND SUBSIDIARIES Notes to Consolidated Financial Statements (U.S. dollars in thousands, except share and per share data) NOTE 4 – LEASES (continued) : As of December 31, 2019, the maturity of lease liabilities under our non-cancelable operating leases were as follows: 2020 409 2021 371 2022 363 2023 57 Total future minimum lease payments 1,200 Less: interest (84 ) Present value of operating lease liabilities 1,116 Future minimum lease payments of the operating lease liabilities under ASC 840 as of January 1, 2019 were as follows: 2019 537 2020 440 2021 410 2022 288 2023 51 Total future minimum lease payments 1,726 NOTE 5 - COMMITMENTS : A. Royalty Commitments: 1. Liability for royalty payments to the Israel Innovation Authority The Company is obligated to pay royalties to the Israel Innovation Authority (the “IIA”) on proceeds from the sale of products developed from research and development activities that were partially funded by grants from the IIA, relating to inodiftagene, development of which the Company discontinued in 2019. See Note 1 above for details. Under the specific terms of the funding arrangements with the IIA, royalties of 3.5% to 25% are payable on the sale of products developed with funding received from the IIA, which payments shall not exceed, in the aggregate, 300% of the amount of the grant received (dollar linked), plus interest at annual rate based on LIBOR. As of December 31, 2019, the Company had recognized and received grants (cumulatively) from the IIA in the amount of $4 million. At the time the Company received the grants, successful development of the program was not probable and, accordingly, no related liability has been recognized in the financial statements. The Company did not receive any grants from the IIA for the years ended December 31, 2019, and 2018. F- 20 ANCHIANO THERAPEUTICS LTD. AND SUBSIDIARIES Notes to Consolidated Financial Statements (U.S. dollars in thousands, except share and per share data) NOTE 5 – COMMITMENTS (continued) : A. Royalty Commitments (continued): 2. Liability for royalty payments to the Israel Innovation Authority The research and development activities of the Group relating to inodiftagene, development of which the Company discontinued in 2019, were based on an exclusive license granted to the Group to use patent-protected technology and/or applications for the registration of patents developed by the Group. The rights to these patents originally belonged to Yissum Technology Transfer, the research development Company of The Hebrew University of Jerusalem (hereinafter, “Yissum”). Under the 2005 license agreement between Yissum and the Group, as amended (the “License Agreement”), Yissum granted an exclusive license to the Group for the global development, use, manufacture and commercialization of products that are based on the patents. In return, the Group undertook to pay royalties to Yissum. The Group does not recognize a liability for royalties until the event underlying the liability actually probable and reasonably and therefore the financial statements do not include a liability for these royalties. B. Restructuring Restructuring provisions are recognized for the direct expenditures arising from restructuring initiatives, where the plans are sufficiently detailed and where appropriate communication has been made to those affected. The Company has recorded restructuring expenses related principally to contract termination costs due to the discontinuation of the clinical trials to clinical research organizations (CRO’s) and manufacturers and contractual involuntary termination benefits to employees which have been accounted for as ongoing benefit arrangements and associated termination costs related to the reduction of its workforce. One-time termination benefits are expensed at the date the employees are notified, unless the employees must provide future services beyond a minimum retention period, in which case the benefits are expensed ratably over the future service periods. A provision for contract termination costs, in which a contract is terminated or the entity will continue to incur costs pursuant to contract for its remaining term without economic benefit, is recognized only when the contract is terminated or when the entity permanently ceases using the rights granted under the contract. In November 2019 the Company decided to discontinue its Phase 2 Codex study in patients with BCG-unresponsive NMIBC. In connection with this decision, the Company is required to make certain payments under contracts with clinical research organizations (CROs) and with manufactures of the drug in order to terminate the contracts and close the trials. This restructuring plan included a reduction in the workforce of seven employees. In January 2020 the Board of Directors approved management’s recommendation to close the Company’s office and laboratories located in Israel. See also Note 10 “Subsequent Events” below . The following table represents a roll forward of the restructuring and other activities noted above: CRO, manufacturing and other related Severance- related Total Expenses 2,979 371 3,350 Paid or utilized (407 ) (35 ) (442 ) December 31, 2019 2,572 336 2,908 F- 21 ANCHIANO THERAPEUTICS LTD. AND SUBSIDIARIES Notes to Consolidated Financial Statements (U.S. dollars in thousands, except share and per share data) NOTE 5 — COMMITMENTS (continued) : C. Acquisition In September 2019, the Company announced that its fully-owned subsidiary, Anchiano Therapeutics, Inc. entered into an option to license agreement with ADT Pharmaceuticals, LLC (“ADT”). Pursuant to the terms and conditions set forth in the agreement, the parties agreed to conduct research and development activities of novel small-molecule inhibitors (RAS and PDE10/β-catenin). As part of the arrangement, the Group is primarily responsible for the research, development, manufacturing and regulatory activities and ADT assists with the research activities as necessary in exchange for a quarterly fee from Anchiano. In connection with the agreement, ADT also granted Anchiano exclusive rights to research, develop, manufacture and commercialize the aforementioned compounds relating to patents owned by ADT and any products containing such compounds worldwide. In consideration for the rights granted under the agreement, Anchiano committed to pay ADT (i) a $3 million upfront fee; (ii) a fee upon transfer of the know-how and intellectual property rights to the Company; and then (iii) additional payments, including milestone and royalty payments. Anchiano may terminate the agreement at any time in its entirety or on a compound-by-compound basis after providing 90 days written notice to ADT. The Company accounted for the upfront fee as a research and development expense. NOTE 6 - SHARE CAPITAL: a. Rights of the Company’s ordinary shares Each ordinary share is entitled to one vote. The holders of ordinary shares are also entitled to receive dividends if declared by the Board of Directors, whenever funds are legally available. Since its inception, the Company has not declared any dividends. b. 2018 Private Placement In June 2018, the Company completed a $22.9 million fundraising round from investors in the United States and Israel, led by Shavit Capital Funds. In consideration for the investment, the Company issued 5,960,787 ordinary shares (constituting approximately 38% of the Company’s issued and outstanding share capital after completion of the transaction) at a price per share of approximately $3.842, as well as warrants to acquire additional shares equal to 80% of the shares issued, at an exercise price per share of NIS 16.20 (approximately $4.32). The warrants are exercisable for five years from the closing date of the transaction, as of December 31, 2018, and may be exercised on a cashless basis. In addition, the investors were granted price protection rights (to shares and warrants) in the event of a future share issuance by the Company wherein the price does not increase by at least approximately 42.86% over the price per share in the fundraising (or is less than the adjusted price per share, if the price has already been adjusted). For details of an allocation that took place in 2019 pursuant to these rights, see Note 6c below. The warrants and shares were recorded within equity on the issuance date (see note 2s on the adoption of ASU2017). As detailed in Note 2c, the Company changed its functional currency from NIS to USD as of January 1, 2019. Due to this change from this date, the exercise price of the warrants were no longer denominated in the Company’s functional currency and therefore not considered indexed to the Company’s own stock according to ASC 815-40. F- 22 ANCHIANO THERAPEUTICS LTD. AND SUBSIDIARIES Notes to Consolidated Financial Statements (U.S. dollars in thousands, except share and per share data) NOTE 6 - SHARE CAPITAL (continued): b. 2018 Private Placement (continued) Additionally, upon the Company’s Nasdaq IPO of February 14, 2019, the warrants’ term modified such that the exercise price currency was changed to USD. As a result, the warrants were reclassified within equity on that date. Consequently, the warrants were measured at fair value from January 1, 2019 until February 14, 2019, with resulting finance expenses of $4.6 million, until they were reclassified within equity. The following table summarizes the activity for the warrants whose fair value measurements are estimated utilizing Level 3 inputs: 2019 Fair value on January 1, 2019 3,628 Adjustments- finance expenses 4,570 Fair value on February 14, 2019 8,198 The Company has determined the fair value of the warrants (a Level 3 valuation) as of January 1, 2019 and February 14, 2019. The fair value of these warrants was estimated by implementing the Probability-Weighted Expected Return Method or the Black-Scholes Method. The following parameters were used: Derivative Financial Instrument February 14, 2019 January 1, 2019 Stock price (USD) $1.84 $2.5 Expected term End of 2022 End of 2022 Risk free rate 2.49% 1.37% Volatility 52% 48% c. 2019 Public offering On February 14, 2019, the Company raised $30.5 million in its Nasdaq initial public offering (“IPO”), allocating 2,652,174 ADSs, each representing five ordinary shares of the Company. The ADSs are listed under the symbol “ANCN”. In accordance with price protection rights granted in 2018 and activated in the offering (see Note 6b above for details and accounting treatment), the Company allocated an additional 8,262,800 ordinary shares (equivalent to 1,652,560 ADSs) to rights holders and adjusted their warrants to be exercisable for an additional 6,207,330 ordinary shares (equivalent to 1,241,466 ADSs). d. 2018 Reverse Split and Capitalization In June 2018, the Company completed a 10:1 reverse share split, canceled the par value of its ordinary shares and increased its authorized capital to 30 million ordinary shares. In December 2018, the Company increased its authorized capital to 100 million ordinary shares. All amounts of shares, underlying shares, share prices and exercise prices in these financial statements reflect such adjustments. F- 23 ANCHIANO THERAPEUTICS LTD. AND SUBSIDIARIES Notes to Consolidated Financial Statements (U.S. dollars in thousands, except share and per share data) NOTE 6 - SHARE CAPITAL (continued): e. Share-based compensation Until 2016, the Company issued options to purchase shares to its employees, directors and other service providers/consultants pursuant to its 2011 Share Option Plan. From 2017, the Company has issued options pursuant to its 2017 Equity-Based Incentive Plan (the “2017 Plan”). As of December 31, 2019 and 2018, 3,501,486 shares and 586,580 shares respectively remain available for grant under the 2017 Plan. In accordance with the terms of the 2017 Plan, on January 1 of each calendar year during the term of the 2017 Plan, the number of shares available for issuance under the 2017 Plan shall be increased by 4% of the total number of company shares outstanding on December 31 of the immediately preceding calendar year, or such lesser number as shall be determined by the administrator of the 2017 Plan, subject to adjustments required for recapitalization events. The Plan is designed to enable the Company to grant options to purchase ordinary shares under various and different tax regimes including, without limitation, as ISOs or non-qualified stock options for U.S. residents, and pursuant and subject to Sections 102 or 3(i) of the Israeli Tax Ordinance. The fair value of each option granted is estimated using the Black-Scholes option pricing method. The volatility is based on the Company’s historical volatility. The risk-free interest rate assumption is based on observed Treasury yields over the expected term of the options granted with USD-denominated exercise prices (options granted in the past with NIS-denominated exercise prices used the equivalent Israeli government bond yields). The Company’s management uses the mid-point between the vesting date and the contractual term for each vesting tranche or its expectations, as applicable, of each option as its expected term. The expected term of the options granted represents the period of time that granted options are expected to remain outstanding. Anti-Dilution Rights As part of the terms of his employment, the CEO was granted options to purchase ordinary shares totaling 7% of the Company’s fully-diluted share capital, and anti-dilution protections that were activated upon the closing of subsequent fundraising rounds. As part of the 2018 private placement described in Note 6B above, the CEO waived his entitlement to additional future grants. F- 24 ANCHIANO THERAPEUTICS LTD. AND SUBSIDIARIES Notes to Consolidated Financial Statements (U.S. dollars in thousands, except share and per share data) NOTE 6 - SHARE CAPITAL (continued): e. Share-based compensation (Continued): Options granted to employees and directors: In the years ended December 31, 2019 and December 31, 2018, the Company granted options to purchase ordinary shares as follows: Year ended December 31, 2019 Award amount Exercise price range Vesting period Expiration Employees 1,098,590 $0.60-$1.55 4 years 2029 Directors 495,000 $0.47-$1.03 3 years 2029 Year ended December 31, 2018 Award amount Exercise price range Vesting period Expiration Employees 1,379,203 $2.94-$4.00 2-4 years 2028 Directors 353 NIS 14.73 4 years 2028 The fair value of options granted during 2019 and 2018 was $0.8 million and $2.6 million, respectively. The fair value of options granted to employees and directors is based on the share price on grant date and was computed using the Black-Scholes model. The underlying data used for computing the fair value of the options are as follows: Year ended December 31 2019 2018 Value of ordinary share $0.47-$1.54 $2.93-$4.00 Dividend yield - - Expected volatility 51.5%-68.8% 54.0%-71.8% Risk-free interest rate 1.7%-2.5% 1.41%-3.10% Expected term 4.95-7 years 5.38-7 years The total unrecognized share-based compensation cost at December 31, 2019 is $0.7 million, which is expected to be recognized over a weighted-average period of 2.6 years. F- 25 ANCHIANO THERAPEUTICS LTD. AND SUBSIDIARIES Notes to Consolidated Financial Statements (U.S. dollars in thousands, except share and per share data) NOTE 6 - SHARE CAPITAL (continued): e. Share-based compensation (Continued): Summary of outstanding and exercisable options: The following table summarizes the number of options outstanding for the years ended December 31, 2019 and December 31, 2018, and related information: Employees, directors and consultants Number of options USD (1) Outstanding at December 31, 2017 1,220,762 $ 3.21 Granted 1,379,556 $ 3.52 Forfeited (90,282 ) $ 2.69 Expired (54,519 ) $ 5.22 Exercised (1,750 ) $ 3.13 Outstanding at December 31, 2018 2,453,767 $ 3.32 Granted 1,593,590 $ 1.03 Forfeited (221,611 ) $ 1.30 Expired (3,372 ) $ 13.32 Exercised - - Outstanding at December 31, 2019 3,822,374 $ 2.50 (1) Weighted-average exercise price per ordinary share. NIS-denominated exercise prices were converted to USD using the year-end Bank of Israel representative rate. The following tables summarizes information concerning outstanding and exercisable options as of December 31, 2019, in terms of ordinary shares: December 31, 2019 Options outstanding Options exercisable Number of Weighted Number of Weighted options Average options Average Exercise outstanding Remaining exercisable Remaining prices per at end of Contractual at end of contractual share (USD) year Life year Life $25-72 6,948 1.98 6,948 1.98 $6-7 14,189 3.90 14,189 3.90 $3-5 1,079,056 8.42 786,513 8.39 $2-3 1,330,452 7.60 824,326 7.30 $1-2 1,336,729 9.48 180,188 9.39 $0-1 55,000 9.87 - - 3,822,374 1,812,164 The aggregate intrinsic value of the total of both the outstanding and exercisable options as of December 31, 2019, is $0. F- 26 ANCHIANO THERAPEUTICS LTD. AND SUBSIDIARIES Notes to Consolidated Financial Statements (U.S. dollars in thousands, except share and per share data) NOTE 6 - SHARE CAPITAL (continued): e. Share-based compensation expenses (Continued): The following table illustrates the effect of share-based compensation on the statements of operations: Year ended December 31 2019 2018 Research and development $ 470 $ 275 General and administrative $ 688 $ 1,651 $ 1,158 $ 1,926 NOTE 7 - INCOME TAX: a. Corporate tax rates 1) Ordinary taxable income in Israel is subject to a corporate tax rate of 23%. 2) The Company’s subsidiary Anchiano Therapeutics, Inc. taxed separately under the U.S. tax laws. The Tax Act reduces the U.S. federal corporate income tax rate from 35% to 21% for tax years beginning after December 31, 2017. In addition, the Tax Act makes certain changes to the depreciation rules and implements new limits on the deductibility of certain expenses and deduction. b. As of December 31, 2019, the Company had $7.7 million in net operating loss carryforwards in Israel that can be carried forward indefinitely and carryforward capital losses of approximately $13.3 million. As of December 31, 2019, the Company’s subsidiary had $70 million in net operating loss carryforwards in Israel that can be carried forward indefinitely and carryforward capital losses of approximately $1.5 million. The U.S. subsidiary had $12 thousand of federal and $12 thousand of state net operating loss carryforwards available to offset future taxable income. c. As of December 31, 2019, the Company’s and the Company’s subsidiary’s tax years until December 31, 2014 are closed to audit inspections by the taxing authority due to statute of limitation rules effective in Israel. The U.S. subsidiary’s tax years until December 31, 2016 are closed to audit inspections by the taxing authority due to statute of limitation rules effective in the U.S. d. The components of the net loss before the provision for income taxes were as follows: Year ended December 31 2019 2018 Israel 22,678 13,917 U.S. 4,446 (425 ) 27,124 13,492 e. The provision for income taxes was as follows: Year ended December 31 2019 2018 Current: Israel - - U.S. - 306 Total current income tax - 306 F- 27 ANCHIANO THERAPEUTICS LTD. AND SUBSIDIARIES Notes to Consolidated Financial Statements (U.S. dollars in thousands, except share and per share data) NOTE 7 - INCOME TAX (continued): f. A reconciliation of the Company’s theoretical income tax expense to actual income tax expense is as follows: Year ended December 31 2019 2018 Loss before income tax (27,124 ) (13,492 ) Tax rate 23 % 23 % Computed “expected” tax benefit (6,238 ) (3,103 ) Decrease (increase) in tax refund resulting from: Change in temporary differences for which deferred taxes were not recognized 2,133 730 Taxes in respect of previous years - (11 ) Different tax rate in subsidiaries operating outside of Israel (1 ) 132 Non-deductible items 1,195 165 Tax credit - (315 ) Losses and benefits for tax purposes for the year, for which deferred taxes were not recorded 2,911 2,708 Actual tax expense - 306 g. The following table presents the significant components of the Company’s deferred tax asset: December 31, 2019 2018 Deferred tax assets: Net operating loss carry forward 17,811 14,031 Capital loss carry forward 3,421 3,155 Research and development 4,297 1,625 Share based compensation 890 717 Other 67 41 Less - valuation allowance (26,486 ) (19,569 ) Net deferred tax assets - - A valuation allowance is provided when it is more likely than not that the deferred tax assets will not be realized. The Company has established a valuation allowance to offset deferred tax assets at December 31, 2019 and 2018 due to the uncertainty of realizing future tax benefits from its net operating loss carryforwards and other deferred tax assets. The net change in the total valuation allowance for the year ended at December 31, 2019 was an increase of $6.9 million. F- 28 ANCHIANO THERAPEUTICS LTD. AND SUBSIDIARIES Notes to Consolidated Financial Statements (U.S. dollars in thousands, except share and per share data) NOTE 8 - SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION: a. Balance sheets: Other payables: December 31 2019 2018 Accrued expenses 2,199 1,619 Payroll and related institutions 97 87 2,296 1,706 b. Statements of operations: Finance expenses, net: Year ended December 31 2019 2018 Finance expenses: Foreign exchange rates, net 40 474 Interest expenses, bank fees and other 9 25 Changes in fair value of warrants (see note 6b) 4,570 - Total finance expenses 4,619 499 Finance income: Interest on bank deposits 393 42 Total finance expenses, net 4,226 457 F- 29 ANCHIANO THERAPEUTICS LTD. AND SUBSIDIARIES Notes to Consolidated Financial Statements (U.S. dollars in thousands, except share and per share data) NOTE 9 - RELATED PARTY TRANSACTIONS: A. Clal Biotechnology Industries Ltd. (“CBI”), which beneficially owned 35.0% of the Company’s ordinary shares prior to the Company’s Nasdaq IPO, purchased 326,085 ordinary shares, represented by 65,217 ADSs, in the offering and owned 23.6% of the Company’s ordinary shares after the offering. As a result of triggering of price protection rights in connection with the offering, CBI became entitled to be issued ordinary shares and warrants — for further details, see C below. Access Industries, which indirectly owns the majority of CBI’s shares, purchased 6,521,735 ordinary shares, represented by 1,304,347 ADSs, in the initial public offering. Following the offering, Access Industries beneficially owned 17.6% of the Company’s ordinary shares. Access Industries did not execute a lock-up agreement restricting its ability to transfer the ADSs or the underlying ordinary shares. B. In connection with its Nasdaq IPO and pursuant to price protection rights granted to private investors in 2018 and activated as a result of the IPO, the Company allocated an additional 4,726,764 ordinary shares (currently equivalent to 945,350 ADSs) to holders that are related parties of the Company, and adjusted their warrants to be exercisable for an additional 3,550,917 ordinary shares (currently equivalent to 710,182 ADSs). For details of the accounting treatment of this allocation, see Note 6C above. C. In July 2019, an annual general meeting of the Company’s shareholders approved annual fees for each director, as well as allocations of options to each director to purchase 55,000 ordinary shares (currently equivalent to 11,000 ADSs). The total expense expected in connection with these allocations is approximately $0.2 million as of December 31, 2019, of which the Company recorded expenses of approximately $0.1 million in 2019. At their discretion, directors can request for payment for their services to be made directly to their employer, whether cash, equity or both. For this reason, and following receipt of the approvals required by applicable Israeli regulations, the Company pays Ofer Gonen’s employer (CBI, the Company’s largest shareholder) directly for his services as a director, including an allocation of options to purchase 55,000 ordinary shares (currently equivalent to 11,000 ADSs) in November 2019. D. In July 2019, pursuant to approval at an annual general meeting of the Company’s shareholders, the Company amended the annual salary of the Company’s CEO, Dr. Frank Haluska, to $480,000 commencing May 1, 2019, and granted an allocation of options to him to purchase 422,090 ordinary shares (equivalent to 84,418 ADSs). The Company further allocated options exercisable into 494,000 ordinary shares of the Company (equivalent to 98,800 ADSs) to directors and officers of the Company (other than the CEO). The total expense expected in connection with these allocations is $0.3 million as of December 31, 2019, of which the Company recorded expenses of $0.2 million in 2019. NOTE 10 - SUBSEQUENT EVENTS: A. In January 2020 the Board of Directors approved management’s recommendation to close the Company’s office and laboratories located in Israel. The decision to close the office and laboratories in Israel was made primarily due to the discontinuation of the Company’s Phase 2 Codex study as previously announced and is consistent with management’s stated intention of focusing the Company’s resources on its pan-RAS and PDE10/ß-catenin programs. Following the closure of the Israeli facilities, the Company’s sole remaining office will be located in Cambridge, Massachusetts. The Company expects to substantially complete the restructuring efforts and record an expense of approximately $0.8 million in the first and second quarters of 2020. B. In light of the outbreak of COVID-19 in December 2019 and the spread of the virus during 2020, the Company's management is analyzing the implications on the Company's activities, while working to maintain and continue its activities in the best fashion that circumstances allow. F- 30