Sol-Gel(SLGL) - 2024 Q4 - Annual Report

Introduction This section defines key product terms, distinguishing approved products Twyneo and Epsolay from investigational candidates SGT-610 and SGT-210 - Key product terms defined include Twyneo and Epsolay as approved products, and SGT-610 and SGT-210 as investigational candidates[18] Key Information Risk Factors The company faces substantial risks, including financial losses, funding dependency, reliance on partner commercialization, clinical development uncertainties, and operational risks in Israel and Nasdaq compliance - The company reported a net loss of $27.2 million in 2023 and $10.6 million in 2024, with an accumulated deficit of $230.9 million as of December 31, 2024[37] - Future product development, particularly for SGT-610, critically depends on a $6 million payment from Mayne Pharma[29][44] - Commercial success of Twyneo and Epsolay is highly dependent on partners like Beimei (China) and Searchlight (Canada)[29][53] - Operations in Israel expose the company to political, economic, and military instability, including the ongoing conflict since October 2023[197][198] - The company's likely status as a Passive Foreign Investment Company (PFIC) for 2024 could lead to adverse U.S. federal income tax consequences for shareholders[237] - Nasdaq non-compliance regarding minimum bid price, despite an extension and reverse stock split, poses a delisting risk[221][222][223] Information on the Company History and Development of the Company Sol-Gel Technologies Ltd., incorporated in Israel in 1997, completed its IPO in 2018 and now trades on Nasdaq, with minimal capital expenditures in 2024 - The company was incorporated in Israel on October 28, 1997[259] Capital Expenditures (in thousands) | Year | 2022 | 2023 | 2024 | | :--- | :--- | :--- | :--- | | Capital Expenditures | $171 | $134 | $2 | Business Overview Sol-Gel is an innovative dermatology company with two FDA-approved products, Twyneo and Epsolay, a pipeline for orphan indications, and proprietary silica-based microencapsulation technology - The company has two FDA-approved products: Twyneo for acne vulgaris and Epsolay for inflammatory lesions of rosacea[262][265] - Key pipeline candidates include SGT-610 for Gorlin syndrome (Phase 3, results expected Q4 2026) and SGT-210 for Darier Disease (Phase 1 completed)[263][264][269] - U.S. rights for Twyneo and Epsolay were sold to Mayne Pharma in April 2025, with commercialization agreements also in place with Beimei (China) and Searchlight (Canada)[262][266] - The core technology is a proprietary silica-based microencapsulation platform for stable formulation and reduced skin irritation[303][304] - The patent portfolio includes 70 patents and patent applications covering manufacturing, formulations, and methods of use[307] Organizational Structure This section is not applicable as the company does not have a complex organizational structure to report Property, Plant and Equipment The company's principal executive offices, laboratories, and production are in a 1,534 square meter leased facility in Ness Ziona, Israel, with the lease expiring December 31, 2025 - The main facility is a leased 1,534 square meter space in Ness Ziona, Israel, with the lease expiring at the end of 2025[444] Operating and Financial Review and Prospects Operating Results In FY2024, revenues significantly increased to $11.6 million, while reduced R&D and G&A expenses led to a substantially lower net loss of $10.6 million compared to 2023 Financial Performance (in thousands) | Metric | 2023 | 2024 | Change | | :--- | :--- | :--- | :--- | | Revenues | $1,554 | $11,538 | +$9,984 | | R&D Expenses | $23,541 | $17,803 | -$5,738 | | G&A Expenses | $7,373 | $5,749 | -$1,624 | | Total Operating Loss | ($29,305) | ($12,014) | +$17,291 | | Net Loss | ($27,238) | ($10,580) | +$16,658 | - The $5.7 million decrease in 2024 R&D expenses was primarily due to a $2.8 million reduction in clinical expenses and a $2.1 million decrease in payroll[480] - The $1.6 million decrease in 2024 G&A expenses was mainly due to a $1.0 million reduction in payroll and a $0.6 million decrease in professional services[481] Liquidity and Capital Resources As of December 31, 2024, Sol-Gel held $23.9 million in cash and equivalents, with management confident existing resources are sufficient for at least the next 12 months - As of December 31, 2024, cash, cash equivalents, bank deposits, and marketable securities totaled $23.9 million[486] - In January 2023, the company raised approximately $22.8 million in gross proceeds through a registered direct offering and private placement[487] Cash Flow Summary (in thousands) | Activity | 2023 | 2024 | | :--- | :--- | :--- | | Net cash used in operating activities | ($17,730) | ($13,889) | | Net cash (used in) provided by investing activities | ($9,742) | $26,692 | | Net cash provided by financing activities | $21,810 | $0 | - Management confirms existing cash resources are sufficient to fund operations for at least 12 months from the report filing date[493] Critical Accounting Estimates The most significant accounting estimates involve determining the fair value of share-based compensation using the Black-Scholes model, requiring subjective assumptions - The most critical accounting estimate is the valuation of share-based compensation using the Black-Scholes model[499][500] - Key Black-Scholes assumptions include expected share price volatility and the expected option term[501] Directors, Senior Management and Employees Directors and Senior Management The company is led by Moshe Arkin, Executive Chairman and interim CEO, with detailed biographies of the senior management team and board of directors provided - Moshe Arkin serves as Executive Chairman of the Board and interim CEO effective January 1, 2025[502] - The senior management team includes Eyal Ben-Or (CFO), Dr. Ofer Toledano (VP R&D), Dr. Ofra Levy-Hacham (VP Clinical, Regulatory & Quality), Michael Glezin (CBO), Dr. Itzik Yosef (COO), and Tamar Fishman Jutkowitz (VP & General Counsel)[502] Compensation Aggregate compensation for executive officers and directors was approximately $2.6 million in 2024, guided by a new policy aligning interests with long-term performance - Aggregate compensation for executive officers and directors totaled approximately $2.6 million for the year ended December 31, 2024[515] 2024 Compensation for Top 5 Highest Compensated Officers (in thousands) | Name and Position | Base Salary | Social Benefits | Equity Based Comp. | Other Comp. | Total | | :--- | :--- | :--- | :--- | :--- | :--- | | Alon Seri-Levy / Former CEO | 324 | 64 | 392 | 321 | 1,101 | | Gilad Mamlok / Former CFO | 263 | 52 | - | 206 | 521 | | Ofer Toledano / VP R&D | 204 | 58 | 107 | 89 | 458 | | Ofra Levy-Hacham / VP Clinical, RA & QA | 172 | 50 | 86 | 67 | 375 | | Tamar Fishman Jutkowitz / VP & GC | 162 | 48 | 35 | 61 | 306 | - A new compensation policy was adopted on April 1, 2024, and a clawback policy became effective October 2, 2023[526][534] Board Practices The nine-member Board of Directors, including three external directors, operates under Israeli law as a "controlled company," with detailed policies on committees, related-party transactions, and indemnification - The board comprises nine directors, including three external directors like Ran Gottfried and Yuval Yanai, meeting Israeli legal requirements[535][537] - The Audit Committee is chaired by Yuval Yanai, and the Compensation Committee by Ran Gottfried, with both including Sharon Kochan[563][570] - As a "controlled company" and foreign private issuer, Sol-Gel follows home country practices, exempting it from certain Nasdaq governance requirements like independent board majority[227][805] - Indemnification agreements with directors and officers have a maximum aggregate amount of the greater of 25% of shareholders' equity or $40 million[634] Employees As of December 31, 2024, Sol-Gel had 34 employees in Israel, primarily in management and R&D, with no collective bargaining agreements and a good employee relationship Employee Headcount by Function | Function | 2023 | 2024 | | :--- | :--- | :--- | | Management | 8 | 8 | | Research and development and other | 28 | 26 | | Total Employees | 36 | 34 | Share Ownership This section details the company's 2014 and 2024 equity incentive plans, with 778,026 ordinary shares available for issuance and 2,176,079 options outstanding as of year-end 2024 - The company operates under a 2014 Share Incentive Plan and a 2024 Share Incentive Plan for equity awards[614] - As of December 31, 2024, 2,176,079 options were outstanding with a weighted average exercise price of $3.78 per share[624] - As of April 1, 2025, 778,026 ordinary shares were available for future issuance under the 2024 Plan[615] Major Shareholders and Related Party Transactions Major Shareholders As of April 1, 2025, M. Arkin Dermatology Ltd. is the controlling shareholder with 61.04% ownership, with Mr. Moshe Arkin as its sole beneficial owner Beneficial Ownership (as of April 1, 2025) | Shareholder | Shares Beneficially Owned | Percentage | | :--- | :--- | :--- | | M. Arkin Dermatology Ltd. (1) | 18,227,792 | 61.04% | | Phoenix Holdings Ltd. (2) | 2,470,192 | 8.87% | | All directors and executive officers as a group (12 persons) | 19,789,335 | 63.24% | - Mr. Moshe Arkin beneficially owns 61.34% of the company through direct ownership and control of Arkin Dermatology[630] Related Party Transactions Key related party transactions include a January 2023 private placement with Arkin Dermatology Ltd., indemnification agreements with directors, and a renewed registration rights agreement - In January 2023, Arkin Dermatology Ltd. purchased 2 million unregistered ordinary shares and warrants for up to 2 million ordinary shares in a private placement[632] - The company has entered into indemnification agreements with all current directors and officers[634] - A registration rights agreement with Arkin Dermatology was renewed in March 2023, granting demand, short-form, and piggyback registration rights[635] Financial Information Financial Statements and Other Financial Information This section presents the company's audited financial statements, noting no historical or anticipated cash dividends due to retained earnings strategy and Israeli Companies Law restrictions - The company has never paid cash dividends and does not plan to in the foreseeable future[640] - Dividend payments are restricted by Israeli Companies Law, requiring sufficient retained earnings or recent profits and assurance of meeting obligations[641] The Offer and Listing Offer and Listing Details The company's ordinary shares began trading on Nasdaq in February 2018 at $12.00 per share and were transferred to The Nasdaq Capital Market in November 2024 under "SLGL" - The company's ordinary shares trade on The Nasdaq Capital Market under the symbol "SLGL"[643] - The initial public offering occurred on January 31, 2018, at a price of $12.00 per share[643] Additional Information Memorandum and Articles of Association This section outlines key provisions of the company's governing documents and Israeli law, covering voting rights, board composition, shareholder meeting quorums, and acquisition frameworks - All ordinary shares have one vote per share and the company's purpose is to engage in any lawful activity[651][653] - The board of directors must consist of not less than five and no more than ten directors[536] - Shareholder meeting quorum requires at least two shareholders holding 33 1/3% of voting rights, with adjourned meetings requiring any number of shareholders[664] - Israeli law governs acquisitions, with specific rules for full tender offers (over 90% of shares) and special tender offers (25% or more, or over 45% of voting rights)[669][672] Taxation This section details Israeli and U.S. federal income tax considerations, including Israel's 23% corporate tax rate and the company's potential Passive Foreign Investment Company (PFIC) status for U.S. shareholders - The general corporate tax rate in Israel is 23% for 2024[688] - The company may be eligible for tax benefits under Israel's Law for the Encouragement of Capital Investments, potentially providing tax exemptions or reduced rates[695][703][707] - The company believes it was a Passive Foreign Investment Company (PFIC) for its 2024 taxable year, potentially leading to adverse U.S. federal income tax consequences for U.S. Holders[737][738] - If a PFIC, U.S. Holders face special tax rules on excess distributions and gains, taxed at highest ordinary income rates plus interest, unless mark-to-market or QEF elections are made[740][742] Quantitative and Qualitative Disclosures About Market Risk Foreign Currency Exchange Risk The company's primary market risk is foreign currency exchange risk, with over 50% of 2024 expenses in NIS, and a 5% USD/NIS fluctuation impacting operating expenses by 2.02% - The company's functional currency is the U.S. dollar, but over 50% of 2024 expenses are denominated in New Israeli Shekels (NIS)[776] - A 5% fluctuation in the USD/NIS exchange rate would have impacted operating expenses by approximately 2.02% in fiscal year 2024[776] - The company uses foreign currency exchange derivative instruments to hedge its exposure to non-U.S. dollar currencies[778] Controls and Procedures Disclosure Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective at a reasonable assurance level as of the end of the reporting period - Management concluded that the company's disclosure controls and procedures were effective as of the end of the reporting period[786] Management's Annual Report on Internal Control over Financial Reporting Management assessed and concluded that the company's internal control over financial reporting was effective as of December 31, 2024, based on the COSO 2013 framework - Based on the COSO framework, management concluded that the company's internal control over financial reporting was effective as of December 31, 2024[789][790] Corporate Governance Audit Committee Financial Expert The board has determined that Mr. Ran Gottfried and Mr. Yuval Yanai qualify as independent audit committee financial experts under Nasdaq Listing Rules - The board has identified Mr. Ran Gottfried and Mr. Yuval Yanai as audit committee financial experts[794] Code of Ethics The company has adopted a code of ethics applicable to its principal executive, financial, and other senior financial personnel, available on its investor relations website - A code of ethics has been adopted for senior executive and financial officers[795] Principal Accountant Fees and Services Total fees paid to the independent accounting firm were $251 thousand in FY2024, up from $229 thousand in 2023, with all services pre-approved by the audit committee Accountant Fees (in thousands) | Service | 2023 | 2024 | | :--- | :--- | :--- | | Audit Fees | $220 | $187 | | Tax Fees | $7 | $62 | | Other Fees | $2 | $2 | | Total | $229 | $251 | Corporate Governance As a foreign private issuer and "controlled company," Sol-Gel follows Israeli corporate governance practices, exempting it from certain Nasdaq rules regarding board independence and shareholder approvals - The company is a "controlled company" due to Arkin Dermatology's over 50% voting power, exempting it from certain Nasdaq requirements like a majority-independent board[807] - As a foreign private issuer, the company follows Israeli practices for governance matters, including shareholder approval for equity plans and quorum for adjourned meetings[805] Cybersecurity The company has implemented a cybersecurity risk management program, overseen by the Board and managed by operations, with no material incidents reported to date - The company has a cybersecurity risk management program based on ISO 27001 and SOX frameworks[811][812] - The Board of Directors provides oversight, with daily operations managed by the COO and a third-party IT provider[816][818] - No cybersecurity threats or incidents have had a material effect on the company's business or financial condition to date[815] Financial Statements Consolidated Financial Statements The consolidated financial statements for FY2024 show $11.5 million in revenues, a $10.6 million net loss, $35.8 million in total assets, and an unqualified audit opinion from Kesselman & Kesselman (PwC) Consolidated Balance Sheet (in thousands) | | Dec 31, 2023 | Dec 31, 2024 | | :--- | :--- | :--- | | Total Current Assets | $41,167 | $31,295 | | Total Assets | $45,287 | $35,846 | | Total Current Liabilities | $4,522 | $5,285 | | Total Liabilities | $6,643 | $6,996 | | Total Shareholders' Equity | $38,644 | $28,850 | Consolidated Statement of Operations (in thousands) | | 2022 | 2023 | 2024 | | :--- | :--- | :--- | :--- | | Revenues | $3,883 | $1,554 | $11,538 | | Total Operating Loss | ($16,244) | ($29,305) | ($12,014) | | Net Loss | ($14,923) | ($27,238) | ($10,580) | | Basic and Diluted EPS | ($0.65) | ($1.01) | ($0.38) | - The independent auditor, Kesselman & Kesselman (PwC Israel), issued an unqualified opinion on the consolidated financial statements[836]