20-F 1 f20f2020_medigusltd.htm ANNUAL REPORT

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 20-F

 

☐   REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

 

OR

 

☒   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2020

 

OR

 

☐   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

OR

 

☐   SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission file number: 001-37381

 

Medigus Ltd.

(Exact name of Registrant as specified in its charter)

 

Israel

(Jurisdiction of incorporation or organization)

 

Omer Industrial Park No. 7A, P.O. Box 3030, 8496500, Israel

(Address of principal executive offices)

 

Oz Adler

7A Industrial Park, P.O. Box 3030

Omer, 8496500, Israel

Tel: +972 72 260-2200

Fax: +972 72 260-2249

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

 

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

 

Title of class   Trading Symbol(s)    Name of each exchange on which registered
American Depositary Shares, each representing twenty (20) Ordinary Shares(1)   MDGS    Nasdaq Capital Market
Ordinary Shares, of no par value (2)        
Series C Warrants   MDGSW   Nasdaq Capital Market

 

(1)Evidenced by American Depositary Receipts.

 

(2)Not for trading, but only in connection with the registration of the American Depositary Shares.

 

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

 

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

 

 

 

 

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of December 31, 2020: 316,442,738 Ordinary Shares, of no par value per share

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act:  

 

Yes ☐               No ☒

 

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934:

 

Yes ☐               No ☒

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

Yes ☒               No ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  

 

Yes ☒               No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company.  See definition of “accelerated filer and large accelerated filer” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

  Large Accelerated filer Accelerated filer  Non-accelerated filer
          Emerging growth company

 

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act.     ☐

 

† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.

 

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐

 

Indicate by check mark the basis of accounting the registrant has used to prepare the financial statements included in this filing:

 

  U.S. GAAP

 

  International Financial Reporting Standards as issued by the International Accounting Standards Board

 

  Other

 

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.

 

Item 17 ☐               Item 18 ☐

 

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):

 

Yes ☐               No ☒

 

 

 

 

 

 

TABLE OF CONTENTS

 

    Page

Introduction 

iii 
Cautionary Note Regarding Forward-Looking Statements iv
Summary Risk Factors v
     
  Part I  
     
Item 1. Identity of Directors, Senior Management and Advisors 1
Item 2. Offer Statistics and Expected Timetable 1
Item 3. Key Information 1
A. Selected Financial Data 1
B. Capitalization and Indebtedness 2
C. Reasons for the Offer and Use of Proceeds 2
D. Risk Factors 2
Item 4. Information on the Company 37
A. History and Development of the Company 37
B. Business Overview 41
C. Organizational Structure 55
D. Property, Plant and Equipment 55
Item 4a. Unresolved staff Comments 56
Item 5. Operating and Financial Review and Prospects 56
A. Operating Results 68
B. Liquidity and Capital Resources 73
E. Off-Balance Sheet Arrangements 76
F. Tabular Disclosure of Contractual Obligations  
Item 6. Directors, Senior Management and Employees 76
A. Directors and Senior Management 76
B. Compensation 77
C. Board Practices 80
D. Employees 91
E. Share Ownership 93
Item 7. Major Shareholders and Related Party Transactions 93
A. Major Shareholders 93
B. Related Party Transactions 95
C. Interests of Experts and Counsel 96
Item 8. Financial Information 97
A. Consolidated Statements and Other Financial Information 97
B. Significant Changes 97
Item 9. The Offer and Listing 97
A. Offer and Listing Details 97
B. Plan of Distribution 98
C Markets 98
D Selling Shareholders 98
E Dilution 98
F Expenses of the Issue 98
Item 10. Additional Information 98
A. Share Capital 98
B. Memorandum and Articles of Association 98
C. Material Contracts 98
D. Exchange Controls 99
E. Taxation 100
F. Dividends and Paying Agents 112
G. Statements by Experts 112
H. Documents on Display 112
I. Subsidiary Information 113
Item 11. Quantitative and Qualitative Disclosures About Market Risk 113
Item 12. Description of Securities Other Than Equity Securities 113
A. Debt Securities   113
B. Warrants and Rights 113
C. Other Securities 113
D. American Depositary Shares 113

 

i

 

 

     
  Part II  
     
Item 13. Defaults, Dividend Arrearages and Delinquencies 115
Item 14. Material Modifications to the Rights of Security Holders and Use of proceeds 115
Item 15. Controls and Procedures 115
Item 16A. Audit Committee Financial Expert 116
Item 16B. Code of Ethics 116
Item 16C. Principal Accountant Fees and Services 116
Item 16D. Exemptions from the Listing Standards for Audit Committees 117
Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers 117
Item 16F. Change in Registrant’s Certifying Accountant 117
Item 16G. Corporate Governance 117
Item 16H. Mine Safety Disclosure 117
     
  Part III  
     
Item 17. Financial Statements 118
Item 18. Financial Statements 118
Item 19. Exhibits 119
Signatures. 121

 

ii

 

 

INTRODUCTION

 

Certain Definitions

 

In this annual report, unless the context otherwise requires:

 

  references to “Medigus,” the “Company,” “us,” “we” and “our” refer to Medigus Ltd. (the “Registrant”), an Israeli company.
     
  references to ScoutCam refer to ScoutCam Inc., a company incorporated under the laws of State of Nevada, minority owned subsidiary of the Company.
     
  references to Pro refer to Smart Repair Pro, Inc., a corporation incorporated under the laws of the State of California, majority owned subsidiary of the Company.  
     
  references to Purex refer to Purex, Corp., a corporation incorporated under the laws of the State of California, majority owned subsidiary of the Company.
     
  references to Eventer refer to Eventer Technologies Ltd., a company incorporated under the laws of the State of Israel, majority subsidiary of the Company.
     
  references to Gix refer to Gix Internet Ltd. (formerly known as Algomizer Ltd.), a public company incorporated under the laws of the State of Israel, a minority owned subsidiary of the Company.
     
  references to Linkury refer to Linkury Ltd., a company incorporated under the laws of the State of Israel, a minority owned entity of the Company.
     
  references to GERD IP refer to GERD IP, Inc., a corporation incorporated under the laws of the State of Delaware, majority owned subsidiary of the Company.
     
  references to Polyrizon refer to Polyrizon Ltd., a company incorporated under the laws of the State of Israel, minority owned entity of the Company.
     
  references to Charging Robotics refer to Charging Robotics Ltd., a company incorporated under the laws of the State of Israel, a wholly owned subsidiary of the Company.
     
  references to “Group” refer to the Company and its consolidated subsidiaries, which are ScoutCam, Eventer, GERD IP and Medigus USA LLC.
     
 

references to “Ordinary Shares,” “our shares” and similar expressions refer to the Registrant’s Ordinary Shares, of no par value per share.

     
  references to “ADS” refer to American Depositary Shares.
     
  references to “dollars,” “U.S. dollars”, “USD” and “$” refer to United States Dollars.
     
  references to “NIS” refer to New Israeli Shekels, the Israeli currency.
     
  references to the “Companies Law” refer to the Israeli Companies Law, 5759-1999, as amended.
     
  references to the “SEC” refer to the United States Securities and Exchange Commission.
     
  references to MUSErefer to the Medigus Ultrasonic Surgical Endostapler, the trade name of an endoscopy system developed by the Company which is intended as a minimally invasive treatment for Gastroesophageal Reflux Disease, or GERD.
     
  references to ScoutCam refer to the trade name of a range of micro CMOS and CCD video cameras which are suitable to both medical and industrial applications.
     
  references to “endoscopy” refer to a medical procedure which is used to diagnose or treat various diseases using an endoscope (a flexible tube which contains lighting features, imaging features and a system used to direct the endoscope within bodily systems).

 

All share data information in this annual report on Form 20-F reflects:

 

a change in the ratio of Ordinary Shares per ADS from five Ordinary Shares per ADS to 50 Ordinary Shares per ADS effected on March 15, 2017; and

 

 

a 1-for-10 reverse share split of our Ordinary Shares effected on July 13, 2018, together with a change in the ratio of Ordinary Shares per ADSs, such that after the reverse share split was implemented each ADS represents 20 post- reverse share split Ordinary Shares, instead of 50 pre- reverse share split Ordinary Shares.

 

iii

 

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

Certain information included or incorporated by reference in this annual report on Form 20-F may be deemed to be “forward-looking statements”. Forward-looking statements are often characterized by the use of forward-looking terminology such as “may,” “will,” “expect,” “anticipate,” “estimate,” “continue,” “believe,” “should,” “intend,” “project” or other similar words, but are not the only way these statements are identified.

 

These forward-looking statements may include, but are not limited to, statements relating to our objectives, plans and strategies, statements that contain projections of results of operations or of financial condition, statements relating to the research, development and use of our products, and all statements (other than statements of historical facts) that address activities, events or developments that we intend, expect, project, believe or anticipate will or may occur in the future.

 

Forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties. We have based these forward-looking statements on assumptions and assessments made by our management in light of their experience and their perception of historical trends, current conditions, expected future developments and other factors they believe to be appropriate.

 

Important factors that could cause actual results, developments and business decisions to differ materially from those anticipated in these forward-looking statements include, among other things:

 

  recent material changes in our strategy;

 

  our ability to sell or license our MUSEtechnology;
     
  ScoutCam’s commercial success in commercializing the ScoutCamsystem;
     
  the commercial success of our recent acquisitions and investments including the commercial success of Pro, Purex and Eventer;

 

  projected capital expenditures and liquidity;

 

  the overall global economic environment as well as the impact of the coronavirus strain COVID-19;

 

  the impact of competition and new technologies;

 

  general market, political, reimbursement and economic conditions in the countries in which we operate;

 

  government regulations and approvals;

 

  litigation and regulatory proceedings; and

 

  those factors referred to in “Item 3. Key Information – D. Risk Factors,” “Item 4. Information on the Company,” and “Item 5. Operating and Financial Review and Prospects”, as well as in this annual report on Form 20-F generally.

 

Readers are urged to carefully review and consider the various disclosures made throughout this annual report on Form 20-F, which are designed to advise interested parties of the risks and factors that may affect our business, financial condition, results of operations and prospects.

 

In addition, the section of this annual report on Form 20-F entitled “Item 4. Information on the Company” contains information obtained from independent industry and other sources that we have not independently verified. You should not put undue reliance on any forward-looking statements. Any forward-looking statements in this annual report are made as of the date hereof, and we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

 

iv

 

 

Summary Risk Factors

 

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

 

Business

 

We made material changes to our business strategy during 2019, which we continued to implement in 2020. We cannot guarantee that any of these changes will result in any value to our shareholders.

 

We have a history of operating losses, we expect to incur additional losses in the future and our ability to grow sales and achieve profitability are unpredictable.

 

We will need additional funding. If we are unable to raise capital, we will be forced to reduce or eliminate our operations.

 

The global outbreak of COVID-19 (coronavirus) may negatively impact the global economy in a significant manner for an extended period of time, and also adversely affect our operating results in a material manner.

 

Our ability to freely operate our business is limited as a result of certain covenants included in our Series C Warrants.

 

Pro, Purex, Gix and Eventer each rely on key employees and highly skilled personnel, and, if they are unable to attract, retain or motivate qualified personnel, they may not be able to operate its business effectively.

 

ScoutCam’s, ScoutCam™ Business

 

ScoutCam’s reliance on third-party suppliers for most of the components of ScoutCam products could harm ScoutCam’s ability to meet demand for ScoutCam products in a timely and cost-effective manner.

 

Because of its limited operating history, ScoutCam may not be able to successfully operate its business or execute its business plan.

 

The commercial success of the ScoutCam™ or any future product, depends upon the degree of market acceptance by the medical community as well as by other prospect markets and industries.

 

ScoutCam expects to face significant competition. If it cannot successfully compete with new or existing products, its marketing and sales will suffer and may never be profitable.

 

Pro and Purex Business

 

Our e-commerce operations are reliant on the Amazon marketplace and fulfillment by Amazon and changes to the marketplace, Amazon services and their terms of use may harm Pro and Purex business.

 

Certain aspects of Pro and Purex business is reliant on foreign manufacturing and international sales which expose us to risks that could impeded plans of expansion and growth.

 

Potential growth of Pro and Purex is based on international expansion, making us susceptible to risks associated with international sales and operations.

 

v

 

 

Business of Eventer

 

If Eventer fails to maintain and improve the quality of its platform, it may not be able to attract clients seeking to manage their online and offline events or facilitate ticket sales for events.

 

Eventer’s business is highly sensitive to public tastes. It is dependent on its ability to secure popular artists and other live music events. Eventer’s ticketing clients may be unable to anticipate or respond to consumer preferences changes, which may result in decreased demand for its services.

 

Eventer faces intense competition in the online and offline event and ticketing industries. It may not be able to maintain or increase its current revenue, which could adversely affect its business, financial condition, and operations results.

 

Gix’s Business and Industry

 

Gix’s advertising customers as well as exchanges through which ad inventory is sold may reduce or terminate their business relationship with Gix at any time. If customers or exchanges representing a significant portion of Gix’s revenue reduce or terminate their relationship with Gix, it could have a material adverse effect on Gix’s business, its results of operations and financial condition.

 

Due to rapid changes in the Internet and the nature of services, it is difficult to accurately predict Gix’s future performance and may be difficult to increase revenue or profitability.

 

MUSE™ Technology Business

 

We are currently proposing our MUSE™ system business for sale or grant of license. If we are unable to sell or license our MUSE™ business or unable to sell or license it in terms acceptable to us, we will have to write off our investment in the MUSE™ system, which will adversely affect our business.

 

We have entered into a Licensing and Sale Agreement with Shanghai Golden Grand-Medical Instruments Ltd. (Golden Grand) for the know-how licensing and sale of goods relating to the Medigus Ultrasonic Surgical Endostapler (MUSE™) system in China with a substantial amount of the consideration subject to milestone achievements.

 

Intellectual Property

 

If we are unable to secure and maintain patent or other intellectual property protection for the intellectual property used in our products, our ability to compete will be harmed.

 

If we are unable to prevent unauthorized use or disclosure of our proprietary trade secrets and unpatented know-how, our ability to compete will be harmed.

 

We could become subject to patent and other intellectual property litigation that could be costly, result in the diversion of management’s attention, require us to pay damages and force us to discontinue selling our products.

 

vi

 

 

Regulatory Compliance

 

If we or our contractors or service providers fail to comply with regulatory laws and regulations, we or they could be subject to regulatory actions, which could affect our ability to develop, market and sell our products in the medical field and any other or future products that we may develop and may harm our reputation in the medical field.

 

Regulatory reforms may adversely affect our ability to sell our products profitably.

 

Operations in Israel

 

Our headquarters, manufacturing facilities, and administrative offices are located in Israel and, therefore, our results may be adversely affected by military instability in Israel.

 

Exchange rate fluctuations between foreign currencies and the U.S. Dollar may negatively affect our earnings.

 

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

 

In the past, we received Israeli government grants for certain of our research and development activities. The terms of those grants may require us, in addition to payment of royalties, to satisfy specified conditions in order to manufacture products and transfer technologies outside of Israel, including increase of the amount of our liabilities in connection with such grants. If we fail to comply with the requirements of the Innovation Law (as defined below), we may be required to pay penalties in addition to repayment of the grants, and may impair our ability to sell our technology outside of Israel.

 

Investment in the Securities

 

We may be a passive foreign investment company, or PFIC, for U.S. federal income tax purposes in 2019 or in any subsequent year. This may result in adverse U.S. federal income tax consequences for U.S. taxpayers that are holders of our securities.

 

The market prices of our securities are subject to fluctuation, which could result in substantial losses by our investors.

 

We do not know whether a market for the ADSs will be sustained or what the trading price of the ADSs will be and as a result it may be difficult for you to sell your ADSs.

 

We do not know whether a market for our Series C Warrants will be sustained or what the trading price of the Series C Warrants will be and as a result it may be difficult for you to sell your Series C Warrants.

  

vii

 

 

PART I

 

ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS

 

Not applicable.

 

ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE

 

Not applicable.

 

ITEM 3. KEY INFORMATION

 

A. Selected Financial Data

 

The following consolidated statements of loss and other comprehensive loss for the years ended December 31, 2020, 2019, and 2018, and the consolidated balance sheet data as of December 31, 2020, 2019 and 2018, is derived from our audited consolidated financial statements included elsewhere in this annual report on Form 20-F. These audited financial statements have been prepared in accordance with International Financial Reporting Standards, or IFRS, as set forth by the International Accounting Standard Board. The consolidated statement of operations data for the years ended December 31, 2017 and 2016 and the consolidated balance sheet data as of December 31, 2017 and 2016 is derived from other consolidated financial statements not included in this Form 20-F. The selected consolidated financial data set forth below should be read in conjunction with and are qualified by reference to “Item 5. Operating and Financial Review and Prospects” and the consolidated financial statements and notes thereto and other financial information included elsewhere in this annual report on Form 20-F.

 

Consolidated Statements of Loss and Other Comprehensive Loss

 

   Year ended December 31, 
   2020   2019   2018   2017   2016 
   U.S. Dollars, in thousands, except per share and
weighted average shares data
 
Revenues:                    
Products   491    188    219    467    192 
Services   40    85    217    -    357 
    531    273    436    467    549 
                          
Cost of revenues:                         
Products   988    370    164    219    81 
Services   46    85    115    -    95 
Inventory impairment   -    -    328    297    - 
    1,034    455    607    516    176 
                          
Gross Profit (Loss)   (503)   (182)   (171)   (49)   373 
                          
Research and development expenses   997    609    1,809    2,208    3,655 
Sales and marketing expenses   471    326    1,354    846    2,125 
General and administrative expenses   5,494    3,081    3,338    3,005    3,684 
Net income from change in fair value of financial assets at fair value through profit or loss   797    92    -    -    - 
Share of net loss of associates accounted for using the equity method   170    216    -    -    - 
Amortization of excess purchase price of an associate   546                     
Listing expenses        10,098    -    -    - 
Operating loss   (7,384)   (14,420)   (6,672)   (6,108)   (9,091)
Changes in fair value of warrants issued to investors   338    142    148    3,502    25 
Financial income (expenses) in respect of deposits, bank commissions and exchange differences, net   205    99    (54)   54    87 
Loss before taxes on income   (6,841)   (14,179)   (6,578)   (2,552)   (8,979)
Taxes benefit (Taxes on income)   (9)   1    (20)   7    (28)
Loss for the year   (6,850)   (14,178)   (6,598)   (2,545)   (9,007)
Other comprehensive loss for the year, net of tax   35    (41)   -    -    - 
                         
Total comprehensive loss for the year   (6,815)   (14,219)   (6,598)   (2,545)   (9,007)
                          
Loss for the year is attributable to:                         
Owners of Medigus   (4,325)   (14,178)   (6,598)   (2,545)   (9,007)
Non-controlling interest   (2,525)   -    -    -    - 
    (6,850)   (14,178)   (6,598)   (2,545)   (9,007)
                          
Total comprehensive income for the period is attributable to:                         
Owners of Medigus   (4,278)   (14,219)   (6,598)   (2,545)   (9,007)
Non-controlling interest   (2,537)   -    -    -    - 
    (6,815)   (14,219)   (6,598)   (2,545)   (9,007)
                          
Basic loss per ordinary share(1)   (0.03)   (0.18)   (0.16)   (0.20)   (2.62)
Diluted loss per ordinary share(1)   (0.03)   (0.18)   (0.16)   (0.23)   (2.62)
                          
Weighted average number of ordinary shares outstanding used to compute (in thousands)(1):                         
Basic loss per share   133,445    78,124    41,988    12,569    3,440 
Diluted loss per share   133,445    78,124    41,988    12,969    3,440 

  

(1)Adjusted to reflect

 

1

 

 

a change in the ratio of ordinary shares per ADS from five ordinary shares per ADS to 50 ordinary shares per ADS effected on March 15, 2017; and

 

a 1-for-10 reverse share split of our ordinary shares effected on July 13, 2018, together with a change in the ratio of ordinary shares per ADSs, such that after the reverse share split was implemented each ADS represents 20 post- reverse share split ordinary shares, instead of 50 pre- reverse share split ordinary shares.

 

For more information see “Item 4. Information on the Company A. History and Development of the Company.”

 

   As of December 31, 
   2020   2019   2018   2017   2016 
   U.S. Dollars (in thousands) 
                     
Balance Sheet Data:                         
Cash and cash equivalents   22,363    7,036    10,625    2,828    3,001 
Short-term Investment   547    -    -    -    - 
Short-term deposit   -    -    -    3,498    - 
Total assets   32,335    13,334    11,239    7,210    4,724 
Total non-current liabilities(2)   2,627    1,838    197    183    226 
Accumulated deficit   (80,982)   (76,657)   (62,479)   (55,881)   (53,336)
Non-controlling interests   3,233    1,424    -    -    - 
Total  equity   26,194    8,131    8,079    5,511    2,927 

 

(2)We adopted Amendments to International Accounting Standard 1, “Classification of Liabilities as Current or Non-Current,” under which we classified in the statement of financial position warrants as part of current liabilities. The amendment was applied retrospectively.

 

B. Capitalization and Indebtedness

 

Not applicable.

 

C. Reasons for the Offer and Use of Proceeds

 

Not applicable.

 

D. Risk Factors

 

You should carefully consider the risks described below, together with all of the other information in this annual report on Form 20-F. The risks described below are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may also materially and adversely affect our business operations. If any of these risks actually occurs, our business and financial condition could suffer, and the price of our shares could decline.

 

2

 

 

Risks Related to Our Business

 

We made material changes to our business strategy during 2019, which we continued to implement in 2020. We cannot guarantee that any of these changes will result in any value to our shareholders.

 

Since 2019, we have materially changed our business model, adjusted our exclusive focus on the medical device industry to include other industries, abandoned our strategy to commercialize the MUSE system, transferred our ScoutCam™ activity into our subsidiary, ScoutCam Ltd., and consummated a securities exchange agreement in relation to ScoutCam Ltd. As a result of these changes, we have acquired substantial stakes in a number of ventures, including but not limited to online business activities such as ad-tech, e-commerce and online event management. We cannot guarantee that these strategic decisions will derive the anticipated value to our shareholders, or any value at all. 

 

We have a history of operating losses, we expect to incur additional losses in the future and our ability to grow sales and achieve profitability are unpredictable.

 

We have incurred losses since our incorporation and we are likely to continue to incur significant net losses for at least the next several years as we continue to pursue our strategy. As of December 31, 2020, we had an accumulated deficit of $81 million and incurred total comprehensive losses of approximately $6.8 million, 14.2 million and $6.6 million in the years ended December 31, 2020 and 2019 and 2018, respectively. Our losses have had, and will continue to have, an adverse effect on our shareholders’ equity and working capital. Any failure to achieve and maintain profitability would continue to have an adverse effect on our shareholders’ equity and working capital and could result in a decline in our share price or cause us to cease operations.

 

Our ability to reach profitability depends on many factors, which include:

 

  successfully implementing our business strategy;

  

  increasing revenues; and

  

  controlling costs

 

There can be no assurance that we will be able to successfully implement our business plan, meet our challenges and become profitable in the future.

 

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We will need additional funding. If we are unable to raise capital, we will be forced to reduce or eliminate our operations.

 

During the year ended December 31, 2020, the Group incurred a total comprehensive loss of approximately $6.8 million and a negative cash flows from operating activities of approximately $5 million. Furthermore, in the recent years, the Group has suffered recurring losses from operations, negative cash flows from operating activities and has an accumulated deficit as of December 31, 2020.

 

As of December 31, 2020, we had a total cash and cash equivalents balance of approximately $22 million. Our management expects that we will continue to generate operating losses. Our management plans to continue to fund its operations primarily through utilization of its financial resources. In addition, we may raise additional capital or realize some of our investments in other entities in order to fund our operating needs. Our management is of the opinion that based on our current operating plan it will be able to carry out its plan for more than a year after the issuance date of this annual report on Form 20-F. However, we anticipate that we are likely to continue to incur significant net losses for at least the next year. There is no assurance however, that we will be successful in obtaining the level of financing needed for our operations. If we are unable to obtain additional sufficient financing our business and results of operations will be materially harmed.

 

On March 22, 2021, ScoutCam, as part of a private placement, undertook to issue units to certain investors for an aggregate purchase price of $20 million. There are no assurances however, that ScoutCam will be successful in obtaining the further financing needed for its operations. If ScoutCam is unsuccessful in commercializing its products and securing sufficient financing, it may need to reduce activities, curtail or even cease operations.

  

Even if we are able to continue to finance our business, the sale of additional equity or debt securities could result in dilution to our current shareholders and could require us to grant a security interest in our assets. If we raise additional funds through the issuance of debt securities, these securities may have rights senior to those of our Ordinary Shares and could contain covenants that could restrict our operations. In addition, we may require additional capital beyond our currently forecasted amounts to achieve profitability. Any such required additional capital may not be available on reasonable terms, or at all.

 

The global outbreak of COVID-19 (coronavirus) may negatively impact the global economy in a significant manner for an extended period of time, and also adversely affect our operating results in a material manner.

 

The COVID-19 pandemic, including the efforts to combat it, has had and may continue to have a widespread effect on our business. In response to the pandemic, public health authorities and local and national governments have implemented measures that have and may continue to impact our business, including voluntary or mandatory quarantines, restrictions on travel and orders to limit the activities of non-essential workforce personnel. As of the date of this annual report, the COVID-19 (coronavirus) pandemic had made a significant impact on global economic activity, with governments around the world, including Israel, having closed office spaces, public transportation and schools, and restricting travel. These closures and restrictions, if continued for a sustained period, could trigger a global recession that could negatively impact our business in a material manner. We are actively monitoring the pandemic and we are taking any necessary measures to respond to the situation in cooperation with the various stakeholders.

 

In light of the evolving nature of the pandemic and the uncertainty it has produced around the world, we do not believe it is possible to predict with precision the pandemic’s cumulative and ultimate impact on our future business operations, liquidity, financial condition and results of operations. For example, travel restrictions have adversely affected our ability to timely achieve certain milestones included in our Golden Grand Agreement and has delayed the recognition revenues deriving therefrom. These travel restrictions have also impacted our sales and marketing efforts and those of our subsidiaries. In addition, a substantial portion of Eventer’s business relates to leisure event management, the scope of which was greatly reduced as a result of governmental policies and measures tailored to address to spread of COVID-19. To the extent that these measures remain in place, Eventer’s business and result of operations could be harmed.

 

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The extent of the impact of the pandemic on our business and financial results will depend largely on future developments, including the duration of the spread of the outbreak and any future “waves” of the outbreak, globally and specifically within Israel and the United States. In addition, the extent of the impact on capital and financial markets, foreign currencies exchange and governmental or regulatory orders that impact our business are highly uncertain and cannot be predicted. If economic conditions generally or in the industries in which we operate specifically, worsen from present levels, our results of operations could be adversely affected and our financial condition will depend on future developments that are highly uncertain and cannot be predicted, including new government actions or restrictions, new information that may emerge concerning the severity, longevity and impact of the COVID-19 pandemic on economic activity.

 

Additionally, concerns over the economic impact of the pandemic have caused extreme volatility in financial markets, which has adversely impacted and may continue to adversely impact our share price and our ability to access capital markets. To the extent the pandemic or any worsening of the global business and economic environment as a result adversely affects our business and financial results, it may also have the effect of heightening many of the other risks described in this annual report.

 

Our ability to freely operate our business is limited as a result of certain covenants included in our Series C Warrants.

 

The Series C Warrant Agreement, or the Series C Warrant, contains a number of covenants that limit our operating activities, and may prevent our acquisition by a third party, including a provision setting forth that in the event of a fundamental transaction (other than a fundamental transaction not approved by the our board of directors), we or any successor entity may at the Series C Warrant holder’s option, exercisable at any time concurrently with, or within 30 days after, the consummation of the fundamental transaction, purchase the Series C Warrants from the holder by paying to the Series C Warrant holder an amount of cash equal to the Black Scholes value of the remaining unexercised portion of the Series C Warrants on the date of the consummation of such fundamental transaction. These and other similar provisions could delay, prevent or impede an acquisition of us or our merger with another company, even if such an acquisition or merger would be beneficial to us or to our shareholders.

 

Pro, Purex, Gix and Eventer each rely on key employees and highly skilled personnel, and, if they are unable to attract, retain or motivate qualified personnel, they may not be able to operate its business effectively.

 

The success of Gix, Pro, Purex and Eventer depends largely on the continued employment of their senior management and key personnel who can effectively operate its business and its ability to attract and retain skilled employees. Competition for highly skilled management, technical, research and development, and other employees is intense, and Gix, Pro, Purex and Eventer may not be able to attract or retain highly qualified personnel in the future. If any of the key employees of Gix, Pro, Purex and Eventer leave or are terminated, and such companies fail to manage a transition to new personnel effectively, or if they fail to attract and retain qualified and experienced professionals on acceptable terms, the business, financial condition and results of operations of Gix, Pro, Purex and Eventer could be adversely affected.

 

We, and our subsidiaries, are subject to stringent and changing laws, regulations, standards, and contractual obligations related to privacy, data protection, and data security. The actual or perceived failure to comply with such obligations could harm our business.

 

Our subsidiaries and we receive, collect, store, process, transfer, and use personal information and other data relating to users of our products, our employees and contractors, and other persons. We have legal and contractual obligations regarding the protection of confidentiality and appropriate use of certain data, including personal information. We are subject to numerous federal, state, local, and international laws, directives, and regulations regarding privacy, data protection, and data security and the collection, storing, sharing, use, processing, transfer, disclosure, and protection of personal information and other data, the scope of which are changing, subject to differing interpretations, and may be inconsistent among jurisdictions or conflict with other legal and regulatory requirements. We are also subject to certain contractual obligations to third parties related to privacy, data protection and data security. We strive to comply with our applicable policies and applicable laws, regulations, contractual obligations, and other legal obligations relating to privacy, data protection, and data security to the extent possible. However, the regulatory framework for privacy, data protection and data security worldwide is, and is likely to remain for the foreseeable future, uncertain and complex, and it is possible that these or other actual or alleged obligations may be interpreted and applied in a manner that we do not anticipate or that is inconsistent from one jurisdiction to another and may conflict with other legal obligations or our practices. Further, any significant change to applicable laws, regulations or industry practices regarding the collection, use, retention, security or disclosure of data, or their interpretation, or any changes regarding the manner in which the consent of users or other data subjects for the collection, use, retention or disclosure of such data must be obtained, could increase our costs and require us to modify our services and features, possibly in a material manner, which we may be unable to complete, and may limit our ability to store and process user data or develop new services and features.

 

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If our subsidiaries or we were found in violation of any applicable laws or regulations relating to privacy, data protection, or security, our business may be materially and adversely affected and we would likely have to change our business practices and potentially the services and features available through our platform. In addition, these laws and regulations could impose significant costs on us and could constrain our ability to use and process data in manners that may be commercially desirable. In addition, if a breach of data security were to occur or to be alleged to have occurred, if any violation of laws and regulations relating to privacy, data protection or data security were to be alleged, or if we had any actual or alleged defect in our safeguards or practices relating to privacy, data protection, or data security, our solutions may be perceived as less desirable, and our business, prospects, financial condition, and results of operations could be materially and adversely affected.

 

We also expect that there will continue to be new laws, regulations, and industry standards concerning privacy, data protection, and information security proposed and enacted in various jurisdictions. For example, the data protection landscape in the European Union (“EU”) is currently evolving, resulting in possible significant operational costs for internal compliance and risks to our business. The EU adopted the General Data Protection Regulation or GDPR, which became effective in May 2018, and contains numerous requirements and changes from previously existing EU laws, including more robust obligations on data processors and heavier documentation requirements for data protection compliance programs by companies. Among other requirements, the GDPR regulates the transfer of personal data subject to the GDPR to third countries that have not been found to provide adequate protection to such personal data, including the United States. Failure to comply with the GDPR could result in penalties for noncompliance (including possible fines of up to the greater of €20 million and 4% of our global annual turnover for the preceding financial year for the most serious violations, as well as the right to compensation for financial or non-financial damages claimed by individuals under Article 82 of the GDPR).

 

In addition to the GDPR, the European Commission has another draft regulation in the approval process that focuses on a person’s right to conduct a private life. The proposed legislation, known as the Regulation of Privacy and Electronic Communications, or ePrivacy Regulation, would replace the current ePrivacy Directive. Originally planned to be adopted and implemented at the same time as the GDPR, the ePrivacy Regulation is still being negotiated.

 

Additionally, in June 2018, California passed the California Consumer Privacy Act, or CCPA, which provides new data privacy rights for California consumers and new operational requirements for covered companies. Specifically, the CCPA provides that covered companies must provide new disclosures to California consumers and afford such consumers new data privacy rights that include the right to request a copy from a covered company of the personal information collected about them, the right to request deletion of such personal information, and the right to request to opt-out of certain sales of such personal information. The CCPA became operative on January 1, 2020. The California Attorney General can enforce the CCPA, including seeking an injunction and civil penalties for violations. The CCPA also provides a private right of action for certain data breaches expected to increase data breach litigation. The CCPA may require us to modify our data practices and policies and to incur substantial costs and expenses in order to comply. On November 3, 2020, California voters passed the California Privacy Rights Act (“CPRA”) into law, which will take effect in January 2023 and will significantly modify the CCPA, potentially resulting in further uncertainty and requiring us to incur additional costs and expenses in an effort to comply. More generally, some observers have noted the CCPA and CPRA could mark the beginning of a trend toward more stringent United States federal privacy legislation, which could increase our potential liability and adversely affect our business.

 

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In addition, failure to comply with the Israeli Privacy Protection Law 5741-1981, and its regulations as well as the guidelines of the Israeli Privacy Protection Authority, may expose us to administrative fines, civil claims (including class actions), and in certain cases, criminal liability. Current pending legislation may result in a change in the current enforcement measures and sanctions.

 

Any failure or perceived failure by our subsidiaries or by us to comply with our posted privacy policies, our privacy-related obligations to users or other third parties, or any other legal obligations or regulatory requirements relating to privacy, data protection, or data security may result in governmental investigations or enforcement actions, litigation, claims, or public statements against us by consumer advocacy groups or others and could result in significant liability, cause our users to lose trust in us, and otherwise materially and adversely affect our reputation and business. Furthermore, the costs of compliance with, and other burdens imposed by, the laws, regulations, other obligations, and policies that are applicable to the businesses of our users may limit the adoption and use of, and reduce the overall demand for, our platform. Additionally, if third parties we work with violate applicable laws, regulations, or contractual obligations, such violations may put our users’ data at risk, could result in governmental investigations or enforcement actions, fines, litigation, claims, or public statements against us by consumer advocacy groups or others and could result in significant liability, cause our users to lose trust in us, and otherwise materially and adversely affect our reputation and business. Further, public scrutiny of, or complaints about, technology companies or their data handling or data protection practices, even if unrelated to our business, industry, or operations, may lead to increased scrutiny of technology companies, including us, and may cause government agencies to enact additional regulatory requirements, or to modify their enforcement or investigation activities, which may increase our costs and risks.

 

Risks Related to Our Subsidiary, ScoutCam’s, ScoutCam Business

 

ScoutCam’s reliance on third-party suppliers for most of the components of ScoutCam products could harm ScoutCam’s ability to meet demand for ScoutCam products in a timely and cost-effective manner.

 

Though ScoutCam attempts to ensure the availability of more than one supplier for each important component in any product that ScoutCam commissions, the number of suppliers engaged in the provision of miniature video sensors which are suitable for ScoutCam’s Complementary Metal Oxide Semiconductor, or CMOS, technology products is very limited, and therefore in some cases ScoutCam engages with a single supplier, which may result in ScoutCam dependency on such supplier. This is the case regarding sensors for the CMOS type technology that is produced by a single supplier in the United States. As ScoutCam does not have a contract in place with this supplier, there is no contractual commitment on the part of such supplier for any set quantity of such sensors. The loss of ScoutCam sole supplier in providing ScoutCam with miniature sensors for ScoutCam’s CMOS technology products, and ScoutCam inability or delay in finding a suitable replacement supplier, could significantly affect ScoutCam’s business, financial condition, results of operations and reputation.

 

Because of its limited operating history, ScoutCam may not be able to successfully operate its business or execute its business plan.

 

In 2019, we transferred our ScoutCam activity, which had limited operation activity, into a wholly-owned subsidiary, ScoutCam Ltd. On December 26, 2019, we consummated a securities exchange agreement with Intellisense Solutions Inc., under which we received 60% of the issued and outstanding stock of Intellisense Solutions Inc. in consideration for 100% of our holdings in ScoutCam Ltd. Simultaneously with the securities exchange agreement, Intellisense Solutions Inc. raised $3.3 million dollars (gross) based on a post money valuation of $13.3 million dollars. Following the aforementioned transactions, Intellisense Solutions Inc. changed its name to ScoutCam Inc. Given the limited operating history, it is hard to evaluate ScoutCam’s proposed business and prospects. ScoutCam’s proposed business operations is subject to numerous risks, uncertainties, expenses and difficulties associated with early-stage enterprises. Such risks include, but are not limited to, the following:

 

  the absence of a lengthy operating history;

 

  insufficient capital to fully realize our operating plan;

 

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  expected continual losses for the foreseeable future;

 

  operating in multiple currencies;

 

  our ability to anticipate and adapt to a developing market(s);

 

  acceptance of our ScoutCam by the medical community and consumers;

 

  acceptance of our ScoutCam by the non-medical community and consumers;

 

  limited marketing experience;

 

  a competitive environment characterized by well-established and well-capitalized competitors;

 

  the ability to identify, attract and retain qualified personnel; and

 

  operating in an environment that is highly regulated by a number of agencies.

 

Furthermore, ScoutCam has a history of losses, and may not be able to generate sufficient revenues to achieve and sustain profitability, and as a result, there is substantial doubt about its ability to continue as a going concern following the fiscal year ended December 31, 2020.

 

Because ScoutCam is subject to these risks, evaluating its business may be difficult, its business strategy may be unsuccessful and it may be unable to address such risks in a cost-effective manner, if at all. If ScoutCam is unable to successfully address these risks, its business and any proceeds derived from it by the Company could be harmed.

 

The commercial success of the ScoutCam or any future product, depends upon the degree of market acceptance by the medical community as well as by other prospect markets and industries.

 

Any product that ScoutCam commissions or brings to the market may or may not gain market acceptance by prospective customers.

 

The commercial success of ScoutCam’s technologies commissioned products, and any future product that it may develop depends in part on the medical community as well as other industries for various use cases, depending on the acceptance by such industries of its commissioned products as a useful and cost-effective solution compared to current technologies. To date, ScoutCam has not yet commenced proactive market penetration in other industries, with the exception of the biomedical sector. If ScoutCam’s technology or any future product that may be developed does not achieve an adequate level of acceptance, or does not garner significant commercial appeal, ScoutCam may not generate significant revenue and may not become profitable. The degree of market acceptance will depend on a number of factors, including:

 

  the cost, safety, efficacy/performance, and convenience of the ScoutCam  technology and any future product that ScoutCam may develop in relation to alternative products; 

 

  the ability of third parties to enter into relationships with ScoutCam without violating their existing agreements; 

 

  the effectiveness of ScoutCam’s sales and marketing efforts; 

 

  the strength of marketing and distribution support for, and timing of market introduction of, competing products; and

 

  publicity concerning ScoutCam’s products or competing products.

 

ScoutCam’s efforts to penetrate industries and educate the marketplace on the benefits of its technology, and reasons to seek the commissioning of products based on its technology, may require significant resources and may never be successful. Such efforts to educate the marketplace may require more resources than are required by conventional technologies.

 

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ScoutCam expects to face significant competition. If it cannot successfully compete with new or existing products, its marketing and sales will suffer and may never be profitable.

 

ScoutCam expects to compete against existing technologies and proven products in different industries. In addition, some of these competitors, either alone or together with their collaborative partners, operate larger research and development programs than ScoutCam does, and have substantially greater financial resources than it does, as well as significantly greater experience in obtaining applicable regulatory approvals applicable to the commercialization of ScoutCam’s technologies and future products.

 

If ScoutCam is unable to establish sales, marketing and distribution capabilities or enter into successful relationships with third parties to perform these services, it may not be successful in commercializing our ScoutCam.

 

ScoutCam is currently a B2B company, and its business is reliant on its ability to successfully attract potential business targets. Furthermore, ScoutCam has a limited sales and marketing infrastructure and has limited experience in the sale, marketing or distribution of its technologies beyond the B2B model. To achieve commercial success for its technologies or any future developed product, it will need to establish a sales and marketing infrastructure or to out-license such future products.

 

In the future, ScoutCam may consider building a focused sales and marketing infrastructure to market any future developed products and potentially other product in the United States or elsewhere in the world. Similarly, ScoutCam may consider evolving its business model in the future and adopting a business-to-consumer approach, or B2C. There are risks involved with establishing its own sales, marketing and distribution capabilities. For example, recruiting and training a sales force could be expensive and time consuming and could delay any product launch. This may be costly, and ScoutCam’s investment would be lost if it cannot retain or reposition its sales and marketing personnel.

 

Factors that may inhibit ScoutCam’s efforts to commercialize its products on its own include:

 

  its inability to recruit, train and retain adequate numbers of effective sales and marketing personnel;

 

  the inability of sales personnel to obtain access to potential customers;

 

  the lack of complementary products to be offered by sales personnel, which may put ScoutCam at a competitive disadvantage relative to companies with more extensive product lines; and

 

  unforeseen costs and expenses associated with creating an independent sales and marketing organization.

 

If ScoutCam is unable to establish its own sales, marketing and distribution capabilities or enter into successful arrangements with third parties to perform these services, its revenues and its profitability may be materially adversely affected.

 

In addition, ScoutCam may not be successful in entering into arrangements with third parties to sell, market and distribute its ScoutCamor other products inside or outside of the United States or may be unable to do so on terms that are favorable to it. ScoutCam likely will have little control over such third parties, and any of them may fail to devote the necessary resources and attention to sell and market its products effectively. If ScoutCam does not establish sales, marketing and distribution capabilities successfully, either on its own or in collaboration with third parties, it will not be successful in commercializing its technologies or any future products ScoutCam may develop.

 

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ScoutCam depends on the success of micro ScoutCam for ScoutCam’s revenue, which could impair ScoutCam’s ability to achieve profitability.

 

ScoutCam plans to derive most of its future revenue from the development services of its imaging equipment and its flagship micro ScoutCam™ and through the engagement with target businesses that are interested in the commissioning of certain products using ScoutCam’s technology. ScoutCam’s future growth and success is largely dependent on the successful commercialization of the micro ScoutCam™ technology. If ScoutCam is unable to achieve increased commercial acceptance of the micro ScoutCam technology, or experience a decrease in the utilization of its product line or procedure volume, ScoutCam’s revenue would be adversely affected.

 

ScoutCam may be subject to product liability claims, product actions, including product recalls, and other field or regulatory actions that could be expensive, divert management’s attention and harm ScoutCam’s. business.

 

ScoutCam’s business exposes it to potential liability risks, product actions and other field or regulatory actions that are inherent in the manufacturing, marketing and sale of medical device products that it may have commissioned for a target business. ScoutCam may be held liable if its products cause injury or death or is found otherwise unsuitable or defective during usage. ScoutCam’s products incorporate mechanical and electrical parts, complex computer software and other sophisticated components, any of which can contain errors or failures. Complex computer software is particularly vulnerable to errors and failures, especially when first introduced. In addition, new products or enhancements to ScoutCam’s existing products may contain undetected errors or performance problems that, despite testing, are discovered only after installation.

 

If any of ScoutCam’s commissioned products are defective, whether due to design or manufacturing defects, improper use of the product, or other reasons, it may voluntarily or involuntarily undertake an action to remove, repair, or replace the product at its own expense. In some circumstances, ScoutCam will be required to notify regulatory authorities of an action pursuant to a product failure.

 

ScoutCam may require substantial additional funding, which may not be available to ScoutCam on acceptable terms, or at all.

 

ScoutCam’s cash balance as of December 31, 2020 was $3.4 million. ScoutCam may require additional funding to fund and grow our operations and to develop certain products. There can be no assurance that financing will be available in amounts or on terms acceptable to ScoutCam, if at all. In the event ScoutCam required additional capital, the inability to obtain additional capital will restrict its ability to grow and may reduce its ability to continue to conduct business operations. If ScoutCam’s require and is unable to obtain additional financing, ScoutCam’s will likely be required to curtail its development plans. In that event, current stockholders, including Medigus, would likely experience a loss of most or all of their investment. Additional funding that we do obtain may be dilutive to the interests of existing stockholders, including Medigus.

 

ScoutCam’s failure to effectively manage growth could impair ScoutCam’s business.

 

ScoutCam’s business strategy contemplates a period of rapid growth which may put a strain on ScoutCam’s administrative and operational resources, and its funding requirements. ScoutCam’s ability to effectively manage growth will require ScoutCam to successfully expand the capabilities of its operational and management systems, and to attract, train, manage, and retain qualified personnel. There can be no assurance that we will be able to do so, particularly if losses continue and ScoutCam is unable to obtain sufficient financing. If ScoutCam is unable to appropriately manage growth, ScoutCam’s business, prospects, financial condition, and results of operations could be adversely affected.

 

ScoutCam may not be able to manage its strategic partners effectively.

 

ScoutCam’s growth strategy may include strategic partners. The process to bring on, train and assist strategic partners is time-consuming and costly. ScoutCam expects to expend significant resources to undertake business, financial and legal due diligence on both existing and potential partners, and there is no guarantee that these will be successful in ultimately increasing ScoutCam’s business.

 

Failure to manage ScoutCam’s partners effectively may affect its success in executing its business plan and may adversely affect its business, financial condition and results of operation. ScoutCam may not realize the anticipated benefits of any or all partnerships, or may not realize them in the time frame expected.

 

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ScoutCam may not have sufficient manufacturing capabilities to satisfy any growing demand for ScoutCam’s commissioned products. ScoutCam may be unable to control the availability or cost of producing such products.

 

ScoutCam’s current manufacturing capabilities may not reach the required production levels necessary in order to meet growing demands for any products ScoutCam may commission or future products it may develop. While ScoutCam do intend to purchase a manufacturing facility in Israel in the future, such an engagement has not yet materialized and it is not clear at what point ScoutCam will execute such an acquisition. In the interim, and prior to the purchase of a manufacturing facility by ScoutCam, there can be no assurance that ScoutCam’s commissioned products can be manufactured at its desired commercial quantities, in compliance with its requirements and at an acceptable cost. Any such failure could delay or prevent ScoutCam from shipping said products and marketing its technologies in accordance with its target growth strategies.

 

Testing of ScoutCam’s technologies potential applications for its products will be required and there is no assurance of regulatory approval.

 

The effect of government regulation and the need for approval may delay marketing of ScoutCam’s technologies and future potentially developed products for a considerable period of time, impose costly procedures upon ScoutCam’s activities and provide an advantage to larger companies that compete with ScoutCam. There can be no assurance that regulatory approval for any products developed by ScoutCam will be granted on a timely basis or at all. Any such delay in obtaining, or failure to obtain, such approvals would materially and adversely affect the marketing of any contemplated products and the ability to earn product revenue. Further, regulation of manufacturing facilities by state, local, and other authorities is subject to change. Any additional regulation could result in limitations or restrictions on ScoutCam’s ability to utilize any of its technologies, thereby adversely affecting ScoutCam’s operations. Various federal and foreign statutes and regulations also govern or influence the manufacturing, safety, labeling, storage, record keeping and marketing of food products. The process of obtaining these approvals and the subsequent compliance with appropriate U.S. and foreign statutes and regulations are time-consuming and require the expenditure of substantial resources. In addition, these requirements and processes vary widely from country to country.

 

ScoutCam’s suppliers may not be able to always supply components or products to us on a timely basis and on favorable terms, and as a result, ScoutCam’s dependency on third party suppliers can adversely affect ScoutCam’s revenue.

 

ScoutCam will rely on ScoutCam’s third-party suppliers for components and depend on obtaining adequate supplies of quality components on a timely basis with favorable terms to manufacture ScoutCam’s commissioned products. Some of those components that ScoutCam sell are provided by a limited number of suppliers. ScoutCam’s will be subject to disruptions in its operations if its sole or limited supply contract manufacturers decrease or stop production of components or do not produce components and products of sufficient quantity. Alternative sources for ScoutCam’s components will not always be available. Many of ScoutCam’s components are manufactured overseas, so they have long lead times, and events such as local disruptions, natural disasters or political conflict may cause unexpected interruptions to the supply of our products or components.

 

It is ScoutCam’s intention, as mentioned in its use of proceeds, to allocate financial resources to improve ScoutCam’s inventory management, including establishing an inventory buffer of components appropriate to ScoutCam’s business. However, ScoutCam cannot assure that its attempt will be successful or that product or component shortages will not occur in the future. If ScoutCam cannot supply commissioned products or future potentially developed products due to a lack of components, or are unable to utilize other components in a timely manner, ScoutCam’s business will be significantly harmed. If inventory shortages continue, they could be expected to have a material and adverse effect on ScoutCam’s future revenues and ability to effectively project future sales and operating results.

 

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ScoutCam relies on highly skilled personnel, and, if ScoutCam is unable to attract, retain or motivate qualified personnel, it may not be able to operate its business effectively.

 

ScoutCam’s success depends in large part on continued employment of senior management and key personnel who can effectively operate its business, as well as its ability to attract and retain skilled employees. Competition for highly skilled management, technical, research and development and other employees is intense and ScoutCam may not be able to attract or retain highly qualified personnel in the future. In making employment decisions, particularly in the job candidates often consider the value of the equity awards they would receive in connection with their employment. ScoutCam’s long-term incentive programs may not be attractive enough or perform sufficiently to attract or retain qualified personnel.

 

If any of ScoutCam’s employees leaves ScoutCam, and ScoutCam fails to effectively manage a transition to new personnel, or if ScoutCam fails to attract and retain qualified and experienced professionals on acceptable terms, ScoutCam business, financial condition and results of operations could be adversely affected.

 

ScoutCam’s success also depends on having highly trained financial, technical, recruiting, sales and marketing personnel. ScoutCam will need to continue to hire additional personnel as ScoutCam’s business grows. A shortage in the number of people with these skills or ScoutCam’s failure to attract them could impede ScoutCam’s ability to increase revenues from its existing technology and services, ensure full compliance with international and federal regulations, or launch new product offerings and would have an adverse effect on ScoutCam’s business and financial results.

 

ScouCam may have difficulty in entering into and maintaining strategic alliances with third parties.

 

ScoutCame has entered into, and may continue to enter into, strategic alliances with third parties to gain access to new and innovative technologies and markets. These parties are often large, established companies. Negotiating and performing under these arrangements involves significant time and expense, and ScoutCam may not have sufficient resources to devote to strategic alliances, particularly those with companies that have significantly greater financial and other resources than ScoutCam do. The anticipated benefits of these arrangements may never materialize, and performing under these arrangements may adversely affect ScoutCam’s results of operations.

 

ScoutCam may not be able to obtain patents or other intellectual property rights necessary to protect its proprietary technology and business.

 

ScoutCam may seek to patent concepts, components, processes, designs and methods, and other inventions and technologies that it considers to have commercial value or that will likely give it a technological advantage. Despite devoting resources to the research and development of proprietary technology, ScoutCam may not be able to develop technology that is patentable or protectable. Patents may not be issued in connection with pending patent applications, and claims allowed may not be sufficient to allow them to use the inventions that they create exclusively. Furthermore, any patents issued could be challenged, re-examined, held invalid or unenforceable or circumvented and may not provide sufficient protection or a competitive advantage. In addition, despite efforts to protect and maintain patents, competitors and other third parties may be able to design around their patents or develop products similar to ScoutCam work products that are not within the scope of their patents. Finally, patents provide certain statutory protection only for a limited period of time that varies depending on the jurisdiction and type of patent.

 

Prosecution and protection of the rights sought in patent applications and patents can be costly and uncertain, often involve complex legal and factual issues and consume significant time and resources. In addition, the breadth of claims allowed in its patents, their enforceability and its ability to protect and maintain them cannot be predicted with any certainty. The laws of certain countries may not protect intellectual property rights to the same extent as the laws of the United States. Even if ScoutCam’s patents are held to be valid and enforceable in a certain jurisdiction, any legal proceedings that it may initiate against third parties to enforce such patents will likely be expensive, take significant time and divert management’s attention from other business matters. ScoutCam cannot assure that any of its issued patents or pending patent applications provide any protectable, maintainable or enforceable rights or competitive advantages to it.

 

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In addition to patents, ScoutCam will rely on a combination of copyrights, trademarks, trade secrets and other related laws and confidentiality procedures and contractual provisions to protect, maintain and enforce its proprietary technology and intellectual property rights in the United States and other countries. However, its ability to protect its brands by registering certain trademarks may be limited. In addition, while it will generally enter into confidentiality and nondisclosure agreements with its employees, consultants, contract manufacturers, distributors and resellers and with others to attempt to limit access to and distribution of its proprietary and confidential information, it is possible that:

 

  misappropriation of its proprietary and confidential information, including technology, will nevertheless occur;
     
  ScoutCam’s confidentiality agreements will not be honored or may be rendered unenforceable;
     
  third parties will independently develop equivalent, superior or competitive technology or products;
     
  disputes will arise with its current or future strategic licensees, customers or others concerning the ownership, validity, enforceability, use, patentability or registrability of its intellectual property; or
     
  unauthorized disclosure of ScoutCam’s know-how, trade secrets or other proprietary or confidential information will occur.

 

ScoutCam cannot assure that it will be successful in protecting, maintaining or enforcing its intellectual property rights. If ScoutCam is unsuccessful in protecting, maintaining or enforcing its intellectual property rights, then its business, operating results and financial condition could be materially adversely affected, which could:

 

  adversely affect ScoutCam’s reputation with customers;
     
  be time-consuming and expensive to evaluate and defend;
     
  cause product shipment delays or stoppages;
     
  divert management’s attention and resources;
     
  subject ScoutCam to significant liabilities and damages;
     
  require ScoutCam to enter into royalty or licensing agreements; or
     
  require ScoutCam to cease certain activities, including the sale of products.

 

If it is determined that ScoutCam has infringed, violated or is infringing or violating a patent or other intellectual property right of any other person or if it is found liable in respect of any other related claim, then, in addition to being liable for potentially substantial damages, ScoutCam may be prohibited from developing, using, distributing, selling or commercializing certain of its technologies unless it obtains a license from the holder of the patent or other intellectual property right. ScoutCam cannot assure that it will be able to obtain any such license on a timely basis or on commercially favorable terms, or that any such licenses will be available, or that workarounds will be feasible and cost-efficient. If ScoutCam do not obtain such a license or find a cost-efficient workaround, its business, operating results and financial condition could be materially adversely affected and it could be required to cease related business operations in some markets and restructure ScoutCam’ business to focus on its continuing operations in other markets.

 

ScoutCam may be unable to keep pace with changes in technology as ScoutCam’s business and market strategy evolves.

 

ScoutCam will need to respond to technological advances in a cost-effective and timely manner in order to remain competitive. The need to respond to technological changes may require ScoutCam to make substantial, unanticipated expenditures. There can be no assurance that ScoutCam will be able to respond successfully to technological change.

 

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Risks Related to Pro and Purex’s Business

 

Our e-commerce operations are reliant on the Amazon marketplace and fulfillment by Amazon and changes to the marketplace, Amazon services and their terms of use may harm Pro and Purex business.

 

Pro and Purex products are sold predominantly on the Amazon marketplace, with the fulfillment aspect of the operations carried out entirely by Amazon utilizing the fulfilled by Amazon, or FBA, model. In order to continue to utilize the Amazon Marketplace and FBA, Pro and Purex must comply with the applicable policies and terms of use relating to these services. Such policies and terms of use may be altered or amended at Amazon’s sole discretion, including changes regarding the cost of securing these services, and changes that increase the burden of compliance and requirements, may cause Pro and Purex to alter their business model in order to comply, cause us to incur additional costs, and the results of Pro and Purex business can be negatively impacted. Non-compliance with applicable terms of use and policies can result in the removal of one or more products from the market place and suspension of fulfillment services which would have an adverse effect on Pro and Purex results of operations. Although Pro and Purex exert efforts in order to ensure ongoing compliance and no notices of non-compliance have been received to date, we cannot assure that events of this kind will not occur in the future.

 

Certain aspects of Pro and Purex business is reliant on foreign manufacturing and international sales, which expose us to risks that could impede plans of expansion and growth.

 

The manufacturers or the products sold on Pro and Purex online stores are located in China. As such, Pro and Purex business is affected by inter-country trade agreements and tariffs. There may be additional, changes to existing trade agreements, greater restrictions on free trade and significant increases in tariffs on goods imported into the United States, particularly those manufactured in China, Mexico and Canada. Future actions of the U.S. administration and that of foreign governments, including China, with respect to tariffs or international trade agreements and policies remains currently unclear. The escalation of a trade war, tariffs, retaliatory tariffs or other trade restrictions on products and materials imported by Pro and Purex from China may impede their supply chain and ability to provide products which could adversely affect their business, financial condition, operating results and cash flows.

 

Potential growth of Pro and Purex is based on international expansion, making us susceptible to risks associated with international sales and operations.

 

Pro and Purex currently sell products exclusively in the U.S. and they intend to expand their operations to reach new markets and localities. For example, Pro has completed the requisite processes in order to offer its products through the Amazon marketplace to the United Kingdom, major European countries, Singapore and Australia. Conducting international operations subjects us to certain risks which include localization of solutions and products and adapting them to local practices and regulatory requirements, exchange rate fluctuations and unexpected changes in tax, trade laws, tariffs, governmental controls and other trade restriction. To the extent that Pro and Purex do not succeed in expanding their operations internationally and managing the associated legal and operational risks, their results of operations may be adversely affected.

 

Pro and Purex operating results are subject to seasonal fluctuations.

 

The e-commerce business is seasonal in nature and the fourth quarter is a significant period for Pro and Purex operating results due to the holiday season. As a result, revenue and income (loss) from operations generally decline (increase) in the first quarter sequentially from the fourth quarter of the previous year. Any disruption in Pro and Purex ability to process and fulfill customer orders during the fourth quarter could have a negative effect on their quarterly and annual operating results. For example, if a large number of customers purchase Pro and Purex products in a short period of time due to increased holiday demand, inefficient management of Pro and Purex inventory may prevent them from efficiently fulfilling orders, which may reduce sales and harm their brands.

 

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Risks Related to of Eventer’s Business

 

If Eventer fails to maintain and improve the quality of its platform, it may not be able to attract clients seeking to manage their online and offline events or facilitate ticket sales for events.

 

To satisfy both clients seeking to manage online and offline events through Eventer’s platform, Eventer needs to continue to improve the user experience and innovate and introduce features and services that both event managers and ticket purchasers find useful cause them to use Eventer’s platform more frequently. In addition, Eventer needs to adapt, expand and improve its platform and user interfaces to keep up with changing user preferences. Eventer invests substantial resources in researching and developing new features and enhancing its platform by incorporating these new features, improving the functionality, and adding other improvements to meet users’ evolving demands. The success of any enhancements or improvements to Eventer’s platform or any new features depends on several factors, including timely completion, adequate quality testing, integration with technologies on the platform and overall market acceptance. Because further development of Eventer’s platform is complex, challenging, and dependent upon an array of factors, the timetable for the release of new features and enhancements to Eventer’s platform is difficult to predict, and it may not offer new features as rapidly as users of its platform require or expect.

 

It is difficult to predict the problems Eventer may encounter in introducing new features to its platform. Eventer may need to devote significant resources to creating, supporting, and maintaining these features. Eventer provides no assurance that its initiatives to improve the user experience will be successful. Eventer also cannot predict whether users will well receive any new features or whether improving its platform will be successful or sufficient to offset the costs incurred to offer these new features. If Eventer is unable to improve or maintain its platform’s quality, its business, prospects, financial condition, and results of operations could be materially and adversely affected.

 

Eventer’s business is highly sensitive to public tastes. It is dependent on its ability to secure popular artists and other live music events. Eventer’s ticketing clients may be unable to anticipate or respond to consumer preferences changes, which may result in decreased demand for its services.

 

Eventer’s business is highly sensitive to rapidly changing public tastes and is dependent on the availability of popular artists and events. Eventer’s live entertainment business depends on its ability to anticipate the tastes of consumers and offer events that appeal to them. Since Eventer relies on unrelated parties to create and perform at live music events as well as online events, any lack of availability of popular artists could limit its ability to generate revenue. If artists do not choose to perform, or if Eventer cannot secure performances and events to be managed and ticketed through its platform, Eventer’s business would be adversely affected. Furthermore, Eventer’s business could be adversely affected if artists utilizing its platform do not tour or perform as frequently as anticipated, or if such tours or performances are not as widely attended by fans as anticipated due to changing tastes, general economic conditions or otherwise.

 

Eventer faces intense competition in the online and offline event and ticketing industries. It may not be able to maintain or increase its current revenue, which could adversely affect its business, financial condition, and operations results.

 

Eventer is active in highly competitive industries, and it may not be able to maintain or increase its current revenue due to such competition. Online and offline leisure events compete with other entertainment forms for consumers’ discretionary spending and within this industry, Eventer faces competition from other promoters and venue operators. Eventer’s competitors compete for relationships with popular music artists and other service providers who have a history of being able to book artists for concerts and events. These competitors may engage in more extensive development efforts, undertake more far-reaching marketing campaigns, adopt more aggressive pricing policies and make more attractive offers to existing and potential artists. Due to increasing artist influence and competition to attract and maintain artist clients for events managed on Eventer’s platform, it may enter into agreements on terms that are less favorable to it, which could negatively impact the number of commissions collected from ticket sales which may adversely affect its financial results. Eventer’s competitors may develop services and advertising options equivalent to or superior to those they provide or achieve greater market acceptance and brand recognition than it achieves. Across the live music and entertainment industry, it is possible that new competitors may emerge and rapidly acquire significant market share.

 

Eventer’s business faces significant competition from other ticketing service providers to continuously secure new and retain existing clients. Additionally, it faces significant and increasing challenges from companies that sell self-ticketing systems and clients who choose to self-ticket by integrating such systems into their existing operations or the acquisition of primary ticket services providers. The advent of new technology, particularly as it relates to online ticketing, has amplified this competition. The intense competition that Eventer faces in the ticketing industry could cause the volume of ticketing services to decline.

 

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If our Eventer subsidiary fails to offer high-quality customer service, their brand and reputation could suffer.

 

Eventer’s clients rely on the platform to plan and manage online and offline events and expect a high level of user experience and customer service relating to both the event management functions of the platform as well as ticket sales. Providing such quality service is imperative for ensuring customer success, sustaining sales growth, and developing Eventer’s business. To the extent that Eventer cannot provide real-time support for users of its platforms, the platform may become less attractive to potential users, and its results of operations may be harmed.

 

The success of Eventer’s event management and ticketing solutions and other operations depends, in part, on the integrity of its systems and infrastructure, as well as affiliate and third-party computer systems, Wi-Fi, and other communication systems. System interruption and the lack of integration and redundancy in these systems and infrastructure may have an adverse impact on its business, financial condition, and operations results.

 

System interruption and the lack of integration and redundancy in the information systems and infrastructure, utilized for Eventer’s platform as well as other computer systems and third-party software, Wi-Fi and other communications systems service providers on which Eventer relies, may adversely affect its ability to operate the platform, process and fulfill transactions, respond to customer inquiries and generally maintain cost-efficient operations. Such interruptions could occur by virtue of natural disasters, malicious actions such as hacking or acts of terrorism or war, or human error. In addition, the loss of some or all of certain key personnel could require Eventer to expend additional resources to continue to maintain its software and systems and could subject it to systems interruptions. The infrastructure required to operate Eventer’s platform requires an ongoing investment of time, money, and effort to maintain or refresh hardware and software and ensure it remains at a level capable of servicing the demand and volume of business it receives. Failure to do so may result in system instability, degradation in performance, or unfixable security vulnerabilities that could adversely impact both the business and the consumers utilizing Eventer’s services.

 

While Eventer has backup systems for certain aspects of its operations, disaster recovery planning by its nature cannot be sufficient for all eventualities. In addition, Eventer may not have adequate insurance coverage to compensate for losses from a major interruption. If any of these adverse events were to occur, it could adversely affect Eventer’s business, financial condition, and operations results.

 

Eventer’s success depends, in significant part, on entertainment and leisure events and economic and other factors adversely affecting such events could have a material adverse effect on its business, financial condition and results of operations.

 

A decline in attendance at or reduction in the number of entertainment and leisure events may have an adverse effect on Eventer’s revenue and operating income. In addition, during periods of economic slowdown and recession, many consumers have historically reduced their discretionary spending and advertisers have reduced their advertising expenditures. The impact of economic slowdowns on Eventer’s business is difficult to predict, but they may result in reductions in ticket sales and the ability to generate revenue. The risks associated with Eventer’s businesses may become more acute in periods of a slowing economy or recession, which may be accompanied by a decrease in attendance at entertainment and leisure events. Many of the factors affecting the number and availability of entertainment and leisure events are beyond Eventer’s control. For example, COVID-19 has led to lockdowns and governmental restrictions on live entertainment and leisure events as well as restrictions regarding the attendance of such events. Although Eventer’s platform supports the management and ticketing of online events, there is no assurance that online events will generate demand on par with live events, which could adversely affect Eventer’s operations results.

 

Eventer’s business depends on discretionary consumer and enterprise spending. Many factors related to corporate spending and discretionary consumer spending, including economic conditions affecting disposable consumer income such as unemployment levels, fuel prices, interest rates, changes in tax rates and tax laws that impact companies or individuals, and inflation can significantly impact Eventer’s operating results. Business conditions, as well as various industry conditions, including corporate marketing and promotional spending and interest levels, can also significantly impact Eventer’s operating results. These factors can affect attendance at online and offline events, advertising, and spending, as well as the financial results of venues, events, and the industry. Negative factors such as challenging economic conditions and public concerns over terrorism and security incidents, particularly when combined, can impact corporate and consumer spending and one negative factor can result in more than another. There can be no assurance that consumer and corporate spending will not be adversely impacted by current economic conditions or by any future deterioration in economic conditions, thereby possibly impacting Eventer’s operating results and growth.

 

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Errors, defects, or disruptions in Eventer’s platform could diminish its brand, subject it to liability, and materially and adversely affect its business, prospects, financial condition, and operations results.

 

Any errors, defects, or disruptions in Eventer’s platform or other performance problems with its platform could harm its brand and may damage the businesses of artists and clients that manage events on its platform. Eventer’s online systems, including its website and mobile apps, could contain undetected errors, or “bugs,” that could adversely affect their performance. Additionally, Eventer regularly updates and enhances its website, platform, and other online systems and introduces new versions of its software products and apps. These updates may contain undetected errors when first introduced or released, which may cause disruptions in its services and may, as a result, cause Eventer to lose market share, and its brand, business, prospects, financial condition and results of operations could be materially and adversely affected.

 

Eventer is subject to escrow, payment services, and money transmitter regulations that may materially and adversely affect its business.

 

Eventer relies on third-party to collect funds from ticket purchasers, remit payments to clients that manage events on its platform, and hold funds in connection with ticket purchases. Although Eventer believes that by working with third parties, its operations comply with existing applicable laws and regulatory requirements related to escrow, money transmission, handling or moving of money, existing laws or regulations may change, and interpretations of existing laws regulations may also change.

 

As a result, Eventer could be required to be licensed as an escrow agent or a money transmitter (or other similar licensees) in jurisdictions in which it is active or may choose to obtain such a license even if not required. As a result, Eventer may be required to register as a money services business under applicable laws and regulations. It is also possible that Eventer could become subject to regulatory enforcement or other proceedings in those jurisdictions with escrow, money transmission, or other similar statutes or regulatory requirements related to the handling or moving of money, which could, in turn, have a significant impact on its business, even if we were to ultimately prevail in such proceedings. Any developments in the laws or regulations related to escrow, money transmission, or the handling or moving of money or increased scrutiny of its business may lead to additional compliance costs and administrative overhead.

 

Eventer faces payment and fraud risks that could materially and adversely affect its business.

 

Requirements applicable to Eventer’s platform relating to user authentication and fraud detection are complex. If Eventer’s security measures do not succeed, Eventer’s business may be adversely affected. In addition, bad actors worldwide use increasingly sophisticated methods to engage in illegal activities involving personal data, such as unauthorized use of another’s identity or payment information, unauthorized acquisition or use of credit or debit card details, and other fraudulent use of another’s identity or information. This could result in any of the following, each of which could adversely affect Eventer’s business:

 

Eventer may be held liable for the unauthorized use of a credit card or bank account number by ticket purchasers and be required by card issuers or banks to pay a chargeback or return fee, and if chargeback or return rate becomes excessive, credit card networks may also require Eventer to pay fines or other fees;

   

  Eventer may be subject to additional risk and liability exposure, including negligence, fraud or other claims, if employees or third-party service providers misappropriate user information for their own gain or facilitate the fraudulent use of such information; and

 

  Eventer may suffer reputational damage as a result of the occurrence of any of the above.

 

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Despite measures taken by Eventer to detect and reduce the risk of this kind of conduct, it cannot ensure that any of its measures will stop illegal or improper uses of its platform. Eventer may receive complaints from users and other third parties concerning misuse of its platform in the future. Even if these claims do not result in litigation or are resolved in Eventer’s favor, these claims, and the time and resources necessary to resolve them, could divert the resources of Eventer’s management and materially and adversely affect its business, prospects, financial condition and results of operations.

 

Eventer uses open source software, which could negatively affect its ability to offer its platform and subject it to litigation or other actions.

 

Eventer uses substantial amounts of open source software in its platform and may use more open source software in the future. From time to time, there have been claims challenging both the ownership of open source software against companies that incorporate open source software into their products and whether such incorporation is permissible under various open source licenses. U.S. and Israeli courts have not interpreted the terms of many open source licenses, and there is a risk that these licenses could be construed in a way that could impose unanticipated conditions or restrictions on its ability to commercialize its platform. As a result, Eventer could be subject to lawsuits by parties claiming ownership of what we believe to be open source software, or breach of open source licenses. Litigation could be costly for Eventer to defend, have a negative effect on its results of operations and financial condition, or require it to devote additional research and development resources to change its platform. In addition, if Eventer were to combine its proprietary source code or software with open source software in a certain manner, it could, under certain of the open source licenses, be required to release the source code of its proprietary software to the public. This would allow its competitors to create similar products with less development effort and time. If Eventer inappropriately uses open source software or the license terms for open source software that its uses change, Eventer may be required to re-engineer its platform, or certain aspects of it, incur additional costs, discontinue the availability of certain features, or take other remedial actions.

 

In addition to risks related to license requirements, open source software usage can lead to greater risks than use of third-party commercial software, as open source licensors generally do not provide warranties or assurance of title or controls on origin of the software. In addition, many of the risks associated with usage of open source software, such as the lack of warranties or assurances of title, cannot be eliminated and could, if not properly addressed, negatively affect Eventer’s business. Eventer has established processes to help alleviate these risks, but it cannot be sure that all of its use of open source software is in a manner that is consistent with its current policies and procedures or will not subject Eventer to liability.

  

To the extent Eventer’s security measures are compromised, its platform may be perceived as not being secure. This may result in customers curtailing or ceasing their use of Eventer’s platform, its reputation being harmed, Eventer incurring significant liabilities, and adverse effects on its results of operations and growth prospects.

 

Eventer’s operations involve the storage and transmission of artist and ticket purchaser data or information. Cyberattacks and other malicious internet-based activity continue to increase, and cloud-based platform providers of services are expected to continue to be targeted. Threats include traditional computer “hackers,” malicious code (such as viruses and worms), employee theft or misuse and denial-of-service attacks. Sophisticated nation-states and nation-state supported actors now engage in such attacks, including advanced persistent threat intrusions. The ticket sales solution included in Eventer’s platform stores credit card data and other customer personal information. Hackers and malicious actors may target Eventer in order to obtain credit card information. Despite significant efforts to create security barriers to such threats, it is virtually impossible for Eventer to entirely mitigate these risks. If Eventer’s security measures are compromised as a result of third-party action, employee or customer error, malfeasance, stolen or fraudulently obtained log-in credentials, or otherwise, Eventer’s reputation could be damaged, its business may be harmed, and it could incur significant liability. Eventer may be unable to anticipate or prevent techniques used to obtain unauthorized access or to compromise its systems because they change frequently and are generally not detected until after an incident has occurred. As Eventer relies on third-party and public-cloud infrastructure, it will depend in part on third-party security measures to protect against unauthorized access, cyberattacks, and the mishandling of customer data. A cybersecurity event could have significant costs, including regulatory enforcement actions, litigation, litigation indemnity obligations, remediation costs, network downtime, increases in insurance premiums, and reputational damage. Many companies that provide cloud-based services have reported a significant increase in cyberattack activity since the beginning of the COVID-19 pandemic.

 

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Risks Related to Gix’s Business and Industry

 

Gix’s advertising customers as well as exchanges through which ad inventory is sold may reduce or terminate their business relationship with Gix at any time. If customers or exchanges representing a significant portion of Gix’s revenue reduce or terminate their relationship with Gix, it could have a material adverse effect on Gix’s business, its results of operations and financial condition.

 

Gix generally does not enter into long-term contracts with its advertising customers, and such customers do business with Gix on a non-exclusive basis. In most cases, Gix’s customers may terminate or reduce the scope of their agreements with little or no penalty or notice. Accordingly, Gix’s business is highly vulnerable to adverse economic conditions, market evolution, development of new or more compelling offerings by Gix’s competitors and development by Gix’s advertising customers of in-house replacement services. Any reduction in spending by, or loss of, existing or potential advertisers by Gix would negatively impact Gix’s revenue and operating results.

 

Due to rapid changes in the Internet and the nature of services, it is difficult to accurately predict Gix’s future performance and may be difficult to increase revenue or profitability.

 

As the digital advertising ecosystem is dynamic, seasonal and challenging, it is hard to predict Gix’s future performance and make predictions, particularly regarding the effect of Gix’s efforts to aggressively increase the distribution and profitability of its services and products. If Gix is unable to continuously improve its systems and processes, adapt to the changing and dynamic needs of its customers and align its expenses with the revenue level, it will impair Gix’s ability to structure its offerings to be compelling and profitable.

 

Increased availability of advertisement-blocking technologies could limit or block the delivery or display of advertisements by Gix solutions, which could undermine Gix’s business’s viability.

 

Advertisement-blocking technologies, such as mobile apps, anti-virus software or browser extensions that limit or block the delivery or display of advertisements, are currently available for desktop and mobile users. Furthermore, new browsers and operating systems, or updates to current browsers or operating systems, offer native advertisement-blocking technologies to their users. The more such technologies become widespread, Gix’s ability to serve advertisements to users may be impeded, and its business financial condition and results of operations may be adversely affected.

 

Large and established internet and technology companies, such as Google and Facebook, play a substantial role in the digital advertising market and may significantly impair Gix’s ability to operate in this industry.

 

Google and Facebook are substantial players in the digital advertising market and account for a large portion of the digital advertising budgets, along with other smaller players. Such high concentration subjects Gix to unilateral changes with respect to advertising on their respective platforms, which may be more lucrative than alternative methods of advertising or partnerships with other publishers that are not subject to such changes. Furthermore, Gix could have limited ability to respond to, and adjust for, changes implemented by such players.

 

These companies, along with other large and established Internet and technology companies, may also leverage their power to make changes to their web browsers, operating systems, platforms, networks or other products or services in a way that impacts the entire digital advertising marketplace.

 

The consolidation among participants within the digital advertising market could have a material adverse impact on Gix and accordingly, its business and results of operations.

 

The digital advertising industry has experienced substantial evolution and consolidation in recent years and Gix expects this trend to continue, increasing the capabilities and competitive posture of larger companies, particularly those that are already dominant in various ways, and enabling new or stronger competitors to emerge. This consolidation could adversely affect Gix’s business in a number of ways, including: (i) Gix’s customers or partners could acquire or be acquired by Gix’s competitors causing them to terminate their relationship with Gix; (ii) Gix’s competitors could improve their competitive position or broaden their offerings through strategic acquisitions or mergers.

 

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The advertising industry is highly competitive. If Gix cannot compete effectively in this market, Gix’s revenues are likely to decline.

 

Gix faces intense competition in the marketplace. Gix operates in a dynamic market that is subject to rapid development and introduction of new technologies, products and solutions, changing branding objectives, evolving customer demands and industry guidelines, all of which affect Gix’s ability to remain competitive. There are a large number of digital media companies and advertising technology companies that offer products or services similar to Gix’s and that compete with Gix for finite advertising budgets and for limited inventory from publishers. There is also a large number of niche companies that are competitive with Gix, as they provide a subset of the services that Gix provides. Some of Gix’s existing and potential competitors may be better established, benefit from greater name recognition may offer solutions and technologies that Gix does not offer or that are more evolved than Gix, and may have significantly more financial, technical, sales, and marketing resources than Gix does. In addition, some competitors, particularly those with a larger and more diversified revenue base and a broader offering, may have greater flexibility than Gix does to compete aggressively on the basis of price and other contract terms as well as respond to market changes. Additionally, companies that do not currently compete with Gix in this space may change their services to be competitive if there is a revenue opportunity, and new or stronger competitors may emerge through consolidations or acquisitions. If Gix’s digital advertising platform and solutions are not perceived as competitively differentiated or Gix fails to develop adequately to meet market evolution, Gix could lose customers and market share or be compelled to reduce Gix’s prices and harm Gix’s operational results.

 

If the demand for digital advertising does not continue to grow or customers do not embrace Gix’s solutions, this could have a material adverse effect on Gix’s business and financial condition.

 

If customers do not embrace Gix’s solutions, or if Gix’s integration with advertising networks is not successful, or if there is a reduction in general demand for digital advertising, in spend for certain channels or solutions, or the demand for Gix’s specific solutions and offerings is decreased, Gix’s revenues could decline or otherwise, Gix’s business may be adversely affected.

 

Gix’s business is susceptible to seasonality, unexpected changes in campaign size, and prolonged cycle time, which could affect its business, results of operations and ability to repay indebtedness when due.

 

The revenue of Gix’s advertising business is affected by a number of factors, and, as a result, Gix’s profit from these operations is seasonal, including:

 

  Product and service revenues are influenced by political advertising, which generally occurs every two years;

 

  In any single period, product and service revenues and delivery costs are subject to significant variation based on changes in the volume and mix of deliveries performed during such period;

 

  Revenues are subject to the changes in brand marketing trends, including when and where brands choose to spend their money in a given year;

 

  Advertising customers generally retain the right to supplement, extend, or cancel existing advertising orders at any time prior to their completion, and Gix has no control over the timing or magnitude of these revenue changes; and

 

  Relative complexity of individual advertising formats, and the length of the creative design process.

 

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Gix’s advertising business depends on Gix’s ability to collect and use data, and any limitation on the collection and use of this data could significantly diminish the value of Gix’s solutions and cause Gix to lose customers, revenue and profit.

 

In most cases, when Gix delivers an advertisement, Gix is often able to collect certain information about the content and placement of the ad, the relevancy of such ad to a user, and the interaction of the user with the ad, such as whether the user viewed or clicked on the ad or watched a video. As Gix collects and aggregates data provided by billions of ad impressions and third-party providers, Gix analyzes the data in order to measure and optimize the placement and delivery of Gix’s advertising inventory and provide cross-channel advertising capabilities.

 

Gix publishers or advertisers might decide not to allow Gix to collect some or all of this data or might limit Gix’s use of this data. Gix’s ability to either collect or use data could be restricted by new laws or regulations, including the General Data Protection Regulation (the “GDPR”), in the European Union, which entered into effect in May 2018, and presumably broaden the definition of personal data to include location data and online identifiers, which are commonly used and collected parameters in digital advertising, and impose more stringent user consent requirements, changes in technology, operating system restrictions, requests to discontinue using certain data, restrictions imposed by advertisers and publishers, industry standards or consumer choice.

 

If this happens, Gix may not be able to optimize ad placement for the benefit of Gix’s advertisers and publishers, which could render Gix’s solutions less valuable and potentially result in loss of clients and a decline in revenues. For more information on privacy regulation and compliance, see also – “We are subject to stringent and changing laws, regulations, standards, and contractual obligations related to privacy, data protection, and data security. Our or our subsidiaries’ actual or perceived failure to comply with such obligations could harm our business”.

 

Risks related to our MUSE Technology Business

  

We are currently proposing our MUSE system business for sale or grant of license. If we are unable to sell or license our MUSEbusiness or unable to sell or license it in terms acceptable to us, we will have to write off our investment in the MUSEsystem, which will adversely affect our business.

 

We are currently proposing our MUSE system business for sale or license. If we are unable to sell or license our MUSE™ business or unable to sell or license it in terms acceptable to us, we could not derive any value from the sale and will lose significant cash flow, which, in turn, will adversely affect our financial results.

 

Several factors may delay or prevent us from selling or granting license to our MUSEsystem business:

 

  potential purchasers’ or licensee perception on the cost, safety, efficacy, and convenience of the MUSEsystem in relation to alternative treatments and products;

 

  publicity concerning our products, including MUSE, or competing products and treatments;

 

  patients suffering from adverse events while using the MUSEsystem; and

 

  competition from the pharmaceutical sector, which could harm the ability to market and commercialize the MUSEsystem and, as a result, impact the attractiveness of the MUSEsystem in the eyes of potential purchasers.

 

Further, we have only limited clinical data to support the value of the MUSEsystem, which may make patients, physicians and hospitals reluctant to accept or purchase our products, and as such a potential purchaser may be reluctant to purchase our MUSEbusiness or such lack of data will be reflected in the purchase price.

 

Moreover, various modifications to our MUSE system regulator-cleared products may require new regulatory clearances or approvals or require a recall or cease marketing of the MUSE system until clearances or approvals are obtained. Clearances and approvals by the applicable regulator are subject to continual review, and the later discovery of previously unknown problems can result in product labeling restrictions or withdrawal of the product from the market. The potential loss of previously received approvals or clearances, or the failure to comply with existing or future regulatory requirements could reduce the potential sales, profitability and future growth prospects of the MUSE.

 

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We have entered into a Licensing and Sale Agreement with Shanghai Golden Grand-Medical Instruments Ltd. (Golden Grand) for the know-how licensing and sale of goods relating to the Medigus Ultrasonic Surgical Endostapler (MUSE) system in China with a substantial amount of the consideration subject to milestone achievements.

 

We entered into a Licensing and Sale Agreement with Shanghai Golden Grand-Medical Instruments Ltd., or Golden Grand, for the know-how licensing and sale of goods relating to the Medigus Ultrasonic Surgical Endostapler (MUSE) system in China, Hong Kong, Taiwan and Macao. The payment of a substantial amount of the consideration is contingent on achievement of certain milestones such as establishing a MUSE assembly line in China. In the event that we are not able to meet such milestones, due to various factors including natural disasters, public health crises, political crises and trade wars which are not under our control, our entitlement to the aggregate consideration under the agreement may be impaired.

 

Due to COVID-19, our personnel’s access to China, our ability to transport the materials and equipment required in order to set up our MUSE assembly line is severely limited. To the extent the coronavirus outbreak persists, it may have an adverse impact on our revenues associated with MUSE.

 

Risks Related to Our Intellectual Property

 

If we are unable to secure and maintain patent or other intellectual property protection for the intellectual property used in our products, our ability to compete will be harmed.

 

Our commercial success depends, in part, on obtaining and maintaining patent and other intellectual property protection for the technologies used in our products. The patent positions of medical device companies, including ours, can be highly uncertain and involve complex and evolving legal and factual questions. Furthermore, we might in the future opt to license intellectual property from other parties. If we, or the other parties from whom we may license intellectual property, fail to obtain and maintain adequate patent or other intellectual property protection for intellectual property used in our products, or if any protection is reduced or eliminated, others could use the intellectual property used in our products, resulting in harm to our competitive business position. In addition, patent and other intellectual property protection may not provide us with a competitive advantage against competitors that devise ways of making competitive products without infringing any patents that we own or have rights to.

 

U.S. patents and patent applications may be subject to interference proceedings, and U.S. patents may be subject to re-examination proceedings in the U.S. Patent and Trademark Office. Foreign patents may be subject to opposition or comparable proceedings in the corresponding foreign patent offices. Any of these proceedings could result in loss of the patent or denial of the patent application, or loss or reduction in the scope of one or more of the claims of the patent or patent application. Changes in either patent laws or in interpretations of patent laws may also diminish the value of our intellectual property or narrow the scope of our protection. Interference, re-examination and opposition proceedings may be costly and time consuming, and we, or the other parties from whom we might potentially license intellectual property, may be unsuccessful in defending against such proceedings. Thus, any patents that we own or might license may provide limited or no protection against competitors. In addition, our pending patent applications and those we may file in the future may have claims narrowed during prosecution or may not result in patents being issued. Even if any of our pending or future applications are issued, they may not provide us with adequate protection or any competitive advantages. Our ability to develop additional patentable technology is also uncertain. 

 

Non-payment or delay in payment of patent fees or annuities, whether intentional or unintentional, may also result in the loss of patents or patent rights important to our business. Many countries, including certain countries in Europe, have compulsory licensing laws under which a patent owner may be compelled to grant licenses to other parties. In addition, many countries limit the enforceability of patents against other parties, including government agencies or government contractors. In these countries, the patent owner may have limited remedies, which could materially diminish the value of the patent. In addition, the laws of some foreign countries do not protect intellectual property rights to the same extent as do the laws of the United States, particularly in the field of medical products and procedures.

 

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If we are unable to prevent unauthorized use or disclosure of our proprietary trade secrets and unpatented know-how, our ability to compete will be harmed.

 

Proprietary trade secrets, copyrights, trademarks and unpatented know-how are also very important to our business. We rely on a combination of trade secrets, copyrights, trademarks, confidentiality agreements and other contractual provisions and technical security measures to protect certain aspects of our technology, especially where we do not believe that patent protection is appropriate or obtainable. We require our office holders, employees, consultants and distributers of our products and most third parties (such as contractors or clinical collaborators) to execute confidentiality agreements in connection with their relationships with us. However, these measures may not be adequate to safeguard our proprietary intellectual property and conflicts may, nonetheless, arise regarding ownership of inventions. Such conflicts may lead to the loss or impairment of our intellectual property or to expensive litigation to defend our rights against competitors who may be better funded and have superior resources. Our office holders, employees, consultants and other advisors may unintentionally or willfully disclose our confidential information to competitors. In addition, confidentiality agreements may be unenforceable or may not provide an adequate remedy in the event of unauthorized disclosure. Enforcing a claim that a third party illegally obtained and is using our trade secrets is expensive and time consuming, and the outcome is unpredictable. Moreover, our competitors may independently develop equivalent knowledge, methods and know-how. Unauthorized parties may also attempt to copy or reverse engineer certain aspects of our products that we consider proprietary. As a result, other parties may be able to use our proprietary technology or information, and our ability to compete in the market would be harmed.

 

We could become subject to patent and other intellectual property litigation that could be costly, result in the diversion of management’s attention, require us to pay damages and force us to discontinue selling our products.

 

Our industry is characterized by competing intellectual property and a substantial amount of litigation over patent and other intellectual property rights. Determining whether a product infringes a patent involves complex legal and factual issues, and the outcome of a patent litigation action is often uncertain. No assurance can be given that patents containing claims covering our products, parts of our products, technology or methods do not exist, have not been filed or could not be filed or issued. Furthermore, our competitors or other parties may assert that our products and the methods we employ in the use of our products are covered by U.S. or foreign patents held by them. In addition, because patent applications can take many years to issue and because publication schedules for pending applications vary by jurisdiction, there may be applications now pending of which we are unaware and which may result in issued patents which our current or future products infringe. Also, because the claims of published patent applications can change between publication and patent grant, there may be published patent applications with claims that we infringe. There could also be existing patents that one or more of our products or parts may infringe and of which we are unaware. As the number of competitors in the endoscopic procedure market grows, and as the number of patents issued in this area grows, the possibility of patent infringement claims against us increases.

 

Infringement actions and other intellectual property claims and proceedings brought against or by us, whether with or without merit, may cause us to incur substantial costs and could place a significant strain on our financial resources, divert the attention of management from our business and harm our reputation. Some of our competitors may be able to sustain the costs of complex patent or intellectual property litigation more effectively than we can because they have substantially greater resources

 

We cannot be certain that we will successfully defend against allegations of infringement of patents and intellectual property rights of others. In the event that we become subject to a patent infringement or other intellectual property lawsuit and if the other party’s patents or other intellectual property were upheld as valid and enforceable and we were found to infringe the other party’s patents or violate the terms of a license to which we are a party, we could be required to pay damages. We could also be prevented from selling our products unless we could obtain a license to use technology or processes covered by such patents or will be able to redesign the product to avoid infringement. A license may not be available at all or on commercially reasonable terms or we may not be able to redesign our products to avoid infringement. Modification of our products or development of new products could require us to conduct clinical trials and to revise our filings with the applicable regulatory bodies, which would be time consuming and expensive. In these circumstances, we may be unable to sell our products at competitive prices or at all, our business and operating results could be harmed.

 

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We may be subject to claims that our employees, consultants, or independent contractors have wrongfully used or disclosed confidential information of third parties or, that our employees have wrongfully used or disclosed alleged trade secrets of their former employers.

 

Certain of our employees and personnel were previously employed at universities, medical institutions, or other biotechnology or pharmaceutical companies. Although we try to ensure that our employees, consultants, and independent contractors do not use the proprietary information or know-how of others in their work for us, we may be subject to claims that we or our employees, consultants, or independent contractors have inadvertently or otherwise used or disclosed intellectual property, including trade secrets or other proprietary information, of any of our employee’s former employer or other third parties. Litigation may be necessary to defend against these claims. If we fail in defending any such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights or personnel. Even if we are successful in defending against such claims, litigation could result in substantial costs and be a distraction to management and other employees. Furthermore, universities or medical institutions who employ some of our key employees and personnel in parallel to their engagement by us may claim that intellectual property developed by such person is owned by the respective academic or medical institution under the respective institution intellectual property policy or applicable law.

 

 We may be subject to claims challenging the inventorship or ownership of our patents and other intellectual property.

 

We may be subject to claims that former employees, collaborators, or other third parties have an ownership interest in our patents or other intellectual property. Ownership disputes may arise in the future, for example, from conflicting obligations of consultants or others who are involved in developing our product candidates. Litigation may be necessary to defend against these and other claims challenging inventorship or ownership. If we fail in defending any such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights, such as exclusive ownership of, or right to use, valuable intellectual property. Such an outcome could have a material adverse effect on our business. Even if we are successful in defending against such claims, litigation could result in substantial costs and be a distraction to management and other employees. 

 

Disruptions to our information technology systems due to cyber-attacks or our failure to upgrade and adjust our information technology systems, may materially impair our operations, hinder our growth and materially and adversely affect our business and results of operations.

 

We believe that an appropriate information technology, or IT, infrastructure is important in order to support our daily operations and the growth of our business. If we experience difficulties in implementing new or upgraded information systems or experience significant system failures, or if we are unable to successfully modify our management information systems or respond to changes in our business needs, we may not be able to effectively manage our business, and we may fail to meet our reporting obligations. Additionally, if our current back-up storage arrangements and our disaster recovery plan are not operated as planned, we may not be able to effectively recover our information system in the event of a crisis, which may materially and adversely affect our business and results of operations.

 

In the current environment, there are numerous and evolving risks to cybersecurity and privacy, including criminal hackers, hacktivists, state-sponsored intrusions, industrial espionage, employee malfeasance and human or technological error. High-profile security breaches at other companies and in government agencies have increased in recent years, and security industry experts and government officials have warned about the risks of hackers and cyber-attacks targeting businesses such as ours. Computer hackers and others routinely attempt to breach the security of technology products, services and systems, and to fraudulently induce employees, customers, or others to disclose information or unwittingly provide access to systems or data. We can provide no assurance that our current IT system or any updates or upgrades thereto and the current or future IT systems of our distributors use or may use in the future, are fully protected against third-party intrusions, viruses, hacker attacks, information or data theft or other similar threats. Legislative or regulatory action in these areas is also evolving, and we may be unable to adapt our IT systems or to manage the IT systems of third parties to accommodate these changes. We have experienced and expect to continue to experience actual or attempted cyber-attacks of our IT networks. Although none of these actual or attempted cyber-attacks has had a material adverse impact on our operations or financial condition, we cannot guarantee that any such incidents will not have such an impact in the future.

 

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Risks Related to Regulatory Compliance

 

If we or our contractors or service providers fail to comply with regulatory laws and regulations, we or they could be subject to regulatory actions, which could affect our ability to develop, market and sell our products in the medical field and any other or future products that we may develop and may harm our reputation in the medical field.

 

If we or our manufacturers or other third-party contractors fail to comply with applicable federal, state or foreign laws or regulations, including with respect to healthcare and data privacy, we could be subject to regulatory actions, which could affect our ability to develop, market and sell our current products or any future products which we may develop in the future and could harm our reputation and lead to reduced demand for or non-acceptance of our proposed products by the market.

 

Regulatory reforms may adversely affect our ability to sell our products profitably.

 

From time to time, legislation is drafted and introduced in the United States, European Union or other countries in which we operate, that could significantly change the statutory provisions governing the clearance or approval, manufacture and marketing of our products, including in the medical devices industry. In addition, regulations and guidance may often be revised or reinterpreted by the regulatory authorities in ways that may significantly affect our business and our products. It is impossible to predict whether legislative changes will be enacted or interpretations changed, and what the impact of such changes, if any, may be.

 

If we fail to comply with the extensive government regulations relating to our business, we may be subject to fines, injunctions and other penalties that could harm our business.

 

The application of our MUSE system as a medical device is subject to extensive regulation by the FDA, pursuant to the Federal Food, Drug, and Cosmetic Act, or FDCA, and various other federal, state and foreign governmental authorities. Government regulations and requirements specific to medical devices are wide ranging and govern, among other things:

 

  design, development and manufacturing;

 

  testing, labeling and storage;

 

  clinical trials;

  

  product safety;

  

  marketing, sales and distribution;

  

  premarket clearance or approval;

  

  record keeping procedures;

  

  advertising and promotions; and

  

  product recalls and field corrective actions.

 

We are subject to annual regulatory audits in order to maintain our quality system certifications, CE mark permissions, FDA Clearance and Canadian medical device license. We do not know whether we will be able to continue to affix the CE mark for new or modified products or that we will continue to meet the quality and safety standards required to maintain the permissions and license we have already received. If we are unable to maintain our quality system certifications and permission to affix the CE mark to our products, we will no longer be able to sell our products in member countries of the European Union or other areas of the world that require CE’s or FDA’s approval of medical devices. If we are unable to maintain our quality system certifications and Canadian medical device license, we will not be able to sell our products in Canada.

 

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Our medical device products and operations are also subject to regulation by the Medical Devices and Accessories Division in the Israeli Ministry of Health, or AMAR, which is responsible for the registration of medical devices in Israel, issuance of import licenses and monitoring marketing of medical equipment. We have received an AMAR approval in Israel. If we fail to comply with the extensive government regulations relating to our business, we may be subject to fines, injunctions and other penalties that could harm our business.

 

Risks Related to Our Operations in Israel

 

Our headquarters, manufacturing facilities, and administrative offices are located in Israel and, therefore, our results may be adversely affected by military instability in Israel.

 

Many of our employees, including certain management members operate from our offices that are located in Omer, Israel. In addition, a number of our officers and directors are residents of Israel. Accordingly, political, economic, and military conditions in Israel and the surrounding region may directly affect our business and operations. In recent years, Israel has been engaged in sporadic armed conflicts with Hamas, an Islamist terrorist group that controls the Gaza Strip, with Hezbollah, an Islamist terrorist group that controls large portions of southern Lebanon, and with Iranian-backed military forces in Syria. In addition, Iran has threatened to attack Israel and may be developing nuclear weapons. Some of these hostilities were accompanied by missiles being fired from the Gaza Strip against civilian targets in various parts of Israel, including areas in which our employees and some of our consultants are located, and negatively affected business conditions in Israel. Any hostilities involving Israel or the interruption or curtailment of trade between Israel and its trading partners could adversely affect our operations and results of operations.

 

Our commercial insurance does not cover losses that may occur as a result of events associated with war and terrorism. Although the Israeli government currently covers the reinstatement value of direct damages that are caused by terrorist attacks or acts of war, we cannot assure you that this government coverage will be maintained or that it will sufficiently cover our potential damages. Any losses or damages incurred by us could have a material adverse effect on our business. Any armed conflicts or political instability in the region would likely negatively affect business conditions and could harm our results of operations. Further, in the past, the State of Israel and Israeli companies have been subjected to economic boycotts. Several countries still restrict business with the State of Israel and with Israeli companies. These restrictive laws and policies may have an adverse impact on our operating results, financial condition or the expansion of our business. A campaign of boycotts, divestment and sanctions has been undertaken against Israel, which could also adversely impact our business.

 

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

 

There is currently a level of unprecedented political instability on Israel’s domestic front. The Israeli government has been in a transitionary phase since December 2018 when the Israeli Parliament, or the Knesset, first resolved to dissolve itself and call for new general elections. Israel held general elections twice in 2019 and once again in 2020. A fourth election tool place on March 23, 2021. The Knesset, for reasons related to this extended political turmoil, failed to pass a budget for the year 2021, and certain government ministries, certain of which are critical to the operation of our business, operated without necessary resources and, assuming the current political stalemate persists, may not receive sufficient funding moving forward. This political reality is further compounded by a budget deficit of NIS 160.3 billion ($50.4 billion) for the year 2020, which is roughly three times larger than in 2019 and the highest on record since Israel’s founding. Given the likelihood that the current situation will not be resolved during the next calendar year, our ability to conduct our business effectively may be adversely materially affected.

 

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Exchange rate fluctuations between foreign currencies and the U.S. Dollar may negatively affect our earnings.

 

Our reporting and functional currency is the U.S. dollar. Our, ScoutCam, Pro and Purex revenues are currently primarily payable in U.S. dollars and we expect our future revenues to be denominated primarily in U.S. dollars. However, certain amount of our expenses are in NIS and as a result, we are exposed to the currency fluctuation risks relating to the recording of our expenses in U.S. dollars. We may, in the future, decide to enter into currency hedging transactions. These measures, however, may not adequately protect us from material adverse effects.

 

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

 

Some of our operations in Israel may entitle us to certain tax benefits under the Law for the Encouragement of Capital Investments, 5719-1959, or the Investments Law, once we begin to produce taxable income. From time to time, the government of Israel has considered reducing or eliminating the tax benefits available to Benefitted Enterprise programs such as ours. If we do not meet the requirements for maintaining these benefits, they may be reduced or cancelled and the relevant operations would be subject to Israeli corporate tax at the standard rate, which was set at 23% in 2018 and thereafter. In addition to being subject to the standard corporate tax rate, we could be required to refund any tax benefits that we have already received, plus interest and penalties thereon. Even if we continue to meet the relevant requirements, the tax benefits that our current “Benefitted Enterprise” is entitled to may not be continued in the future at their current levels, or at all. If these tax benefits were reduced or eliminated, the amount of taxes that we would have to pay if we produce revenues would likely increase, as all of our operations would consequently be subject to corporate tax at the standard rate, which could adversely affect our results of operations. Additionally, if we increase our activities outside of Israel, for example, by way of acquisitions, our increased activities may not be eligible for inclusion in Israeli tax benefits programs. See “Item 10. Additional Information - E. Taxation.” 

 

In the past, we received Israeli government grants for certain of our research and development activities. The terms of those grants may require us, in addition to payment of royalties, to satisfy specified conditions in order to manufacture products and transfer technologies outside of Israel, including increase of the amount of our liabilities in connection with such grants. If we fail to comply with the requirements of the Innovation Law (as defined below), we may be required to pay penalties in addition to repayment of the grants, and may impair our ability to sell our technology outside of Israel.

 

Some of our research and development efforts were financed in part through royalty-bearing grants, in an amount of $0.2 million that we received from the Israeli Innovation Authority of the Israeli Ministry of Economy and Industry, or IIA. When know-how is developed using IIA grants, the Encouragement of Research, Development and Technological Innovation in the Industry Law 5744-1984 and the regulations thereunder, restricts our ability to manufacture products and transfer technology and know-how, developed as a result of IIA funding, outside of Israel.

 

Under the Innovation Law and the regulations thereunder, a recipient of IIA grants is required to return the grants by the payment of royalties of 3% to 6% on the revenues generated from the sale of products (and related services) developed (in whole or in part) under IIA program up to the total amount of the grants received from IIA, linked to the U.S. dollar and bearing interest at an annual rate of LIBOR applicable to U.S. dollar deposits, as published on the first business day of each calendar year.

 

The United Kingdom’s Financial Conduct Authority, which regulates the London Interbank Offered Rate (LIBOR), announced that it will no longer persuade or require banks to submit rates for LIBOR after January 1, 2022. The grants received from the IIA bear an annual interest rate based on the 12-month LIBOR. Accordingly, there is considerable uncertainty regarding the publication of LIBOR beyond 2022. While it is not currently possible to determine precisely whether, or to what extent, the withdrawal and replacement of LIBOR would affect us, the implementation of alternative benchmark rates to LIBOR may increase our financial liabilities to the IIA. To date, IIA has not published a decision regarding an alternative benchmark to be used in the LIBOR’s stead.

 

Transfer of IIA funded know-how and related intellectual property rights outside of Israel, including by way of license for research and development purpose requires pre-approval by IIA and imposes certain conditions, including, requirement of payment of a redemption fee calculated according to the formula provided in the Innovation Law which takes into account, among others, the consideration for such know-how paid to us in the transaction in which the technology is transferred, research and development expenses, the amount of IIA support, the time of completion of IIA supported research project and other factors, while the redemption fee will not exceed 600% of the grants amount plus interest. No assurance can be given that approval to any such transfer, if requested, will be granted and what will be the amount of the redemption fee payable.

 

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Transfer of IIA funded know-how and related intellectual property rights to an Israeli company requires a pre-approval by IIA and may be granted if the recipient undertakes to fulfil all the liabilities to IIA and undertakes to abide by the provisions of Innovation Law, including the restrictions on the transfer of know-how and the manufacturing rights outside of Israel and the obligation to pay royalties (note that there will be an obligation to pay royalties to IIA from the income received by us in connection with such transfer transaction as part of the royalty payment obligation). No assurance can be given that approval to any such transfer, if requested, will be granted.

 

In addition, the products may be manufactured outside Israel by us or by another entity only if prior approval is received from IIA (such approval is not required for the transfer outside of Israel of less than 10% of the manufacturing capacity in the aggregate, and in such event only a notice to IIA is required). As a condition for obtaining approval to manufacture outside Israel, we would be required to pay increased royalties, which usually amount to 1% in addition to the standard royalties rate, and also the total amount of our liability to IIA will be increased to between 120% and 300% of the grants we received from IIA, depending on the manufacturing volume that is performed outside Israel (less royalties already paid to IIA). This restriction may impair our ability to outsource manufacturing rights abroad, however, it does not restrict export of our products that incorporate IIA funded know-how. 

 

A company also has the option of declaring in its IIA grant application its intention to exercise a portion of the manufacturing capacity abroad, thus avoiding the need to obtain additional approval. Such declaration may affect the increased royalties cap.

 

The restrictions under the Innovation Law (such as with respect to transfer of manufacturing rights abroad or the transfer of IIA funded know-how and related intellectual property rights abroad) will continue to apply even our liabilities to IIA in full and will cease to exist only upon payment of the redemption fee described above.

 

Furthermore, in the event that we undertake a transaction involving the transfer to a non-Israeli entity of technology developed with IIA funding pursuant to a merger or similar transaction, the consideration available to our shareholders may be reduced by the amounts we are required to pay to IIA. Any approval, if given, will generally be subject to additional financial obligations. Failure to comply with the requirements under the Innovation Law may subject us to mandatory repayment of grants received by us (together with interest and penalties), as well as expose us to criminal proceedings.

 

In May 2017, IIA issued new rules for licensing know how developed with IIA funding outside of Israel, or the Licensing Rules, allowing us to enter into licensing arrangements or grant other rights in know-how developed under IIA programs outside of Israel, subject to the prior consent of IIA and payment of license fees to IIA, calculated in accordance with the Licensing Rules. The payment of the license fees will not discharge us from the obligations to pay royalties or other payments to IIA.

 

We were members of an IIA-related consortium, in which certain of our technologies were developed. We are required to provide licenses to the other members of the consortium to use such technologies for no consideration, which could reduce our profitability.

 

Certain of our miniaturized imaging equipment may be based on technological models developed as part of the Bio Medical Photonic Consortium in the framework of Magnet program of the IIA. We received $2.3 million from IIA in the framework of the Consortium. The property rights in and to “new information” (as such term is defined therein) which has been developed by a member of the Consortium, in the framework of a research and development program conducted as part of the Consortium, belongs solely to the Consortium member that developed it. The developing member is obligated to provide the other members in the Consortium a non-sublicensable license to use of the “new information” developed by such member, without consideration, provided that the other members do not transfer such “new information” to any entity which is not a member of the Consortium, without the consent of such member. No royalties from this funding are payable to the Israeli government, however, the provisions of the Innovation Law and related regulations regarding, inter alia, the restrictions on the transfer of know-how outside of Israel do apply, mutatis mutandis.

 

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

 

Israeli corporate law regulates mergers, requires tender offers for acquisitions of shares above specified thresholds, requires special approvals for transactions involving directors, officers or significant shareholders and regulates other matters that may be relevant to such types of transactions. For example, a merger may not be consummated unless at least 50 days have passed from the date on which a merger proposal is filed by each merging company with the Israel Registrar of Companies and at least 30 days have passed from the date on which the shareholders of both merging companies have approved the merger. In addition, a majority of each class of securities of the target company must approve a merger. Moreover, a tender offer for all of a company’s issued and outstanding shares can only be completed if the acquirer receives positive responses from the holders of at least 95% of the issued share capital. Completion of the tender offer also requires approval of a majority of the offerees that do not have a personal interest in the tender offer, unless, following consummation of the tender offer, the acquirer would hold at least 98% of the Company’s outstanding shares. Furthermore, the shareholders, including those who indicated their acceptance of the tender offer, may, at any time within six months following the completion of the tender offer, claim that the consideration for the acquisition of the shares does not reflect their fair market value, and petition an Israeli court to alter the consideration for the acquisition accordingly, unless the acquirer stipulated in its tender offer that a shareholder that accepts the offer may not seek such appraisal rights, and the acquirer or the company published all required information with respect to the tender offer prior to the tender offer’s response date.

 

Furthermore, Israeli tax considerations may make potential transactions unappealing to us or to our shareholders whose country of residence does not have a tax treaty with Israel exempting such shareholders from Israeli tax.  

 

These and other similar provisions could delay, prevent or impede an acquisition of us or our merger with another company, even if such an acquisition or merger would be beneficial to us or to our shareholders.

 

It may be difficult to enforce a judgment of a U.S. court against us and our officers and directors and the Israeli experts named in this annual report on Form 20-F in Israel or the United States, to assert United States securities laws claims in Israel or to serve process on our officers and directors and these experts.

 

We are incorporated in Israel. Certain of our executive officers and directors reside in Israel and most of our assets and most of the assets of these persons are located outside of the United States. Therefore, a judgment obtained against us, or any of these persons in the United States, including one based on the civil liability provisions of the U.S. federal securities laws, may not be collectible in the United States and may not necessarily be enforced by an Israeli court. It may also be difficult to affect service of process on these persons in the United States or to assert United States securities law claims in original actions instituted in Israel.

  

Even if an Israeli court agrees to hear such claim, it may determine that Israeli law, and not U.S. law is applicable to the claim. Under Israeli law, if U.S. law is found to be applicable to such claim, the content of applicable U.S. law must be proven as a fact by expert witnesses, which can be a time consuming and costly process, and certain matters of procedure would also be governed by Israeli law. There is little binding case law in Israel that addresses the matters.

 

The rights and responsibilities of a shareholder will be governed by Israeli law which differs in some material respects from the rights and responsibilities of shareholders of U.S. companies.

 

The rights and responsibilities of the holders of our Ordinary Shares are governed by our articles of association and by Israeli law. These rights and responsibilities differ in some material respects from the rights and responsibilities of shareholders in typical U.S.-registered corporations. In particular, a shareholder of an Israeli company has certain duties to act in good faith and fairness towards the company and other shareholders, and to refrain from abusing its power in the company. There is limited case law available to assist us in understanding the nature of this duty or the implications of these provisions. These provisions may be interpreted to impose additional obligations and liabilities on holders of our Ordinary Shares that are not typically imposed on shareholders of U.S. corporations.

 

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The ability of any Israeli company to pay dividends is subject to Israeli law and the amount of cash dividends payable may be subject to devaluation in the Israeli currency.

 

The ability of an Israeli company to pay dividends is governed by Israeli law, which provides that cash dividends may be paid only out of retained earnings or earnings derived over the two most recent fiscal years, whichever is higher, as determined for statutory purposes in Israeli currency, provided that there is no reasonable concern that payment of a dividend will prevent a company from satisfying its existing and foreseeable obligations as they become due. In the event of a devaluation of the Israeli currency against the U.S. dollar, the amount in U.S. dollars available for payment of cash dividends out of prior years’ earnings will decrease.

 

The termination or reduction of tax and other incentives that the Israeli Government provides to domestic companies may increase the costs involved in operating a company in Israel.

 

The Israeli government currently provides major tax and capital investment incentives to domestic companies, as well as grant and loan programs relating to research and development and marketing and export activities. In recent years, the Israeli Government has reduced the benefits available under these programs and the Israeli Governmental authorities have indicated that the government may in the future further reduce or eliminate the benefits of those programs. We currently take advantage of these programs. There is no assurance that such benefits and programs would continue to be available in the future to us. If such benefits and programs were terminated or further reduced, it could have an adverse effect on our business, operating results and financial condition.

 

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

 

A significant portion of our intellectual property has been developed by our employees in the course of their employment for us. Under the Israeli Patent Law, 5727-1967, or the Patent Law, inventions conceived by an employee in the course and as a result of or arising from his or her employment with a company are regarded as “service inventions,” which belong to the employer, absent a specific agreement between the employee and employer giving the employee service invention rights. The Patent Law also provides that if there is no such agreement between an employer and an employee, the Israeli Compensation and Royalties Committee, or the Committee, a body constituted under the Patent Law, will determine whether the employee is entitled to remuneration for his inventions. Recent case law clarifies that the right to receive consideration for “service inventions” can be waived by the employee and that in certain circumstances, such waiver does not necessarily have to be explicit. The Committee will examine, on a case-by-case basis, the general contractual framework between the parties, using interpretation rules of the general Israeli contract laws. Further, the Committee has not yet determined one specific formula for calculating this remuneration (but rather uses the criteria specified in the Patent Law). Although we generally enter into assignment-of-invention agreements with our employees pursuant to which such individuals assign to us all rights to any inventions created in the scope of their employment or engagement with us, we may face claims demanding remuneration in consideration for assigned inventions. As a consequence of such claims, we could be required to pay additional remuneration or royalties to our current and/or former employees, or be forced to litigate such claims, which could negatively affect our business.

 

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Risks Related to an Investment Our Securities

 

We may be a passive foreign investment company, or PFIC, for U.S. federal income tax purposes in 2019 or in any subsequent year. This may result in adverse U.S. federal income tax consequences for U.S. taxpayers that are holders of our securities.

 

We will be treated as a PFIC for U.S. federal income tax purposes in any taxable year in which either (1) at least 75% of our gross income is “passive income” or (2) on average at least 50% of our assets by value produce passive income or are held for the production of passive income. Passive income for this purpose generally includes, among other things, certain dividends, interest, royalties, rents and gains from commodities and securities transactions and from the sale or exchange of property that gives rise to passive income. Passive income also includes amounts derived by reason of the temporary investment of funds, including those raised in a public offering. In determining whether a non-U.S. corporation is a PFIC, a proportionate share of the income and assets of each corporation in which it owns, directly or indirectly, at least a 25% interest (by value) is taken into account. There can be no assurance that we are not a PFIC in 2020 and will not be a PFIC in subsequent years, as our operating results for any such years may cause us to be a PFIC. If we are a PFIC in 2020, or any subsequent year, and a U.S. shareholder does not make an election to treat us as a “qualified electing fund,” or QEF, or make a “mark-to-market” election, then “excess distributions” to a U.S. shareholder, and any gain realized on the sale or other disposition of our securities will be subject to special rules. Under these rules: (1) the excess distribution or gain would be allocated ratably over the U.S. shareholder’s holding period for the securities; (2) the amount allocated to the current taxable year and any period prior to the first day of the first taxable year in which we were a PFIC would be taxed as ordinary income; and (3) the amount allocated to each of the other taxable years would be subject to tax at the highest rate of tax in effect for the applicable class of taxpayer for that year, and an interest charge for the deemed deferral benefit would be imposed with respect to the resulting tax attributable to each such other taxable year. In addition, if the U.S. Internal Revenue Service, or the IRS, determines that we are a PFIC for a year with respect to which we have determined that we were not a PFIC, it may be too late for a U.S. shareholder to make a timely QEF or mark-to-market election. U.S. shareholders who hold or have held our securities during a period when we were or are a PFIC will be subject to the foregoing rules, even if we cease to be a PFIC in subsequent years, subject to exceptions for U.S. shareholders who made a timely QEF or mark-to-market election. A U.S. shareholder can make a QEF election by completing the relevant portions of and filing IRS Form 8621 in accordance with the instructions thereto.

 

The market prices of our securities are subject to fluctuation, which could result in substantial losses by our investors.

 

The stock market in general and the market prices of our ADSs on Nasdaq, in particular, are or will be subject to fluctuation, and changes in these prices may be unrelated to our operating performance. We anticipate that the market prices of our securities will continue to be subject to wide fluctuations. The market price of our securities is, and will be, subject to a number of factors, including:

 

  announcements of technological innovations or new products by us or others;

 

  announcements by us of significant acquisitions, strategic partnerships, in-licensing, out-licensing, joint ventures or capital commitments;

  

  expiration or terminations of licenses, research contracts or other collaboration agreements;

   

  public concern as to the safety of the equipment we sell;

  

  the volatility of market prices for shares of medical devices companies generally;

  

  developments concerning intellectual property rights or regulatory approvals;

 

  variations in our and our competitors’ results of operations;

 

  changes in revenues, gross profits and earnings announced by the company;

 

  changes in estimates or recommendations by securities analysts, if our Ordinary Shares or the ADSs are covered by analysts;
     
  fluctuations in the stock price of our publicly traded subsidiaries;

 

  changes in government regulations or patent decisions; and

  

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

 

These factors may materially and adversely affect the market price of our securities s and result in substantial losses by our investors.

 

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We do not know whether a market for the ADSs will be sustained or what the trading price of the ADSs will be and as a result it may be difficult for you to sell your ADSs.

 

Although our ADSs trade on Nasdaq, an active trading market for the ADSs may not be sustained. It may be difficult for you to sell your ADSs without depressing the market price for the ADSs. As a result of these and other factors, you may not be able to sell your ADSs. Further, an inactive market may also impair our ability to raise capital by selling ADSs and may impair our ability to enter into strategic partnerships or acquire companies or products by using our ADSs as consideration.

 

We do not know whether a market for our Series C Warrants will be sustained or what the trading price of the Series C Warrants will be and as a result it may be difficult for you to sell your Series C Warrants.

 

Even though our Series C Warrant are listed on Nasdaq, there is no assurance that a market will be sustained or maintain a high enough per warrant trading price to maintain the national exchange listing requirements in the future. Without an active market, the liquidity of the Series C Warrants will be limited.

 

Our Series C Warrants are speculative in nature.

 

The Series C Warrants do not confer any rights of ownership of ordinary shares or ADSs on their holders, such as voting rights or the right to receive dividends, but only represent the right to acquire ADSs at a fixed price for a limited period of time. Holders of the Series C Warrants may exercise their right to acquire ADSs and pay the exercise price per ADS of $3.50, subject to adjustment upon certain events, prior to five years from the date of issuance, after which date any unexercised warrants will expire and have no further value.

 

Future sales of our securities could reduce their market price.

 

Substantial sales of our securities on Nasdaq, may cause the market price of our securities to decline. Sales by us or our security holders of substantial amounts of our securities, or the perception that these sales may occur in the future, could cause a reduction in the market price of our securities.

 

The issuance of any additional Ordinary Shares, ADSs, warrants or any securities that are exercisable for or convertible into our Ordinary Shares or ADSs, may have an adverse effect on the market price of our securities and will have a dilutive effect on our existing shareholders and holders of ADSs.

 

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Holders of ADSs may not receive the same distributions or dividends as those we make to the holders of our Ordinary Shares, and, in some limited circumstances, you may not receive dividends or other distributions on our Ordinary Shares and you may not receive any value for them, if it is illegal or impractical to make them available to you.

 

The depositary for the ADSs has agreed to pay to you the cash dividends or other distributions it or the custodian receives on ordinary shares or other deposited securities underlying the ADSs, after deducting its fees and expenses. You will receive these distributions in proportion to the number of Ordinary Shares your ADSs represent. However, the depositary is not responsible if it decides that it is unlawful or impractical to make a distribution available to any holders of ADSs. For example, it would be unlawful to make a distribution to a holder of ADSs if it consists of securities that require registration under the Securities Act of 1933, as amended, or the Securities Act, but that are not properly registered or distributed under an applicable exemption from registration. In addition, conversion into U.S. dollars from foreign currency that was part of a dividend made in respect of deposited ordinary shares may require the approval or license of, or a filing with, any government or agency thereof, which may be unobtainable. In these cases, the depositary may determine not to distribute such property and hold it as “deposited securities” or may seek to effect a substitute dividend or distribution, including net cash proceeds from the sale of the dividends that the depositary deems an equitable and practicable substitute. We have no obligation to register under U.S. securities laws any ADSs, ordinary shares, rights or other securities received through such distributions. We also have no obligation to take any other action to permit the distribution of ADSs, ordinary shares, rights or anything else to holders of ADSs. In addition, the depositary may withhold from such dividends or distributions its fees and an amount on account of taxes or other governmental charges to the extent the depositary believes it is required to make such withholding. This means that you may not receive the same distributions or dividends as those we make to the holders of our ordinary shares, and, in some limited circumstances, you may not receive any value for such distributions or dividends if it is illegal or impractical for us to make them available to you. These restrictions may cause a material decline in the value of the ADSs.

 

Holders of ADSs must act through the depositary to exercise their rights as shareholders of our company.

 

Holders of our ADSs do not have the same rights of our shareholders and may only exercise the voting rights with respect to the underlying Ordinary Shares in accordance with the provisions of the Deposit Agreement. Under Israeli law and our articles of association, the minimum notice period required to convene a shareholders meeting is no less than 21 or 35 calendar days, depending on the proposals on the agenda for the shareholders meeting. When a shareholder meeting is convened, holders of ADSs may not receive sufficient notice of a shareholders’ meeting to permit them to withdraw their ordinary shares to allow them to cast their vote with respect to any specific matter. In addition, the Depositary and its agents may not be able to send voting instructions to holders of ADSs or carry out their voting instructions in a timely manner. We will make all reasonable efforts to cause the Depositary to extend voting rights to holders of the ADSs in a timely manner, but we cannot assure holders that they will receive the voting materials in time to ensure that they can instruct the Depositary to vote their Ordinary Shares underlying the ADSs. Furthermore, the Depositary and its agents will not be responsible for any failure to carry out any instructions to vote, for the manner in which any vote is cast or for the effect of any such vote. As a result, holders of ADSs may not be able to exercise their right to vote and they may lack recourse if their Ordinary Shares underlying the ADSs are not voted as they requested. In addition, in the capacity as a holder of ADSs, they will not be able to call a shareholders’ meeting. 

 

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We incur additional increased costs as a result of the listing of the ADSs for trading on Nasdaq, and our management is required to devote substantial time to new compliance initiatives and reporting requirements.

 

As a public company in the United States, we incur significant accounting, legal and other expenses as a result of the listing of the ADSs on Nasdaq. These include costs associated with corporate governance requirements of the Securities Exchange Commission, or the SEC, and the Marketplace Rules of the Nasdaq, as well as requirements under Section 404 and other provisions of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act. These rules and regulations increase our legal and financial compliance costs, introduce costs such as investor relations, stock exchange listing fees and shareholder reporting, and make some activities more time consuming and costly. Any future changes in the laws and regulations affecting public companies in the United States and Israel, including Section 404 and other provisions of the Sarbanes-Oxley Act, the rules and regulations adopted by the SEC and the rules of the Nasdaq Stock Market may result in increased costs to us as we respond to such changes. These laws, rules and regulations could make it more difficult or more costly for us to obtain certain types of insurance, including director and officer liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. The impact of these requirements could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, our board committees or as executive officers.

 

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

 

As a foreign private issuer, we are permitted to follow certain home country corporate governance practices instead of those otherwise required under the rules of the Nasdaq for domestic issuers. Following our home country governance practices as opposed to the requirements that would otherwise apply to a U.S. company listed on the Nasdaq, may provide less protection than is accorded to investors under the rules of the Nasdaq applicable to domestic issuers. For more information, see “Item 16G. Corporate Governance - Nasdaq Stock Market Listing Rules and Home Country Practices.”

 

In addition, as a foreign private issuer, we are exempt from the rules and regulations under the Securities Exchange Act of 1934, as amended, or the Exchange Act, related to the furnishing and content of proxy statements, and our officers, directors and principal shareholders are exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the Exchange Act. In addition, we are not required under the Exchange Act to file annual, quarterly and current reports and financial statements with the SEC as frequently or as promptly as domestic companies whose securities are registered under the Exchange Act.

 

We may lose our foreign private issuer status in the future, which could result in significant additional costs and expenses.

 

We are a foreign private issuer, as such term is defined in Rule 405 under the Securities Act, and therefore, we are not required to comply with all the periodic disclosure and current reporting requirements of the Exchange Act and related rules and regulations. Under Rule 405, the determination of foreign private issuer status is made annually on the last business day of an issuer’s most recently completed second fiscal quarter and, accordingly, the next determination will be made with respect to us on June 30, 2021.

 

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In the future, we would lose our foreign private issuer status if a majority of our shareholders, directors or management are U.S. citizens or residents and we fail to meet additional requirements necessary to avoid loss of foreign private issuer status. Although we have elected to comply with certain U.S. regulatory provisions, our loss of foreign private issuer status would make such provisions mandatory. The regulatory and compliance costs to us under U.S. securities laws as a U.S. domestic issuer may be significantly higher. If we are not a foreign private issuer, we will be required to file periodic reports and registration statements on U.S. domestic issuer forms with the U.S. Securities and Exchange Commission, or the SEC, which are more detailed and extensive than the forms available to a foreign private issuer. For example, the annual report on Form 10-K requires domestic issuers to disclose executive compensation information on an individual basis with specific disclosure regarding the domestic compensation philosophy, objectives, annual total compensation (base salary, bonus, equity compensation) and potential payments in connection with change in control, retirement, death or disability, while the SEC forms applicable to foreign private issuers permit them to disclose compensation information on an aggregate basis if executive compensation disclosure on an individual basis is not required or otherwise has not been provided in the issuer’s home jurisdiction. We disclose individual compensation information, but this disclosure is not as comprehensive as that required of U.S. domestic issuers since we are not required to disclose more detailed information in Israel. We intend to continue this practice as long as it is permitted under the SEC’s rules and Israel’s rules do not require more detailed disclosure. We will also have to mandatorily comply with U.S. federal proxy requirements, and our officers, directors and principal shareholders will become subject to the short-swing profit disclosure and recovery provisions of Section 16 of the Exchange Act. We may also be required to modify certain of our policies to comply with good governance practices associated with U.S. domestic issuers. Such conversion and modifications will involve additional costs. In addition, we may lose our ability to rely upon exemptions from certain corporate governance requirements on U.S. stock exchanges that are available to foreign private issuers.

 

If we are unable to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act as they apply to a foreign private issuer that is listing on a U.S. exchange for the first time, or our internal control over financial reporting is not effective, the reliability of our financial statements may be questioned, and our securities price may suffer.

 

Section 404 of the Sarbanes-Oxley Act requires a company subject to the reporting requirements of the U.S. securities laws to do a comprehensive evaluation of its and its subsidiaries’ internal control over financial reporting. As such, we are required to document and test our internal control procedures and our management is required to assess and issue a report concerning our internal control over financial reporting. In addition, when applicable to comply with this statute, our independent registered public accounting firm may be required to issue an opinion on the effectiveness of our internal control over financial reporting at a later date.

 

The continuous process of strengthening our internal controls and complying with Section 404 is complicated and time-consuming. Furthermore, as our business continues to grow both domestically and internationally, our internal controls will become more complex and will require significantly more resources and attention to ensure our internal controls remain effective overall. During the course of its testing, our management may identify weaknesses or deficiencies, which may not be remedied in a timely manner. If our management cannot favorably assess the effectiveness of our internal controls over financial reporting, or if our independent registered public accounting firm identifies material weaknesses in our internal control, investor confidence in our financial results may weaken, and the market price of our securities may suffer.

 

We may not satisfy Nasdaq’s requirements for continued listing. If we cannot satisfy these requirements, Nasdaq could delist our securities. 

 

Our ADSs are listed on Nasdaq under the symbol “MDGS”. To continue to be listed on Nasdaq, we are required to satisfy a number of conditions, including a minimum bid price of at least $1.00 per ADS, a market value of our publicly held shares of at least $1 million and shareholders’ equity of at least $2.5 million. 

 

If we are delisted from Nasdaq, trading in our securities may be conducted, if available, on the OTC Markets or, if available, via another market. In the event of such delisting, our shareholders would likely find it significantly more difficult to dispose of, or to obtain accurate quotations as to the value of our securities, and our ability to raise future capital through the sale of our securities could be severely limited. In addition, if our securities were delisted from Nasdaq, our ADSs could be considered a “penny stock” under the U.S. federal securities laws. Additional regulatory requirements apply to trading by broker-dealers of penny stocks that could result in the loss of an effective trading market for our securities. Moreover, if our securities were delisted from Nasdaq, we will no longer be exempt from certain provision of the Israeli Securities Law, and therefore will have increased disclosure requirements. 

   

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General Risk Factors

 

We do not intend to pay any cash dividends on our ordinary shares in the foreseeable future and, therefore, any return on your investment in our securities must come from increases in the value and trading price of our securities.

 

We have never declared or paid cash dividends on our securities and do not anticipate that we will pay any cash dividends on our securities in the foreseeable future, therefore, any return on your investment in our securities must come from increases in the value and trading price of our securities.

 

We intend to retain our earnings to finance the development and expenses of our business. Any future determination relating to our dividend policy will be at the discretion of our board of directors and will depend on a number of factors, including future earnings, our financial condition, operating results, contractual restrictions, capital requirements, business prospects, applicable Israeli law and other factors our board of directors may deem relevant.

 

Raising additional capital by issuing securities may cause dilution to existing shareholders.

 

We may seek additional capital through a combination of private and public equity offerings, debt financings and collaborations and strategic and licensing arrangements. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest will be diluted, and the terms of any such offerings may include liquidation or other preferences that may adversely affect the then existing shareholders rights. Debt financing, if available, would result in increased fixed payment obligations and may involve agreements that include covenants limiting or restricting our ability to take specific actions such as incurring debt or making capital expenditures. If we raise additional funds through collaboration, strategic alliance or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams or product candidates, or grant licenses on terms that are not favorable to us.

 

If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, our share price and trading volume could decline.

 

The trading market for our securities will depend on the research and reports that securities or industry analysts publish about us or our business. We do not have any control over these analysts. There can be no assurance that analysts will cover us, or provide favorable coverage. If one or more analysts downgrade our share or change their opinion of our securities, the price of our securities would likely decline. In addition, if one or more analysts cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which could cause our share price or trading volume to decline.

 

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ITEM 4. INFORMATION ON THE COMPANY

 

A. History and Development of the Company

 

Our legal and commercial name is Medigus Ltd. We were incorporated in the State of Israel on December 9, 1999, as a private company pursuant to the Israeli Companies Ordinance (New Version), 1983. In February 2006, we completed our initial public offering in Israel, and until January 25, 2021 our Ordinary Shares have since traded on the Tel Aviv Stock Exchange , or TASE, under the symbol “MDGS”. The last trading day of our ordinary shares on TASE was January 21, 2021, and on January 25, 2021, three months after the date of our announcement and in accordance with applicable Israeli law, our Ordinary Shares were delisted from TASE. Following the delisting, our ADSs have continued to be traded on the Nasdaq and we continue to file public reports and make public disclosures in accordance with the rules and regulations of the SEC and Nasdaq. Holders of our Ordinary Shares were urged to convert their shares into ADSs through their banks and brokers. Every twenty (20) Ordinary Shares are convertible into one (1) ADS.

 

In May 2015, we listed the ADSs on Nasdaq, and since August 2015 the ADSs have been traded on Nasdaq under the symbol “MDGS”. Our Series C Warrants have been trading on Nasdaq under the symbol “MDGSW” since July 2018. Each Series C Warrant is exercisable into one ADS for an exercise price of $3.50 and will expire five years from the date of issuance. Each ADS represents 20 ordinary shares.

 

On February 12, 2021, following the approval our shareholders at an extraordinary general meeting of the shareholders, we amended our articles of association to eliminate the par value of its ordinary shares, such that our authorized share capital following the amendment consists of 1,000,000,000 Ordinary Shares of no par value.

 

We are a public limited liability company and operate under the provisions of the Companies Law. Our registered office and principal place of business are located at Omer Industrial Park, No. 7A, P.O. Box 3030, Omer 8496500, Israel and our telephone number in Israel is + 972-72-260-2200. Our website address is www.medigus.com. The information contained on our website or available through our website is not incorporated by reference into and should not be considered a part of this annual report on Form 20-F.

 

On July 24, 2007, we formed a wholly owned subsidiary in the State of Delaware under the name Medigus USA LLC, or Medigus U.S. On October 1, 2013, a service agreement was executed between us and Medigus U.S. whereby Medigus U.S. would render services to us against reimbursement of its direct expenses as well as a premium at a reasonable rate. In February 2019, Medigus U.S. ceased its operations due to the termination of Chris Rowland, our former Chief Executive Officer, the only employee of Medigus U.S. On September 3, 2020 Medigus U.S. was dissolved.

 

On January 3, 2019, we formed a wholly owned subsidiary in Israel under the name ScoutCam Ltd. ScoutCam Ltd. was incorporated as part our reorganization of intended to distinguish our miniaturized imaging business, or the micro ScoutCamportfolio, from our other operations and to enable us to form a separate business unit with dedicated resources focused on the promotion of such technology.

 

We have previously engaged in the development, production and marketing of innovative endoscopic surgical devices for the treatment of Gastroesophageal Reflux Disease, or GERD, a common ailment which is predominantly treated by medical therapy (e.g., proton pump inhibitorsor in more chronic cases, conventional open or laparoscopic surgery. Our FDA-cleared and CE-marked product, known as the MUSESystem, enables a trans-orifice procedure, or scar less procedure through a natural opening in the body, that requires no incision for the treatment of gastroesophageal reflux, or GERD by reconstruction of the esophageal valve where the stomach and the esophagus meet. On June 3, 2019, we entered into a Licensing and Sale Agreement with Golden Grand for the know-how licensing and sale of goods relating to the MUSE system in China, Hong Kong, Taiwan and Macao. Under the agreement, we committed to provide a license, training services and goods to Golden Grand in consideration for $3,000,000 to be paid to us in four milestone based installments. To date, some of these milestones have been achieved and hawse have received $1,800,000. The final milestone shall be completed and the final installment paid upon completion of a MUSE assembly line in China. We are no longer maintaining efforts to commercialize the MUSE System and rather are pursuing potential opportunities to sell or grant a license for the use of our MUSEtechnology.

 

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On September 3, 2019, we consummated an investment agreement in Gix, and its wholly owned subsidiary Linkury, which operate in the field of software development, marketing, and distribution to internet users, for an aggregate investment of $5,000,000. The investment agreement contains customary provisions and warranties, and provides for us to invest NIS 5.4 million directly in Gix, which engages in internet advertising and whose shares are traded on TASE. The investment was made at a price per Gix share of NIS 4.15. We invested an additional NIS 9 million through a direct acquisition of the shares of Linkury from Gix, at a company valuation of Linkury of approximately NIS 96 million. In addition, we invested an additional $1 million in Gix through equity exchange by issuing Gix American Depositary Shares (ADRs) at a price of $3 per ADR in consideration for Gix shares based on a price per Gix share of NIS 4.15. In addition, we issued Gix warrants to purchase our ADRs in an amount equal to the ADRs issued to Gix, at an exercise price of $4 per ADR. On October 14, 2020, we notified Gix of our election to convert 793,448 ordinary shares of Linkury into Gix shares and as a result of such conversion, we are entitled to receive 9,858,698 ordinary shares of Gix. Pursuant to the provisions of the Companies Law, the issuance of shares representing 25% or more of the voting rights in a public company is subject to prior shareholder approval. We have requested that Gix convene a shareholder meeting as soon as practicably possible in order to obtain the requisite approval and affect the conversion, and on April 6, 2021 we exercised part of our right to convert Linkury conversion shares and were issued by Gix with additional 5,903,718 ordinary shares, such that following the partly conversion we hold 24.99% of Gix outstanding share capital on a fully diluted basis. The shareholder meeting of Gix has not yet been called.

 

On December 1, 2019, Medigus and ScoutCam Ltd. consummated a certain Amended and Restated Asset Transfer Agreement (A&R Transfer Agreement), effective March 1, 2019, which transferred and assigned certain assets and intellectual property rights related to its miniaturized imaging business, and a patent license. Under the A&R Transfer Agreement, we transferred two patent families in exchange for a license in connection with the marketing and sale of the Medigus Ultrasonic Surgical Endostapler. In addition, we granted to ScoutCam Ltd. a license to access, use, improve, develop, market and sell licensed intellectual property, including the right to any future versions, enhancements, improvements and derivative works of such licensed intellectual property in connection with the development and commercialization of the ScoutCam miniature video technology. On July 27, 2020, we amended the A&R Transfer Agreement such that the patents that were previously licenses to ScoutCam, were assigned to ScoutCam.

 

On December 30, 2019, or the Closing, we consummated a securities exchange agreement with Intellisense Solutions Inc., a Nevada corporation, or Intellisense, and as a result we assigned, transferred and delivered 100% of our holdings in ScoutCam Ltd. to Intellisense, in exchange for (i) common stock representing 60% of Intellisense’s issued and outstanding share capital as of the Closing, and (ii) in the event ScoutCam Ltd. achieves $33,000,000 in aggregate sales within the first three (3) years immediately following the Closing, we will receive additional shares of Intellisense’s common stock representing 10% of its outstanding share capital as of the Closing. Simultaneous with the Closing, Intellisense consummated a financing transaction in the aggregate amount of $3.3 million (gross) based on a company post-money valuation of $13.3 million. Following the aforementioned transaction, Intellisense changed its name to ScoutCam Inc. Following the technology transfer and the securities exchange agreement, ScoutCam began examining additional applications for our micro ScoutCamportfolio outside of the medical device industry, among others, the defense, aerospace, automotive, and industrial non-destructing-testing industries and is pursuing opportunities and collaborations in this field. ScoutCam plans to further expand the activity in these non-medical spaces.

 

On January 13, 2020, together with our advisor Mr. Kfir Zilberman we formed a subsidiary in Delaware, in which we hold 90% of the stock capital, under the name GERD IP, Inc. GERD IP was incorporated in accordance with our efforts to reorganize our assets and increase asset and organizational efficiencies. In connection thereto, we entered into a founders agreement as of January 12, 2020, with Kfir Zilberman. Under the founders agreement, we transferred certain patents to GERD IP in consideration for $14,000,000 in capital notes. We are entitled to all proceeds of GERD IP as repayment of any outstanding loans extended by us to GERD IP, before any dividend distributions, if any. The founders agreement subjects the transfer of GERD IP membership interests held by Kfir Zilberman to a right of first offer, and provides that owners of 51% of GERD IP membership interest may enforce a sale of GERD IP on the minority membership interest. We are obligated under the founders agreement to indemnify Kfir Zilberman for litigations expenses imposed on him or incurred by him in connection with his capacity as owner of a membership interest in GERD IP.

 

On April 19, 2020, we entered an Asset Transfer Agreement, effective January 20, 2020 with our majority owned subsidiary GERD IP. Pursuant to the Asset Transfer Agreement, we transferred certain of our patents in consideration for seven capital notes issued to us by GERD IP of $2,000,000 each.

 

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On February 18, 2020, we purchased 2,284,865 shares of Matomy Media Group Ltd. (“Matomy”), which represents 2.32% of its issued and outstanding share capital. On March 24, 2020 we completed an additional purchase of 22,326,246 shares of Matomy, which raised our aggregate holding to 24.99% of its issued and outstanding share capital. On January 19, 2021 and March 9, 2021, we sold 2,300,000 and 11,000,000 shares of Matomy, respectively. Subsequently, following such sales and the merger of Matomy with Automax, our aggregate holdings in Matomy decreased to 4.74% of its issued and outstanding share capital.

  

On September 29, 2020, Matomy announced that it had entered into a memorandum of understanding with Global Automax Ltd., or Automax, an Israeli private company that imports various leading car brands to Israel and Automax’s shareholders, for a proposed merger in which the shareholders of Automax would exchange 100% of their shares in Automax for shares of Matomy, or the Merger. On November 9, 2020, Matomy signed a binding agreement for the Merger, and on March 24, 2021 the preconditions under the merger agreement were met to complete the Merger. Following the closing of the Merger, Automax shareholders held approximately 53% of the outstanding share capital of Matomy and potentially up to a maximum of 73%, due to additional share issuances which are subject to achievement of certain revenue and profit milestones by Matomy, or if the value of the Matomy’s shares reach specific values after the Merger.

  

On October 8, 2020, we entered into a common stock purchase agreement with Pro, Purex, and their respective stockholders, or the Purex Purchase Agreement. Pro and Purex both are in the e-Commerce field and operate online stores for the sale of various consumer products on the Amazon online marketplace. Pursuant to the Purex Purchase Agreement, we agreed to acquire 50.01% of Pro’s and 50.03% of Purex’s issued and outstanding share capital on a fully diluted basis through a combination of cash investments in the companies and acquisition of additional shares from the current shareholders of the two companies in consideration for our restricted ADSs and a cash component. We agreed to invest an aggregate amount of $1,250,000 in Pro and Purex, pay $150,000 in cash consideration to the current stockholders, and issue $500,000 worth of restricted ADSs to the current stockholders of such companies, with the value of restricted ADSs may be subject to downward adjustment based on the 2020 results of the two companies. In addition, the companies’ current shareholders are entitled to additional milestone issuances of up to an aggregate $750,000 in restricted ADSs subject to the achievement by Pro and Purex of certain milestones throughout 2021. The transactions contemplated in the definitive agreements closed on January 4, 2021. In addition, we agreed to financing arrangements including (i) providing financing by way of a stockholder loan of a principal amount equal to $250,000, which may be extended up to an aggregate cap of $1 million of which we will finance 60%; and (ii) additional financing of up to a principal amount of $1 million, to finance the acquisition of additional online Amazon stores provided that such Acquisition Financing will constitute 80% of the applicable acquisition cost, with the remaining 20% to be financed by the other Pro’ and Purex’ stockholders.

 

Subsequently, according to the terms of the Purex Purchase Agreement, we entered into a loan and pledge agreement, effective January 5, 2021 with our majority owned subsidiaries Pro and Purex. Pursuant to this loan and pledge agreement, we extended a $250,000 loan, with an annual interest of 4%, to be repaid on the second anniversary of the effective date.

 

On February 2, 2021, we entered into a loan and pledge agreement, effective February 2, 2021, and amended on February 5, 2021, or the Pro Loan and Pledge Agreement, with our majority owned subsidiary Pro and its other stockholder, to finance Pro’s additional purchases of three new brands on the Amazon online marketplace. Pursuant to the Pro Loan and Pledge Agreement, we extended a $3.76 million loan, with an annual interest of 4%, to be repaid on the fifth anniversary of the effective date. In order to secure the repayment of the loan and interest amounts, Pro granted us a fixed charge over the stores currently owned and operated by Pro, a fixed charge over the minority shares of common stock held by the other Pro stockholder, and a floating charge of Pro cash and cash equivalents.

 

On October 14, 2020, we signed a share purchase agreement and a revolving loan agreement with Eventer, a technology company engaged in the development of unique tools for automatic creation, management, promotion, and billing of events and ticketing sales. The Eventer transaction closed on October 26, 2020. Pursuant to the share purchase agreement, we invested $750,000 and were issued an aggregate of 325,270 ordinary shares of Eventer, representing 50.01% of Eventer’s issued and outstanding share capital on a fully diluted basis. The share purchase agreement provides that we will invest an additional $250,000 in a second tranche, subject to Eventer achieving certain post-closing EBITDA based milestones during the fiscal years 2021 through 2023.

 

In addition, we entered into a revolving loan agreement with Eventer, or the Loan Agreement, under which we committed to lend up to $1,250,000 to Eventer through advances of funds upon Eventer’s request and subject to our approval. We extended an initial advance of $250,000 upon closing of the Loan Agreement, or the Initial Advance. Advances extended under the Loan Agreement may be repaid and borrowed in part or in full from time to time. The Initial Advance will be repaid in twenty-four equal monthly installments, commencing on the first anniversary of the Loan Agreement. Other advances extended under the Loan Agreement will be repaid immediately following, and in no event later than thirty days following the completion of the project or purpose for which they were made. Outstanding principal balances on the advances will bear interest at a rate equal to the higher of (i) 4% per year, or (ii) the interest rate determined by the Israeli Income Tax Ordinance [New Version] 5721-1961 and the rules and regulation promulgated thereunder. Interest payments will be made on a monthly basis.

 

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On January 7, 2021, we entered into an agreement to purchase a provisional patent filed with the United States Patent and Trademark Office and know-how relating to wireless vehicle battery charging technology in consideration for $75,000. Furthermore, we entered into a collaboration agreement with the seller, whereby the Company committed to invest $150,000 in a newly incorporated wholly owned subsidiary of the Company, Charging Robotics, incorporated on February 1, 2021, which will focus on our new electric vehicle and wireless charging activities. Pursuant to the collaboration agreement, seller is entitled to a monthly consultant fee as well as options to purchase 15% of Charging Robotics’ fully diluted share capital as of its incorporation date based on a valuation of $1,000,000.

 

On February 19, 2021, we entered into a joint venture agreement, or the Joint Venture Agreement, with Amir Zaid and Weijian Zhou and our wholly-owned subsidiary Charging Robotics, under which we formed a joint venture, under the name Revoltz Ltd, or Revoltz, to develop and commercialize three modular electric vehicle (EV) micro mobility vehicles for urban individual use and “last mile” cargo delivery. Under the terms of the Joint Venture Agreement, we invested an initial amount of $250,000. We were issued 19,990 ordinary shares of Revoltz, representing 19.99% of Revoltz’s issued and outstanding share capital on a fully diluted basis. The Joint Venture Agreement requires us to invest an additional $400,000 in a second tranche, subject to Revoltz achieving certain post-closing milestones, under which we will be entitled to 37.5% of Revoltz’s issued and outstanding share capital. In addition, within twelve (12) months following the completion of the second tranche (but in any event not later than December 31, 2022) we shall be entitled to invest an additional amount of $700,000 in consideration for Revoltz’s ordinary shares which, will result in us holding 50.1% Revoltz’s issued and outstanding share capital.

 

In July 2020, we entered into an ordinary share purchase agreement with Polyrizon, pursuant to which we purchased 19.9% of Polyrizon’s issued and outstanding capital stock on a fully diluted basis for aggregate gross proceeds of $10,000. We also agreed to loan Polyrizon $94,000. The loan does not bear any interest and is repayable only upon a deemed liquidation event, as defined in that share purchase agreement. In addition, we have an option, or the Option, to invest an additional amount of up to $1,000,000 in consideration for shares of Polyrizon such that following the additional investment, we will own 51% of Polyrizon’s capital stock on a fully diluted basis, excluding outstanding deferred shares, as defined in the share purchase agreement. The Option is exercisable until the earlier of (i) April 23, 2023, or (ii) the consummation by Polyrizon of equity financing of at least $500,000 based on a pre-money valuation of at least $10,000,000.

 

In addition, we entered into an exclusive reseller agreement with Polyrizon. As part of the reseller agreement, we received an exclusive global license to promote, market, and resell the Polyrizon products, focusing on a unique Biogel to protect from the COVID-19 virus. The term of the license is for four years, commencing upon receipt of sufficient FDA approvals for the lawful marketing and sale of the products globally. We also have the right to purchase the Polyrizon products on a cost-plus 15% basis for the purpose of reselling the products worldwide. In consideration of the license, Polyrizon will be entitled to receive annual royalty payments equal to 10% of our annualized operating profit arising from selling the products. To date, Poyrizon’s products have not received the requisite FDA approvals, and therefore manufacturing and commercialization efforts have not yet commenced.

 

On March 9, 2021, we entered into a share purchase agreement, with Polyrizon and Mr. Raul Srugo, an existing shareholder of Polyrizon, for an additional investment of up to a total of $250,000 in Polyrizon. Following an investment of $120,500, we hold approximately 33.24% of Polyrizon shares on a fully diluted basis. The closing of this transaction occurred on March 9, 2021.

 

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Principal Capital Expenditures

 

Our Group had capital expenditures of approximately $324,000, $62,000 and $11,000 in the years ended on December 31, 2020, 2019, and 2018, respectively. Our capital expenditures are primarily for network infrastructure, computer hardware, purchase of machinery and software and leasehold improvements of our facilities. We have financed our capital expenditures from our available cash. We expect to maintain our capital expenditures in 2021 with a consistent volume.

 

There are no significant capital expenditures or divestitures currently in progress by the Company.

 

B. Business Overview

 

Overview

 

The activities carried out by us, and our subsidiaries are focused on medical-related devices and products on internet and other online-related technologies, and vehicle and wireless charging activities. Our medical-related activities include miniaturized imaging equipment through Scoutcam (formerly known as Intellisense Solutions Inc.), innovative surgical devices with direct visualization capabilities for the treatment of GERD, by the Company using MUSETM, and biological gels to protect patients against biological threats and prevent intrusion of allergens and viruses through the upper airways and eye cavities through our stake and licensing arrangement with Polyrizon. Our internet-related activities include ad-tech operations through our stake in Gix, and its subsidiary Linkury. Eventer, an online event management and ticketing platform and Pro and Purex, e-Commerce companies which operate online stores for the sale of various consumer products on the Amazon online marketplace, utilizing the fulfillment by Amazon or FBA model. Our new electric vehicle and wireless charging activities include development of three modular electric vehicle and wireless vehicle battery charging technology which we develop through Charging Robotics, our recently incorporated wholly owned subsidiary.

 

The diversification of our core activity and our entry into the internet and online-related operations are in accordance with a change to our business model, which we initiated in 2019. Following an analysis of our previous efforts to commercialize the MUSETM system and the ScoutCamTM portfolio, we decided to broaden our activities to include operations in fields with a shorter go-to-market pathway and increased growth potential. In accordance with this strategy, we abandoned the efforts to commercialize the MUSETM system, transferred the ScoutCamTM activity to our Israel subsidiary, ScoutCam Ltd., and consummated a securities exchange agreement relating to ScoutCam Ltd. Since implementing these steps, we have pursued investments that have granted us substantial and controlling interests in other ventures, which we believe will provide a greater return to our shareholders.

 

Medical Activity Overview

 

ScoutCam – Miniaturized Imaging Equipment

 

We previously engaged in the development, production and marketing of innovative miniaturized imaging equipment known as the micro ScoutCam™ portfolio for use in medical procedures as well as various industrial applications, through ScoutCam Ltd. ScoutCam Ltd. was incorporated as part of our reorganization intended to distinguish our micro ScoutCam™ portfolio from our other operations and to enable us to form a separate business unit with dedicated resources, focused on the promotion of our miniaturized imaging technology. After we completed the transfer of all of our assets and intellectual property related to our miniature video cameras business into ScoutCam Ltd., we consummated a securities exchange agreement with ScoutCam (formerly known as Intellisense Solutions Inc.), under which we received 60% of the issued and outstanding stock of ScoutCam in consideration for 100% of our holdings in ScoutCam Ltd. Following the aforementioned transactions, Intellisense Solutions Inc. changed its name to ScoutCam Inc. Since the securities exchange agreement, the commercialization efforts relating to the ScoutCam™ portfolio are carried out exclusively by ScoutCam. Commercially, ScoutCam has received purchase orders for its products from a Fortune 500 company in the healthcare sector and has been added to the Approved Supplier List of a leading healthcare company. ScoutCam is examining and pursuing additional applications for the micro ScoutCam™ portfolio outside of the medical device industry, including, among others, the defense, aerospace, automotive, and industrial non-destructing-testing industries, and plans to further expand the activity in these non-medical spaces.

 

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Since the reorganization and spinoff of the ScoutCam activity, ScoutCam has made headway in its field both in the form of achieving commercial milestones and raising additional capital to fund its operations.

 

On March 3, 2020, ScoutCam consummated a securities purchase agreement with certain investors in connection with the sale and issuance of $948,400 worth of units, or the Units. Each Unit consisted of (i) two shares of ScoutCam’s common stock, par value $0.001 per share, or the ScoutCam Common Stock; and (ii) (a) one warrant to purchase one share of ScoutCam Common Stock with an exercise price of $0.595, or the A Warrant, and (b) two warrants to purchase one share of ScoutCam Common Stock each with an exercise price of $0.893, or the B Warrant, at a purchase price of $0.968 per Unit. In connection with the agreement, ScoutCam issued 1,959,504 shares of ScoutCam Common Stock, 979,754 A Warrants, and 1,959,504 B Warrants to purchase shares of ScoutCam Common Stock. In addition, on May 19, 2020, we announced that ScoutCam entered into and consummated a securities purchase agreement with M. Arkin (1999) Ltd. in connection with an investment of $2,000,000 on the same terms of the previous investment. Since September 14, 2020, ScoutCam’s common stock is quoted on the OTCQB Venture Market.

 

On June 23, 2020, we entered into and consummated a side letter agreement with ScoutCam, whereby the parties agreed to convert, at a conversion price of $0.484 per share, an outstanding line of credit previously extended by us to ScoutCam, which as of the date thereof was $381,136, into (i) 787,471 shares of ScoutCam Common Stock, (ii) warrants to purchase 393,736 shares of ScoutCam Common Stock with an exercise price of $0.595 with a term of twelve months from the date of issuance, and (iii) warrants to purchase 787,471 shares of ScoutCam Common Stock with an exercise price of $0.893 with a term of eighteen months from the date of issuance.

 

On March 22, 2021, ScoutCam, as part of a private placement, issued to certain investors 22,222,223 units, or the PP Units, in exchange for an aggregate purchase price of $20 million. Each PP Unit consists of (i) one share of ScoutCam Common Stock and (ii) one warrant to purchase one share of ScoutCam Common Stock with an exercise price of $1.15 per share, or the PP Warrant. Each PP Warrant is exercisable until the close of business on March 31, 2026. Pursuant to the terms of the PP Warrants, following April 1, 2024, if the closing price of ScoutCam Common Stock equal or exceeds 135% of the exercise price (subject to appropriate adjustments for stock splits, stock dividends, stock combinations and other similar transactions after the issue date of the PP Warrants) for any thirty (30) consecutive trading days, ScoutCam may force the exercise of the PP Warrants, in whole or in part, by delivering to the investors a notice of forced exercise.

 

Our MUSE‎™‎ System

 

In addition, we have been engaged in the development, production and marketing of innovative surgical devices with direct visualization capabilities for the treatment of GERD, a common ailment, which is predominantly treated by medical therapy (e.g. proton pump inhibitors) or in chronic cases, conventional open or laparoscopic surgery. The U.S. Food and Drug Administration, or FDA, cleared and CE-marked endosurgical system, known as the MUSE™ system, enables minimally-invasive and incisionless procedures for the treatment of GERD by reconstruction of the esophageal valve via the mouth and esophagus, eliminating the need for surgery in eligible patients. We believe that this procedure offers a safe, effective and economical alternative to the current modes of GERD treatment for certain GERD patients, and has the ability to provide results that are equivalent to those of standard surgical procedures while reducing pain and trauma, minimizing hospital stays, and delivering economic value to hospitals and payors.

 

We seek to generate revenues by pursuing potential opportunities to sell our MUSE technology, or alternatively grant a license or licenses for the use of the MUSE technology. Our strategy includes the following key elements: (i) Our board of directors has determined that we invest in the growth, development and expansion of our consolidated subsidiaries businesses; (ii) Our board of directors has determined to examine potential opportunities to sell our MUSE technology, or alternatively grant a license or licenses for the use of the MUSEtechnology; and (iii) Our board of directors and management are constantly seeking and pursuing opportunities through which to leverage our assets and capabilities.

 

Prevalence of GERD

 

GERD is a worldwide disorder, with evidence suggesting an increase in GERD disease prevalence since 1995. Treatment of GERD involves a stepwise approach. The goals are to control symptoms, to heal esophagitis and to prevent recurrent esophagitis. The most common operation for GERD is called a surgical fundoplication, a procedure that prevents reflux by wrapping or attaching the upper part of the stomach around the lower esophagus and securing it with sutures. Due to the presence of the wrap or attachment, increasing pressure in the stomach compresses the portion of the esophagus, which is wrapped or attached by the stomach, and prevents acidic gastric content from flowing up into the esophagus. Today, the operation is usually performed laparoscopically: instead of a single large incision into the chest or abdomen, four or five smaller incisions are made in the abdomen, and the operator uses a number of specially designed tools to operate under video control.

 

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Our product, the MUSE™ system for transoral fundoplication is a single use innovative device for the treatment of GERD. The MUSE™ technology is based on our proprietary platform technology, experience and know-how. Transoral means that the procedure is performed through the mouth, rather than through incisions in the abdomen. The MUSE™ system is used to perform a procedure as an alternative to a surgical fundoplication. The MUSE™ system offers an endoscopic, incisionless alternative to surgery. A single surgeon or gastroenterologist can perform the MUSE™ procedure in a transoral way, unlike in a laparoscopic fundoplication, which requires incisions.

 

The clearance by the FDA, or ‘Indications for Use,’ of the MUSE™ system is “for endoscopic placement of surgical staples in the soft tissue of the esophagus and stomach in order to create anterior partial fundoplication for treatment of symptomatic chronic Gastro-Esophageal Reflux Disease in patients who require and respond to pharmacological therapy”. As such, the FDA clearance covers the use by an operator of the MUSE™ endostapler as described in the above paragraph. In addition, in the pivotal study presented to the FDA to gain clearance, only patients who were currently taking GERD medications (i.e. pharmacological therapy) were allowed in the study. In addition, all patients had to have a significant decrease in their symptoms when they were taking medication compared to when they were off the medication. The FDA clearance indicated that the MUSE™ system is intended for patients who require and respond to pharmacological therapy. The MUSE™ system indication does not restrict its use with respect to GERD severity from a regulatory point of view. However, clinicians typically only consider interventional treatment options for moderate to severe GERD. Therefore, it is reasonable to expect the MUSE™ system would be primarily used to treat moderate and severe GERD in practice. The system has received 510(k) marketing clearance from the FDA in the United States, as well as a CE mark in Europe.

 

On June 3, 2019, we entered into a Licensing and Sale Agreement with Golden Grand, for the know-how licensing and sale of goods relating to the MUSE™ system in China, Hong Kong, Taiwan and Macao. Under the agreement, we committed to providing a license, training services and goods to Golden Grand in consideration for $3,000,000 to be paid to us in four milestone-based installments. To date, some of these milestones have been achieved and we received $1,800,000. The final milestones will be completed, and the final installment paid upon completion of a MUSE™ assembly line in China. Due to COVID-19, the implementation of certain actions required to be achieved under the milestones has been delayed, specifically due to travel restrictions. In recent months, efforts have been renewed to achieve the next milestones.

 

Polyrizon – Protective Biological Gels

 

Polyrizon is a private company engaged in developing biological gels designed to protect patients against biological threats and reduce the intrusion of allergens and viruses through the upper airways and eye cavities.

 

In July 2020, we entered into an ordinary share purchase agreement with Polyrizon, pursuant to which we purchased 19.9% of Polyrizon’s issued and outstanding capital stock on a fully diluted basis for aggregate gross proceeds of $10,000. We also agreed to loan Polyrizon $94,000. The loan does not bear any interest and is repayable only upon a deemed liquidation event, as defined in that share purchase agreement. In addition, we have an option, or the Option, to invest an additional amount of up to $1,000,000 in consideration for shares of Polyrizon such that following the additional investment, we will own 51% of Polyrizon’s capital stock on a fully diluted basis, excluding outstanding deferred shares, as defined in the share purchase agreement. The Option is exercisable until the earlier of (i) April 23, 2023, or (ii) the consummation by Polyrizon of equity financing of at least $500,000 based on a pre-money valuation of at least $10,000,000.

 

In addition, we entered into an exclusive reseller agreement with Polyrizon. As part of the reseller agreement, we received an exclusive global license to promote, market, and resell the Polyrizon products, focusing on a unique Biogel to protect from the COVID-19 virus. The term of the license is for four years, commencing upon receipt of sufficient FDA approvals for the lawful marketing and sale of the products globally. We also have the right to purchase the Polyrizon products on a cost-plus 15% basis for the purpose of reselling the products worldwide. In consideration of the license, Polyrizon will be entitled to receive annual royalty payments equal to 10% of our annualized operating profit arising from selling the products. To date, Poyrizon’s products have not received the requisite FDA approvals, and therefore manufacturing and commercialization efforts have not yet commenced.

 

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On March 9, 2021, we entered into a share purchase agreement, with Polyrizon and Mr. Raul Srugo, an existing shareholder of Polyrizon, for an additional investment of up to a total of $250,000 in Polyrizon. Following an investment of $120,500, we hold approximately 33.24% of Polyrizon shares on a fully diluted basis. The closing of this transaction occurred on March 9, 2021.

 

Internet Activity Overview

 

Gix – Ad-Tech and Online Advertising

 

We currently own a minority stake in Gix and its subsidiary, Linkury. Linkury operates in the field of software development, marketing, and distribution to internet users. Gix recently announced its intention to focus its efforts on Linkury, which is the primary source of Gix’s revenues and operations, with a goal of expanding its product portfolio in the field of technological solutions for advertising and media. In the coming year, Linkury plans to launch new products in the sector of advertising technologies and mobile. Furthermore, Gix continues its efforts to seek opportunities for engaging in acquisitions of companies with significant revenues and commercial potential. Gix operates through two major arms: Gix Apps, which is distributed free of charge (as browser add-ons and desktop apps) to end-users and drives revenues from the placement of advertisements, and Gix Content, a solution platform for publishers, personalized content ads and banners per users’ preferences, based on Gix’s proprietary technologies.

 

Our stake in Gix and Linkury was acquired pursuant to a securities purchase agreement dated June 19, 2019, or the Agreement. Pursuant to the Agreement, we are entitled, for a period of three years following the closing of the investment, to convert any and all of our Linkury shares into Gix shares with a 20% discount over the average share price of Gix on the TASE within the 60 trading days preceding the conversion. On October 14, 2020, we notified Gix of our election to convert the 793,448 ordinary shares of Linkury that we currently own into Gix’s ordinary shares in accordance with the Agreement. As a result of the conversion, we will be entitled to receive an additional 9,858,698 ordinary shares of Gix, which, together with our current holdings, will constitute approximately 33.17% of Gix’s issued and outstanding share capital following the conversion. In addition, pursuant to the Agreement, we are entitled to an issuance of additional ordinary shares of Gix and an adjustment to our outstanding warrant to purchase Gix ordinary shares, in the event that Gix issues shares at a price per share lower than the price paid by us under the Agreement. Pursuant to the provisions of the Companies Law, the issuance of shares representing 25% or more of the voting rights in a public company is subject to prior shareholder approval. Therefore, on April 6, 2021 we exercised part of our right to convert Linkury conversion shares and were issued by Gix with additional 5,903,718 ordinary shares, such that following the partly conversion we hold 24.99% of Gix outstanding share capital on a fully diluted basis and we have requested that Gix convene a shareholder meeting as soon as practicably possible in order to obtain the requisite approval and affect the conversion in full. The shareholder meeting of Gix has not yet been called.

 

Eventer – Online Event Management

 

Eventer is a technology company engaged in the development of unique tools for automatic creation, management, promotion, and billing of events and ticketing sales. Eventer seeks to tap the growing demand for enterprise and private online communication over the last year. As such, Eventer’s systems offer and enable advanced, user-friendly solutions for online events such as online concerts, enterprise events and online conferences, in addition to management and ticket sales for events carried out in offline venues. In addition, Eventer’s platform provides individuals with the ability to create and sell tickets to custom small-scale private or public events. Eventer’s revenues are derived from commissions from sales of tickets for online and offline events planned and managed through its platform.

 

On October 14, 2020, we signed a share purchase agreement and a revolving loan agreement with Eventer. The Eventer transaction closed on October 26, 2020. Pursuant to the share purchase agreement, we invested $750,000 and were issued an aggregate of 325,270 ordinary shares of Eventer, representing 50.01% of Eventer’s issued and outstanding share capital on a fully diluted basis. The share purchase agreement provides that we will invest an additional $250,000 in a second tranche, subject to Eventer achieving certain post-closing EBITDA based milestones during the fiscal years 2021 through 2023.

 

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In addition, we entered into the Loan agreement, under which we committed to lend up to $1,250,000 to Eventer through advances of funds upon Eventer’s request and subject to our approval. We extended the Initial Advance. Advances extended under the Loan Agreement may be repaid and borrowed in part or in full from time to time. The Initial Advance will be repaid in twenty-four equal monthly installments, commencing on the first anniversary of the Loan Agreement. Other advances extended under the Loan Agreement will be repaid immediately following, and in no event later than thirty days following the completion of the project or purpose for which they were made. Outstanding principal balances on the advances will bear interest at a rate equal to the higher of (i) 4% per year, or (ii) the interest rate determined by the Israeli Income Tax Ordinance [New Version] 5721-1961 and the rules and regulation promulgated thereunder. Interest payments will be made on a monthly basis.

 

On October 14, 2020, we entered into a share exchange agreement with Eventer’s shareholders, or the Exchange Agreement, pursuant to which, during the period commencing on the second anniversary of the Exchange Agreement and ending fifty-four (54) months following the date of the Exchange Agreement, Eventer’s shareholders may elect to exchange all of their Eventer shares for ordinary shares of our company. The number of ordinary shares of our company to which Eventer’s shareholders would be entitled pursuant to an exchange will be calculated by dividing the fair market value of each Eventer’s ordinary share, as mutually determined by our company and the shareholders, by the average closing price of an ordinary share of our company on the principal market on which its ordinary shares or ADSs are traded during the sixty days prior to the exchange date rounded down to the nearest whole number. Our board of directors may defer the exchange’s implementation in the event it determines in good faith that doing so would be materially detrimental to our company and its shareholders. In addition, the exchange may not be effected for so long as $600,000 or greater remains outstanding under the Loan Agreement, or if an event of default under the Loan Agreement has occurred.

 

On April 8, 2021 Eventer consummated a share purchase agreement with certain investors in connection with the sale and issuance of $2.25 million worth of its ordinary shares for an aggregate amount of $2.25 million. According to the share purchase agreement, half of the proceeds will be used for promotion of Eventer’s business through media content and space advertising in different platforms and media outlets operated by the lead investor. Following an investment of $300,000 under the described share purchase agreement we hold approximately 47.69% of Eventer Shares on a fully diluted basis.

 

Pro and Purex – Investment, Secondary Agreement and Loan

 

Pro, and Purex both are California corporations in the e-Commerce field, which operate online stores for the sale of various consumer products on the Amazon online marketplace, utilizing the fulfillment by Amazon or FBA model. Pro and Purex utilize artificial intelligence and machine learning technologies to analyze sales data and patterns on the Amazon marketplace in order to identify existing stores, niches and products that have the potential for development and growth as well as maximize sales of its existing proprietary products. Pro and Purex together manage two online stores through which three distinct product brands are marketed and sold to consumers in the United States. Pro and Purex’s strategy is to achieve organic growth and profitability by expanding to new geographies, increasing sales of its existing products through marketing and advertising efforts, development of new products and brands, supply chain optimization and inventory management. Pro has completed processes with Amazon, which will allow for it to open its stores for sale to consumers in the United Kingdom, German, France, Spain, Italy and Australia.

 

On October 8, 2020, we entered into the Purex Purchase Agreement with Pro, Purex, and their respective stockholders. Pro, and Purex both are in the e-Commerce field and operate online stores for the sale of various consumer products on the Amazon online marketplace. Pursuant to the Purex Purchase Agreement, we agreed to acquire 50.01% of Pro’s and 50.03% of Purex’s issued and outstanding share capital on a fully diluted basis through a combination of cash investments in the companies and acquisition of additional shares from the current shareholders of the two companies in consideration for our restricted ADSs and a cash component. We agreed to invest an aggregate amount of $1,250,000 in Pro and Purex, pay $150,000 in cash consideration to the current stockholders, and issue $500,000 worth of restricted ADSs to the current stockholders of such companies, with the value of restricted ADSs may be subject to downward adjustment based on the 2020 results of the two companies. In addition, the companies’ current shareholders are entitled to additional milestone issuances of up to an aggregate $750,000 in restricted ADSs subject to the achievement by Pro and Purex of certain milestones throughout 2021. The transactions contemplated in the definitive agreements closed on January 4, 2021. In addition, we agreed to financing arrangements including (i) providing financing by way of a stockholder loan of a principal amount equal to $250,000, which may be extended up to an aggregate cap of $1 million of which we will finance 60%; and (ii) additional financing of up to a principal amount of $1 million, to finance the acquisition of additional online Amazon stores provided that such Acquisition Financing will constitute 80% of the applicable acquisition cost, with the remaining 20% to be financed by the other Pro’ and Purex’ stockholders.

 

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Subsequently, according to the terms of the Purex Purchase Agreement, we entered into a loan and pledge agreement, effective January 5, 2021 with our majority owned subsidiaries Pro and Purex. Pursuant to this loan and pledge agreement, we extended a $250,000 loan, with an annual interest of 4%, to be repaid on the second anniversary of the effective date.

 

On February 2, 2021, we entered into a loan and pledge agreement, effective February 2, 2021, and amended on February 5, 2021, or the Pro Loan and Pledge Agreement, with our majority owned subsidiary Pro and its other stockholder, to finance Pro’s additional purchases of three new brands on the Amazon online marketplace. Pursuant to the Pro Loan and Pledge Agreement, we extended a $3.76 million loan, with an annual interest of 4%, to be repaid on the fifth anniversary of the effective date. In order to secure the repayment of the loan and interest amounts, Pro granted us a fixed charge over the stores currently owned and operated by Pro, a fixed charge over the minority shares of common stock held by the other Pro stockholder, and a floating charge of Pro cash and cash equivalents.

 

Electric Vehicles Activity Overview

 

Charging Robotics Ltd.

 

On January 7, 2021, we entered into an agreement to purchase a provisional patent filed with the United States Patent and Trademark Office and know-how relating to wireless vehicle battery charging technology in consideration for $75,000. Furthermore, we entered into a collaboration agreement with the seller, whereby the Company committed to invest $150,000 in a newly incorporated wholly owned subsidiary of the Company, Charging Robotics, incorporated on February 1, 2021, which will focus on our new electric vehicle and wireless charging activities. Pursuant to the collaboration agreement, the seller is entitled to a monthly consultant fee as well as options to purchase 15% of Charging Robotics’ fully diluted share capital as of its incorporation date based on a valuation of $1,000,000.

 

Revoltz Ltd.

 

On February 19, 2021, we entered into the Joint Venture Agreement, with Amir Zaid and Weijian Zhou and our wholly-owned subsidiary Charging Robotics, under which we formed a joint venture, under the name Revoltz, to develop and commercialize three modular electric vehicle (EV) micro mobility vehicles for urban individual use and “last mile” cargo delivery. Under the terms of the Joint Venture Agreement, we invested an initial amount of $250,000. We were issued an aggregated 19,990 ordinary shares of Revoltz, representing 19.99% of Revoltz’s issued and outstanding share capital on a fully diluted basis. The Joint Venture Agreement requires us to invest an additional $400,000 in a second tranche, subject to Revoltz achieving certain post-closing milestones, under which we will be entitled to 37.5% of Revoltz’s issued and outstanding share capital. In addition, within twelve (12) months following the completion of the second tranche (but in any event not later than December 31, 2022) we shall be entitled to invest an additional amount of $700,000 in consideration for Revoltz’s ordinary shares which, will result in us holding 50.1% Revoltz’s issued and outstanding share capital.

 

Other Activities

 

Matomy Media Group Ltd.

 

We hold approximately 4.74% of the outstanding share capital of Matomy, a public company listed on the TASE.

 

On September 29, 2020, Matomy announced that it had entered into a memorandum of understanding with Automax for a proposed merger in which the shareholders of Automax would exchange 100% of their shares in Automax for shares of Matomy. On November 9, 2020, Matomy signed a binding agreement for the Merger, and on March 24, 2021 the preconditions under the merger agreement were met to complete the Merger. Following the closing of the Merger, Automax shareholders held approximately 53% of the outstanding share capital of Matomy and potentially up to a maximum of 73%, due to additional share issuances which are subject to achievement of certain revenue and profit milestones by Matomy, or if the value of the Matomy’s shares reach specific values after the Merger.

 

On October 20, 2020, Matomy held an extraordinary general meeting of shareholders and approved the cancellation of the admission of Matomy’s ordinary shares for trading on the High Growth Segment of the London Stock Exchange.

 

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Our Strategy

 

Our primary goal is to generate revenues through the activities of our consolidated subsidiaries, each in their respective market and field. In addition, we seek to generate revenues by pursuing potential opportunities to sell our MUSE technology, or alternatively grant a license or licenses for the use of the MUSE technology. Our strategy includes the following key elements:

 

Commercialization of the products and services provided by our consolidated subsidiaries. Our board of directors has determined that we invest in the growth, development and expansion of our consolidated subsidiaries businesses.

 

Sell or License MUSE‎ technology. Our board of directors has determined to examine potential opportunities to sell our MUSE technology, or alternatively grant a license or licenses for the use of the MUSEtechnology.

 

General Pursuit of Opportunities. Our board of directors and management are constantly seeking and pursuing opportunities through which to leverage our assets and capabilities.

 

Substantially material portion of our revenues in recent years was derived from the sale of miniature cameras which is currently developed and manufactured by ScoutCam. The following data reflects our total revenue arising from the following services:

 

   Revenues 
   Year Ended December 31, 
   2020   2019   2018 
   (Thousands of U.S. dollars) 
Sales of Miniature Cameras and related equipment   491    188    175 
Development services   -    85    217 

Revenues from commissions

   40           
Sales of the MUSE‎‎ System   -    -    44 
Total   531    273    436 

 

The following data reflects our total revenue broken down by geographic region:

 

   Revenues 
   Year Ended December 31, 
   2020   2019   2018 
   (Thousands of U.S. dollars) 
United States   418    138    315 
Europe   41    69    63 
Asia   45    22    36 
Other   27    44    22 
Total   531    273    436 

 

Seasonality of Business

 

During the last few years we have not seen any seasonality in our sales.

 

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Marketing and Distribution

 

Sale or License of MUSE System

 

As part of our board of directors decision to examine potential opportunities to sell our MUSE technology, or alternatively grant a license or licenses for the use of the MUSE technology, our board of directors has reexamined the efforts and resources previously invested by us in our MUSE technology distribution agreements as well as the revenues obtained through such agreements in order to assess their financial viability. As a result of this analysis, our board of directors resolved to terminate our distribution agreements in order to redirect our resources to securing licensing agreements, which may in turn generate significant income in the short term, reduce operating expenses and lower our company’s burn rate.

 

Intellectual Property

 

Our commercial success depends, in part, on obtaining and maintaining patent and other intellectual property protection, in the United States and internationally, for the technologies used in our products. We cannot be sure that any of our patents will be commercially useful in protecting our technology. Our commercial success also depends in part on our non-infringement of the patents or proprietary rights of third parties. The patent positions of medical device companies, including ours, can be highly uncertain and involve complex and evolving legal and factual questions. For additional information see “Item 3. Key information—D. Risk Factors—Risks Related to Our Intellectual Property.”

 

We, ScoutCam Ltd., Charging Robotics and GERD IP own 23 U.S. patents and have filed 3 additional pending patent applications in the U.S. and 4 U.S. Provisional Patent Applications. In addition, we own 41 patents that were granted in other countries, including 21 European patents, which are not valid on their own unless validated in specific European countries, as indeed were validated according to our list of chosen European countries. We also have six pending patent applications outside of the U.S., one pending Paris Convention Treaty (PCT) patent application and eight European patents pending an opposition appeal. Our patents and any patents which may be granted under our pending patent applications, expire between 2021 to 2041.

 

Pursuant to the A&R Transfer Agreement, we transferred five patent families to ScoutCam Ltd. and received a license back to the transferred patents to be used in connection with the sale or license of MUSE. In addition, we granted to ScoutCam Ltd. a license to access, use, improve, develop, market and sell licensed intellectual property, including the right to any future versions, enhancements, improvements and derivative works of such licensed intellectual property in connection with the development and commercialization of the ScoutCam miniature video camera technology.

 

We cannot be sure that any patents will be granted with respect to any of our pending patent applications or with respect to any patent applications filed by us in the future. There is also a significant risk that any issued patents will have substantially narrower claims than those that are currently sought.

 

We also protect our proprietary technology and processes, in part, by confidentiality and invention assignment agreements with our employees, consultants, scientific advisors and other contractors. These agreements may be breached, and we may not have adequate remedies for any breach. We also rely on trade secrets to protect our product candidates. However, our trade secrets may otherwise become known or be independently discovered by competitors. To the extent that our employees, consultants, scientific advisors or other contractors use intellectual property owned by others in their work for us, disputes may arise as to the rights in related or resulting know-how and inventions.

 

Competition

 

The medical device industry can be significantly affected by new product introductions and other market activities of industry participants. We believe that the principal competitive factors in our market include:

 

safety, efficacy and clinically effective performance of products;

 

ease of use and comfort for the physician and patient;

 

the cost of product offerings and the availability of product coverage and reimbursement from third-party payers, insurance companies and other parties;

 

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the strength of acceptance and adoption by physicians and hospitals;

 

the ability to deliver new product offerings and enhanced technology to expand or improve upon existing applications through continued research and development;

 

the quality of training, services and clinical support provided to physicians and hospitals;

 

effective sales, marketing and distribution;

 

the ability to provide proprietary products protected by strong intellectual property rights; and

 

the ability to offer products that are intuitive and easy to learn and use.

 

Competition with the MUSE‎ system

 

We have several competitors in the medical device and pharmaceutical industries. Patients and physicians may opt for more established existing therapies to treat GERD, including PPI pharmaceutical treatment or laparoscopic fundoplication surgery. PPIs are currently being offered by several large pharmaceutical manufacturers, most of whom have significantly greater financial, clinical, manufacturing, marketing, distribution and technical resources and experience than we have.

 

Over the last few years a number of different medical devices and treatments have been introduced to address the “treatment gap” in GERD treatments and therapies which is found between long-term pharmaceutical therapy on one hand and surgery on the other. These devices and treatments seek to treat GERD less invasively than fundoplication and without the need for long-term use of drug therapy. 

 

Government Regulation

 

The healthcare industry, and, therefore, our business, is subject to extensive federal, state, local and foreign regulation. Some of the pertinent laws have not been definitively interpreted by the regulatory authorities or the courts, and their provisions are open to a variety of interpretations. In addition, these laws and their interpretations are subject to change.

 

Both federal and state governmental agencies continue to subject the healthcare industry to intense regulatory scrutiny, including heightened civil and criminal enforcement efforts. As indicated by work plans and reports issued by these agencies, the federal government will continue to scrutinize, among other things, the billing practices of healthcare providers and the marketing of healthcare products.

 

We believe that we have structured our business operations and relationships with our customers to comply with all applicable legal requirements. However, it is possible that governmental entities or other third parties could interpret these laws differently and assert otherwise. In addition, because there is a risk that our products are used off label, we believe we are subject to increased risk of prosecution under these laws and by these entities even if we believe we are acting appropriately. We discuss below the statutes and regulations that are most relevant to our business and most frequently cited in enforcement actions.

 

U.S. Food and Drug Administration

 

All of our medical device products sold in the U.S. are subject to regulation as medical devices under the FDA, as implemented and enforced by the FDA. The FDA governs the following activities that we perform or that are performed on our behalf, to ensure that medical products we manufacture, promote and distribute domestically or export internationally are safe and effective for their intended uses:

 

product design, preclinical and clinical development and manufacture;

 

product premarket clearance and approval;

 

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product safety, testing, labeling and storage;

 

record keeping procedures;

 

product marketing, sales and distribution; and

 

post-marketing surveillance, complaint handling, medical device reporting, reporting of deaths, serious injuries or device malfunctions and repair or recall of products.

 

FDA Premarket Clearance and Approval Requirements

 

Unless an exemption applies, each medical device we wish to commercially distribute in the United States will require either premarket notification, or 510(k) marketing clearance or approval of a premarket approval application, or PMA, from the FDA. The FDA classifies medical devices into one of three classes. Class I devices, considered to have the lowest risk, are those for which safety and effectiveness can be assured by adherence to the FDA’s general regulatory controls for medical devices, which include compliance with the applicable portions of the Quality System Regulation, facility registration and product listing, reporting of adverse medical events, and appropriate, truthful and non-misleading labeling, advertising, and promotional materials (General Controls). Class II devices are subject to the FDA’s General Controls, and any other special controls as deemed necessary by the FDA to ensure the safety and effectiveness of the device (Special Controls). Manufacturers of most class II and some class I devices are required to submit to the FDA a premarket notification under Section 510(k) of the FDCA requesting permission to commercially distribute the device. This process is generally known as 510(k) marketing clearance. Devices deemed by the FDA to pose the greatest risks, such as life sustaining, life supporting or some implantable devices, or devices that have a new intended use, or use advanced technology that is not substantially equivalent to that of a legally marketed device, are placed in class III, requiring approval of a PMA.

 

510(k) Marketing Clearance Pathway

 

To obtain 510(k) marketing clearance, we must submit a premarket notification demonstrating that the proposed device is “substantially equivalent” to a legally marketed “predicate device” that is either in class I or class II, or to a class III device that was in commercial distribution before May 28, 1976 for which the FDA has not yet called for the submission of a PMA. A Special 510(k) is an abbreviated 510(k) application which can be used to obtain clearance for certain types of device modification such as modifications that do not affect the intended use of the device or alter the device’s fundamental scientific technology. A Special 510(k) generally requires less information and data than a complete, or Traditional 510(k). In addition, a Special 510(k) application often takes a shorter period of time, which could be as short as 30 days, than a Traditional 510(k) marketing clearance application, which can be used for any type of 510(k) device. The FDA’s 510(k) marketing clearance pathway usually takes from three to twelve months, but may take significantly longer. The FDA may require additional information, including clinical data, to make a determination regarding substantial equivalence. There is no guarantee that the FDA will grant 510(k) marketing clearance for our future products and failure to obtain necessary clearances for our future products would adversely affect our ability to grow our business.

 

Medical devices can be marketed only for the indications for which they are cleared or approved. After a device receives 510(k) marketing clearance, any modification that could significantly affect its safety or effectiveness, or that would constitute a new or major change in its intended use, will require a new 510(k) marketing clearance or, depending on the modification, PMA approval. The FDA requires each manufacturer to determine whether the proposed changes requires submission of a 510(k) or a PMA, but the FDA can review any such decision and can disagree with a manufacturer’s determination. If the FDA disagrees with a manufacturer’s determination, the FDA can require the manufacturer to cease marketing or recall the modified device until 510(k) marketing clearance or PMA approval is obtained. Also, in these circumstances, we may be subject to significant regulatory fines or penalties. We have made product enhancements to MUSE system and other products that we believe do not require new 510(k) marketing clearances. We cannot be assured that the FDA would agree with any of our decisions not to seek 510(k) marketing clearance or PMA approval. For risks related to 510(k) marketing clearance, see “Item 3. Key information—D. Risk Factors – Risks Related to Regulatory Compliance.”

 

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PMA Approval Pathway

 

A PMA must be submitted to the FDA if the device cannot be cleared through the 510(k) process or is not otherwise exempt from the FDA’s premarket clearance and approval requirements. A PMA must generally be supported by extensive data, including, but not limited to, technical, preclinical, clinical trials, manufacturing and labeling, to demonstrate to the FDA’s satisfaction the safety and effectiveness of the device for its intended use. Also, an advisory panel of experts from outside the FDA may be convened to review and evaluate the application and provide recommendations to the FDA as to the approvability of the device. The FDA may or may not accept the panel’s recommendation. In addition, the FDA will generally conduct a pre-approval inspection of the applicant or its third-party manufacturers’ or suppliers’ manufacturing facility or facilities to ensure compliance with the QSR.

 

Pervasive and Continuing Regulation

 

After a device is placed on the market, numerous regulatory requirements continue to apply. In addition to the requirements below, the Medical Device Reporting, or MDR, regulations require that we report to the FDA any incident in which our products may have caused or contributed to a death or serious injury or in which our product malfunctioned and, if the malfunction were to recur, would likely cause or contribute to death or serious injury. See “Item 4. Information on the Company —D. Risk Factors – Risks Related to Regulatory Compliance,” for further information regarding our reporting obligations under MDR regulations. Additional regulatory requirements include:

 

product listing and establishment registration, which helps facilitate FDA inspections and other regulatory action;

 

QSR, which requires manufacturers, including third-party manufacturers, to follow stringent design, testing, control, documentation and other quality assurance procedures during all phases of the design and manufacturing process;

 

labeling regulations and FDA prohibitions against the promotion of products for uncleared, unapproved or off-label use or indication;

 

clearance of product modifications that could significantly affect safety or efficacy or that would constitute a major change in intended use of one of our cleared devices;

 

approval of product modifications that affect the safety or effectiveness of one of our approved devices;

 

post-approval restrictions or conditions, including post-approval study commitments;

 

post-market surveillance regulations, which apply, when necessary, to protect the public health or to provide additional safety and effectiveness data for the device;

 

the FDA’s recall authority, whereby it can ask, or under certain conditions order, device manufacturers to recall from the market a product that is in violation of governing laws and regulations; and

   

notices of corrections or removals.

 

We must also register with the FDA as a medical device manufacturer and must obtain all necessary state permits or licenses to operate our business.

 

Failure to comply with applicable regulatory requirements, including delays in or failures to report incidents to the FDA as required under the MDR regulations, can result in enforcement action by the FDA, which may include any of the following sanctions:

 

warning letters, fines, injunctions, consent decrees and civil penalties;

  

customer notifications or repair, replacement, refunds, recall, detention or seizure of our products;

 

operating restrictions or partial suspension or total shutdown of production;

 

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refusing or delaying requests for 510(k) marketing clearance or PMA approvals of new products or modified products;

  

withdrawing 510(k) marketing clearances or PMA approvals that have already been granted;

  

refusal to grant export approval for our products; or

  

criminal prosecution.

 

In January 2016, we performed an FDA mock audit by an FDA veteran specialist, following which we implemented improvements in our quality management system. We cannot be assured that we have adequately complied with all regulatory requirements or that one or more of the referenced sanctions will not be applied to us as a result of a failure to comply.

 

Marketing Approvals Outside the United States

 

Sales of medical devices outside the United States are subject to foreign government regulations, which vary substantially from country to country. The time required to obtain approval by a foreign country may be longer or shorter than that required for FDA clearance or approval, and the requirements may differ.

 

The European Union has adopted numerous directives and standards regulating the design, manufacture, clinical trials, labeling and adverse event reporting for medical devices. Each European Union member state has implemented legislation applying these directives and standards at the national level. Other countries, such as Switzerland, have voluntarily adopted laws and regulations that mirror those of the European Union with respect to medical devices. Devices that comply with the requirements of the laws of the relevant member state applying the applicable European Union directive are entitled to bear CE conformity marking and, accordingly, can be commercially distributed throughout the member states of the European Union and other countries that comply with or mirror these directives. The method of assessing conformity varies depending on the type and class of the product, but normally involves a combination of self-assessment by the manufacturer and a third-party assessment by a “Notified Body,” an independent and neutral institution appointed to conduct conformity assessment. This third-party assessment consists of an audit of the manufacturer’s quality system and clinical information, as well as technical review of the manufacturer’s product. An assessment by a Notified Body in one country within the European Union is required in order for a manufacturer to commercially distribute the product throughout the European Union. In addition, compliance with ISO 13845 on quality systems issued by the International Organization for Standards, among other standards, establishes the presumption of conformity with the essential requirements for a CE marking. In addition, many countries apply requirements in their reimbursement, pricing or health care systems that affect companies’ ability to market products.

 

We are entitled to print the CE Mark on our products, after having examined the EU Technical File for each new product.

 

Israeli Government Programs

 

Under the Encouragement of Research, Development and Technological Innovation in the Industry Law, 5744-1984, or the Innovation Law, research and development programs which meet specified criteria and are approved by a committee of the Israeli Innovation Authority of the Israeli Ministry of Economy and Industry, or IIA are eligible for grants from the IIA. The grant amounts are determined by the research committee, and are typically a percentage of the project’s expenditures. Under most programs, the grantee is required to pay royalties to the State of Israel from the sale of products developed under the program. Regulations under the Innovation Law generally provide for the payment of royalties of 3% to 6% on sales of products and services based on or incorporating technology developed using grants or know-how deriving therefrom, up to 100% of the grant, linked to the dollar and bearing interest at the LIBOR rate, is repaid. The royalty rates and the aggregate repayment amount may be higher if manufacturing rights are transferred outside of Israel, as further detailed below. The manufacturing rights of products incorporating technology developed thereunder may not be transferred outside of Israel, unless approval is received from the IIA and additional royalty payments are made to the State of Israel, as further detailed below. However, this does not restrict the export of products that incorporate the funded technology.

 

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The United Kingdom’s Financial Conduct Authority, which regulates the London Interbank Offered Rate (LIBOR), announced that it will no longer persuade or require banks to submit rates for LIBOR after January 1, 2022. The grants received from the IIA bear an annual interest rate based on the 12-month LIBOR. Accordingly, there is considerable uncertainty regarding the publication of LIBOR beyond 2021. While it is not currently possible to determine precisely whether, or to what extent, the withdrawal and replacement of LIBOR would affect us, the implementation of alternative benchmark rates to LIBOR may increase our financial liabilities to the IIA.

 

The pertinent obligations under the Innovation Law are as follows:

 

Local Manufacturing Obligation. The terms of the grants under the Innovation Law require that we manufacture the products developed with these grants in Israel. Under the regulations promulgated under the Innovation Law, the products may be manufactured outside Israel by us or by another entity only if prior approval is received from the IIA (such approval is not required for the transfer of less than 10% of the manufacturing capacity in the aggregate, in which case a notice should be provided to the IIA). As a condition to obtaining approval to manufacture outside Israel, we would be required to pay royalties at an increased rate (usually 1% in addition to the standard rate and increased royalties cap (between 120% and 300% of the grants, depending on the manufacturing volume that is performed outside Israel). We note that a company also has the option of declaring in its IIA grant applications of its intention to exercise a portion of the manufacturing capacity abroad, thus avoiding the need to obtain additional approvals and pay the increased royalties cap with respect to the portion declared.

 

Know-How transfer limitation. The Innovation Law restricts the ability to transfer know-how funded by the IIA outside of Israel. Transfer of IIA funded know-how outside of Israel requires prior approval of IIA and in certain circumstances is subject to certain payment to the IIA, calculated according to formulae provided under the Innovation Law. If we wish to transfer IIA funded know-how, the terms for approval will be determined according to the character of the transaction and the consideration paid to us for such transfer. The IIA approval to transfer know-how created, in whole or in part, in connection with a IIA-funded project to third party outside Israel where the transferring company remains an operating Israeli entity is subject to payment of a redemption fee to the IIA calculated according to a formula provided under the Innovation Law that is based, in general, on the ratio between the aggregate IIA grants to the company’s aggregate investments in the project that was funded by these IIA grants, multiplied by the transaction consideration, considering depreciation mechanism and less royalties already paid to the IIA. The transfer of such know-how to a party outside Israel where the transferring company ceases to exist as an Israeli entity is subject to a redemption fee formula that is based, in general, on the ratio between aggregate IIA grants received by the company and the company’s aggregate research and development expenses, multiplied by the transaction consideration considering depreciation mechanism and less royalties already paid to the IIA. The regulations promulgated under the Innovation Law establish a maximum payment of the redemption fee paid to the IIA under the above mentioned formulas and differentiates between two situations: (i) in the event that the company sells its IIA funded know-how, in whole or in part, or is sold as part of an M&A transaction, and subsequently ceases to conduct business in Israel, the maximum redemption fee under the above mentioned formulas will be no more than six times the amount received (plus annual interest) for the applicable know-how being transferred, or the entire amount received from the IIA, as applicable; (ii) in the event that following the transactions described above (i.e. asset sale of IIA funded know-how or transfer as part of an M&A transaction) the company continues to conduct its research and development activity in Israel (for at least three years following such transfer and maintain staff of at least 75% of the number of research and development employees it had for the six months before the know-how was transferred and keeps the same scope of employment for such research and development staff), then the company is eligible for a reduced cap of the redemption fee of no more than three times the amounts received (plus annual interest) for the applicable know-how being transferred.

 

Approval of the transfer of IIA funded technology to another Israeli company may be granted only if the recipient abides by the provisions of the Innovation law and related regulations, including the restrictions on the transfer of know-how and manufacturing rights outside of Israel (note that there will be an obligation to pay royalties to the IIA from the income of such sale transaction as part of the royalty payment obligation).

 

Approval to manufacture products outside of Israel or consent to the transfer of technology, if requested, might not be granted. Furthermore, the IIA may impose certain conditions on any arrangement under which it permits us to transfer technology or development out of Israel.

 

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Grants Received from the IIA (formerly the OCS)

 

We have received grants from the IIA as part of our participation in two programs as described below:

 

Membership in the Activities of the Bio Medical Photonic Consortium

 

The Bio Medical Photonic Consortium, or the Consortium, commenced its activities in June 2007, and concluded its activities on December 31, 2012. The purpose of the Consortium was to develop generic photonic technologies in the field of diagnostics and therapeutics in the biomedical industry in Israel, and specifically on the subject of the digestive system. The activities of the Consortium were performed under our management and the management of Given Imaging Ltd., where each would develop technological models which are based on their internal developments and on developments of the members of the Consortium.

 

Within the framework of the activities of the Consortium, the Company worked to develop the next generation technology of miniature cameras. The cameras were integrated, within the framework of the Consortium, in technological models for minimally invasive procedures which were developed by the members of the Consortium. The various combinations of surgical tools and advanced visual capabilities with miniature endoscopes are innovative, and we predict that the Consortium framework will continue serving as a fruitful basis for the development of innovative medical procedures through the creation of intellectual property. Additionally, we will cooperate with research groups which develop indicators for early detection of colorectal cancer, with the aim of integrating the visualization techniques and key products in this field. The Company received an amount of approximately US $2.3 from the IIA in the framework of the Consortium.

  

In February 2019, the IIA approved a transfer of IIA know-how developed by the Company in the framework of the Consortium to ScoutCam Ltd., a company incorporated under the laws of the State of Israel, a wholly owned subsidiary of the Company. In November 2019, the IIA approved a transfer of the know-how from ScoutCam Ltd. back to the Company in exchange for a license to the ScoutCam Ltd. to access, and develop the know-how. Accordingly all rights and obligations to the IIA under the Innovation Law in connection with such know-how apply to both the Company and ScoutCam Ltd.

 

The following are details regarding the rights and obligations within the framework of our activity in the Consortium, which will apply to the Company and the indirect subsidiary notwithstanding the conclusion of the program:

 

(i)The property rights to information which has been developed belongs to the Consortium member that developed it. However, the developing entity is obligated to provide the other members in the Consortium a license for the use of the new information, without consideration, provided that the other members do not transfer such information to any entity which is not a member of the Consortium. The provision of a license or of the right to use the new information to a third party is subject to approval by the administration of the MAGNET Program at the IIA;

 

(ii)The Consortium member is entitled to register a patent for the new information which has been developed by it within the framework of its activity in the Consortium. The foregoing registration does not require approval from the administration; and

 

(iii)The know-how and technology developed under the program is subject to the restrictions set forth under the Innovation Law, including restrictions on the transfer of such know-how and any manufacturing rights with respect thereto, without first obtaining the approval of the IIA. Such approval may entail additional payments to the IIA, as determined under the Innovation Law and regulations, and as further detailed above.

 

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Collaboration Grant for the Development of a Miniature Diameter Endoscope for Use in Dental Implants

 

In July 2011, the IIA approved our application for support for a joint project regarding the development of an innovative, miniature diameter endoscopic product in the field of dental surgery, or the Dental Project. In October 2012, the Company received a notice according to which approval was given for continued support for the Dental Project for a second year. The IIA support for the Dental Project concluded on July 31, 2013.

 

The Dental Project was performed in collaboration with Qioptiq GmbH, a German corporation, or Qioptiq, in the field of sophisticated medical micro-optics, including in the medical and life sciences sector. The collaboration between the Company and Qioptiq was performed within the framework of the Eureka organization, a Pan-European organization which includes approximately 40 member states, including the State of Israel, and which acts to coordinate and to finance research and development enterprises in and outside of Europe.

 

In accordance with the outline of the Dental Project, we collaborated with Qioptiq on the development of an innovative miniature-diameter endoscope, with side viewing capabilities, intended for use in various dental implant procedures, the Dental Endoscope. During the Dental Project, each of the parties developed different parts of the Dental Endoscope. In accordance with the terms of the collaboration, the intellectual property which originated from the development of the Dental Endoscope remained the exclusive property of the party which developed it. Subject to the completion of the project, the parties agreed to conduct negotiations regarding the method used to produce and market the Product. The foregoing negotiations have not been conducted. In January 2019 we have notified the IIA that the Dental Project had failed due to technological reasons and that there are no revenues to be expected from this project.

  

Grants and Royalty Obligations

 

We received various grants from the IIA in connection with our participation in its programs. We received a grant of approximately $2.3 million in connection with our participation in the Bio Medical Photonics Consortium in the production of generic technology related to the partial development of miniature or the Consortium Grant. Under the terms of the Consortium Grant, we are not required to pay royalties. In addition, we received a grant of approximately $0.2 million in connection with a collaboration within the framework of the Eureka organization related to miniature endoscope for dental implants, or the Eureka Grant. Under the terms of the Eureka Grant, we would have to pay royalties at a rate of 3%-5% from the actual sales of the relevant device, up to the repayment of the grant, with the addition of interest and linkage. In January 2018 we have notified the IIA that the project that received the Eureka Grant has failed due to technological reasons and that there are no revenues to be expected from this project.

 

C.Organizational Structure

 

We currently have three majority held subsidiaries, (i) GERD IP, Inc., a corporation incorporated in the State of Delaware, United States in which we hold 90% of its outstanding share capital, (ii) Smart Repair Pro, Inc., a corporation incorporated in the State of California, in which we hold 50.01% and (iii) Purex, Corp., a corporation incorporated under the laws of the State of California, in which we hold 50.03%. We currently own minority stakes in (i) Eventer Technologies Ltd., a company incorporated under the laws of the State of Israel in which we hold 47.69% of its outstanding share capital, (ii) Polyrizon Ltd., in which we hold 33.24% of its outstanding share capital (iii) ScoutCam Inc., a corporation incorporated in the State of Nevada, United states in which we hold 28.06% of its outstanding share capital, (iv) Gix Internet Ltd. (formerly known as Algomizer Ltd.), a company incorporated under the laws of the State of Israel, in which we hold 24.99% of its outstanding share capital, (v) Linkury Ltd. a company incorporated under the laws of the State of Israel, in which we hold 4.04% of its outstanding share capital, and (vi) Matomy Media Group Ltd., a company incorporated under the laws of the State of Israel, in which we hold 4.74% of its outstanding share capital. We have two wholly owned subsidiary, Charging Robotics Ltd. and Jeffs’ Brand Ltd., both incorporated under the laws of the State of Israel.

 

D.Property, Plant and Equipment

  

Our offices and research and development facility are located at Omer Industrial Park, No. 7A, P.O. Box 3030, Omer 8496500 Israel, where we occupy approximately 45 square meters. We sub-lease our facilities from ScoutCam Ltd. The arrangement regarding the allocation of lease costs between Medigus and ScoutCam Ltd. are set out in an Amended and Restated Inter Company Services Agreement that was entered into on April 19, 2020, as amended thereafter. While we do intend to expend our offices in the future, we believe our sub-leased facilities sufficiently meets our current needs.

 

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ITEM 4A. UNRESOLVED STAFF COMMENTS

 

Not applicable.

  

ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS

 

The following discussion of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes to those statements included elsewhere in this annual report on Form 20-F. In addition to historical consolidated financial information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results and timing of selected events may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those discussed under “Item 3. Key Information—D. Risk Factors” and elsewhere in this annual report.

 

The audited consolidated financial statements for the years ended December 31, 2020 and 2019 in this annual report have been prepared in accordance with International Financial Reporting Standards, which are standards and interpretations thereto issued by the International Accounting Standard Board.

 

For the purpose of this Item 5., references to “Medigus”, the “Company”, “us”, “we” and “our” refer to Medigus and its consolidated subsidiaries.

 

Overview

 

Our Israeli subsidiary, ScoutCam Ltd. and our Nevada subsidiary ScoutCam are engaged in the development, production and marketing of innovative miniaturized imaging equipment known as our micro ScoutCamportfolio for use in medical procedures as well as various industrial applications.

 

Eventer, our Israeli subsidiary is engaged in the development and commercialization of online and offline event planning software as well as ticketing solutions.

 

In addition, we have been engaged in the development, production and marketing of innovative surgical devices with direct visualization capabilities for the treatment of GERD, a common ailment, which is predominantly treated by medical therapy (e.g. proton pump inhibitors) or in chronic cases, conventional open or laparoscopic surgery. Our board of directors has determined to examine potential opportunities to sell our MUSE technology, or alternatively grant a license or licenses for the use of the MUSEtechnology.

 

As of December 31, 2020, substantially material portion of our revenues have derived from ScoutCam. We anticipate that our revenue composition will defer in the year of 2021.

 

We have incurred net losses each year since inception. Our accumulated deficit as of December 31, 2020 aggregated to approximately $81 million. We anticipate that we are likely to continue to incur significant net losses for at least the next year as we continue the development of our products and expand our sales and marketing capabilities required to sell and market our products.

 

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Summary of Critical Accounting Policies

 

The preparation of consolidated financial statements in conformity with general accepted accounting principles require management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Critical accounting policies are those that are the most important to the portrayal of our financial condition and results of operations, and that require our most difficult, subjective and complex judgments. While our significant accounting policies are described in more detail in the notes to our financial statements, our most critical accounting policies, discussed below, pertain to revenue recognition, warrants, share- based compensation, inventory impairment, functional currency and accounting for income taxes.

 

Estimates, by their nature, are based upon judgments and information currently available to us. The estimates that we make are based upon historical factors, current circumstances and the experience and judgment of management. We evaluate our assumptions and estimates on an ongoing basis.

 

Financial instruments

 

Financial assets and financial liabilities are recognized on the Group’s statement of financial position when the Group becomes a party to the contractual provisions of the instrument.

 

Financial assets and financial liabilities are initially measured at fair value. Transaction costs that are directly attributable to the acquisition or issue of financial assets and financial liabilities (other than financial assets and financial liabilities at fair value through profit or loss) are added to or deducted from the fair value of the financial assets or financial liabilities, as appropriate, on initial recognition.

 

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Financial assets

 

Classification

 

The Group classifies its financial assets in the following measurement categories:

 

  those to be measured subsequently at fair value through profit or loss, and

 

  those to be measured at amortized cost.

 

The classification depends on the entity’s business model for managing the financial assets and the contractual terms of the cash flows.

 

For assets measured at fair value, gains and losses will be recorded in profit or loss.

 

Recognition

 

Regular way purchases and sales of financial assets are recognized on trade date, being the date on which the Group commits to purchase or sell the asset. Financial assets are derecognized when the rights to receive cash flows from the financial assets have expired or have been transferred and the Group has transferred substantially all the risks and rewards of ownership.

 

Measurement

 

At initial recognition, the Group measures a financial asset at its fair value plus, in the case of a financial asset not at fair value through profit or loss, or FVTPL, transaction costs that are directly attributable to the acquisition of the financial asset. Transaction costs of financial assets carried at FVTPL are expensed in profit or loss.

 

Financial assets with embedded derivatives are considered in their entirety when determining whether their cash flows are solely payment of principal and interest.

 

Debt instruments

 

Subsequent measurement of debt instruments depends on the Group’s business model for managing the asset and the cash flow characteristics of the asset. There are two measurement categories into which the Group classifies its debt instruments:

 

 

Amortized cost: Financial assets are measured at amortized cost if both of the following conditions are met:

 

-the financial asset is held within a business model whose objective is to hold financial assets in order to collect contractual cash flows; and

 

-the contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding.

 

Interest income from these financial assets is included in finance income using the effective interest rate method. Any gain or loss arising on derecognition is recognized directly in profit or loss and presented in other gains/(losses) together with foreign exchange gains and losses.

 

  Fair value through profit and loss: A gain or loss on a debt investment that is subsequently measured at FVTPL is recognized in profit or loss and presented net within other gains/(losses) in the period in which it arises.

 

Equity instruments

 

The Group subsequently measures equity investments at fair value through profit and loss except when the Group has control or significant influence. Dividends from such investments continue to be recognized in profit or loss as other income when the Group’s right to receive payments is established.

 

Changes in the fair value of financial assets at FVTPL are recognized in “net change in fair value of financial assets at fair value through profit or loss” in the statement of profit or loss as applicable.

 

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Impairment

 

The Group recognizes a loss allowance for expected credit losses on financial assets at amortized cost.

 

At each reporting date, the Group assesses whether the credit risk on a financial instrument has increased significantly since initial recognition. If the financial instrument is determined to have a low credit risk at the reporting date, the Group assumes that the credit risk on a financial instrument has not increased significantly since initial recognition.

 

The Group measures the loss allowance for expected credit losses on trade receivables that are within the scope of IFRS 15 and on financial instruments for which the credit risk has increased significantly since initial recognition based on lifetime expected credit losses. Otherwise, the Group measures the loss allowance at an amount equal to 12-month expected credit losses at the current reporting date. 

 

Financial liabilities

 

Financial liabilities are initially recognized at their fair value minus, in the case of a financial liability not at fair value through profit or loss, transaction costs that are directly attributable to the issue of the financial liability.

 

Financial liabilities are subsequently measured at amortized cost, except for derivative financial instruments, which are subsequently measured at fair value through profit or loss. 

 

The Group has early adopted the narrow-scope amendment to IAS 1 as described in note 2(q) to our financial statements. Accordingly, financial liabilities are classified as non-current if the Group has a substantive right to defer settlement for at least 12 months at the end of the reporting period, otherwise, they are classified as current liabilities.

 

The Group’s financial liabilities at amortized cost are included in accounts payable, accrued expenses, other current liabilities, payable in respect of the intangible asset and lease liabilities.

 

The derivative financial instruments represent warrants that confer the right to net share settlement.

 

The Group removes a financial liability (or a part of a financial liability) when, and only when, it is extinguished (when the obligation specified in the contract is discharged, cancelled or expired).

  

59

 

 

Revenue Recognition

  

a) Revenue measurement

 

The Group’s revenues are measured according to the amount of consideration that the Group expects to be entitled in exchange for transferring promised goods or services to a customer, excluding amounts collected on behalf of third parties, such as sales taxes. Revenues are presented net of VAT. 

 

b)Revenue recognition

 

The Group recognizes revenue when a customer obtains control over promised goods or services. For each performance obligation, the Group determines at contract inception whether it satisfies the performance obligation over time or satisfies the performance obligation at a point in time.

 

Identifying the contract

 

The Group accounts for a contract with a customer only when the following conditions are met:

 

  (a) The parties to the contract have approved the contract (in writing, orally or according to other customary business practices) and they are committed to satisfying the obligations attributable to them;

 

  (b) The Group can identify the rights of each party in relation to the goods or services that will be transferred;

 

  (c) The Group can identify the payment terms for the goods or services that will be transferred;

 

(d)The contract has a commercial substance (i.e. the risk, timing and amount of the entity’s future cash flows are expected to change as a result of the contract); and
   
(e)It is probable that the consideration, to which the Group is entitled to in exchange for the goods or services transferred to the customer, will be collected.

 

For the purpose of section (e) the Group examines, inter alia, the percentage of the advance payments received and the spread of the contractual payments, past experience with the customer and the status and existence of sufficient collateral. 

 

If a contract with a customer does not meet all of the above criteria, consideration received from the customer is recognized as a liability until the criteria are met or when one of the following events occurs: the Group has no remaining obligations to transfer goods or services to the customer and any consideration promised by the customer has been received and cannot be returned; or the contract has been terminated and the consideration received from the customer cannot be refunded.

 

60

 

 

Identifying performance obligations

 

On the contract’s inception date, the Group assesses the goods or services promised in the contract with the customer and identifies as a performance obligation any promise to transfer to the customer one of the following:

 

(a)Goods or services (or a bundle of goods or services) that are distinct; or
(b)A series of distinct goods or services that are substantially the same and have the same pattern of transfer to the customer.

 

The Group identifies goods or services promised to the customer as being distinct when the customer can benefit from the goods or services on their own or in conjunction with other readily available resources and the Group’s promise to transfer the goods or services to the customer is separately identifiable from other promises in the contract. In order to examine whether a promise to transfer goods or services is separately identifiable, the Group examines whether it is providing a significant service of integrating the goods or services with other goods or services promised in the contract into one integrated outcome that is the purpose of the contract.

 

Performance obligations are satisfied over time if one of the following criteria is met:

 

(a) the customer simultaneously receives and consumes the benefits provided by the Group ’s performance; (b) the Group ’s performance creates or enhances an asset that the customer controls as the asset is created or enhanced; or (c) the Group ’s performance does not create an asset with an alternative use to the Group and the Group has an enforceable right to payment for performance completed to date.

 

If a performance obligation is not satisfied over time, a Company satisfies the performance obligation at a point in time.

 

Determining the Transaction Price

 

The transaction price is allocated to each distinct performance obligations on a relative standalone selling price (“SSP”) basis and revenue is recognized for each performance obligation when control has passed. In most cases, the Group is able to establish SSP based on the observable prices of services sold separately in comparable circumstances to similar customers and for products based on the Group ’s best estimates of the price at which the Group would have sold the product regularly on a stand-alone basis. The Group reassesses the SSP on a periodic basis or when facts and circumstances change.

 

Costs deferred in respect of deferral of revenues are recorded as contract fulfilment assets on the Group’s consolidated balance sheet and are written down to the extent the contract is expect to incur losses.

 

Product Revenue

 

Revenues from product sales of miniature cameras through Scoutcam is recognized when the customer obtains control of the Group’s product, typically upon shipment to the customer. Taxes collected from customers relating to product sales and remitted to governmental authorities are excluded from revenues.

 

Service Revenue

 

The Group also generates revenues from development services. Revenue from development services through Scoutcam is recognized over the period of the applicable service contract. To the extent development services are not distinct from the performance obligation relating to the subsequent mass production phase of the prototype under development, revenue from these services is deferred until commencement of the production phase of the project.

 

There are no long-term payment terms or significant financing components of the Group’s contracts.

 

The Group’s contract payment terms for product and services vary by customer. The Group assesses collectability based on several factors, including collection history.

 

Revenues from commissions through Eventer 

 

The Group provides through the subsidiary Eventer services for using the event production platform in exchange for a commission from the sale of tickets for events. These services constitute a performance obligation that is fulfilled at one point in time and therefore the Group recognizes revenues at the time of the event.

 

The essence of the Group’s promise to the customer is to arrange for the consideration for the tickets to be provided by another party, therefore the Group’s revenues from these transactions are presented on a net basis.

 

61

 

 

Leases

 

Group as lessee:

 

The Group assesses whether a contract is or contains a lease, at inception of the contract. The Group recognizes a right-of-use asset and a corresponding lease liability with respect to all lease arrangements in which it is the lessee, except for short-term leases (defined as leases with a lease term of 12 months or less) and leases of low value assets (such as tablets and personal computers, small items of office furniture and telephones). For these leases, the Group recognizes the lease payments as an operating expense on a straight-line basis over the term of the lease unless another systematic basis is more representative of the time pattern in which economic benefits from the leased assets are consumed.

 

Prior to January 1, 2019, the Group applied IAS 17 to account for leases. Leases are classified as operating leases whenever the terms of the lease do not transfer substantially all the risks and rewards of ownership to the lessee. Hence, the Group’s leases were operating leases. 

 

Discount rate: 

 

The lease payments are discounted using the lessee’s incremental borrowing rate, since the interest rate implicit in the lease cannot be readily determined. The lessee’s incremental borrowing rate is the rate that the individual lessee would have to pay to borrow the funds necessary to obtain an asset of similar value to the right-of-use asset in a similar economic environment with similar terms, security and conditions.

 

The Group is using the practical expedient of accounting together a portfolio of leases with similar characteristics provided that it is reasonably expected that the effects on the financial statements of applying this standard to the portfolio would not differ materially from applying this Standard to the individual leases within that portfolio. And using a single discount rate to a portfolio of leases with reasonably similar characteristics (such as leases with a similar remaining lease term for a similar class of underlying asset in a similar economic environment). The weighted average of lessee’s incremental annual borrowing rate applied to the lease liabilities was 10%.

 

Lease liabilities measurement:

 

Lease liabilities were initially measured on a present value basis of the following lease payments:

 

  fixed payments (including in-substance fixed payments), less any lease incentives receivable

 

  variable lease payment that are based on an index or a rate (such as CPI).

 

  lease payments (principal and interest) to be made under reasonably certain extension options

 

The lease liability is subsequently measured according to the effective interest method, with interest costs recognized in the statement of income as incurred. The amount of lease liabilities is increased to reflect the accretion of interest and reduced for the lease payments made. In addition, the carrying amount of lease liabilities is remeasured if there is a modification, a change in the lease term, a change in the lease payments (e.g., changes to future payments resulting from a change in an index or rate used to determine such lease payments) or a change in the assessment of an option to purchase the underlying asset.

 

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The Group is exposed to potential future changes in lease payments based on linkage to the CPI index, which are not included in the lease liability until they take effect. When adjustments to lease payments based on an index or rate take effect, the lease liability is reassessed and adjusted against the right-of-use asset.

 

Principal elements of the lease payments are presented in the statement of cash flows under the cash used in financing activities. Finance cost of the lease payments are presented in the statement of cash flows under the operating activities.

 

Right-of-use assets measurement:

 

Right-of-use assets were measured at cost comprising the following:

 

  the amount of the initial measurement of lease liability;
     
  any lease payments made at or before the commencement date; and
     
  any initial direct costs (except for initial application).

 

After the commencement date, the Group measures the right-of-use asset applying the cost model, less any accumulated depreciation and any accumulated impairment losses and adjusted for any remeasurement of the lease liability.

 

The Group applies IAS 36 to determine whether a right-of-use asset is impaired and accounts for any identified impairment loss as described in the ‘Property, Plant and Equipment’ policy.

 

Right-of-use assets are depreciated by the straight-line method over the estimated useful lives of the right of use assets or the lease period, which is shorter:

 

  Years
Property 1-2
Motor vehicles 3

  

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Share based payments

 

The Group granted several equity-settled share based compensation plans to the Group’s employees and other service providers in connection with their service to the Group. The fair value of such services is calculated at the grant date and amortized to the statement of loss and other comprehensive loss during the vesting period. The total amount charged as an expense is determined taking into consideration the fair value of the options granted:

 

  The fair value excludes the effect of non-market-based vesting conditions. Details regarding the determination of the fair value of equity-settled share-based transactions are set out in note 11(c) to our financial statements.

 

 

Non-market vesting conditions are included among the assumptions in connection with the estimate level of options vesting period. The total expense is recognized during the vesting period, which is the period over which all of the specified vesting conditions of the share-based payment are to be satisfied.

 

The fair value determined at the grant date of the equity-settled share-based payments is expensed on a straight-line basis over the vesting period, based on the Group’s estimate of the number of equity instruments that will eventually vest. At each reporting date, the Group revises its estimate of the number of equity instruments expected to vest as a result of the effect of non-market-based vesting conditions. The impact of the revision of the original estimates, if any, is recognized in profit or loss such that the cumulative expense reflects the revised estimate, with a corresponding adjustment to reserves. 

 

When the options are exercised, the Group issues new shares. The proceeds, less directly related transaction costs, are reflected in the share capital (at par value) and in share premium.

 

Fair value measurement of financial assets and liabilities at fair value through profit or loss

 

As described in Note 3 to our financial statements for the year ended December 31, 2020, the Company signed an agreement with Gix. As part of the agreement the Company received several financial assets. The fair value of these financial assets classified at FVTPL, which are not traded on an active market, is determined by using a level 3 valuation technique, see Note 5 to our financial statements for the year ended December 31, 2020.

 

In addition, the Company issued warrants to investors. The fair value of these warrants classified at financial liabilities through profit or loss, which are not traded on an active market, is determined by using a level 3 valuation technique, see Note 4 to our financial statements for the year ended December 31, 2020.

 

The fair value of these financial assets and liabilities is measured on the basis of accepted valuation models and assumptions regarding unobservable inputs used in the valuation models. The fair value mentioned above is expensed to the statement of loss and other comprehensive loss.

 

Listing expenses

 

The reverse recapitalization transaction conducted at ScoutCam Ltd.’s level was accounted for in the consolidated financial statements of the Company as a transaction with non-controlling interest in which the Company consolidated Intellisense’s net assets in consideration equal to the fair value of the shares Intellisense had to issue to Medigus as part of the reverse recapitalization transaction. The fair value could not be determined based on Intellisense’s stock market value since the trading volume of Intellisense’s common stock was nil. Therefore, the Company determined the fair value of the transaction based on the pre-money valuation of Intellisense, which was taken into account as part of the Issuance of Units to External Investors as mentioned above.

 

Warrants

 

Receipts from investors in respect of warrants are classified as equity to the extent that they confer the right to purchase a fixed number of shares for a fixed exercise price. In the event that the exercise price is not deemed to be fixed, the warrants are classified as current liability. This liability initially recognized at its fair value on the issue date and subsequently accounted for at fair value at each reporting date. The fair value changes are charged to profit from changes in fair value of warrants issued to investors on the statement of comprehensive loss. The fair value of the warrants is measured at issue date and each reporting date on the basis of accepted valuation models and assumptions regarding unobservable inputs used in the valuation models.

 

64

 

 

We adopted the amendment to IAS 1. Accordingly, we classified the statement of financial position warrants as part of current liabilities based on the rights that exist at the end of the reporting period including the right to convert into equity. The amendment was applied retrospectively and as a result we reclassified warrants presented in comparative periods to current liabilities.

 

In December 2016, in connection with a registered direct offering, we issued warrants to purchase 9,970 of our ADSs at an exercise price of $36 per ADS. The warrants are exercisable for a period of five and half years from the date of issuance.

 

In March 2017, in connection with our public offering, we issued warrants to purchase 535,730 of our ADSs at an exercise price of $14 per ADS. The warrants are exercisable for a period of five years from the date of issuance.

 

In November 2017, in connection with a registered direct offering, we issued warrants to purchase 101,251 of our ADSs at an exercise price of $9 per ADS. The warrants are exercisable for a period of five and half years from the date of issuance.

 

In July 2018, in connection with an underwritten offering, we issued warrants to purchase 3,263,325 of our ADSs at an exercise price of $3.5 per ADS. The warrants were listed on Nasdaq under the symbol MDGSW. The warrants are exercisable for a period of five years from their issuance.

 

The fair value of the warrants was calculated according to valuation methods, and based on the following assumptions:

 

   December 31 
   2020   2019 
   Standard
deviation
(%)
   Risk-free
interest
(%)
   Fair value
($ in
thousands)
   Standard
deviation
(%)
   Risk-free
interest
(%)
   Fair value
($ in
thousands)
 
Warrants issued November 2017   91.72%   0.23%   36    85.23%   0.32%   40 
Warrants issued March 2017   82.35%   0.13%   -    84.49%   0.19%   - 
Warrants issued December 2016   80.94%   0.13%   -    82.19%   0.23%   - 

 

Financial assets at fair value through profit or loss

 

On June 19, 2019 the Company signed an agreement with Gix and its wholly-owned subsidiary Linkury. (together with Gix, the “Gix Group”), for an investment of approximately $5 million in Gix Group (the “Investment Agreement”). The investment was subject to certain pre-conditions, which were met on September 3, 2019 (“Closing Date”). As part of the Investment Agreement:

 

a.Medigus received 2,168,675 ordinary shares of Gix (“Gix Shares”).

 

b.Medigus received 729,508 ordinary shares of Linkury (“Linkury Shares”).

 

c.Medigus received 2,898,183 warrants to purchase 2,898,183 Gix shares at an exercise price of NIS 5.25 per share (“Gix Warrants”).

 

d.Medigus’ investment in Gix and Linkury is based on a projection that Linkury’s net profit for 2019 will be at least NIS 15 million. In the event that Linkury’s net income is less than NIS 15 million for 2019, Medigus will be issued with additional securities in Gix Group, adjusting the price per Gix Group securities to the actual net profit for 2019, and compensating Medigus for the difference between the actual net profit and the target net profit for 2019 (“Reverse Earn Out”). Linkury net profit for 2019 was less than NIS 15 million and on September 21, 2021, we were issued with an additional 63,940 ordinary shares of Linkury, for no additional consideration.

 

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e.Medigus is also entitled, for a period of three years following the closing of the investment, to convert any and all of its Linkury shares into Gix ordinary shares with a 20% discount over the average share price of Gix on TASE within the 60 trading days preceding the conversion (“Conversion Right”). October 14, 2020, we notified Gix of our election to convert the 793,448 ordinary shares of Linkury that we currently own into Gix’s ordinary shares in accordance with the Conversion Right, a result of the conversion, we will be entitled to receive additional 9,858,698 ordinary shares of Gix, which, together with our current holdings, will constitute approximately 33.17% of Gix’s issued and outstanding share capital following the conversion. Due to regulatory requirement to convene a shareholders meeting for the approval of the issuance of shares representing 25% or more of the voting rights in a public company, on April 6, 2021 we exercised part of our right to convert Linkury conversion shares and were issued by Gix with additional 5,903,718 ordinary shares, such that following the partly conversion we hold 24.99% of Gix outstanding share capital on a fully diluted basis.

 

  f.

In the event, during the three year period following the closing of the investment, Gix shall issue, or under take to issue ordinary shares with a price per share or exercise per share lower then NIS 4.15 (the “Reduced Per Share Purchase Price”), Gix shall be allocated immediately with such amounts of additional Ordinary Shares (and the Gix Warrant shall be adjusted accordingly) equal to the difference of (x) the amount of ordinary shares actually received by the Company under the Investment Agreement, and (y) the amount which Medigus would have otherwise received should the Reduced Per Share Purchase Price was applied (“Anti-Dilution”). On November 10, 2020, Gix announced an offering of its ordinary shares at a price per share of NIS 1.33, resulting in our entitlement to receive an additional 4,598,243 ordinary shares. As a result of the aforementioned conversion and adjustment we will hold approximately 40.26 % of Gix outstanding share capital on a fully diluted basis.

 

On March 22, 2021, the offering previously announced by Gix, on November 10, 2020, was terminated.

 

In consideration for the assets as described above Medigus:

 

  a. Paid NIS 14,400,000 at cash (approximately $4,057 thousands).

 

  b. Issued to Gix 333,334 ADS representing 6,666,680 ordinary shares.

 

  c. Issued to Gix 333,334 warrants at an exercise price of $4 per ADS.

 

The difference between the fair value of consideration paid by the Company and the fair value of Linkury Shares, Gix Warrants, Reverse Earn Out, Conversion Right and Anti-Dilution was attributed to Gix Shares which accounted for using the equity method.

 

The following table presents the level 3 fair value financial assets as of December 31, 2020:

 

   December 31, 
   2020 
   Level 3 
   $ in
thousands
 
     
Linkury’s shares   2,438 
Gix Warrants   14 
Conversion Right   1,393 
Anti-dilution   473 
    4,318 

 

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Valuation processes of the financial assets (for details, see Note 3 to our financial statements for the year ended December 31, 2020):

 

  Linkury shares - the Company used the Discounted Cash Flow (DCF) model for a period of 7 years, using the following principal assumptions: weighted average cost of capital (WACC) – 21.3%. The asset amount is adjusted at each balance sheet date based on the then relevant assumptions. A shift of the WACC by +/- 1% results in a change in fair value of Linkury shares of $445.

 

  Gix warrants - the Company used the Black-Scholes model, using the following principal assumptions: expected volatility of 52.31%, risk-free interest of 0.23%, expected term of 3 years following the grant date. The asset amount is adjusted at each balance sheet date based on the then relevant assumptions, until the earlier of full exercise or expiration.

 

  Anti-dilution - the Company used the Black-Scholes model, using the following principal assumptions: 25% probability for the occurrence of an anti-dilution event, expected volatility of 52.31%, risk-free interest of 0.13%, expected term of 3 years following the issuance date. An increase of the probability for the occurrence of anti-dilution event by 10% would have increased the fair value of Anti-dilution by $189 thousands.

 

  Conversion right - the exercise of a replacement option will be carried out in two beats the Company used the Monte Carlo method for a period of 3 years following the grant date, using the following principal assumptions: first beat expected volatility 66.77%, risk-free interest 0.04% second beat expected volatility 57.66%, risk-free interest 0.06%.

 

Share-Based Compensation

 

We granted several equity-settled share-based compensation plans to the Company’s employees, directors and other service providers in connection with their service to the Company. The fair value of such services is calculated at the grant date and amortized to the statement of loss and other comprehensive loss during the vesting period.

 

The fair value of the options which was granted on October 2017, January 2019, July 2019, and during the year of 2020 was calculated using the Black and Scholes options pricing model, and based on the following assumptions:

 

Date of grant   Fair value
on grant
date
(NIS in
thousands)
    Share
price on
date of
grant
(NIS)
    Expected
dividend
  Expected
volatility
    Risk free
interest
    Vesting conditions   Expected
term
October 2017     1,109       1.62     None     64 %     1.16 %   Four equal portions, following each anniversary of the grant date   6 years
January 2019     947       0.506     None     74 %     1.45 %   will vest in 12 equal quarterly installments over a three-year period commencing October 1, 2018   6 years
July 2019     325       0.436     None     75 %     1.12 %   25% will vest on the first anniversary of the grant date and 75% will vest on a quarterly basis over a period of three years thereafter   6 years
May 2020     278       0.566     None     79 %     0.44 %   will vest in 12 equal quarterly installments over a three-year period commencing May 18, 2020   6 years
June 2020     282       0.397     None     74 %     0.53 %   will vest in 12 equal quarterly installments over a three-year period commencing June 1, 2020   6 years
July 2020     124       0.29     None     74 %     0.37 %   will vest in 12 equal quarterly installments over a three-year period commencing July 9, 2020   6 years
October 2020     70       0.4     None     76 %     0.42 %   will vest in 12 equal quarterly installments over a three-year period commencing October 22, 2020   6 years

 

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Functional Currency

 

Until December 31, 2015, our consolidated financial statements were presented in NIS, which was the Company’s functional and presentation currency as of such date. Effective January 1, 2016, the Company changed its functional currency to the U.S. dollar.

 

A. Results of Operations

 

Overview

 

Our legal and commercial name is Medigus Ltd. We were incorporated in the State of Israel on December 9, 1999, as a private company pursuant to the Israeli Companies Ordinance (New Version), 1983. In February 2006, we completed our initial public offering in Israel, and until January 25, 2021, our Ordinary Shares were traded on the TASE, under the symbol “MDGS”. On January 25, 2021, we delisted our Ordinary Shares from trading on TASE. In May 2015, we listed our ADSs on Nasdaq, and since August 2015 our ADSs have been traded on the Nasdaq under the symbol “MDGS”. Each ADS represents 20 Ordinary Shares. In July 2018, we listed our Series C Warrants on the Nasdaq, and since then our Series C Warrants have been traded on Nasdaq under the symbol “MDGSW”. Each Series C Warrant is exercisable into one ADS for an exercise price of $3.50, and will expire five years from the date of issuance.

 

ScoutCam Ltd. was formed in Israel on January 3, 2019, as a wholly owned subsidiary of Medigus, and commenced operations on March 1, 2019. ScoutCam Ltd. was incorporated as part of the reorganization of Medigus, which was designed to distinguish ScoutCam’s miniaturized imaging business, or the micro ScoutCam portfolio, from Medigus’s other operations and to enable Medigus to form a separate business unit with dedicated resources focused on the promotion of such technology. In December 2019, Medigus and ScoutCam Ltd. consummated an Amended and Restated Asset Transfer Agreement, effective March 1, 2019, which transferred and assigned certain assets and intellectual property rights related to its miniaturized imaging business. On March 1, 2019, 12 employees moved from Medigus to ScoutCam. The vast majority of these employees were from the Production and R&D departments. Therefore, their transfer caused large changes in the data of these two line items in the year 2018 and 2019.

 

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On October 14, 2020, we signed a share purchase agreement and a revolving loan agreement with Eventer. The Eventer transaction closed on October 26, 2020. Pursuant to the share purchase agreement, we invested $750,000 and were issued an aggregate of 325,270 ordinary shares of Eventer, representing 50.01% of Eventer’s then issued and outstanding share capital on a fully diluted basis. On April 8, 2021 Eventer consummated an additional share purchase agreement with certain investors in connection with the sale and issuance of $2.25 million worth of its ordinary shares for an aggregate amount of $2.25 million. Following such round and our additional investment of $300,000 we hold approximately 47.69% of Eventer outstanding share capital on a fully diluted basis.

 

The following table sets forth a summary of our operating results:

 

   Year ended
December 31,
 
   2020   2019   2018 
   U.S. Dollars, in thousands,
except per share and
weighted average shares data
 
Revenues:            
Products   491    188    219 
Services   40    85    217 
    531    273    436 
                
Cost of revenues:               
Products   988    370    164 
Services   46    85    115 
Inventory impairment   -    -    328 
    1,034    455    607 
                
Gross Profit (Loss)   (503)   (182)   (171)
                
Research and development expenses   997    609    1,809 
Sales and marketing expenses   471    326    1,354 
General and administrative expenses   5,494    3,081    3,338 
Net income from change in fair value of financial assets at fair value through profit or loss   797    92    - 
Share of net loss of associates accounted for using the equity method   170    216    - 
Amortization of excess purchase price of an associate   546    -    - 
Listing expenses   -    10,098    - 
Operating loss   (7,384)   (14,420)   (6,672)
Changes in fair value of warrants issued to investors   338    142    148 
Financial income (expenses) in respect of deposits, bank commissions and exchange differences, net   205    99    (54)
Loss before taxes on income   (6,841)   (14,179)   (6,578)
Taxes benefit (Taxes on income)   (9)   1    (20)
Loss for the year   (6,850)   (14,178)   (6,598)
Other comprehensive income (loss) for the year, net of tax   35    (41)   - 
Total comprehensive loss for the year   (6,815)   (14,219)   (6,598)
                
Loss for the year is attributable to:               
Owners of Medigus   (4,325)   (14,178)   (6,598)
Non-controlling interest   (2,525)   -    - 
    (6,850)   (14,178)   (6,598)
                
Total comprehensive income for the period is attributable to:               
Owners of Medigus   (4,278)   (14,219)   (6,598)
Non-controlling interest   (2,537)   -    - 
    (6,815)   (14,219)   (6,598)
                
Basic loss per ordinary share(1)   (0.03)   (0.18)   (0.16)
Diluted loss per ordinary share(1)   (0.03)   (0.18)   (0.16)
                
Weighted average number of ordinary shares outstanding used to compute (in thousands)(1):               
Basic loss per share   133,445    78,124    41,988 
Diluted loss per share   133,445    78,124    41,988 

 

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Year ended December 31, 2020 compared to year ended December 31, 2019

 

Revenues

 

Revenues for the year ended December 31, 2020 were $586,000 representing an increase of $313,000 or 115%, compared to total revenues of $273,000 for the year ended December 31, 2019.

 

The tables below set forth our revenues, by region and by product for the periods presented:

 

U.S. dollars; in thousands

 

   Year Ended
December 31,
 
   2020   2019 
United States   418    79%   138    51%
Europe   41    8%   69    25%
Asia   45    8%   22    8%
Other   27    5%   44    16%
Total   531    100%   273    100%

 

U.S. dollars; in thousands

 

   Year Ended
December 31,
 
   2020   2019 
Development services   -    -    85    31%

Revenues from commissions

   40    8%          
Miniature camera and related equipment   491    92%   188    69%
Total   531    100%   273    100%

 

Our revenues in recent years were primarily derived from the sale of miniature camera and related equipment which we develop and manufacture and from development services.

 

The increase in revenues from miniature camera and related equipment was primarily due to the sale of products to A.M. Surgical by ScoutCam. Total revenues recorded from A.M. Surgical during 2020 amounted to approximately $383,000. Total revenues we recorded from A.M. Surgical during 2019 amounted to approximately $85,000. This increase was partially offset by decrease in revenues to other customers due to the COVID-19 pandemic impact on global markets and ScoutCam management decision to reduce sales to occasional customers and focus on larger projects.

 

The attributed to the revenues from services comes from Eventer, which was consolidated commencing October 15, 2020. 

 

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Cost of revenues and inventory impairment

 

Cost of revenues for the year ended December 31, 2020 were $1,034,000 representing an increase of $579,000, or 127%, compared to cost of revenues and of $455,000 for the year ended December 31, 2019. The increase was primarily due to the increase in revenues of $316,000.

 

The increase in cost of revenues was due to:

 

  a) changes in products and services mix;

 

  b) increase in revenues; and

 

  c) increase in payroll expenses as a result of hiring additional employees in ScoutCam.

 

Gross Loss

 

Gross loss for the year ended December 31, 20120 was $503,000, representing an increase of $321,000 compared to gross loss of $182,000 for the year ended December 31, 2019. The gross loss is impacted by several factors, including shifts in product mix, sales volume, fluctuations in manufacturing costs, labor costs, and pricing strategies.

 

Research and Development Expenses

 

Research and development expenses for the year ended December 31, 2020, were $997,000, representing an increase of $388,000, or 64%, compared to $609,000 for the year ended December 31, 2019. The increase was primarily due to an increase of $231,000 in payroll expenses and an increase of $205,000 in materials expenses and expenses related to services rendered to ScoutCam by its subcontractors. The increase in payroll expenses resulted from an increase in share-based compensation expenses and hiring of additional employees in ScoutCam. The increase in materials and subcontractors was primarily due to an increase in research and development activities and due to and the acquisition of Eventer in October 15, 2020.

 

Sales and Marketing Expenses

 

Sales and marketing expenses for the year ended December 31, 2020, were $471,000, representing an increase of $145,000, or 44%, compared to $326,000 for the year ended December 31, 2019. The increase was primarily due to an increase in ScoutCam’s marketing activities.

 

General and Administrative Expenses

 

General and Administrative expenses for the year ended December 31, 2020, were $5,494,000, representing an increase of $2,413,000, or 78%, compared to $3,081,000, for the year ended December 31, 2019. The increase was primarily due to:

 

  a. increase in payroll expenses in ScoutCam, as a result of an increase in share-based compensation expenses and hiring of additional employees, and due to and the acquisition of Eventer on October 15, 2020;

 

  b. increase in the annual premium of our directors’ and officers’ liability insurance policy

 

  c. increase in professional services was primarily in ScoutCam due to an increase in share - based compensation expenses, increase in the number of directors and use of HR services.

 

  d. increase in PR activities, audit fees and the fees of our directors.

 

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Net change in fair value of financial assets at fair value through profit or loss

 

Linkury Shares, Gix Warrants, Conversion Right, Anti-Dilution and Save Foods Inc.(“Safo”) shares and warrants are classified as financial assets through profit and loss and measured at fair value through profit or loss at each balance sheet date based on the then relevant assumptions, until the earlier of full exercise or expiration. On year ended December 31,2020 we recognized income of $797,000 from net change in fair value of this financial assets.

 

On February 18, 2020, we purchased 2,284,865 shares of Matomy , which represents 2.32% of its issued and outstanding share capital. On March 24, 2020, we completed an additional purchase of 22,326,246 shares of Matomy, raising our aggregate holdings in Matomy to 24.92% of Matomy’s issued and outstanding share capital and achieved a significant influence in Matomy. As a consequence, we gained significant influence over this investment and the investment was reclassified from a financial asset at fair value through profit or loss to an associate. On year ended December 31, 2020, we recognized loss of $16,000 from net change in fair value of this financial assets.

 

Share of net loss of accounted for using the equity method

 

We invested in Gix and received 2,168,675 ordinary shares of Gix. This investment accounted for using the equity method. Share of net loss of accounted for using the equity method we recognized at year ended December 31, 2020 was $208,000.

 

Additionally, on February 18, 2020, we purchased 2,284,865 shares of Matomy, which represents 2.32% of its issued and outstanding share capital. On March 24, 2020, we completed an additional purchase of 22,326,246 shares of Matomy, which raised our aggregate holding to 24.99% of its issued and outstanding share capital. Our share of net gain of accounted for using the equity method we recognized at year ended December 31, 2020 was $38,000.

 

Amortization of excess purchase price of an associate

 

Upon acquisition Matomy’s shares the difference between the cost of the investment and Medigus’ share of the net fair value of Matomy’s equity’ amounted to $546,000 and was recognized as an amortization of excess purchase price of an associate.

 

Listing expenses 

 

In 2019 the reverse recapitalization transaction conducted at ScoutCam Ltd.’s level was accounted for in the consolidated financial statement of our company as a transaction with non-controlling interest in which the Company consolidated Intellisense’s net assets in consideration equal to the fair value of the shares Intellisense had to issue to Medigus as part of the reverse recapitalization transaction. The fair value could not be determined based on Intellisense’s stock market value since the trading volume of Intellisense’s common stock was nil. Therefore, the Company determined the fair value of the transaction based on the pre-money valuation of Intellisense, which was taken into account as part of the Issuance of Units to External Investors. Accordingly, an amount of $10,098,000 was listed in the consolidated statement of loss and comprehensive loss as listing expenses.

 

Operating loss

 

We incurred an operating loss of $7,427,000 for the year ended December 31, 2020, representing a decrease of $6,993,000, or 48%, compared to operating loss of $14,420,000 for the year ended December 31, 2019. The decrease in operating loss was due to decrease in listing expenses at an amount of $10,098,000, an increase of $705,000 in profit from net change in fair value of financial assets at fair value through profit or loss partially offset by $546,000 increase in amortization of excess purchase price of an associate, $388,000 increase in research and development expenses, $145,000 increase in sales and marketing expenses, and $2,413,000 increase in administrative and general expenses.

 

Change in Fair Value of Warrants Issued to Investors

 

Profit from change in the fair value of warrants issued to investors for the year ended December 31, 2020, was $338,000, representing an increase of $196,000, compared to profit of $142,000 for the year ended December 31, 2019.

  

Warrants issued to investors classified as either liabilities or as part of the shareholders’ equity based on the accounting guidance established in connection with the rights attached to the warrants. The warrants that were classified as liabilities due to a cashless exercise mechanism are subject to adjustment to fair value each balance sheet cut-off date. This adjustment is presented separately within the consolidated statement of loss and other comprehensive loss.

 

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Financial income (expenses) in respect of deposits, bank commissions and exchange differences, net

 

Finance income, net for the year ended December 31, 2020, was $205,000, representing an increase of $106,000, compared to finance expenses of $99,000 for the year ended December 31, 2019.

 

Loss for the year

 

We incurred loss of $6,850,000 for the year ended December 31, 2020, representing a decrease of $7,328,000, or 52%, compared to loss of $14,178,000 for the year ended December 31, 2019. The decrease was primarily due to a decrease of $6,993,000 in operating loss, an increase of $106,000 in finance income, net and $196,000 change in the fair value of the warrants issued to our investors.

 

Year ended December 31, 2019 compared to year ended December 31, 2018

 

The discussion and analysis regarding the results of operations from the fiscal years ended December 31, 2019 and December 31, 2018 is contained in our annual report on Form 20-F, filed with the SEC, on April 4, 2020.

 

Effective Corporate Tax Rate

 

Our effective consolidated tax rate for the years ended December 31, 2020 and 2019 was almost zero percent (0%), primarily due to the fact that the Company ScoutCam Ltd. and Eventer did not record deferred tax asset in connection with the losses incurred in Israel, since it is not probable that we will be able to utilize such losses in the foreseeable future against taxable income.

 

Impact of Inflation, Devaluation and Fluctuation in Currencies on Results of Operations, Liabilities and Assets

 

We generate part of our revenues in different currencies than our functional currency (U.S. dollars), such as NIS and Euro. As a result, some of our financial assets are denominated in these currencies, and fluctuations in these currencies could adversely affect our financial results. A considerable amount of our expenses are generated in U.S. dollars, but a significant portion of our expenses such as salaries are generated in other currencies such as NIS. In addition to our operations in Israel, we are expanding our international operations in the European Union. Accordingly, we incur and expect to continue incurring additional expenses in non-U.S. dollar currencies, such as described above. Due to the mentioned, our results could be adversely affected as a result of a strengthening or weakening of the U.S. Dollar compared to these other currencies.

 

The inflation in Israel during the last several years was relatively immaterial and, therefore, had immaterial effect on our results of operations.

 

Effective January 1, 2016, we changed our functional currency to the U.S. dollar from NIS. This change was based on management’s assessment that the U.S. dollar is the primary currency of the economic environment in which we operate. Accordingly, the functional and reporting currency of our consolidated financial statements is the U.S. dollar.

 

B.Liquidity and Capital Resources

 

Liquidity

 

During the year ended December 31, 2020, we incurred a total comprehensive loss of approximately $6.9 million and a negative cash flow used in operating activities of approximately $6.1 million. As of December 31, 2020, we incurred accumulated deficit of approximately $81 million.

 

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We will need to seek additional sources of funds, including selling additional equity, debt or other securities or entering into a credit facility, take costs reduction steps or modify our current business plan to achieve profitability. If we raise additional funds through the issuance of debt securities, these securities may have rights senior to those of our ordinary shares and could contain covenants that could restrict our operations and ability to issue dividends. We may also require additional capital beyond our currently forecasted amounts. Any required additional capital, whether forecasted or not, may not be available on reasonable terms, or at all. If we are unable to obtain additional financing, we may be required to reduce the scope of, delay or eliminate some or all of our planned research, development and commercialization activities, which could materially harm our business and results of operations.

 

Because of the numerous risks and uncertainties associated with the development of our products and the current economic situation, we are unable to estimate the exact amounts of capital outlays and operating expenditures necessary to complete the development of our products and successfully deliver commercial products to the market. Our future capital requirements will depend on many factors, including but not limited to the following:

 

  ●  the revenue generated by sales of our current and future products;
     
  the expenses we incur in selling and marketing our products and supporting our growth;

 

  the costs and timing of regulatory clearance or approvals for new products or upgrades or changes to our products;
     
  the expenses we incur in complying with domestic or foreign regulatory requirements imposed on medical device companies;
     
  the rate of progress, cost and success or failure of on-going development activities;
     
  the emergence of competing or complementary technological developments;
     
  the costs of filing, prosecuting, defending and enforcing any patent or license claims and other intellectual property rights;
     
  the terms and timing of any collaborative, licensing, or other arrangements that we may establish;
     
  the future unknown impact of recently enacted healthcare legislation;
     
  the acquisition of businesses, products and technologies; and
     
  general economic conditions and interest rates.

 

Cash Flows

 

Operating Activities

 

Net cash used in operating activities for the year ended December 31, 2020 was $6,142,000, representing an increase of $3,447,000, compared to net cash used in operating activities of $2,695,000 for the year ended December 31, 2019.

 

Net cash used in operating activities for the year ended December 31, 2020, consisted primarily loss for the year before taxes on income of $6,816,000, representing increase in net change in fair value of financial assets at fair value through profit or loss of $680,000, decrease in inventory of $473,000, partially offset by increase in stock-based compensation of $1,129,000 increase in amortization of excess purchase price of an associate of $546,000 and liability to event producers of $661,000.

 

Net cash used in operating activities for the year ended December 31, 2019, consisted primarily of loss for the year before taxes on income of $14,179,000 and increase in inventory of $819,000, partially offset by listing expenses of $10,098,000, stock-based compensation of $259,000, share of losses of associate company of $216,000, increase in other current liabilities of $88,000 and an increase in contract liability of $1,953,000.

 

Investing Activities

 

Net cash used in investing activities for the year ended December 31, 2020 was $1,601,000, representing a decrease of $2,518,000, compared to net cash generated from investing activities of $4,119,000 for the year ended December 31, 2019.

 

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Net cash used in investing activities for the year ended December 31, 2020, consisted primarily of payment for acquisition of Eventer, Matomy, Polyrizon and Safo. (see Note 3 to our financial statements for the year ended December 31, 2020).

 

Net cash used in investing activities for the year ended December 31, 2019, consisted primarily of payment for acquisition of Gix and Linkury.

 

Financing Activities

 

Net cash generated from financing activities for the year ended December 31, 2020 was $22,946,000, an increase of $19,790,000, compared to net cash generated from financing activities of $3,156,000 for the year ended December 31, 2019.

 

Net cash generated from financing activities for the year ended December 31, 2020, consisted primarily of proceeds from issuance of shares and warrants and from exercise of warrants in the total amount of $18,405,000, and an increase in proceeds from issuance of shares and warrants by a subsidiary, net of issuance costs of $4,587,000

 

Net cash generated from financing activities for the year ended December 31, 2019, consisted primarily of cash obtained in connection with a transaction with non-controlling interest of $3,202,000.

  

On May 19, 2020, we entered into an underwriting agreement with ThinkEquity, a division of Fordham Financial Management, or ThinkEquity, pursuant to which we agreed to sell to ThinkEquity, in a firm commitment public offering: (i) 575,001 ADSs, each representing 20 ordinary shares of the Company, par value NIS 1.00, for a public offering price of $1.50 per ADS, and (ii) 2,758,333 pre-funded warrants to purchase one ADS at a public offering price of $1.499, with an exercise price of $0.001. The offering closed on May 22, 2020 and resulted in gross proceeds to us of approximately $5 million. As of the date of this annual report on Form 20-F, all of the pre-funded warrants have been exercised.

 

On December 1, 2020, we entered into an underwriting agreement for a public offering with Aegis Capital Corp. or Aegis, pursuant to which we agreed to sell to Aegis 7,098,491 ADSs at a public offering price of $1.83 per ADS. Aegis was granted a 45-day option to purchase up to an additional 15% of the number of ADSs offered in the public offering to cover over-allotments, if any, at the public offering price. The offering closed on December 4, 2020 and resulted in gross proceeds to us of approximately $13 million, before deducting underwriting discounts and commissions and other estimated offering expenses payable by us.

 

On January 11, 2021, we entered into an underwriting agreement for a firm commitment public offering with Aegis, pursuant to which we agreed to sell to Aegis 3,659,735 ADSs for a public offering price of $2.30 per ADS. In addition, Aegis was granted an option to purchase additional 15 percent of the ADSs sold in the offering solely to cover over-allotments, exercisable until the earlier of 30 days or the last day of trading of our Ordinary Shares on the TASE. Aegis exercised its over-allotment option in full to purchase an additional 548,960 ADSs. The offering closed on January 19, 2021 and resulted in gross proceeds to us of approximately $9.6 million.

 

On February 25, 2021, we entered into an underwriting agreement a firm commitment public offering with Aegis, pursuant to which we agreed to sell to Aegis 3,258,438 ADSs for a public offering price of $2.60 per ADS. In addition, Aegis was granted an option to purchase additional 15 percent of the ADSs sold in the offering solely to cover over-allotments. Aegis exercised its over-allotment option in full to purchase an additional 548,960 ADSs. The offering closed on March 1, 2021 and resulted in total gross proceeds to us of approximately $9.7 million.

 

C. Research and Development, Patents and Licenses, etc.

        

Our research and development efforts are focused on continuous improvement of our products. We conduct all of our research activities in Israel. 

 

As of December 31, 2020, our research and development team, including regulatory and quality team members, consisted of 6 employees. In addition, we work with subcontractors for the development of our products as needed. We have assembled an experienced team with recognized expertise in mechanical and electrical engineering, software, control algorithms and systems integration, as well as significant medical and clinical knowledge and expertise.

 

We finance our research and development activities mainly through sale of our products, capital raising and grants received from the IIA. As of December 31, 2020, we had received total aggregated grants of $2.5 million from the IIA. For further information see “Item 4. Information on the Company—B. Business Overview—Israeli Government Programs.”

 

The table below set forth our research and development expenses for the periods presented:

 

   Year Ended
December 31,
 
   2020   2019   2018 
   (U.S. Dollars, in thousands) 
Research and development expenses  $987   $609   $1,809 
                

 

From time to time we file applications for patent registration in the certain countries, some in which we are active and some which we consider as potential markets in order to protect our developed intellectual property.

 

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D.Trend Information

 

The following is a description of factors that may influence our future results of operations, including significant trends and challenges that we believe are important to an understanding of our business and results of operations:

 

To date, a significant portion of our revenues was generated from the sale of our micro ScoutCam portfolio products, development services and the remainder from the sale of the MUSE system. The level of our future revenues is hard to predict as it depends on many factors, which most of them are outside of our control. For instance, future revenues from the sale of our products may be adversely affected by current general economic conditions and the resulting tightening of credit markets, which may cause purchasing decisions to be delayed, our customers may have difficulty securing adequate funding to buy our products or, in an extraordinary event, may cause our customers to experience difficulties in complying with their engagements with us. In addition, revenue growth depends on the acceptance of our technology in the market.

 

The healthcare industry in the United States has experienced a trend toward cost containment as government and private insurers seek to manage healthcare costs by imposing lower payment rates and negotiating reduced contract rates with service providers. This trend may result in inadequate coverage for procedures, especially those utilizing new technology, or result in new technology not receiving reimbursement coverage, which may negatively impact utilization of our products. In addition, medical malpractice carriers are withdrawing coverage in certain states or substantially increasing premiums. If this trend continues or worsens, physicians and surgeons may discontinue using our products or may choose to not purchase it in the future due to the cost or inability to procure insurance coverage.

 

Additionally, The COVID-19 pandemic has impacted companies in Israel and around the world, and as its trajectory remains highly uncertain, we cannot predict the duration and severity of the outbreak and its containment measures. See also “Item 3.D. – Risk Factors– The global outbreak of COVID-19 (coronavirus) may negatively impact the global economy in a significant manner for an extended period of time, and also adversely affect our operating results in a material manner.

 

E. Off-Balance Sheet Arrangements

 

We have no material off-balance sheet arrangements

 

ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

 

A. Directors and Senior Management

 

The following table lists the names and ages of our directors and senior management as of May 10, 2021:

  

Name   Age   Position(s)
Liron Carmel   37   Chief Executive Officer
Eliyahu Yoresh(1)(3)(4)   51   Chairman of the Board of Directors
Ronen Rosenbloom(1)(2)(4)   49   Director
Eli Cohen(1)(2)(3)(4)   52   Director
Kineret Tzedef(2)(4)   41   Director
Oz Adler   34   Chief Financial Officer

  

(1) Member of the audit committee.
   
(2) Member of the compensation committee.
   
(3) Member of the investment committee.
   
(4) Indicates independent director under Nasdaq Stock Market rules.

 

Liron Carmel has been serving as our Chief Executive Officer since April 2019. Mr. Carmel has vast experience in business and leadership across multiple industries, including bio pharma, internet technology, oil & gas exploration & production, real estate and financial services. In addition he serves as chairman of the Israel Tennis Table Association. Mr. Carmel served as the chief executive officer and director of CannaPowder (PINK: CAPD), a bio-pharma company dedicated to developing and applying innovative technology in the cannabinoid field, from 2017 and 2018. Mr. Carmel previously served as a director of Chiron Refineries Ltd. (TASE: CHR), a company engaged in consulting and initiation of transactions in the refineries field, and as a director of Gix (TASE: GIX) which operates in the field of software development, marketing and distribution to internet users. He also served as vice president business development at Yaad Givatayim development, a municipal corporation dedicated to initiate, develop and establish projects of public importance. Prior to Yaad Givatayim, Mr. Carmel served as an investment manager and as a research and strategy analyst at Excellence Nessuah, one of the leading companies in the field of provident and advanced studies funds in Israel.

 

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Eliyahu Yoresh has been serving as a member of our Board since September 2018 and as our Chairman of the board since February 2020. Mr. Yoresh serves as chief financial officer of Foresight Autonomous Holdings Ltd. (Nasdaq, TASE: FRSX). In addition, Mr. Yoresh serves as a director of Gix (TASE: GIX) and has previously served as a director of Nano Dimension Ltd. (Nasdaq: NNDM) and as a director of Geffen Biomed Investments Ltd. and Greenstone Industries Ltd. Mr. Yoresh served as the chief executive officer of Tomcar Global Holdings Ltd., a global manufacturer of off-road vehicles, from 2005 to 2008. Mr. Yoresh is an Israeli Certified Public Accountant. Yoresh acquired a B.A. in business administration from the Business College, Israel and an M.A. in Law Study from Bar-Ilan University, Israel.

 

Ronen Rosenbloom has been serving as a member of our Board since September 2018. Mr. Rosenbloom is an independent lawyer working out of a self-owned law firm specializing in white collar offences. Mr. Rosenbloom serves as chairman of the Israeli Money Laundering Prohibition committee and the Prohibition of Money Laundering Committee of the Tel Aviv District, both of the Israel Bar Association. Mr. Rosenbloom previously served as a police prosecutor in the Tel Aviv District. Mr. Rosenbloom holds an LL.B. from the Ono Academic College, an Israeli branch of University of Manchester.

 

Eli Cohen has been serving as a member of our Board since September 2018. Mr. Cohen is an independent lawyer working out of a self-owned firm. He serves as chairman of Univo Pharmaceuticals Ltd., as director of Europe Hagag Ltd., and has previously served as director of Hagag Group Ltd., Multimatrixs Ltd., Matrat Mizug Ltd. and User Trend-M Ltd. Mr. Cohen also serves as a director of several private companies. Mr. Cohen holds an economics degree, an LL.B. and an LL.M. in Commercial Law from Tel-Aviv University, as well as an MBA from the Northwestern University and Tel-Aviv University joint program.

 

Kineret Tzedef has been serving as member of our Board since June 2019. Ms. Tzedef also serves as a director of sports division and served in other positions at Hapoel Organization (Israeli Sport Federation) since 2007. Ms. Tzedef is the president of Israeli Gymnastics Federation since 2018. Ms. Tzedef serves as an external director at Chiron Refineries Ltd. (TASE: CHR), and as an external director of Biomedico Hadarim Ltd. (TASE: BIMCM). Ms. Tzedef is admitted to the Israel Bar Association since 2014. Ms. Tzedef acquired a LL.B from the Academic Center for Law and Science, Israel and a B.Ed. in Law Study from the Academic College at Wingate, Israel.

 

Oz Adler. Mr. Adler has been serving as our Chief Financial Officer since January 15, 2021. Since September 2017, Mr. Adler has served as VP Finance and Chief Financial Officer of Therapix Biosciences Ltd., a former Nasdaq listed company that is currently listed on the OTC Pink Sheets. Between 2012 and 2017, Mr. Adler worked in the audit department of Kost Forer Gabbay & Kasierer, a member of Ernst & Young Global. Mr. Adler is a certified public accountant in Israel and holds a B.A. degree in Accounting and Business management from The College of Management, Israel.

 

Family Relationships

 

There are no family relationships between any members of our executive management and our directors.

 

Arrangements for Election of Directions and Members of Management

 

There are no arrangements or understandings with major shareholders, customers, suppliers or others pursuant to which any of our executive management or our directors were appointed.

 

B.Compensation

 

Compensation of Executive Officers

 

In accordance with the provisions of the Companies Law, the compensation of our directors and officer holders must generally comply with the terms and conditions of our compensation policy, as approved by our compensation committee, board of directors and general meeting of our shareholders, subject to certain exceptions under the Companies Law. Our current compensation policy was approved by our general meeting on January 9, 2019 and a subsequent amendment was approved by our general meeting on July 25, 2019 and February 12, 2021.

 

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The table below reflects the compensation granted to our five most highly compensated office holders (as defined in the Companies Law) during or with respect to the year ended December 31, 2020:

 

Name and Position  Salary(1)   Bonus   Equity-Based
Compensation(2)
   All
other
compensation(3)
   Total 
   U.S. Dollars in thousands 
Liron Carmel 
Chief Executive Officer
   139    53    22                -    214 
Tatiana Yosef
Former Chief Financial Officer(4)
   120    12    41    -    173 
Eliyahu Yoresh 
Chairman of the Board of Directors(5)
   81    34    15    -    130 
Eli Cohen
Director
   18    -    15    -    33 
Ronen Rosenbloom
Director
   20    -    15    -    35 
Kineret Tzedef
Director
   17    -    16    -    33 

Oz Adler(6)
Chief Financial Officer

   11    -    -    -    11 

 

(1)Salary includes the office holders’ gross salary plus payment of social benefits made by us on behalf of such office holder. Such benefits may include, to the extent applicable to the office holder, payments, contributions and/or allocations for savings funds (such as managers’ life insurance policy), education funds (referred to in Hebrew as “keren hishtalmut”), pension, severance, risk insurances (e.g., life, or work disability insurance), payments for social security and tax gross-up payments, vacation, medical insurance and benefits, convalescence or recreation pay and other benefits and perquisites consistent with our policies.

 

(2)Represents the equity-based compensation expenses recorded in the Company’s consolidated financial statements for the year ended December 31, 2020, based on the option’s fair value, calculated in accordance with accounting guidance for equity-based compensation.

 

(3)Includes travel expenses.

 

(4)Ms. Yosef stepped down from her position as the Company’s Chief Financial Officer, effective January 15, 2021.

 

(5)Mr. Yoresh has been serving as a member of our board of directors since September 2018 and as our Chairman of the board of directorssince February 2020.

 

(6)Mr. Adler’s employment with the Company commenced on December 1, 2020, terminated on January 1, 2021. On the same date of the termination, the Company entered into a consulting agreement with Mr. Adler.

 

The aggregate compensation paid by us to our office holders, as defined in the Companies Law, for the year ended December 31, 2020 was approximately $0.6 million, which includes seven persons, including our former executive officers. This amount includes, when applicable, set aside or accrued to provide pension, severance, retirement or similar benefits or expenses, car expenses and value of the ordinary shares underlying the options representing accounting expenses, but does not include business travel, relocation, professional and business association dues and expenses reimbursed to officers, and other benefits commonly reimbursed or paid by companies in Israel.

 

Compensation of Directors

 

Under the Companies Law and the rules and regulations promulgated thereunder, our directors are entitled to fixed annual compensation and to an additional payment for each meeting attended. We currently pay Mr. Ronen Rosenbloom, Ms. Kineret Tzedef and Mr. Eli Cohen an annual fee of NIS 37,115 and a per meeting fee of NIS 1,860.

 

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On February 2, 2020 and on June 1, 2020, our compensation committee and board of directors approved new compensation terms for Mr. Eliyahu Yoresh in connection with his services as an active chairman of the board of directors. For his services, Mr. Yoresh is entitled to receive a monthly payment of NIS25,000 plus VAT, which constitutes the sole and complete compensation. Mr. Yoresh will not be entitled to a per meeting fee. In addition, Mr. Yoresh shall be entitled to an annual, target based bonus of up to NIS 200,000, whereas the targets are to be decided by our board of directors and compensation committee in accordance with the following weights: (a) 25% Company performance measures of profitability and/or revenues; (b) 35% Company performance measures of liquidity and/or cash flow; and (c) 40% Company performance measures of strategic goals and related objectives. The aforementioned compensation terms are not consistent with our current compensation policy, and were approved by the Company’s shareholders in accordance with the Companies Law on July 9, 2020.

 

Equity Based Compensation of our Executive Officers and Directors

 

As of May 10, 2021, options to purchase 4,250,000 of our Ordinary Shares were outstanding and held by current executive officers and directors (consisting of 5 persons) with an average exercise price of NIS 0.56 per ordinary share, of which, options to purchase 2,218,750 of our ordinary shares are currently exercisable or exercisable within 60 days as of May 10, 2021. See “Item 6. Directors, Senior Management and Employees—E. Share Ownership” in this annual report on Form 20-F.

 

Agreements with Executive Officers

 

We have entered into written agreements with each of our executive officers. All of these agreements contain customary provisions regarding non-competition, confidentiality of information and assignment of inventions. However, the enforceability of the noncompetition provisions may be limited under applicable law. In addition, we have entered into agreements with each executive officer and director pursuant to which we have agreed to indemnify each of them to the fullest extent permitted by law to the extent that these liabilities are not covered by directors and officers insurance.

 

Our office holders are generally eligible for bonuses each year. The bonuses are established and granted in accordance with our compensation policy and, and are generally payable upon meeting objectives and targets that are approved by our compensation committee and board of directors (and if required by our shareholders).

 

Consulting Agreement with Mr. Carmel

 

On July 25, 2019, our shareholders approved that as of April 2, 2019, our company would enter into a consulting agreement with Mr. Carmel, who serves as our Chief Executive Officer. The term is for an indefinite period, however the agreement may be terminated by either party by giving 60 days advance notice, or shorter periods in some cases, such as termination for “cause”. During the notice period, Mr. Carmel will be entitled to consulting fees only to the extent that he provides services to the Company during the notice period.

 

In accordance with the consulting agreement, Mr. Carmel was entitled to a monthly consulting fee of NIS 36,000 + VAT for 80% position and reimbursement of business expenses in accordance with our policies from time to time. On June 1, 2020, our compensation committee approved an immaterial change to Mr. Carmel’s consulting agreement by increasing the monthly consulting fee to NIS 41,500 plus VAT, effective as of the approval date. In addition, Mr. Carmel may be entitled to an annual cash bonus of up to NIS 215,000 plus VAT, based on a discretionary component of not more than 25% and measurable objectives to be determined by our compensation committee and approved by our board of directors for the applicable fiscal year. The annual target bonus may be reduced by our board of directors according to our financial position and Mr. Carmel’s performance, and must be returned by Mr. Carmel if it is later shown to be granted in error which shall be restated in our financial statements.

  

In addition, Mr. Carmel was granted with options to purchase up to 1,250,000 Ordinary Shares of the Company (the “Options”), in accordance with the following terms: (i) the Options shall vest over a period of four (4) years commencing April 1, 2019, 25% of the Options shall vest on the first anniversary (i.e., April 1, 2020), and 75% of the Options shall vest on a quarterly basis over a period of three (3) years thereafter; (ii) the term of the Options shall be of six (6) years from the date of grant, unless they have been exercised or cancelled in accordance with the terms of and conditions of the applicable incentive plan of the Company, (iii) unless previously exercised or cancelled, the Options may be exercised until 180 days from the date of termination of the service, (iv) the exercise price per share of the Options shall be NIS 0.59, (v) the Options’ grant shall be in accordance and pursuant to Section 102 of the Income Tax Ordinance [New Version], and (vi) the Options shall be accelerated upon the closing of a material transaction, resulting in change of control of the Company. 

 

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The agreement also includes customary covenants regarding confidentiality, IP assignment, non-competition and non-solicitation.

  

C.Board Practices

 

Introduction

 

Under the Companies Law and our articles of association, the management of our business is vested in our board of directors. Our board of directors may exercise all powers and may take all actions that are not specifically granted to our shareholders or to management. Our executive officers are responsible for our day-to-day management and have individual responsibilities established by our board of directors. Our chief executive officer is appointed by the general meeting of our shareholders, subject to his personal contract with the Company.

 

Under our articles of association, our board of directors must consist of at least three and not more than 12 directors, not including two external directors appointed as required under the Companies Law. Our board of directors currently consists of four members, none of which are external directors, including our chairman of the board of directors, which is also appointed by the general meeting of our shareholders. Our directors are nominated by our independent directors and elected at the annual general meeting of our shareholders by a simple majority. Because our Ordinary Shares do not have cumulative voting rights in the election of directors, the holders of a majority of the voting power represented at a shareholders meeting have the power to elect all of our directors. The general meeting of our shareholders may resolve, at any time, by an ordinary majority resolution prior to the termination of his respective term of service and it may appoint another director in his place, provided that the director was given a reasonable opportunity to state his case before the general meeting.

 

In addition, if a director’s office becomes vacant, the remaining serving directors may continue to act in any manner, provided that their number is of the minimal number specified in our articles of association. If the number of serving directors is lower than three, then our board of directors will not be permitted to act, other than for the purpose of convening a general meeting of the Company’s shareholders for the purpose of appointing additional directors. In addition, the directors may appoint, immediately or of a future date, additional director(s) to serve until the subsequent annual general meeting of our shareholders, provided that the total number of directors in office do not exceed twelve directors (not including external directors).

 

Pursuant to the Companies Law and our articles of association, a resolution proposed at any meeting of our board of directors at which a quorum is present is adopted if approved by a vote of a majority of the directors present and eligible to vote. A quorum of the board of directors requires at least a majority of the directors then in office who are lawfully entitled to participate in the meeting.

 

According to the Companies Law, the board of directors of a public company must determine the minimum number of board members that should have financial and accounting expertise while considering, among other, the nature of the company, its size, the scope and complexity of its operations and the number of directors stated in the articles of association. Our board of directors resolved that the minimum number of board members that need to have financial and accounting expertise is one, and that Mr. Eliyahu Yoresh has accounting and financial expertise as required under the Companies Law.

 

External Directors

 

Under the Companies Law, companies incorporated under the laws of the State of Israel that are “public companies,” including companies with shares listed on the Nasdaq Capital Market, are required to appoint at least two external directors. External directors must meet certain independence criteria to ensure that they are unaffiliated with the company and its controlling shareholder, as well certain other criteria. External directors are elected for three-year terms in accordance with specific rules set forth in the Companies Law and the regulations promulgated thereunder and may be removed from office only under limited circumstances. Under the Companies Law, each committee of a company’s board of directors that is authorized to exercise powers of the board of directors is required to include at least one external director, and all external directors must be members of the company’s audit committee and compensation committee.

 

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Pursuant to regulations promulgated under the Companies Law, companies with shares traded on a U.S. stock exchange, including the Nasdaq Capital Market, may, subject to certain conditions, “opt out” from the Companies Law requirements to appoint external directors and related Companies Law rules concerning the composition of the audit committee and compensation committee of the board of directors. In accordance with these regulations, effective as of June 28, 2017, we have “opted out” from the Companies Law requirements to appoint external directors and related Companies Law rules concerning the composition of the audit committee and compensation committee of the board of directors.

 

Under these regulations, the exemptions from such Companies Law requirements will continue to be available to us so long as: (i) we do not have a “controlling shareholder” (as such term is defined under the Companies Law), (ii) our shares are traded on a U.S. stock exchange, including the Nasdaq Capital Market, and (iii) we comply with the director independence requirements, the audit committee and the compensation committee composition requirements, under U.S. laws (including applicable Nasdaq Rules) applicable to U.S. domestic issuers. We believe that Mr. Eli Cohen, Mr. Eliyahu Yoresh, Mr. Ronen Rosenbloom and Ms. Kineret Tzedef are “independent” for purposes of the Nasdaq Stock Market rules.

 

Alternate directors

 

Our articles of association provide, as allowed by the Companies Law, that any director may, by written notice to us, appoint another person who is qualified to serve as a director to serve as an alternate director and to terminate such appointment. Under the Companies Law, a person who is not qualified to be appointed as a director, a person who is already serving as a director or a person who is already serving as an alternate director for another director, may not be appointed as an alternate director. Nevertheless, a director who is already serving as a director may be appointed as an alternate director for a member of a committee of the board of directors as long as he or she is not already serving as a member of such committee.

 

Board committees

 

The board of directors may, subject to the provisions of the Companies Law, delegate any or all of its powers to committees, each consisting of one or more directors (except the audit and compensation committees, as described below), and it may, from time to time, revoke such delegation or alter the composition of any such committees. Unless otherwise expressly provided by the board of directors, the committees will not be empowered to further delegate such powers. The composition and duties of our audit committee and compensation committee are described below.

  

Audit committee

 

Our audit committee is currently comprised of Mr. Eli Cohen, Mr. Eliyahu Yoresh, and Mr. Ronen Rosenbloom. Mr. Eli Cohen acts as the chairperson of our audit committee.

 

Companies Law Requirements

 

Under the Companies Law, our board of directors is required to appoint an audit committee, which is responsible, among others, for:

 

  (i) determining whether there are deficiencies in the business management practices of our Company, including in consultation with our internal auditor or the independent auditor, and making recommendations to our board of directors to improve such practices;

 

  (ii) determining the approval process for transactions that are ‘non-negligible’ (i.e., transactions with a controlling shareholder that are classified by the audit committee as non-negligible, even though they are not deemed extraordinary transactions), as well as determining which types of transactions would require the approval of the audit committee, optionally based on criteria which may be determined annually in advance by the audit committee;

 

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  (iii) determining whether to approve certain related party transactions (including transactions in which an office holder has a personal interest and whether such transaction is extraordinary or material under Companies Law. See “— Fiduciary duties and approval of specified related party transactions and compensation under Israeli law.”;

 

  (iv) where the board of directors approves the working plan of the internal auditor, to examine such working plan before its submission to our board of directors and proposing amendments thereto;

 

  (v) examining our internal controls and internal auditor’s performance, including whether the internal auditor has sufficient resources and tools to dispose of its responsibilities;

 

  (vi) examining the scope of our auditor’s work and compensation and submitting a recommendation with respect thereto to our board of directors or shareholders, depending on which of them is considering the appointment of our auditor; and

 

  (vii)  establishing procedures for the handling of employees’ complaints as to the management of our business and the protection to be provided to such employees.

 

Nasdaq requirements

 

Under the Nasdaq corporate governance 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. All members of our audit committee meet the requirements for financial literacy under the applicable rules and regulations of the SEC and the Nasdaq corporate governance rules. Our board of directors has determined that Mr. Eliyahu Yoresh is an audit committee financial expert as defined by the SEC rules and has the requisite financial experience as defined by the Nasdaq Marketplace Rules.

 

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, which is different from the general test for independence of board and committee members. Our board of directors has determined that each member of our audit committee is independent as such term is defined in Rule 10A-3(b)(1) of the Exchange Act.

 

Audit committee role

 

Our board of directors has adopted an audit committee charter setting forth the responsibilities of the audit committee consistent with the rules of the SEC and the Nasdaq Rules, which include, among others:

 

  retaining and terminating our independent auditors, subject to the ratification of the board of directors, and in the case of retention, to that of the shareholders;

 

  pre-approving of audit and non-audit services and related fees and terms, to be provided by the independent auditors;

 

  overseeing the accounting and financial reporting processes of our company and audits of our financial statements, the effectiveness of our internal control over financial reporting and making such reports as may be required of an audit committee under the rules and regulations promulgated under the Exchange Act;

 

  reviewing with management and our independent auditor our annual and quarterly financial statements prior to publication or filing (or submission, as the case may be) to the SEC;

 

  recommending to the board of directors the retention and termination of the internal auditor, and the internal auditor’s engagement fees and terms, in accordance with the Companies Law as well as approving the yearly or periodic work plan proposed by the internal auditor;

 

  reviewing with our general counsel and/or external counsel, as deem necessary, legal and regulatory matters that could have a material impact on the financial statements;

 

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  identifying irregularities in our business administration, inter alia, by consulting with the internal auditor or with the independent auditor, and suggesting corrective measures to the board of directors; and

 

  reviewing policies and procedures with respect to transactions (other than transactions related to the compensation or terms of services) between the company and officers and directors, or affiliates of officers or directors, or transactions that are not in the ordinary course of the company’s business and deciding whether to approve such acts and transactions if so required under the Companies Law.

 

The audit committee charter states that in fulfilling its obligations, the committee is entitled to demand from the Company any document, file, report or any other information that is required for the fulfillment of its roles and duties and to interview any of our employees or any employees of our subsidiaries in order to receive more details about his or her line of work or other issues that are connected to the roles and duties of the audit committee.

 

Compensation Committee

 

Our compensation committee is currently comprised of Mr. Ronen Rosenbloom, Mr. Eli Cohen and Ms. Kineret Tzedef. Mr. Ronen Rosenbloom acts as the chairperson of our compensation committee.

 

Companies Law requirements

 

Under the Companies Law, the board of directors of a public company must appoint a compensation committee which roles are, among others, as follows:

 

  to recommend to the board of directors the approval of compensation policy for directors and officers in accordance with the requirements of the Companies Law;

 

  to oversee the development and implementation of such compensation policy and recommending to the board of directors regarding any amendments or modifications that the compensation committee deems appropriate;

  

  to determine whether to approve transactions concerning the terms of engagement and employment of office holders that require approval of the compensation committee; and

 

  to resolve whether to exempt a transaction with a candidate for chief executive officer from shareholder’s approval.

 

Nasdaq requirements

 

Our board of directors has adopted a compensation committee charter setting forth the responsibilities of the committee consistent with the Nasdaq Rules, which include among others:

 

  recommending to our board of directors for its approval a compensation policy in accordance with the requirements of the Companies Law as well as other compensation policies, incentive-based compensation plans and equity-based compensation plans, and overseeing the development and implementation of such policies and recommending to our board of directors any amendments or modifications to the committee deems appropriate, including as required under the Companies Law;

 

  reviewing and approving the granting of options and other incentive awards to our chief executive officer and other executive officers, including reviewing and approving corporate goals and objectives relevant to the compensation of our chief executive officer and other executive officers, including evaluating their performance in light of such goals and objectives;

 

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  approving and exempting certain transactions regarding office holders’ compensation pursuant to the Companies Law; and

 

  administer our equity-based compensation plans, including without limitation to approve the adoption of such plans, to amend and interpret such plans and the awards and agreements issued pursuant thereto, and to make awards to eligible persons under the plans and determine the terms of such awards. 

 

The compensation committee is also authorized to retain and terminate compensation consultants, legal counsel or other advisors to the committee and to approve the engagement of any such consultant, counsel or advisor, to the extent it deems necessary or advisable.

 

Our board of directors has determined that each member of our compensation committee is independent under the Nasdaq Rules, including the additional independence requirements applicable to the members of a compensation committee.

 

Compensation policy

 

Under the Companies Law, companies incorporated under the laws of the State of Israel, whose shares are listed for trading on a stock exchange or have been offered to the public in or outside of Israel, such as us, are required to adopt a policy governing the compensation of “office holders” (as defined in the Companies Law). Following the recommendation of our compensation committee and approval by our board of directors, our shareholders approved our current compensation policy at our special general meeting of shareholders held on January 9, 2019 as well as certain amendments to the policy approved by our shareholders on July 25, 2019 and February 12, 2021. Our compensation policy must be approved at least once every three years, first, by our board of directors, upon recommendation of our compensation committee, and second, by a simple majority of the ordinary shares present, in person or by proxy, and voting at a shareholders meeting, provided that either:

 

  such majority includes at least a majority of the shares held by shareholders who are not controlling shareholders and do not have a personal interest in such compensation arrangement and who are present and voting (excluding abstentions); or

 

  the total number of shares of non-controlling shareholders and shareholders who do not have a personal interest in the compensation arrangement and who vote against the arrangement, does not exceed 2% of the company’s aggregate voting rights.

 

Such majority determined in accordance with the majority requirement described above is hereinafter referred to as the Compensation Special Majority Requirement.

 

To the extent a compensation policy is not approved by shareholders at a duly convened shareholders meeting or by the Compensation Special Majority Requirement, the board of directors of a company may override the resolution of the shareholders following a re-discussion of the matter by the board of directors and the compensation committee and for specified reasons, and after determining that despite the rejection by the shareholders, the adoption of the compensation policy is in the best interest of the company. A compensation policy that is for a period of more than three years must be approved in accordance with the above procedure once every three years.

 

The compensation policy must serve as the basis for decisions concerning the financial terms of employment or engagement of office holders, including exculpation, insurance, indemnification or any monetary payment or obligation of payment in respect of employment or engagement. The compensation policy must relate to certain factors, including advancement of the company’s objectives, the company’s business plan and its long-term strategy, and creation of appropriate incentives for office holders. It must also consider, among other things, the company’s risk management, size and the nature of its operations. The compensation policy must furthermore consider the following additional factors:

 

  the knowledge, skills, expertise and accomplishments of the relevant office holder;

 

  the office holder’s roles and responsibilities and prior compensation agreements with him or her;

 

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  the ratio between the cost of the terms of employment of an office holder and the cost of the compensation of the other employees of the company, including those employed through manpower companies, in particular the ratio between such cost and the average and median compensation of the other employees of the company, as well as the impact such disparities may have on the work relationships in the company;

 

  the possibility of reducing variable compensation, if any, at the discretion of the board of directors; and the possibility of setting a limit on the exercise value of non-cash variable equity-based compensation; and

 

  as to severance compensation, if any, the period of service of the office holder, the terms of his or her compensation during such service period, the company’s performance during that period of service, the person’s contribution towards the company’s achievement of its goals and the maximization of its profits, and the circumstances under which the person is leaving the company.

 

The compensation policy must also include the following principles:

 

  the link between variable compensation and long-term performance and measurable criteria;

 

  the relationship between variable and fixed compensation, and the ceiling for the value of variable compensation;

 

  the conditions under which an office holder would be required to repay compensation paid to him or her if it was later shown that the data upon which such compensation was based was inaccurate and was required to be restated in the company’s financial statements;

 

  the minimum holding or vesting period for variable, equity-based compensation; and

 

  maximum limits for severance compensation.

 

Investment Committee

 

Our investment committee is comprised of Mr. Eli Yoresh and Mr. Eli Cohen. The investment committee is authorized to approve certain investments in accordance with the Company’s investment policy approved by the board of directors. The investment committee monitors the management of the portfolio for compliance with the investment policies and guidelines and considers the merits of time sensitive investments that could be beneficial to the Company. 

 

Internal auditor

 

Under the Companies Law, the board of directors of a public company must appoint an internal auditor based on the recommendation of the audit committee. Under the Companies Law, each of the following may not be appointed as internal auditor:

 

  a person (or a relative of a person) who holds more than 5% of the company’s outstanding shares or voting rights;

 

  a person (or a relative of a person) who has the power to appoint a director or the general manager of the company;

 

  an office holder (including a director) of the company (or a relative thereof); or

 

  a member of the company’s independent accounting firm, or anyone on his or her behalf.

 

The role of the internal auditor is, among other things, to examine whether a company’s actions comply with applicable law and orderly business procedure. The audit committee is required to oversee the activities and to assess the performance of the internal auditor as well as to review the internal auditor’s work plan. Our internal auditor is Daniel Spira, Certified Public Accountant (Isr.).

 

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Fiduciary duties and approval of specified related party transactions and compensation under Israeli law

 

Fiduciary duties of office holders

 

The Companies Law imposes fiduciary duties on all office holders of a company comprised of a duty of care and a duty of loyalty.

 

The duty of care requires an office holder to act in the same degree of proficiency with which a reasonable office holder in the same position would have acted under the same circumstances. The duty of care includes, among other things, a duty to use reasonable means, in light of the circumstances, to obtain:

 

  information on the business advisability of a given action brought for his or her approval or performed by virtue of his or her position; and

 

  all other important information pertaining to such action.

 

The duty of loyalty requires an office holder to act in good faith and for the benefit of the company, and includes, among other things, the duty to:

 

  refrain from any act involving a conflict of interest between the performance of his or her duties in the company and his or her other duties or personal affairs;

 

  refrain from any activity that is competitive with the business of the company;

 

  refrain from exploiting any business opportunity of the company for the purpose of gaining a personal advantage for himself or herself or others; and

 

  disclose to the company any information or documents relating to the company’s affairs which the office holder received as a result of his or her position as an office holder.

 

Under the Companies Law, we may approve an act specified above, provided that the office holder acted in good faith, the act or its approval does not harm the company’s best interest, and the office holder discloses his or her personal interest a sufficient time before the approval of such act, including any relevant document.

 

Disclosure of personal interests of an office holder and approval of transactions

 

The Companies Law requires that an office holder promptly disclose to the company any personal interest that he or she may have and all related material information or documents relating to any existing or proposed transaction by the company. An interested office holder’s disclosure must be made promptly and, in any event, no later than the first meeting of the board of directors at which the transaction is considered. Under the Companies Law, once an office holder complies with the above disclosure requirement, the board of directors at which the transaction is considered. An office holder is not obliged to disclose such information if the personal interest of the office holder derives solely from the personal interest of his or her relative in a transaction that is not considered an extraordinary transaction.

 

Under the Companies Law, a company may approve a transaction between the company and the office holder or a third party in which the office holder has a personal interest only if the office holder has complied with the above disclosure requirement, provided, however, that a company may not approve a transaction or action that is not to the company’s benefit.

 

Under the Companies Law, unless the articles of association of a company provide otherwise, a transaction with an office holder or with a third party in which the office holder has a personal interest, which is not an extraordinary transaction, requires approval by the board of directors. Our articles of association do not state otherwise. If the transaction considered with an office holder or third party in which the office holder has a personal interest is an extraordinary transaction, then the audit committee’s approval is required prior to approval by the board of directors. For the approval of compensation arrangements with directors and executive officers, see “Item 6. Directors, Senior Management and Employees —C. Board Practices—Compensation of directors and executive officers.”

 

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Any person who has a personal interest in the approval of a transaction that is brought before a meeting of the board of directors or the audit committee may not be present at the meeting or vote on the matter. However, if the chairperson of the board of directors or the chairperson of the audit committee has determined that the presence of an office holder with a personal interest is required, such office holder may be present at the meeting for the purpose of presenting the matter. Notwithstanding the foregoing, a director who has a personal interest may be present at the meeting and vote on the matter if a majority of the directors or members of the audit committee have a personal interest in the approval of such transaction’ provided, however, that if a majority of the directors at a board of directors meeting have a personal interest in the approval of the transaction, such transaction also requires the approval of the shareholders of the company.

 

A “personal interest” is defined under the Companies Law as the personal interest of a person in an action or in a transaction of the company, including the personal interest of such person’s relative or the interest of any other corporate body in which such person and/or such person’s relative is a director or general manager, a 5% shareholder or holds 5% or more of the voting rights, or has the right to appoint at least one director or the general manager, but excluding a personal interest stemming solely from the fact of holding shares in the company. A personal interest also includes (1) a personal interest of a person who votes according to a proxy of another person, including in the event that the other person has no personal interest, and (2) a personal interest of a person who gave a proxy to another person to vote on his or her behalf regardless of whether the discretion of how to vote lies with the person voting or not.

 

An “extraordinary transaction” is defined under the Companies Law as any of the following:

 

  a transaction other than in the ordinary course of business;

 

  a transaction that is not on market terms; or

 

  a transaction that may have a material impact on the company’s profitability, assets or liabilities.

 

An extraordinary transaction in which an office holder has a personal interest requires approval of the company’s audit committee followed by the approval of the board of directors.

 

Disclosure of personal interests of a controlling shareholder and approval of transactions

 

The Companies Law also requires that a controlling shareholder promptly disclose to the company any personal interest that he or she may have and all related material information or documents relating to any existing or proposed transaction by the company. A controlling shareholder’s disclosure must be made promptly and, in any event, no later than the first meeting of the board of directors at which the transaction is considered. The following require the approval of each of (i) the audit committee (or the compensation committee with respect to the terms of engagement of the controlling shareholder or relative thereof with the company related for the provision of service, including among others as an office holder or employee of the company), (ii) the board of directors and (iii) the shareholders (in that order): (a) extraordinary transactions with a controlling shareholder or in which a controlling shareholder has a personal interest (including a private placement in which a controlling shareholder has a personal interest), (b) the engagement with a controlling shareholder or his or her relative, directly or indirectly, for the provision of services to the company, (c) the terms of engagement and compensation of a controlling shareholder or his or her relative as an office holder, and (d) the employment of a controlling shareholder or his or her relative by the company, other than as an office holder (collectively referred as Transaction with a Controlling Shareholder). In addition, the shareholder approval must fulfill one of the following requirements:

 

  at least a majority of the shares held by shareholders who have no personal interest in the transaction and are voting at the meeting must be voted in favor of approving the transaction, excluding abstentions; or
     
  the shares voted by shareholders who have no personal interest in the transaction who vote against the transaction represent no more than two percent (2%) of the voting rights in the company.

 

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In addition, any extraordinary transaction with a controlling shareholder or in which a controlling shareholder has a personal interest with a term of more than three years requires the abovementioned approval every three years, however, unless, with respect to certain transactions the audit committee determines that such longer term is reasonable under the circumstances.

 

Pursuant to regulations promulgated under the Companies Law, certain transactions with a controlling shareholder, a relative thereof, or with a director, that would otherwise require approval of a company’s shareholders may be exempt from shareholder approval upon certain determinations of the audit committee and board of directors.

 

The Companies Law requires that every shareholder that participates, in person, by proxy or by voting instrument, in a vote regarding a transaction with a controlling shareholder, must indicate in advance or in the ballot whether or not that shareholder has a personal interest in the vote in question. Failure to so indicate will result in the invalidation of that shareholder’s vote.

 

Approval of the compensation of directors and executive officers

 

The compensation of, or an undertaking to indemnify, insure or exculpate, an office holder who is not a director requires the approval of the company’s compensation committee, followed by the approval of the company’s board of directors, and, if such compensation arrangement or an undertaking to indemnify or insure is inconsistent with the company’s stated compensation policy, or if the said office holder is the chief executive officer of the company (apart from a number of specific exceptions), then such arrangement is subject to the approval of our shareholders, subject to the Compensation Special Majority Requirement.

 

Directors. Under the Companies Law, the compensation of our directors requires the approval of our compensation committee, the subsequent approval of the board of directors and, unless exempted under the regulations promulgated under the Companies Law, the approval of the general meeting of our shareholders. If the compensation of our directors is inconsistent with our stated compensation policy, then, provided that those provisions that must be included in the compensation policy according to the Companies Law have been considered by the compensation committee and board of directors, shareholder approval will also be required to be approved by the Compensation Special Majority Requirement.

 

Executive officers other than the chief executive officer. The Companies Law requires the approval of the compensation of a public company’s executive officers (other than the chief executive officer) in the following order: (i) the compensation committee, (ii) the company’s board of directors, and (iii) if such compensation arrangement is inconsistent with the company’s stated compensation policy, the company’s shareholders by the Compensation Special Majority Requirement. However, if the shareholders of the company do not approve a compensation arrangement with an executive officer that is inconsistent with the company’s stated compensation policy, the compensation committee and board of directors may override the shareholders’ decision if each of the compensation committee and the board of directors provide detailed reasons for their decision.

 

Chief executive officer. Under the Companies Law, the compensation of a public company’s chief executive officer is required to be approved by: (i) the company’s compensation committee; (ii) the company’s board of directors, and (iii) the company’s shareholders by the Compensation Special Majority Requirement. However, if the shareholders of the company do not approve the compensation arrangement with the chief executive officer, the compensation committee and board of directors may override the shareholders’ decision if each of the compensation committee and the board of directors provide a detailed reasoning for their decision. The approval of each of the compensation committee and the board of directors must be in accordance with the company’s stated compensation policy; however, under special circumstances, the compensation committee and the board of directors may approve compensation terms of a chief executive officer that are inconsistent with the company’s compensation policy provided that they have considered those provisions that must be included in the compensation policy according to the Companies Law and that shareholder approval was obtained by the Compensation Special Majority Requirement. In addition, the compensation committee may resolve that the shareholder approval is not required for the approval of the engagement terms of a candidate to serve as the chief executive officer, if the compensation committee determines that the compensation arrangement is consistent with the company’s stated compensation policy, that the chief executive officer did not have a prior business relationship with the company or a controlling shareholder of the company, and that subjecting the approval to a shareholder vote would impede the company’s ability to attain the candidate to serve as the company’s chief executive officer.

 

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Duties of shareholders

 

Under the Companies Law, a shareholder has a duty to refrain from abusing its power in the company and to act in good faith and in an acceptable manner in exercising its rights and performing its obligations to the company and other shareholders, including, among other things, when voting at meetings of shareholders on the following matters:

 

  an amendment to the articles of association;

 

  an increase in the company’s authorized share capital;

 

  a merger; and

 

  the approval of related party transactions and acts of office holders that require shareholder approval.

 

A shareholder also has a general duty to refrain from discriminating against other shareholders.

 

The remedies generally available upon a breach of contract will also apply to a breach of the shareholder duties mentioned above, and in the event of discrimination against other shareholders, additional remedies are available to the injured shareholder.

 

In addition, any controlling shareholder, any shareholder that knows that its vote can determine the outcome of a shareholder vote and any shareholder that, under a company’s articles of association, has the power to appoint or prevent the appointment of an office holder, or any other power with respect to a company, is under a duty to act with fairness towards the company. The Companies Law does not describe the substance of this duty except to state that the remedies generally available upon a breach of contract will also apply in the event of a breach of the duty to act with fairness, taking each shareholder’s position in the company into account.

 

Approval of private placements

 

Under the Companies Law and the regulations promulgated thereunder, a private placement of securities does not require approval at a general meeting of the shareholders of a company; provided however, that in special circumstances, such as a private placement completed in lieu of a special tender offer or a private placement which qualifies as a related party transaction (See “Item 6. Directors, Senior Management and Employees —C. Board Practices—Fiduciary duties and approval of specified related party transactions and compensation under Israeli law”), for which approval at a general meeting of the shareholders of a company is required.

 

Exemption, Insurance and Indemnification of Directors and Officers

 

Under the Companies Law, a company may not exculpate an office holder from liability for a breach of a fiduciary duty. An Israeli company may exculpate an office holder in advance from liability to the company, in whole or in part, for damages caused to the company as a result of a breach of duty of care but only if a provision authorizing such exculpation is included in its articles of association. Our articles of association include such a provision. The company may not exculpate in advance a director from liability arising out of a prohibited dividend or distribution to shareholders.

 

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Under the Companies Law and the Securities Law, 5738-1968, or the Securities Law, a company may indemnify an office holder in respect of the following liabilities, payments and expenses incurred for acts performed by him or her as an office holder, either in advance of an event or following an event, provided its articles of association include a provision authorizing such indemnification:

 

  a monetary liability incurred by or imposed on the office holder in favor of another person pursuant to a court judgment, including pursuant to a settlement confirmed as judgment or arbitrator’s decision approved by a competent court. However, if an undertaking to indemnify an office holder with respect to such liability is provided in advance, then such an undertaking must be limited to events which, in the opinion of the board of directors, can be foreseen based on the company’s activities when the undertaking to indemnify is given, and to an amount or according to criteria determined by the board of directors as reasonable under the circumstances, and such undertaking will detail the abovementioned foreseen events and amount or criteria;

 

  reasonable litigation expenses, including reasonable attorneys’ fees, which were incurred by the office holder as a result of an investigation or proceeding filed against the office holder by an authority authorized to conduct such investigation or proceeding, provided that such investigation or proceeding was either (i) concluded without the filing of an indictment against such office holder and without the imposition on him of any monetary obligation in lieu of a criminal proceeding; (ii) concluded without the filing of an indictment against the office holder but with the imposition of a monetary obligation on the office holder in lieu of criminal proceedings for an offense that does not require proof of criminal intent; or (iii) in connection with a monetary sanction;

 

  reasonable litigation expenses, including attorneys’ fees, incurred by the office holder or which were imposed on the office holder by a court (i) in a proceeding instituted against him or her by the company, on its behalf, or by a third party, (ii) in connection with criminal indictment of which the office holder was acquitted, or (iii) in a criminal indictment which the office holder was convicted of an offense that does not require proof of criminal intent;

 

  a monetary liability imposed on the office holder in favor of a payment for a breach offended at an Administrative Procedure (as defined below) as set forth in Section 52(54)(a)(1)(a) to the Securities Law;

 

  expenses incurred by an office holder or certain compensation payments made to an injured party that were instituted against an office holder in connection with an Administrative Procedure under the Securities Law, including reasonable litigation expenses and reasonable attorneys’ fees; and

 

  any other obligation or expense in respect of which it is permitted or will be permitted under applicable law to indemnify an office holder, including, without limitation, matters referenced in Section 56H(b)(1) of the Securities Law.

  

An “Administrative Procedure” is defined as a procedure pursuant to chapters H3 (Monetary Sanction by the Israeli Securities Authority), H4 (Administrative Enforcement Procedures of the Administrative Enforcement Committee) or I1 (Arrangement to prevent Procedures or Interruption of procedures subject to conditions) to the Securities Law.

 

Under the Companies Law and the Securities Law, a company may insure an office holder against the following liabilities incurred for acts performed by him or her as an office holder if and to the extent provided in the company’s articles of association:

 

  a breach of a fiduciary duty to the company, provided that the office holder acted in good faith and had a reasonable basis to believe that the act would not harm the company;

 

  a breach of duty of care to the company or to a third party, to the extent such a breach arises out of the negligent conduct of the office holder;

 

  a monetary liability imposed on the office holder in favor of a third party;

 

  a monetary liability imposed on the office holder in favor of an injured party at an Administrative Procedure pursuant to Section 52(54)(a)(1)(a) of the Securities Law; and

 

  expenses incurred by an office holder in connection with an Administrative Procedure, including reasonable litigation expenses and reasonable attorneys’ fees.

 

Under the Companies Law, a company may not indemnify, exculpate or insure an office holder against any of the following:

 

  a breach of fiduciary duty, except for indemnification and insurance for a breach of the fiduciary duty to the company to the extent that the office holder acted in good faith and had a reasonable basis to believe that the act would not prejudice the company;

 

  a breach of duty of care committed intentionally or recklessly, excluding a breach arising out of the negligent conduct of the office holder;

 

  an act or omission committed with intent to derive illegal personal benefit; or

 

  a civil or administrative fine, monetary sanction or forfeit levied against the office holder.

 

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Under the Companies Law, exculpation, indemnification and insurance of office holders must be approved by the compensation committee and the board of directors and, with respect to directors or controlling shareholders, their relatives and third parties in which such controlling shareholders have a personal interest, also by the shareholders.

 

Our articles of association permit us to exculpate, indemnify and insure our office holders to the fullest extent permitted or to be permitted by law. On February 18, 2021, our board of directors approved a new directors’ and officers’ liability insurance policy, following the recent amended of our compensation policy approved by our shareholders on February 12, 2021.

 

Employment and consulting agreements with executive officers

 

We have entered into written employment or service agreements with each of our executive officers. See “Item 7. Major Shareholders and Related Party Transactions — B. Related Party Transactions – Employment Agreements” for additional information.

 

Directors’ service contracts

 

There are no arrangements or understandings between us, on the one hand, and any of our directors, on the other hand, providing for benefits upon termination of their employment or service as directors of our company.

  

D. Employees

 

Number of Employees

 

As of December 31, 2020, we employed 39 employees in Israel including those employed by our indirect subsidiaries ScoutCam Ltd. and Eventer.

 

As of December 31, 2019, we had 20 full-time employees, none of which were located in the United States and the rest were located in Israel.

 

As of December 31, 2018, we had 27 full-time employees, 1 of which were located in the United States and the rest were located in Israel.

 

As of May 10, 2021, we employed two employees, and chief executive officer and chief financial officer as consultants in Israel.

 

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Distribution of Employees

 

The following is the distribution of our employees (including those employed by our indirect subsidiary ScoutCam Ltd.) by areas of engagement and geographic location:

 

   As of December 31, 
   2020   2019   2018 
Numbers of employees by category of activity            
Management and administrative   21    4    6 
Research and development   9    4    6 
Operations   -    6    6 
Sales and marketing   1    1    3 
Production