UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________
FORM 20-F
_______________________
(Mark One)
☐
☒
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
For the fiscal year ended December 31, 2019
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
OR
☐
SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of event requiring this shell company report
Commission file number 001-38775
Itamar Medical Ltd.
(Exact name of Registrant as specified in its charter)
Not Applicable
(Translation of Registrant’s name into English)
Israel
(Jurisdiction of incorporation or organization)
9 Halamish Street
Caesarea 3088900, Israel
(Address of principal executive offices)
Shy Basson
Chief Financial Officer
Telephone: +972-4-6177000; Facsimile: +972-4-6275598
Itamar Medical Ltd.
9 Halamish Street, Caesarea 3088900, Israel
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)
_______________________
Securities registered or to be registered, pursuant to Section 12(b) of the Act:
Title of each class
American Depository Shares, each representing 30
Ordinary Shares, par value NIS 0.01 per share (1)
Trading Symbol(s)
ITMR
Name of each exchange on which registered
The Nasdaq Stock Market LLC
(Nasdaq Capital Market)
Ordinary Shares, par value NIS 0.01 per share (2)
ITMR
The Nasdaq Stock Market LLC
(Nasdaq Capital Market)
(1) Evidenced by American Depositary Receipts.
(2) Not for trading, but only in connection with the listing 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 stock or common stock as of the close of the period covered by the
annual report (December 31, 2019): 335,285,001 ordinary shares.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o 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 ☒
Note—Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934 from their obligations under those Sections.
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 every Interactive Data File required to be submitted 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 such files).
Yes ☒ No o
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
the definitions of “large accelerated filer,” “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 which 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 ☒
CONTENTS
GENERAL INFORMATION
PRESENTATION OF FINANCIAL AND OTHER INFORMATION
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
PART I
Item 1. Identity of Directors, Senior Management and Advisers
Item 2. Offer Statistics and Expected Timetable
Item 3. Key Information
A. Selected Financial Data
B. Capitalization and Indebtedness
C. Reasons for the Offer and Use of Proceeds
D. Risk Factors
Item 4. Information on the Company
A. History and Development of the Company
B. Business Overview
C. Organizational Structure
D. Property, Plants and Equipment
Item 4A. Unresolved Staff Comments
Item 5. Operating and Financial Review and Prospects
A. Operating Results
B. Liquidity and Capital Resources
C. Research and Development, Patents and Licenses, etc.
D. Trend Information
E. Off-Balance Sheet Arrangements
F. Tabular Disclosure of Contractual Obligations
G. Safe Harbor
Item 6. Directors, Senior Management and Employees
A. Directors and Senior Management
B. Compensation
C. Board Practices
D. Employees
E. Share Ownership
Item 7. Major Shareholders and Related Party Transactions
A. Major Shareholders
B. Related Party Transactions
C. Interests of Experts and Counsel
Item 8. Financial Information
A. Consolidated Statements and Other Financial Information
B. Significant Changes
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Item 9. The Offer and Listing
A. Offer and Listing Details
B. Plan of Distribution
C. Markets
D. Selling Shareholders
E. Dilution
F. Expenses of the Issue
Item 10. Additional Information
A. Share Capital
B. Memorandum and Articles of Association
C. Material Contracts
D. Exchange Controls
E. Taxation
F. Dividends and Paying Agents
G. Statement by Experts
H. Documents on Display
I. Subsidiary Information
Item 11. Quantitative and Qualitative Disclosures About Market Risk
Item 12. Description of Securities Other than Equity Securities
A. Debt Securities
B. Warrants and Rights
C. Other Securities
D. American Depositary Shares
PART II
Item 13. Defaults, Dividend Arrearages and Delinquencies
Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds
Item 15. Controls and Procedures
Item 16. [Reserved]
A. Audit Committee Financial Expert
B. Code of Ethics
C. Principal Accounting Fees and Services
D. Exemptions from the Listing Standards for Audit Committees
E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers
F. Change in Registrant’s Certifying Accountant
G. Corporate Governance
H. Mine Safety Disclosure
PART III
Item 17. Financial Statements
Item 18. Financial Statements
Item 19. Exhibits
SIGNATURES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
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F-1
GENERAL INFORMATION
Except where the context otherwise requires or where otherwise indicated in this Annual Report on Form 20-F, or Annual Report, the terms
“Itamar,” the “Company,” “we,” “us,” “our,” “our company” and “our business” refer to Itamar Medical Ltd., together with its consolidated subsidiaries as
a consolidated entity.
When the following terms and abbreviations appear in the text of this Annual Report, they have the meanings indicated below:
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·
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“ADSs” means our American Depositary Shares, each representing 30 ordinary shares.
“Companies Law” means the Israeli Companies Law, 1999.
“convertible notes” or “Series L convertible notes” mean the convertible notes we issued as part of a public offering we conducted in 2013, all
of which notes were fully repaid in February 2018.
“CPAP” means continuous positive airway pressure. CPAP devices are therapy devices used to treat certain sleep apnea conditions.
“Credit Facility” means that certain Credit Framework Agreement by and between the Company and Mizrahi Tefahot Bank Ltd., dated
February 9, 2020.
“dollars”, “U.S. dollars” or “$” mean United States dollars.
“Endo PAT” means our device that enables testing of endothelial dysfunctions (the failure of the normal function of the inner lining of blood
vessels).
“Exchange Act” means United States Securities Exchange Act of 1934, as amended.
“euro” or “€” means the currency introduced at the start of the third stage of European economic and monetary union pursuant to the treaty
establishing the European Community, as amended.
“HSAT” means home sleep apnea test.
“Israeli CPI” means the Israeli consumer price index published by the Israeli Central Bureau of Statistics.
“MADs” means mandibular advancement devices. MADs are therapy devices used to treat certain sleep apnea conditions, also known as
sleep apnea oral or dental appliances.
“major shareholder” means a shareholder that is the beneficial owner of 5% or more of our outstanding ordinary shares.
“Nasdaq” means the Nasdaq Stock Market LLC.
“NIS” means New Israeli Shekels, the official currency of the State of Israel.
“ordinary shares” means our ordinary shares, par value NIS 0.01 per share.
“OSA” means obstructive sleep apnea.
“PAT” or “PAT signal” means Peripheral Arterial Tonometry, or Peripheral Arterial Tone, which measures the arterial volume changes at the
fingertip, reflecting the sympathetic nervous system activation.
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“PSG” means polysomnography. PSG is the process of monitoring, recording and analyzing physiologic data during sleep and wakefulness to
assist in the assessment and diagnosis of sleep disorders.
“SEC” means the United States Securities and Exchange Commission.
“TASE” means the Tel Aviv Stock Exchange.
“TaaS” means Test as a Service.
“TSS,” “TSS marketing program” or “TSS program” means our Total Sleep Solution. TSS is our marketing program that is designed to allow
any medical practice or physician that is not a sleep physician by specialty, easy access to a comprehensive suite of products and services for
the diagnosis, treatment and management of patients they suspect suffer from sleep apnea.
“U.S. Subsidiary” means Itamar Medical, Inc.
“Viola” means, collectively, Viola Growth II A.V. LP, a limited partnership registered in Israel, Viola Growth II (A) L.P., a limited partnership
registered in Cayman Islands, and Viola Growth II (B) L.P., a limited partnership registered in Cayman Islands.
“Viola Transaction” means the private placement transaction pursuant to the share purchase agreement we entered into with Viola, dated as of
August 26, 2015.
“Viola Warrants” means warrants issued to Viola in November 2015 and January 2016 as part of the Viola Transaction, which expired on May
4, 2019.
“Warrants (Series 4)” means the warrants issued to certain of our shareholders as part of a rights offering in December 2015, which expired on
May 4, 2019.
“WatchPAT” means our portable diagnostic device that enables HSATs.
EMERGING GROWTH COMPANY STATUS
We qualify as an “emerging growth company,” as defined in the JOBS Act, and we may take advantage of certain exemptions, including
exemptions from various reporting requirements that are otherwise applicable to public traded entities that do not qualify as emerging growth companies.
These exemptions include:
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not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002; and
not being required to comply with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding
mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial
statements (i.e., an auditor discussion and analysis).
Section 107 of the JOBS Act also provides that an emerging growth company can take advantage of the extended transition period provided in
Section 13(a) of the Securities Exchange Act of 1934, as amended, or the Exchange Act, for complying with new or revised accounting standards. We have
elected to irrevocably opt out of this extended transition period and, as a result, we are required to comply with new or revised accounting standards on the
relevant dates on which adoption of such standards is required for non-emerging growth companies. Under federal securities laws, our decision to opt out
of the extended transition period is irrevocable.
We will remain an emerging growth company until the earliest of: (i) the last day of the first fiscal year in which our annual gross revenues exceed
$1.07 billion; (ii) the last day of 2024; (iii) the date that we become a “large accelerated filer” as defined in Rule 12b-2 under the Exchange Act, which
would occur if the market value of our ordinary shares, including ordinary shares represented by ADSs, held by non-affiliates exceeds $700 million as of
the last business day of our most recently completed second fiscal quarter; or (iv) the date on which we have issued more than $1.0 billion in non-
convertible debt securities during any three-year period.
2
PRESENTATION OF FINANCIAL AND OTHER INFORMATION
Our consolidated financial statements appearing in this Annual Report are prepared in accordance with International Financial Reporting
Standards, or IFRS, as adopted by the International Accounting Standards Board, or IASB. None of our financial statements were prepared in accordance
with generally accepted accounting principles in the United States. We present our consolidated financial statements in U.S. dollars. We have made
rounding adjustments to some of the figures included in this Annual Report. Accordingly, numerical figures shown as totals in some tables may not be an
arithmetic aggregation of the figures that preceded them.
On March 24, 2020, the representative exchange rate, or Exchange Rate, between the NIS and the U.S. dollar, as quoted by the Bank of Israel, was
NIS 3.658 to $1.00. Unless derived from our financial statements or indicated otherwise by the context, statements in this Annual Report that provide the
U.S. dollar equivalent of NIS amounts or provide the NIS equivalent of U.S. dollar amounts are based on the representative exchange rate, as quoted by the
Bank of Israel, as of such date (or, if no quote was provided for such date, the next quote provided) or, when the applicable date has yet to be determined,
the Exchange Rate. Such U.S. dollar amounts are not necessarily indicative of the amounts of U.S. dollars that could actually have been purchased upon
exchange of NIS at the dates indicated.
MARKET, INDUSTRY AND OTHER DATA
Unless otherwise indicated, information contained in this Annual Report concerning our industry and the markets in which we operate, including
our competitive position and market opportunity, is based on information from our own management estimates and research, as well as from industry and
general publications and research, surveys and studies conducted by third parties. Management estimates are derived from publicly available information,
our knowledge of our industry and assumptions based on such information and knowledge, which we believe to be reasonable. Our management estimates
have not been verified by any independent source, and we have not independently verified any third-party information. In addition, assumptions and
estimates of our and our industry’s future performance are necessarily subject to a high degree of uncertainty and risk due to a variety of factors, including
those described in Item 3.D. “Risk Factors” below.
Statements made in this Annual Report concerning the contents of any contract, agreement or other document are summaries of such contracts,
agreements or documents and are not complete descriptions of all of their terms. If we filed any of these documents as an exhibit to this Annual Report, you
may read the document itself for a complete description of its terms, and the summary included herein is qualified by reference to the full text of the
document which is incorporated by reference into this Annual Report.
TRADEMARKS
We have obtained trademark registrations in the U.S. for, among others, PAT, Endo PAT, WatchPAT, EndoScore, ITAMAR, CloudPAT and
SLEEPATH and some of them are also registered in additional jurisdictions, including Europe, Japan, Canada, China, India, Russia, Mexico, Korea and
Singapore. Although we have omitted the “®” and “TM” trademark designations for such marks in this Annual Report, all rights to such trademarks and
service marks are nevertheless reserved. Unless indicated otherwise by the context, any other trademarks and trade names appearing in this Annual Report
are owned by their respective holders.
3
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report contains statements that constitute “forward-looking statements” within the meaning of the U.S. Private Securities Litigation
Reform Act of 1995. These statements are neither historical facts nor assurances of future performance. Although we believe that these estimates and
forward-looking statements are based upon reasonable assumptions, they are subject to numerous risks and uncertainties some of which are beyond our
control, and are made in light of information currently available to us.
In some cases, these forward-looking statements can be identified by words or phrases such as “believe,” “may,” “will,” “expect,” “estimate,”
“could,” “should,” “anticipate,” “aim,” “estimate,” “intend,” “plan,” “believe,” “potential,” “continue,” “is/are likely to” or other similar expressions.
Forward-looking statements contained in this Annual Report include, but are not limited to, statements about:
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the development of our products;
the potential attributes and benefit of our products and their competitive position;
our ability to successfully commercialize, or enter into strategic relationships with third parties to commercialize, our products;
our estimates regarding expenses, future revenues, capital requirements and our need for additional financing;
our ability to acquire or in-license new product candidates;
potential strategic relationships; and
the duration of our patent portfolio.
These forward-looking statements are subject to risks, uncertainties and assumptions, some of which are beyond our control. In addition, these
forward-looking statements reflect our current views with respect to future events and are not a guarantee of future performance. Actual outcomes may
differ materially from the information contained in the forward-looking statements as a result of a number of important factors, including, without
limitation, the important risk factors set forth in Item 3.D. “Risk Factors” of this Annual Report.
We operate in an evolving environment. New risks emerge from time to time, and it is not possible for our management to predict all risks, nor can
we assess the effect of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially
from those contained in any forward-looking statements.
The forward-looking statements made in this Annual Report relate only to events or information as of the date on which the statements are made
in this Annual Report. Except as required by law, we undertake no obligation to update or revise publicly any forward-looking statements, whether as a
result of new information, future events or otherwise, after the date on which the statements are made or to reflect the occurrence of unanticipated events.
You should read this Annual Report and the documents that we have filed as exhibits hereto completely and with the understanding that our actual future
results or performance may be materially different from what we expect.
4
Item 1. Identity of Directors, Senior Management and Advisers
Not applicable.
Item 2. Offer Statistics and Expected Timetable
PART I
Not applicable.
Item 3. Key Information
A. Selected Financial Data
We prepare our consolidated financial statements in accordance with IFRS as issued by the IASB.
The following tables present our selected consolidated financial and other data as of and for the periods indicated. The selected consolidated
statements of operations data for the years ended December 31, 2019, 2018 and 2017 and the selected consolidated statements of financial position as of
December 31, 2019 and 2018 are derived from our audited consolidated financial statements and the notes thereto included elsewhere in this Annual
Report. Our audited consolidated financial statements and the notes thereto and other data for the years ended December 31, 2016 and 2015 and as of
December 31, 2017, 2016, and 2015 are not included elsewhere in this Annual Report.
The 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 audited consolidated financial statements and notes thereto included elsewhere in this Annual Report. Our historical results for any
prior period do not necessarily indicate our results to be expected for any future period.
$
Consolidated Statements of Operations Data:
Revenues
Cost of revenues
Gross profit
Operating expenses:
Selling and marketing
Research and development
General and administrative
Total operating expenses
Operating loss
Financial income (expenses) from cash, deposits and
investments
Financial expenses from leases, notes, loans and other
Gain (loss) from derivative instruments, net
Financial income (expenses), net
Loss before income taxes
Taxes on income
Net loss
$
Loss per share:
Basic
Diluted
Consolidated Statements of Financial Position
Data:
Cash and cash equivalents
Investment in marketable securities
Working capital
Total assets
Total non-current liabilities
Accumulated deficit
Total equity
$
$
$
2019
31,258 $
6,984
24,274
18,294
4,520
6,354
29,168
(4,894)
454
(1,233)
442
(337)
(5,231)
(37)
(5,268) $
(0.02) $
(0.02) $
Year Ended December 31,
2017
(in thousands, except per share and share data)
2018
2016
24,189 $
5,726
18,463
12,699
3,638
5,247
21,584
(3,121)
244
(1,161)
2,433
1,516
(1,605)
(124)
(1,729) $
(0.01) $
(0.01) $
20,701 $
5,002
15,699
12,140
4,129
5,278
21,547
(5,848)
1,591
(4,884)
3,925
632
(5,216)
(85)
(5,301) $
(0.02) $
(0.02) $
18,440 $
4,979
13,461
14,035
3,225
6,213
23,473
(10,012)
716
(4,760)
(216)
(4,260)
(14,272)
(131)
(14,403) $
(0.05) $
(0.05) $
2015
16,807
4,401
12,406
10,684
2,831
4,350
17,865
(5,459)
(354)
(4,229)
7,930
3,347
(2,112)
(135)
(2,247)
(0.01)
(0.02)
2019
2018
As of December 31,
2017
(in thousands)
2016
2015
15,115 $
-
14,951
33,207
3,228
(109,649)
16,664
5
6,471 $
-
6,222
18,392
1,653
(105,546)
6,688
7,643 $
3,173
3,356
21,227
4,133
(105,004)
1,377
23,358 $
2,781
18,843
35,547
15,986
(100,885)
5,241
33,019
2,710
36,989
43,740
22,169
(88,151)
16,951
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 important risks described below before making an investment decision. Additional risks not presently known to
us or that we currently deem immaterial may also impair our business operations. Our business, financial condition or results of operations could be
materially and adversely affected by any of these risks. The trading price and value of our ordinary shares and ADSs could decline due to any of these
risks, and you may lose all or part of your investment. This Annual Report also contains forward-looking statements that involve risks and uncertainties.
Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including the risks faced
by us described below and elsewhere in this Annual Report.
Risks Related to Our Business and Operations
We substantially depend on the sales of our WatchPAT family of products.
Building upon our WatchPAT family of products and related services, the key elements of our business strategy and success are to focus on and
sell a one-stop sleep apnea solution for the cardiology market, to continue to focus on the core sleep market by calling on sleep physicians, to develop
direct to consumer, or DTC, sales channels and to expand into additional countries. In order to do so, we have, among other things, focused and invested
substantial time and resources on developing various solutions and WatchPAT related services, such as our TSS program. We also plan to invest resources
into developing DTC channels and relationships with distributors and resellers in other countries. While focusing on promoting our WatchPAT family of
products, we, at the same time, limited our sales and marketing efforts for our legacy EndoPAT product, whose sales gradually decreased in the years ended
December 31, 2017 and 2018. Although EndoPAT sales increased during the year ended December 31, 2019, we currently plan to continue to limit our
sales and marketing efforts of the EndoPAT. The sales of our WatchPAT family of products as stand-alone products remain our main source of revenue,
representing approximately 92.7%, 92.5% and 87.5% of our total revenues in the years ended December 31, 2019, 2018 and 2017, respectively. If we are
not successful in implementing our business strategy to increase the sales of our WatchPAT family of products and related consumables and services to the
cardiology market, the core sleep market, through DTC channels and in additional countries, or if we are unable to use our technologies to further develop
and enhance our WatchPAT family of products and related services with significant commercial potential, we may not be able to achieve our objectives or
build a sustainable or profitable business.
We have a history of losses, may incur future losses and may never achieve profitability.
Since our incorporation in 1997, we have incurred operating and net losses in most of our years of operation. In particular, we incurred operating
losses of approximately $4.9 million, $3.1 million and $5.8 million for the years ended December 31, 2019, 2018 and 2017, respectively. We expect to
continue to incur operating and net losses for the foreseeable future, as we continue to invest in research and development and marketing and sales
operations aimed at growing our business. The extent of our future operating and net losses is highly uncertain and we may never achieve or sustain
profitability. Even if we reach and maintain profitability, we cannot assure that future net income will offset our accumulated deficit, which as of December
31, 2019 was approximately $109.6 million. In addition, there is no guarantee that we will be able to benefit from our losses for tax purposes.
6
There is no certainty that our EndoPAT and WatchPAT family of products and related services will be accepted by the international medical
community, in general, and specifically that the WatchPAT family of products will be accepted by the cardiology community and consumers.
Building upon our WatchPAT family of products and related services, one of the key elements of our business strategy and success is to focus on
and sell a one-stop sleep apnea solution for the cardiology market. Our success in doing so depends, to a large extent, on recognition by the international
medical community, in general, and the cardiology community in particular, of:
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the linkage between sleep apnea and cardiovascular disease and the benefits of diagnostic aids;
the advantages of shifting the point of care for sleep apnea, mainly in the United States, from sleep centers to the cardiology care point; and
the advantages of our WatchPAT family of products and related services.
Recognition by the cardiology community of the linkage between sleep apnea and cardiovascular disease depends, among other things, on our
ability to promote awareness amongst physicians, primarily cardiologists, to such linkage in a manner consistent with the labeling for our products,
including by providing supporting clinical data and studies demonstrating the said linkage and benefits of sleep apnea diagnosis and treatment to their
cardiology patients. Recognition by the cardiology community of the advantages of shifting the point of care for sleep apnea, mainly in the United States,
from sleep centers to the cardiology care point, in general, and of the advantages of our WatchPAT family of products and related services in particular,
depends to a large extent on our ability to demonstrate that (i) our WatchPAT devices are efficient, cost-effective and provides significant improvement in
performance and data compared to other diagnostic tools available in the sleep market and (ii) our WatchPAT-related services, such as our TSS program,
provide cardiologists with easy access to prescribe HSATs to patients, receive reimbursement for the WatchPAT-related services and increase the diagnosis
rate with an effective management and monitoring of sleep apnea.
Even if we succeed in promoting awareness to the linkage between sleep apnea and cardiovascular disease and in proving the advantages of
shifting the point of care to the cardiology care point and the advantages of our WatchPAT family of products and related services, there is a risk that
healthcare service providers and other prospective customers will avoid purchasing our products and related services for any number of reasons. For
example, they may continue to use PSG tests in sleep centers or other traditional HSAT devices because such diagnostic tools are already widely accepted.
The failure to gain wide market acceptance of the linkage between sleep apnea and cardiovascular disease and in proving the advantages of shifting the
point of care to the cardiology care point or the failure of our WatchPAT family of products and related services to otherwise gain market acceptance may
adversely affect our business, financial condition and results of operations.
In addition, during 2019, we began focusing on the DTC market segment, where we will offer our prescription HSAT products and most of the
TSS components, through channel partners that have a consumer market presence, directly to patients, and facilitate patient access to real time consultation,
advice and prescriptions throughout the care pathway. Although we believe that our digital health platform, which we believe can facilitate the journey of
patients from diagnosis to therapy and compliance in an easy, efficient and innovative manner within their homes, positions us for new growth
opportunities, if our products and related DTC services fail to gain wide market acceptance among consumers, our business, financial condition and results
of operations may be adversely affected.
If healthcare providers are not adequately reimbursed for tests conducted using our products and related services, we may not be successful in
marketing and selling our products.
We market our products and related services primarily to healthcare providers, including health facilities and physicians, many of whom rely on
reimbursement for the healthcare services they provide to their patients from third-party payors, such as Medicare and Medicaid in the United States, as
well as private insurance plans, managed care programs and other domestic and international government programs. These healthcare providers as well as
government agencies in the United States and foreign countries are unlikely to purchase our products if they are not adequately reimbursed for the tests
conducted using our products. Unless a sufficient amount of conclusive, peer-reviewed clinical data about our products is published and regular clinical use
is documented, third-party payors, including insurance companies and government agencies, may refuse to provide reimbursement.
7
In 2009, the Centers for Medicare and Medicaid Services, or CMS, issued a National Coverage Determination in the United States to extend
Medicare coverage to a number of HSATs, including the WatchPAT and other sleep testing devices when used to aid in the diagnosis of OSA in Medicare
beneficiaries who have signs and symptoms indicative of OSA if performed unattended in or out of sleep lab facility or attended in a sleep lab facility.
Certain commercial third-party payors, including, among others, Aetna, Cigna and UnitedHealthcare, updated their coverage policies to include coverage
for these tests, including the WatchPAT. In March 2017, the American Academy of Sleep Medicine, or AASM, published guidelines establishing updated
clinical practice recommendations to aid in the diagnosis of OSA in adults, pursuant to which devices that measure a minimum of the following sensors are
considered technically adequate to diagnose OSA in uncomplicated adult patients presenting signs and symptoms that indicate an increased risk of
moderate-to-severe OSA: (i) nasal pressure, chest and abdominal respiratory inductance plethysmography and oximetry; or (ii) PAT with oximetry and
actigraphy, such as our WatchPAT family of products. Since that time, other commercial third-party payors and specialty benefits management companies
that manage sleep apnea benefits for other United States health insurance plans determined that devices utilizing the combination of peripheral arterial tone,
actigraphy, EKG/heart rate and oxygen saturation are considered medically necessary when certain clinical criteria are met.
Nevertheless, certain commercial payors and most Medicaid programs currently do not cover certain HSATs, including our WatchPAT. Other
third-party payors that cover WatchPAT may require that our customers meet certain accreditation and certification requirements to receive reimbursement
for administering or interpreting the test, which can limit our ability to obtain new customers. It is difficult to predict at this time what third-party payors
and government agencies in the United States and abroad will decide with respect to the coverage and reimbursement for tests using our products. We
cannot provide assurance that we will be successful in any efforts we may potentially undertake to reverse such non-coverage decisions. If we are not
successful in reversing non-coverage policies, or if third-party payors that currently cover or reimburse certain tests reverse or limit their coverage of such
tests in the future, or if other third-party payors issue similar policies, our business could be adversely impacted.
Even if coverage is available for tests using our products, reimbursement may not be adequate to fully compensate the health facilities and
physicians. Third-party payors regularly update reimbursement amounts and also from time to time revise the methodologies used to determine
reimbursement amounts. This includes annual updates to payments to physicians for tests using our products. Because the cost of our products generally is
recovered by our customers as part of the payment for performing the test and not separately reimbursed, these updates could directly impact the demand
for our products. An example of payment updates in the United States is the Medicare program’s updates to physician payments under the Medicare
Physician Fee Schedule, or MPFS, which are done on an annual basis using a prescribed statutory formula. In November 2019, CMS issued final revisions
to its payment policies under the MPFS, effective January 1, 2020, reducing the payment associated with certain HSAT procedures. It is unclear what
impact, if any, these payment reductions will have on our customers’ willingness to adopt the broad use of our WatchPAT and other devices. Any changes
in coverage and reimbursement that further restrict coverage of our products or lower reimbursement for tests using our devices could materially affect our
business.
In addition, in the United States, our TSS program relies, to some extent, on the reimbursement available for sleep apnea treatment devices, such
as CPAP devices, and on the desire of durable mobile equipment, or DME, suppliers to sell such devices. If healthcare providers cannot obtain sufficient
reimbursement from third-party payors for such third-party treatment devices, our business may suffer. For example, in the past several years, Medicare has
gradually reduced the reimbursement levels of CPAP devices through competitive bidding. In addition, under the Patient Protection and Affordable Care
Act, or ACA, as amended by the Health Care and Education Affordability Reconciliation Act of 2010, in 2016, CMS adjusted Medicare reimbursement
amounts in non-competitive bidding areas to competitive bidding prices. On March 7, 2019, CMS announced it would initiate a new round of competitive
bidding, named Round 2021, with contracts expected to become effective on January 1, 2021 and extend through December 31, 2023. In addition to
adopting new bidding processes, CMS expanded the product categories included in competitive bidding to include non-invasive ventilators, in addition to
oxygen, CPAP and respiratory assist devices, and related supplies and accessories, which had been included in prior rounds of competitive bidding.
Competitive bidding has generally reduced the Medicare reimbursement to DME suppliers compared with reimbursement before the program was
implemented. A further reduction of reimbursement levels or institution of burdensome restrictions and procedures on such reimbursements may also cause
DME suppliers to lose interest in selling such devices, in which case, our TSS program and business would suffer. Reimbursement, funding and healthcare
payment systems vary significantly by country and we may not obtain approvals for reimbursement in a timely manner, or at all. For example, in Japan, our
second largest market for the past two years, our WatchPAT family of products was approved by local authorities and medical institutions that use our
WatchPAT test for diagnosis of sleep apnea, at a fixed reimbursement amount per test. Nevertheless, local authorities have limited such clearance to
diagnose OSA for the purpose of prescribing therapy only to those patients who are categorized as severe and, to our knowledge, PSG tests remain the
dominant means of sleep apnea diagnosis. If our efforts to convince local authorities in Japan to remove such limitations fail, our growth prospects in Japan
may be adversely affected. Similarly, our potential expansion in other countries may depend to a large extent on our ability to obtain reimbursement and
coverage of our products by local payors and government agencies.
8
There is no certainty that our WatchPAT family of products will be included in, or recommended by, any clinical practice guidelines or other
guidelines and standards relevant to our business.
Professional associations publish clinical practice guidelines from time to time, suggesting processes and procedures intended for various medical
conditions, as well as other guidelines and standards for the dispatch, prescription and billing procedures for tests using medical devices. Such guidelines
and standards have significant importance and influence decisions by various health plans administrators, clinicians, government agencies and hospital
administrators. In addition, many physicians consider clinical practice guidelines and act according to the recommendations included therein. For example,
the clinical practice guidelines to aid in the diagnosis of OSA published by the AASM included the PAT-based technology used by our WatchPAT family of
products in March 2017, whereas AIM Specialty Health, or AIM, an organization which manages the insurance reimbursement policies for some insurance
companies and payors in the United States, updated its guidelines to medical insurers to include sleep apnea diagnostic aids using the PAT-based
technology, only in November 2017. There is no assurance that all medical insurers, in the United States as well as in other countries, will follow the
AASM and AIM guidelines and provide reimbursement for our WatchPAT family of products and related services. There is also no certainty that our
product will continue to be included in such guidelines, or recommended by additional clinical guidelines or that the methods by which we offer our
products and related services for sale will be consistent with guidelines and standards related to the dispatch, prescription and billing procedures for
medical devices.
If we fail to have our products included in clinical practice guidelines in the United States or in other countries into which we wish to expand (or,
in the case of the AASM and AIM guidelines, continue to be included in such guidelines) or if we fail to offer our products and related services for sale in a
manner consistent with guidelines and standards related to dispatch, prescription and billing, it could have an adverse effect on our business, financial
condition and results of operations.
The loss of one or more of our material customers or a decline in demand from one or more of these customers could harm our business.
Historically, a limited number of customers accounted for a substantial portion of our total sales. For example, our three largest customers, Kaiser
Foundation Health Plan, Inc., or Kaiser, Philips Respironics GK, a subsidiary of Koninklijke Philips NV (also known as Royal Philips), or Philips Japan,
and the Department of Veterans Affairs, or VA, accounted for 22.4%, 11.0% and 6.6%, respectively, of our total revenues, in the year ended December 31,
2019, compared with 18.9%, 13.3% and 11.9%, respectively, of our total revenues in the year ended December 31, 2018. There can be no assurance that
such customers will continue to order our products at the same level, or at all. A reduction or delay in orders from such customers, including reductions or
delays due to market, economic or competitive conditions, could have a material adverse effect on our business, operating results and financial condition.
We depend on our proprietary PAT-based technology.
Our PAT-based technology is designed to provide a non-invasive window to the cardiovascular system and autonomic nervous system by
monitoring the PAT signal and analyzing it for diagnostic aid purposes. Since our products are mainly based on our PAT-based technology, we are
dependent on such technology that has taken us many years to develop. We have benefited from the fact that the type of proprietary technology equivalent
to our PAT-based technology has not been widely available to, or used by, our competitors. If our technology becomes more widely available to our current
or future competitors for any reason, or if our competitors are able to develop similar technology or present their products as using similar technology, our
operating results may be adversely affected. Additionally, adoption or development of similar or more advanced technologies by our competitors may
require that we devote substantial resources to the development of more advanced technology to remain competitive.
9
The market for our WatchPAT family of products and related services is highly competitive. If we are unable to compete successfully, this would
adversely impact our business, revenues and results of operation.
The market for our WatchPAT family of products is highly competitive and is characterized by frequent product improvements and evolving
technology. Our competitors range from small privately held companies to multinational corporations and their product offerings vary in scope and breadth,
and some of our competitors may have certain competitive advantages, including:
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significant brand name recognition;
established relationships with healthcare professionals, customers and third-party payors;
established distribution networks and channels;
additional product lines and the ability to offer rebates or bundle products to offer higher discounts or other incentives to gain a competitive
advantage; and
greater financial and human resources for product development, sales and marketing, customer support and intellectual property litigation.
Also, while we are not aware of any competitors offering products and services similar to our TSS program and other WatchPAT related services
targeted at the cardiology community, we believe that competitors who possess robust financial resources and sales and regulatory personnel may be able to
overcome the barriers to entry into this market and offer products and service models similar to our TSS program.
Our ability to compete successfully depends, in part, on our ability to continuously develop, improve and market our WatchPAT family of products
and related services. Consequently, we may need to increase our efforts, and related expenses for research and development, clinical studies and sales and
marketing, to maintain or improve our market position. Additionally, our efforts to educate the medical community, specifically the cardiology community,
and third-party payors on the linkage between sleep apnea and cardiovascular conditions, the advantages of shifting the point of care for sleep apnea from
sleep centers to the cardiology care point as well as on the diagnostic aid benefits of the WatchPAT and related services may require significant resources
and may not be successful.
The development of innovative new products and services by our competitors for the same or similar indications as our product offerings, which
competitive products and services may be less costly, more effective, or more widely accepted by the medical community, may also adversely affect the
sales of our products and related services and could result in our products and services being noncompetitive or obsolete. Also, our competitors may
attempt to present their products as providing features and advantages similar or superior to those provided by the WatchPAT family of products or as being
based on similar technology, thus adversely affecting our ability to differentiate our WatchPAT family of products. In addition, our WatchPAT family of
products may be subject to pricing pressures as a result of competition with other HSATs or with PSG tests.
If we are unable to support our plans for continued growth, our business could suffer.
We intend to continue our investment in research and development activities and to expand our sales and marketing activities in the United States
and in other countries through our own field sales force as well as through local distributors and DTC channel partners. If we continue to grow, the
complexity of our operations is likely to increase, placing greater demands on our management. Our ability to manage our growth effectively depends on
our ability to implement and improve our financial and management information systems on a timely basis and to effect other changes in our business,
including the ability to monitor and improve our manufacturing systems, and align our information, quality and regulatory compliance systems, among
others. Unexpected difficulties during expansion, the failure to attract and retain qualified employees and subcontractors, the failure to successfully replace
or upgrade our management information systems, the failure to manage costs or our inability to respond effectively to growth or plan for future expansion
could halt our growth. If we fail to manage our growth effectively and efficiently, our costs could increase faster than our revenues and our business results
could suffer.
10
We depend on strategic relationships with our distributors, channel partners and other business partners and our revenues may be reduced if
such relationships are not successful or are terminated.
Our products and services are offered through both direct and indirect channels, including distributors, channel partners in the cardiology and DTC
segments and other business partners in the United States and in other countries. Specifically, we rely on strategic relationships with distributors and other
business partners, such as Philips Japan, which acts as the exclusive distributor of our WatchPAT family of products in Japan, to sell our products, and these
relationships account for a large portion of our revenues. In addition, in order to promote our TSS program in the United States, we are also developing
partnerships with various business partners whose products or services are complimentary to ours. Additionally, we have entered into an agreement with a
wholly-owned subsidiary of SoClean Inc., or SoClean, for the sale of our WatchPAT ONE via SoClean’s DTC marketing channels. Any failure of these
relationships, whether to market our products effectively or generate significant revenues for us or our inability to sell products and services that are
complimentary to ours, a termination of any of these relationships, or if we are unable to form additional strategic alliances in the future that will prove
beneficial to us, could have a material adverse effect on our business, operating results and financial condition.
Natural disasters and other states of emergency, such as the novel coronavirus outbreak, could adversely impact our business, financial condition
and results of operations.
Natural disasters and other states of emergency affecting the countries in which we operate, or the global economic markets may have an adverse
impact on our business. For example, in December 2019, a strain of novel coronavirus surfaced in Wuhan, China and, in January 2020, the World Health
Organization, or the WHO, declared the novel coronavirus outbreak a “Public Health Emergency of International Concern” and the U.S. Department of
State instructed travelers to avoid all nonessential travel to China. Since then, the WHO declared the novel coronavirus as a pandemic and many countries,
including the U.S., Israel, Japan and certain states in Europe have imposed various measures designed to minimize the spread of the coronavirus, such as
restrictions on international travel, domestic commute, public gatherings and employment and business operations, as well as limitations on the presence of
employees in any work place at a given time. Such measures, designed to limit the spread of the coronavirus, have impacted our operations and may
continue to impact our operations, primarily in connection with our manufacturing facility in Israel.
11
In compliance with regulations enacted in Israel as a response to the coronavirus, we moved most of our office employees in Israel to work from
their homes and have changed the structure of our manufacturing facility shifts in order to comply with the said regulations. Our supply chain has also been
interrupted, particularly our suppliers in China, who have halted their operations for a few weeks. While our safety inventory has allowed us to meet
demand for the first quarter of 2020, and our suppliers in China are in the process of resuming operations, with first deliveries already arrived in Israel
recently, and while our current shift structure allows us to continue our manufacturing activities in full capacity, there is no assurance that more stringent
regulations, limiting our suppliers ability to deliver or limiting our ability to operate our manufacturing facility at its current pace, will not be enacted. The
coronavirus has also impacted the global economy and may impact our business, operations and sales and marketing efforts. If, as a result of the outbreak
or a second or continued outbreak and related governmental orders and regulations, certain of our suppliers and subcontractors, primarily in China,
continue to be affected and experience closures and labor shortages, this could disrupt their activities. We could therefore face difficulty sourcing key
components and materials necessary to produce supply of our products, which may negatively affect our ability to meet demand for our products. Even if
we are able to find alternate sources for some of these components and materials, qualification processes of such suppliers are lengthy and they may cost
more, which could adversely affect our business, results of operations and financial position.
In addition, because the outbreak has spread to Israel, where our headquarters and single manufacturing facility are located, as well as to the U.S.,
where our U.S. headquarters and products warehouse are located, we have restricted access and may continue to restrict access, including of some of our
own employees, to our facilities. Also, our employees in the various countries in which we operate may be infected by the coronavirus or quarantined for
purposes of containing its spread. While employees whose access to our facilities was restricted are currently working remotely from their homes, these
restrictions, could negatively impact our employees’ productivity. While current regulations allow us to operate our manufacturing facility in full capacity,
subject to certain restrictions, we have applied for a special permit from the Israeli Ministry of Health and from the Israeli Ministry of Economics, that will
allow some of our employees, who are most critical to our ability to continue production at the Israeli facility, to continue to have access to such facility, in
case a complete shutdown is imposed in Israel. However, there is no assurance that we will obtain such permit and, even if we do obtain such permit,
whether it will suffice in order to maintain production at the same level.
Moreover, the measures imposed by many countries to minimize the spread of the coronavirus, including restrictions on international travel,
domestic commutes, public gatherings, entrance to medical facilities and the number of personnel present in a work place at a given time, may also
adversely affect our sales and marketing efforts. In addition, the coronavirus outbreak could delay enrollment in our clinical trials due to prioritization of
hospital resources toward the outbreak, and some patients may not be able to comply with clinical trial protocols if quarantines impede patient movement
or interrupt healthcare services. Also, as governments, regulators, healthcare systems and payors in the various counties in which we operate focus on
containing the recent coronavirus outbreak, and prioritize their work and resources accordingly, there is no guarantee that submissions of our products for
approval for sale or for inclusion in payor’s policies in such counties will be completed within standard time frames, which could adversely affect the
execution of our business goals. Similarly, interruption or delays in the operations of the U.S. Food and Drug Administration, or the FDA, may also impact
review and approval timelines.
Lastly, at this point in time, there is significant uncertainty relating to the potential effect of the novel coronavirus on our business and, while we
maintain business continuity plans, they might not adequately protect us. Infections may become more widespread, including in countries where we
manufacture key components of our products or in which we sell our products, and manufacturing closures, travel restrictions and other restrictions may
remain or worsen, all of which would have a negative impact on our business, financial condition and results of operations.
12
We are dependent on a single facility that houses the majority of our manufacturing operations.
We are dependent on the uninterrupted and efficient operations of our leased manufacturing facility, located in Caesarea, Israel. If operations at the
plant were to be disrupted or halted as a result of equipment failures, earthquakes and other natural disasters (including public health emergencies, such as
the novel coronavirus and related governmental orders and regulations), fires, accidents, work stoppages, power outages, acts of war, terrorism or other
reasons, we will likely need to use subcontractors or stop manufacturing activities until we are able to set up and qualify an alternative facility or
subcontractor, and our business could be materially adversely affected. Lost sales, our inability to meet our delivery obligations or customers’ demand or
increased costs that we may experience during the disruption or halting of operations may not be recoverable under our insurance policies, and longer-term
business disruptions could result in a loss of customers, customers’ claims and loss of sales. If this were to occur, our business could be materially
adversely affected.
We are dependent upon third-party manufacturers and suppliers, which makes us vulnerable to supply disruptions.
In addition to manufacturing our products in our own manufacturing facility, we also engage third-party manufacturers and suppliers. the majority
of which are located in China and Israel, for the assembly and manufacture of our products and components of our products as well as to provide us with
software licenses for IT platforms and other applications which we use as part of our CloudPAT and related services. Some of our suppliers and third-party
manufacturers are not obligated to continue to supply us. We have relatively few sources of supply for some of the components and materials used in our
products and IT platforms and other applications and, in some cases, we rely entirely on sole-source suppliers. In addition, the lead-time involved in
manufacturing some of these components can be lengthy. Our third-party suppliers and manufacturers may encounter problems during manufacturing or
supply or suffer a complete stoppage of operations for long periods of time, due to a variety of reasons, including, among others, failure to follow specific
protocols and procedures, failure to comply with applicable regulatory requirements, equipment or software malfunctions, environmental factors, natural
disasters, including public health emergencies, such as the novel coronavirus and related governmental orders and regulations, or work force stoppages, any
of which could delay or impede their ability to meet our demand for components or ongoing support. Our sole-source suppliers, and any of our other
suppliers or our third-party contract manufacturers, may be unwilling or unable to supply the necessary materials and components or manufacture and
assemble our products reliably and at the levels we anticipate or that are required by the market. Our ability to supply our products and related services
commercially and to develop any future products and related services depends, in part, on our ability to timely obtain these materials, components and
products in accordance with regulatory requirements and in sufficient quantities for commercialization and clinical testing. For example, we rely upon a
single supplier who provides us with development services and database management services used for our CloudPAT platform.
While our suppliers and other contract manufacturers have generally met our demand for their products and services on a timely basis in the past,
there have been occasions when our suppliers, particularly in China, during the recent novel coronavirus outbreak, have completely halted their operations
resulting in a disruption of supply of components and materials to us. While we generally maintain relatively high inventory levels of components,
materials and complete products, to allow us to meet customers’ demand despite potential supply disruption by our suppliers and contract manufacturers,
we cannot guarantee that such inventory levels will be sufficient in the face of long term supply disruptions or stoppages or that our suppliers and contract
manufacturers will be able to meet our demand for their products and services in the future, either because of acts of nature, emergency situations and the
nature of our agreements with those suppliers and other manufacturers or our relative importance to them as a customer., Our suppliers and other
manufacturers may also decide in the future to discontinue or reduce the level of business they conduct with us. While we believe we can engage
alternative suppliers, license or purchase our requirements or develop an alternative independently, changing suppliers or contract manufacturers due to any
change in, or termination of, our relationships with these third parties may be a lengthy and expensive process and, consequently, we may lose sales,
experience manufacturing or other delays, incur increased costs or otherwise experience impairment to our customer relationships. We cannot guarantee
that we will be able to establish alternative relationships on adequate terms and without delays. Our reliance on third-party suppliers also subjects us to
additional risks that could harm our business, including, among others:
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our third-party suppliers or third-party manufacturers, especially new suppliers or manufacturers, may make manufacturing errors that may
not be detected by our quality assurance testing, which could negatively affect the efficacy or safety of our products or cause shipment delays
or product recalls;
our suppliers or third-party manufacturers may encounter financial or other hardships unrelated to our demand, such as a result of equipment
failures, earthquakes and other natural disasters (including public health emergencies, such as the novel coronavirus and related governmental
orders and regulations), which could inhibit their ability to fulfill our orders and meet our requirements; and
our suppliers or third-party manufacturers may not maintain their regulatory clearances, authorizations or approvals and as a result, we may
not be able use their products or services, which may result in delays and reduction of our production capacity.
In addition, replacement or alternative sources might not be readily obtainable due to regulatory requirements and other factors applicable to our
manufacturing operations. Incorporation of components or services from new suppliers or new third-party manufacturers into our products and related
services may require a new or supplemental filing with applicable regulatory authorities and clearance or approval of the filing before we could resume
product manufacturing. This process may take a substantial period of time, and we may not be able to obtain the necessary regulatory clearance or
approval. This could also create supply disruptions that would harm our ability to meet our delivery obligations to our customers, may impede product sales
and could have a material adverse effect on our business, financial condition and results of operations.
Our Credit Facility contains restrictive covenants that may limit our operating flexibility.
In February 2020, we secured a line of credit from an Israeli bank of up to $20 million, subject to the terms of the Credit Facility, from which we
withdrew $5 million on February 20, 2020, which are due on May 20, 2020, unless extended with the consent of the bank. In order to secure our
obligations under the Credit Facility, we pledged and granted to the bank a first priority floating charge on all of our assets and a first priority fixed charge
on (i) our intellectual property, goodwill, holdings in our subsidiaries and certain other assets; and (ii) all of the assets of our U.S. subsidiary. We refer to
the agreements relating to such charges and other security interests as the Security Agreements.
The Security Agreements contain a number of customary restrictive terms and covenants that limit our operating flexibility, such as limitations on
the creation of additional liens, on the incurrence of indebtedness, on the provision of loans and guarantees, on engagement in certain fundamental
transactions including mergers and consolidations, on the sale and transfer of assets and on distributions of dividends. The Security Agreements also grant
the bank the ability to accelerate repayment in certain events, such as breach of covenants, liquidation and a change of control of our Company. In addition,
our right to make any draws under the Credit Facility is conditioned upon us having cash balances in our account with the lending bank of not less than
30% of the total amount drawn for draws of up to $10 million in the aggregate and 40% of the aggregate amount exceeding $10 million. Such provisions
may hinder our future operations or the manner in which we operate our business, which could have a material adverse effect on our business, financial
condition or results of operations. A breach of any of these covenants could result in a default under the Credit Facility, which could cause all of the
outstanding indebtedness under our Credit Facility to become immediately due and payable and terminate all commitments to extend further credit. These
covenants could also limit our ability to seek capital through the incurrence of new indebtedness or, if we are unable to meet our obligations, require us to
repay any outstanding amounts with sources of capital we may otherwise use to fund our business, operations and strategy.
Defects or failures associated with our products or our quality system could lead to the filing of adverse event reports, product recalls or safety
alerts with associated negative publicity and could also subject us to regulatory actions.
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Manufacturing flaws, component failures, design defects, off-label uses or inadequate disclosure of product-related information could result in an
unsafe condition or bodily injury of a patient. These problems could lead to a recall of, issuance of a safety alert relating to, or need for us to submit
applications for new marketing authorizations for, our products and result in significant costs and negative publicity. An adverse event involving one of our
products could result in reduced market acceptance and demand for all products within that brand, and could harm our reputation and our ability to market
our products in the future. In some circumstances, adverse events arising from or associated with the design, manufacture or marketing of our products
could result in the suspension of current regulatory clearances or approvals of our products or delays in regulatory reviews of our applications for new
product approvals or clearances. The FDA, and foreign regulatory authorities have the authority to require the recall of commercialized products in certain
circumstances, such as where the FDA finds that there is a reasonable probability that a device intended for human use would cause serious, adverse health
consequences or death. We may also voluntarily undertake a recall of our products, temporarily shut down production lines or place products on a shipping
hold based on internal safety and quality monitoring. We may also face litigation brought against us as a result of any of the foregoing instances, by
customers and patients, and there is no assurance that our insurance policies will fully cover such claims. A government-mandated or voluntary recall or
other shutdown by us could occur as a result of an unacceptable health risk, component failure, malfunction, manufacturing defect, labeling or design
deficiency, packaging defect, or other deficiency or failure to comply with applicable regulations. Companies are required to maintain certain records of
recalls, even if they are not reportable to the FDA. We may initiate voluntary withdrawals for our products in the future that we determine do not require
notification to the FDA. If the FDA disagrees with our determinations, it could require us to report those actions as recalls and we may be subject to
enforcement action. Any corrective action, whether voluntary or involuntary, will require the dedication of our time and capital, distract management from
operating our business and may harm our reputation and financial results. Moreover, depending on the corrective action we take to redress a product’s
deficiencies or defects, the FDA may require, or we may decide, that we will need to obtain new clearances or approvals for the device before we may
market or distribute the corrected device. Seeking such clearances or approvals may delay our ability to replace the recalled devices in a timely manner.
We are subject to the FDA’s medical device reporting, or MDR, regulations and similar foreign regulations, which require us to report to the FDA
or foreign regulatory bodies when we receive or become aware of information that reasonably suggests that one or more of our products may have caused
or contributed to a death or serious injury or malfunctioned in a way that, if the malfunction were to recur, could cause or contribute to a death or serious
injury. The timing of our obligation to report is triggered by the date we become aware of the adverse event as well as the nature of the event. We may fail
to report adverse events of which we become aware within the prescribed timeframe. We may also fail to recognize that we have become aware of a
reportable adverse event or malfunction, especially if it is not reported to us as an adverse event or if it is an adverse event that is unexpected or removed in
time from the use of the product. If we fail to comply with our reporting obligations, the FDA could take action, including warning letters, untitled letters,
administrative actions, criminal prosecution, imposition of civil monetary penalties, revocation of our device clearances, seizure of our products or delay in
clearance or approval of future products.
Our future operating results will depend on our ability to sustain an effective quality control system and effectively train and manage our
employee base, suppliers and subcontractors with respect to our quality system. Our quality system plays an essential role in determining and meeting
customer requirements, preventing defects and improving our products and services. While we have a network of quality systems throughout our business
lines and facilities, quality and safety issues may occur with respect to any of our products. A quality or safety issue may result in, among other things,
product recalls, a public warning letter, a public safety communication or potentially a consent decree from the FDA in the United States and from similar
regulatory bodies elsewhere. In addition, we may be subject to product recalls or seizures, monetary sanctions, injunctions to halt manufacturing and
distribution of products, civil or criminal sanctions, import detentions of our products and restrictions on operations. Any of the foregoing events could
disrupt our business and have an adverse effect on our results of operations and financial condition.
The misuse or off-label use of our products may harm our reputation in the marketplace, result in injuries that lead to product liability suits or
result in costly investigations, fines or sanctions by regulatory bodies if we are deemed to have engaged in the promotion of these uses, any of
which could be costly to our business.
Our currently marketed products have been cleared by the FDA for specific indications. We train our marketing personnel and direct sales force to
not promote our devices for uses outside of the FDA-cleared indications for use, known as “off-label uses.” We cannot, however, prevent a physician from
using our devices off-label, when in the physician’s independent professional medical judgment and practice of medicine he or she deems it appropriate.
There may be increased risk of injury to patients if physicians attempt to use our devices off-label. Furthermore, the use of our devices for indications other
than those cleared by the FDA or approved by any foreign regulatory body may not effectively treat such conditions, which could harm our reputation in
the marketplace among physicians and patients.
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If the FDA or any foreign regulatory body determines that our promotional materials or training constitute promotion of an off-label use, it could
request that we modify our training or promotional materials or subject us to regulatory or enforcement actions, including the issuance of an untitled letter,
which is used for violators that do not necessitate a warning letter, issuance of a warning letter or imposition of an injunction, seizure, civil fine or criminal
penalties. It is also possible that other federal, state or foreign enforcement authorities might take action under other regulatory authority, such as false
claims laws, if they consider our business activities to constitute promotion of an off-label use, which could result in significant penalties, including, but not
limited to, criminal, civil and administrative penalties, damages, fines, disgorgement, exclusion from participation in government healthcare programs and
the curtailment of our operations.
In addition, physicians may misuse our products or use improper techniques if they are not adequately trained, potentially leading to injury and an
increased risk of product liability. If our devices are misused or used with improper technique, we may become subject to costly litigation by our customers
or their patients. As described below, product liability claims could divert management’s attention from our core business, be expensive to defend and
result in sizeable damage awards against us that may not be covered by insurance.
We face the risk of product liability claims that could be expensive, divert management attention and harm our reputation and business. We may
not be able to maintain adequate product liability insurance.
Our business exposes us to the risk of product liability claims that are inherent in the testing, manufacturing and marketing of medical devices.
This risk exists even if a device is cleared or approved for commercial sale by the FDA or other applicable foreign regulatory authority and manufactured
in facilities regulated by the FDA or other applicable foreign regulatory authority. Our products are designed to test, and future products may be designed to
test, important bodily functions and processes. Any adverse effects, manufacturing defects, misuse or abuse associated with our devices could result in
patient injury. The medical device industry has historically been subject to extensive litigation over product liability claims, and we cannot offer any
assurance that we will not face product liability suits. We may be subject to product liability claims if our devices cause, or merely appear to have caused,
patient injury. In addition, we may be subject to claims related to our DTC business through the online marketplace that we plan to create, which will
connect patients in demand for clinical services with physicians. Further, an injury that is caused by the activities of our suppliers, such as those who
provide us with components and raw materials, may be the basis for a claim against us either as manufacturers or resellers of third-party devices. Product
liability claims may be brought against us by patients, physicians, healthcare providers or others selling or otherwise coming into contact with our products
or, while less likely, the products we resell.
In addition, we facilitate the provision of home sleep apnea test interpretation, and also plan to facilitate the provisions of prescriptions and on-line
consultations via our digital health platform, the CloudPAT, by licensed physicians in line with acceptable medical standards. We take precautions to assure
that all of the physicians which provide services via CloudPAT are duly licensed and intend to require all such physicians to procure appropriate
professional malpractice insurance, however, there is no assurance that patients receiving such physician services, facilitated by our CloudPAT platform do
not suffer from malpractice by such physicians, which may be the basis for a claim against us.
If we cannot successfully defend ourselves against product liability claims, we will incur substantial liabilities and reputational harm. In addition,
regardless of merit or eventual outcome, product liability and medical malpractice claims may result in:
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cost of litigation;
distraction of management’s attention from our primary business;
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the inability to commercialize our products and related services;
decreased demand for our products and related services, including through our digital health platform;
damage to our business reputation;
product recalls or withdrawals from the market;
withdrawal of clinical trial participants;
substantial monetary awards to patients or other claimants; and
loss of sales.
While we may attempt to manage our product liability exposure by proactively recalling or withdrawing from the market any defective products,
any recall or market withdrawal of our products may delay the supply of those products to our customers and may negatively impact our reputation. We can
provide no assurance that we will be successful in initiating appropriate market recall or market withdrawal efforts that may be required in the future or that
these efforts will have the intended effect of preventing product malfunctions and the accompanying product liability that may result. Such recalls and
withdrawals may also be used by our competitors to harm our reputation for safety or be perceived by patients as a safety risk when considering the use of
our products, either of which could have a material adverse effect on our business, financial condition and results of operations.
Although we have product liability and clinical study liability insurance that we believe is appropriate, this insurance is subject to deductibles and
coverage limitations. Our current product liability insurance may not continue to be available to us on acceptable terms, if at all, and, if available, coverage
may not be adequate to protect us against any future product liability claims. If we are unable to obtain insurance at an acceptable cost or on acceptable
terms or otherwise protect against potential product liability claims, we could be exposed to significant liabilities. A product liability claim, recall or other
claim with respect to uninsured liabilities or for amounts in excess of insured liabilities could have a material adverse effect on our business, financial
condition and results of operations.
Our use of “open source” software could adversely affect our ability to offer our services and subject us to possible litigation.
We may use open source software in connection with our products and services. Companies that incorporate open source software into their
products have, from time to time, faced claims challenging the use of open source software and/or compliance with open source license terms. As a result,
we could be subject to suits by parties claiming ownership of what we believe to be open source software or claiming noncompliance with open source
licensing terms. Some open source software licenses require users who distribute software containing open source software to publicly disclose all or part
of the source code to such software and/or make available any derivative works of the open source code, which could include valuable proprietary code of
the user, on unfavorable terms or at no cost. While we plan to monitor the use of open source software and try to ensure that none is used in a manner that
would require us to disclose our proprietary source code or that would otherwise breach the terms of an open source agreement, such use could
inadvertently occur, in part because open source license terms are often ambiguous. Any requirement to disclose our proprietary source code or pay
damages for breach of contract could have a material adverse effect on our business, financial condition and results of operations, and could help our
competitors develop products and services that are similar to or better than ours. In addition, there can be no assurance that the security characteristics of
open source software would be sufficient to keep our products or services compliant with applicable security and privacy requirements and regulations.
We have limited data and experience regarding the safety and efficacy of our products. Results of earlier studies may not be predictive of future
clinical trial results, or the safety or efficacy profile for such products.
The results of preclinical studies and clinical trials of our products conducted to date and ongoing or future studies and trials of our current,
planned or future products may not be predictive of the results of later studies or clinical trials, and interim results of a study or clinical trial do not
necessarily predict final results. Our interpretation of data and results from our studies or clinical trials do not ensure that we will achieve similar results in
future studies or clinical trials in other patient populations. In addition, preclinical and clinical data are often susceptible to various interpretations and
analyses, and many companies that have believed their products performed satisfactorily in preclinical studies and earlier clinical trials have nonetheless
failed to replicate results in later clinical trials. Products in later stages of clinical trials may fail to show the desired safety and efficacy despite having
progressed through nonclinical studies and earlier clinical trials.
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If we receive a significant number of warranty claims or our products require significant post-sale support, our costs will increase and our
business and financial results will be adversely affected.
Sales of our products typically include a warranty on our part, generally for a period of 12 months from the date the product is delivered to the
customer’s facility (and, in some cases, for extended periods of 24 and 36 months). While we have not experienced many warranty claims in the past and
the cost of repairing or replacing our products has not been material thus far, if product returns or warranty claims are significant or exceed our
expectations, we could incur unanticipated reductions in sales or additional expenditures for parts and service. In addition, our reputation could be damaged
and our products may not achieve market acceptance.
Long lead-times required by certain suppliers could prevent us from meeting the demand for our products. As such, if we do not accurately
forecast such demand, our operating results could be adversely affected.
Market uncertainty makes it difficult for us, our customers, our distributors and our suppliers to accurately forecast future product demand trends,
which could cause us to order or produce excess products that can increase our inventory costs and result in obsolete inventory. Alternatively, this
forecasting difficulty could cause a shortage of products, or components and materials used in our products, that could result in an inability to satisfy
demand within a timeframe acceptable by our customers for our products and a resulting material loss of potential revenue.
In addition, some of our suppliers, such as suppliers of components, may require extensive advance notice of our requirements in order to produce
products in the quantities we desire and may not guarantee the final price in advance. This long lead-time, which in some cases can be between six and
twelve months, and price fluctuations may require us to place orders far in advance of the time when certain products will be offered for sale, thereby also
making it difficult for us to accurately forecast supply of our products and their cost of manufacturing, exposing us to risks relating to shifts in consumer
demand and trends, cost fluctuations and adversely affecting our operating results.
Our competitive position may be adversely affected if we fail to develop additional products and applications or enhance existing products.
We plan to develop and manufacture additional products and applications using our PAT-based technology, continue enhancing our existing line of
products and further develop and enhance our digital health platform in order to remain competitive. There is no certainty that we will meet the
technological, clinical and regulatory requirements or any other requirements applicable to the development process of such new products or applications.
In addition, we may not have the financial resources necessary for the completion of such development. If we fail to develop additional products and
applications, enhance our existing line of products or further develop and enhance our digital health platform in a manner that is acceptable to our partners
and consumers, it may have an adverse effect on our competitive position, reputation, growth prospects and business results, and our operating results may
decline or fail to grow as expected. In addition, if we fail to develop and deploy new products, enhancements of our products and our digital health
platform on a timely basis or if we fail to gain market acceptance of our new products, our revenues may decline and we may lose market share to our
competitors.
The risks and uncertainties inherent in conducting clinical trials could delay or prevent the development and commercialization of new products,
or new indications for our existing products, which could have a material adverse effect on our results of operations, financial condition and
growth prospects.
Manufacturers may be required to conduct clinical trials prior to obtaining regulatory authorizations to market and sell a medical device in any
given territory, or may conduct clinical trials to support the marketing of their products. Clinical trials are experiments conducted or observations made in
clinical research of medical devices on human participants. Such trials are designed to answer particular questions about novel medical devices or new
indications that require further study and provide data about the product’s safety and efficacy, and are subject to stringent oversight by regulatory
authorities and/or institute ethics committees. Clinical testing is difficult to design and implement, can take many years, can be expensive and carries
uncertain outcomes.
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We have been required to provide data from clinical trials in connection with our submissions for marketing authorizations, and we may be
required to support our marketing authorization submissions with clinical data in the future. There are a number of risks and uncertainties associated with
conducting clinical trials. Clinical trials vary in scale and scope and may entail significant costs. They are also often conducted with patients having
advanced stages of disease and, as a result, during the course of the trial, these patients may suffer adverse medical effects for reasons that may not be
related to the product being tested, but which nevertheless affect the clinical trial results. In addition, side effects experienced by the patients may cause a
delay of clearance or approval or limited profile of a cleared or approved product. Moreover, clinical trials may not provide sufficient safety and efficacy
data to support FDA clearance or approval, or the approval or marketing authorization of applicable foreign regulatory authorities. Regulatory authorities
may disagree with our interpretation of data and results from our clinical trials.
Failure can occur at any time during the clinical trial process, and the results from early clinical trials may not be predictive of results obtained in
later and larger clinical trials. Product candidates in later clinical trials may fail to show the desired safety or efficacy despite having progressed
successfully through earlier clinical testing. In the future, the completion of clinical trials, if required, for our new products or new indications of current
products may be delayed or halted for many reasons, including:
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we may be required to submit an IDE application to the FDA, which must become effective prior to commencing certain human clinical trials
of medical devices, and the FDA may reject our IDE application and notify us that we may not begin clinical trials;
regulators may disagree as to the design or implementation of our clinical trials, and regulators or institutional review boards or ethics
committees may not allow us to commence or continue a clinical trial;
we may not reach agreement on acceptable terms with prospective contract research organizations, or CROs, and clinical trial sites, the terms
of which can be subject to extensive negotiation and may vary significantly among different CROs and trial sites;
the number of subjects required for clinical trials may be larger than we anticipate, enrollment in these clinical trials may be insufficient or
slower than we anticipate, the number of clinical trials being conducted at any given time may be high and result in fewer available subjects
for any given clinical trial or subjects may drop out of these clinical trials at a higher rate than we anticipate;
risks associated with trial design, which may result in a failure of the trial to show statistically significant results;
clinical trials may produce negative or inconclusive results, and we may decide, or regulators may require us, to conduct additional clinical
trials or abandon product development programs;
our third-party contractors, including those manufacturing products or conducting clinical trials on our behalf, may fail to comply with
regulatory requirements or meet their contractual obligations to us in a timely manner, or at all;
safety issues, including adverse events associated with product candidates, occurring during clinical trials;
the failure of patients to complete clinical trials due to adverse side effects, dissatisfaction with the product candidate or other reasons;
clinical sites may not adhere to the clinical protocol or may drop out of a clinical trial; and
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governmental or regulatory delays or changes in regulatory requirements, policy, guidelines or interpretations.
Clinical trials must be conducted in accordance with the laws and regulations of the FDA and other applicable regulatory authorities’ legal
requirements, regulations or guidelines, and are subject to oversight by these governmental agencies and ethics committees or institutional review boards at
the medical institutions where the clinical trials are conducted. In addition, clinical trials must be conducted with supplies of our devices produced under
current good manufacturing practice, or cGMP, requirements and other regulations. Furthermore, we may rely on CROs and clinical trial sites to ensure the
proper and timely conduct of our clinical trials, and while we have agreements governing their committed activities, we have limited influence over their
actual performance. We depend on our collaborators and on medical institutions to conduct our clinical trials in compliance with good clinical practice, or
GCP, requirements. To the extent our collaborators or the CROs fail to enroll participants in our clinical trials, fail to conduct the study to GCP standards or
are delayed for a significant time in the execution of trials, including achieving full enrollment, we may be affected by increased costs, program delays, or
both. In addition, clinical trials that are conducted in countries outside the United States may subject us to further delays and expenses as a result of
increased shipment costs, additional regulatory requirements and the engagement of non-U.S. CROs, as well as expose us to risks associated with clinical
investigators who are unknown to the FDA, and different standards of diagnosis, screening and medical care.
Any failure or delay in completing clinical trials for new products or new indications of our products would prevent or delay the
commercialization of our product or the introduction of new indications for our products, which could result in significant expenses and materially
adversely affect our business. In addition, disruptions caused by the coronavirus pandemic may increase the likelihood that we encounter such difficulties
or delays in initiating, enrolling, conducting or completing our planned and ongoing clinical trials. There is no certainty that our expenses related to clinical
trials will lead to the development of products or new product indications that will receive regulatory clearance or approval and generate revenues in the
near future, or ever.
Delays or failure in the development and commercialization of our products could have a material adverse effect on our results of operations,
liquidity, financial condition and growth prospects. Negative results of clinical trials performed by us or by third parties regarding the use of our products
may also adversely affect the medical community’s and customers’ acceptance of our products.
Our revenues and operating results could fluctuate significantly.
Our revenues and operating results may vary significantly from year-to-year and quarter-to-quarter. Variations may result from, among other
factors:
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the timing of product launches, and market acceptance of such products launched;
changes in the amount we spend to research, develop, acquire, license or promote new products;
the outcome of our research, development and clinical trial programs, as well as independent trials conducted without our involvement which
could be published in peer-reviewed journals;
serious or unexpected health or safety concerns related to our products or our product candidates;
the introduction of new products by others that render our products obsolete or noncompetitive;
the ability to maintain selling prices and high gross margins on our products;
changes in coverage and reimbursement policies of health plans and other health insurers, including changes to Medicare, Medicaid and
similar state programs;
increases in the cost of components or raw materials used to manufacture our products;
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· manufacturing and supply interruptions, including product rejections or recalls due to failure to comply with manufacturing specifications or
inability to meet demand due to interruptions in our supply chain;
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the timing of FDA or any other foreign regulatory authority clearances, authorizations or approvals;
the ability to protect our intellectual property and avoid infringing the intellectual property of others;
the timing and quantities of our customers’ purchases of our products, which may be affected by factors out of our control including, among
others, their budget constraints; and
the outcome and cost of possible litigation over patents with third parties.
We are an international business, and we are exposed to various global risks that could have a material adverse effect on our financial condition
and results of operations.
As an international business, which operates in multiple jurisdictions, we are exposed to trends and financial risks of international markets, and are
also required to comply with varying legal and regulatory requirements in such multiple jurisdictions. Profitability from international operations may be
limited by risks and uncertainties related to regional and global economic conditions, regulatory clearances and approvals and reimbursement approvals,
and our ability to implement our overall business strategy in various jurisdictions. We expect these risks will increase as we pursue our strategy to expand
operations into new geographic markets. We may not succeed in developing and implementing effective policies and strategies in each location where we
conduct business. Any failure to do so may harm our business, results of operations and financial condition.
International sales and operations are subject to a variety of risks, including:
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foreign currency exchange rate fluctuations;
potential adverse changes in laws and regulatory practices, including export license requirements, trade barriers, tariffs and tax laws;
burdens and costs of compliance with a variety of foreign laws;
foreign tax laws and potential increased costs associated with overlapping tax structures;
greater difficulty in staffing and managing foreign operations;
greater risk of uncollectible accounts;
longer collection cycles;
logistical and communications challenges;
changes in labor conditions;
political and economic instability, including, without limitation, due to natural disasters or other catastrophic events, such as terrorist attacks,
pandemic diseases, such as the novel coronavirus, hurricanes, fire, floods, pollution and earthquakes;
greater difficulty in protecting intellectual property;
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the risk of third-party disputes over ownership of intellectual property and infringement of third-party intellectual property by our products;
and
general economic and political conditions in these foreign markets.
International markets are also affected by economic pressure to contain reimbursement levels and healthcare costs. Profitability from international
operations may be limited by risks and uncertainties related to regional economic conditions, regulatory clearances and approvals and reimbursement
approvals, competing products, infrastructure development, intellectual property rights protection and our ability to implement our overall business
strategy. We expect these risks will increase as we pursue our strategy to expand operations into new geographic markets. We may not succeed in
developing and implementing effective policies and strategies in each location where we conduct business. Any failure to do so may harm our business,
results of operations and financial condition.
Exchange rate fluctuations, primarily between the U.S. dollar and the NIS, may negatively affect our liquidity, financial condition and results of
operation.
We currently generate a substantial portion of our revenues in U.S. dollars whereas we currently incur a significant portion of our expenses in
other currencies, predominantly NIS. Since our functional and reporting currency is the U.S. dollar, our financial results may be affected by fluctuations in
the exchange rates of currencies in the countries in which we transact business. For example, during 2019, we witnessed a strengthening of the average
exchange rate of the NIS against the U.S. dollar, which increased the U.S. dollar value of Israeli expenses. If the NIS strengthens against the U.S. dollar, as
it did in 2019, the U.S. dollar value of our Israeli expenses, mainly personnel and facility-related, will increase. It is possible that such fluctuation of the
average exchange rate of the NIS against the U.S. dollar may continue in 2020, including as a result of the effect of the coronavirus outbreak on global
economy, including on currencies exchange rates. While we engage, from time to time, in currency hedging transactions intended to reduce the effect of
fluctuations in foreign currency exchange rates on our results of operations, we cannot guarantee that such measures will adequately protect us against
currency fluctuations in the future. Although exposure to currency fluctuations to date has not had a material adverse effect on our business, there can be no
assurance such fluctuations in the future will not have a material adverse effect on our operating results and financial condition.
Changing or severe global economic conditions may materially adversely affect our business.
Our business and financial condition are affected by global economic conditions and their impact on levels of spending by customers, which may
be disproportionately affected by economic downturns. The global economy is subject to uncertainties surrounding its strength in many regions. For
example, the recent outbreak of the coronavirus is already affecting the global economy and international trade (see also above under “Natural disasters
and other states of emergency, such as the novel coronavirus outbreak could adversely impact our business, financial condition and results of operations”)
and, at this point in time, there is significant uncertainty relating to the potential effect thereof on our business. In addition, the recent escalating
disagreements between the United States and certain European states, as well between the United States and China, with respect to placing tariffs and other
trade barriers, may adversely affect international trade and we cannot predict the implications of such barriers on our business. Uncertainty about current
global economic conditions continues to pose a risk as customers may postpone or reduce spending in response to restraints on credit or concerns about
restraints on credit. Should an economic slowdown resume and/or companies in our target markets reduce capital expenditures, it may cause our customers
to reduce or postpone their spending significantly, which could result in reductions in sales of our products, longer sales cycles, slower adoption of new
technologies and increased price competition.
In addition, if the market is flat and customers experience low visibility, we may not be able to increase our sales (whether direct sales or indirect
sales through our distributors). Each of the above scenarios would have a material adverse effect on our business, operating results and financial condition.
Our ability to retain and attract qualified senior management, including our President and Chief Executive Officer, as well as employees with the
expertise required for our business is key to our success.
Our success largely depends on our ability to retain and attract qualified senior management, in particular Mr. Gilad Glick, our President and Chief
Executive Officer, who also acts as President of our wholly-owned U.S. subsidiary, Itamar Medical, Inc., as well as on our ability to retain and attract
qualified personnel, including personnel with expertise in research and development and sales and marketing, and to effectively provide for the succession
of senior management. There is intense competition from numerous biotechnology, medical device and other companies seeking to employ qualified
individuals in the business fields in which we operate, and we may not be able to attract and retain the qualified personnel necessary for the achievement of
our business objectives.
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We do not maintain life insurance on any of our personnel. Regardless, the loss of senior management employees, the failure of any senior
management employee to perform or our inability to attract and retain skilled employees, as needed, or an inability to effectively plan for and implement a
succession plan for senior management could harm our business. In particular, the loss of the services of Mr. Glick could result in a significant loss in the
knowledge and experience that we possess and could significantly delay or prevent successful implementation of our business objectives.
Under applicable employment laws, we may not be able to enforce covenants not to compete.
Our employment agreements generally include covenants not to compete. These agreements prohibit our employees, if they cease working for us,
from competing directly with us or working for our competitors for a limited period. We may be unable to enforce these agreements under the laws of the
jurisdictions in which our employees work. For example, Israeli courts have required employers seeking to enforce covenants not to compete to
demonstrate that the competitive activities of a former employee will harm one of a limited number of material interests of the employer, such as the
secrecy of a company’s confidential commercial information or the protection of its intellectual property. If we cannot demonstrate that such an interest will
be harmed, we may be unable to prevent our competitors from benefiting from the expertise of our former employees or consultants and our
competitiveness may be diminished, which could materially adversely affect our business, results of operations and ability to capitalize on our proprietary
information.
Our employees, independent contractors, consultants, partners and vendors may engage in misconduct or other improper activities, including
noncompliance with regulatory standards and requirements.
We are exposed to the risk of employee fraud or other illegal activity by our employees, former employees, independent contractors, consultants,
partners and vendors. Misconduct by these parties could include intentional, reckless and/or negligent conduct that fails to comply with the regulations of
the FDA, the European Medicines Agency, or the EMA, and comparable foreign regulatory authorities, provide true, complete and accurate information to
the FDA, EMA and comparable foreign regulatory authorities, comply with manufacturing standards we have established, comply with healthcare fraud
and abuse laws in Israel, the United States and similar foreign fraudulent misconduct laws, report financial information or data accurately or disclose
unauthorized activities to us. These laws may impact, among other things, our current activities with principal investigators and research patients, as well as
proposed and future sales, marketing and education programs. We have adopted a code of business conduct and ethics, but it is not always possible to
identify and deter misconduct by our employees, independent contractors, consultants, partners and vendors, and the precautions we take to detect and
prevent such activities may not be effective in controlling unknown or unmanaged risks or losses or in protecting us from governmental investigations or
other actions or lawsuits stemming from a failure to comply with these laws or regulations. If any actions are instituted against us and we are not successful
in defending ourselves or asserting our rights, those actions could result in the imposition of civil, criminal and administrative penalties, damages, monetary
fines, imprisonment, disgorgement, possible exclusion from participation in government healthcare programs, additional reporting obligations and
oversight if we become subject to a corporate integrity agreement or other agreement to resolve allegations of non-compliance with these laws, contractual
damages, reputational harm, diminished profits and future earnings and the curtailment of our operations.
Cyber security attacks or breaches of our data could adversely affect our reputation and business.
The risk of a security breach or disruption, particularly through cyber-attacks or cyber intrusion, including by criminal hackers, hacktivists, state-
sponsored intrusions, industrial espionage, employee malfeasance and human or technological error are constantly evolving. Computer hackers and others
routinely attempt to breach the security of high profile companies, governmental agencies, technology products, services and systems. Such risk may be
enhanced if a significant portion of our personnel were to work remotely, as is currently done due to the coronavirus outbreak.
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In the ordinary course of our business, we collect and store personal, financial, proprietary and other confidential information related to our
business, employees, customers and their patients and partners on our IT systems. We rely on said systems to manage our business, operations and research
and development and, in some cases, to provide services to our customers. For example, sensitive data is stored using our CloudPAT digital health cloud-
based platform. This includes, where required or permitted by applicable laws, personally identifiable information of our customers, as well as records of
home sleep tests conducted by our WatchPAT devices and the interpretation records of such tests. The CloudPAT platform facilitates the upload, storage
and transfer of such data as part of the services provided via the CloudPAT platform. We also plan to enhance our CloudPAT platform to facilitate on-line
physician consults and transferring of related medical documentation. Certain third parties with whom we collaborate also collect and store such data. The
secure maintenance of this information is important to our operations and business strategy. Despite the implementation of security measures, our internal
computer systems, and those of third parties on which we rely, are vulnerable to damage from, among others, computer viruses, malware, natural disasters,
terrorism, war, telecommunication and electrical failures, cyber-attacks or cyber-intrusions over the Internet, attachments to emails, persons inside our
organization, or persons with access to systems inside our organization or similar disruptive problems. Any such breach could compromise information
stored on our networks or those of our partners and may result in significant data losses or theft of personally identifiable information. If such an event
were to occur and cause interruptions in our operations, it could result in a material disruption of our product development programs. A cybersecurity
breach could also hurt our reputation by adversely affecting the patients’ perception of the security of their information. A number of proposed and enacted
federal, state and international laws and regulations obligate companies to notify individuals of security breaches involving particular personally
identifiable information, which could result from breaches experienced by us or by third parties, including collaborators, vendors, contractors or other
organizations with which we expect to form strategic relationships.
We are subject to strict data privacy laws and regulations in the United States, European Union and other jurisdictions in which we operate,
governing the collection, transmission, storage and use of data and personally identifying information, such as the federal Health Insurance Portability and
Accountability Act of 1996, as amended by the Health Information Technology for Economic and Clinical Health Act, or HIPAA, in the United States and
the General Data Protection Regulation, or GDPR, in Europe. Any breach, unauthorized access, disclosure or other loss of information could result in legal
claims or proceedings, liability under data privacy laws and regulations, disruption of our operations, including delays in our efforts to obtain regulatory
clearances or approvals of our products, criminal penalties or civil liabilities, any of which would damage our reputation and adversely affect our business.
See also below under “Risks Related to Our Industry—Privacy regulations may impose costs and liabilities on us, limit our use of information, and
adversely affect our business.”
We can provide no assurance that our current IT systems are fully protected against cyber security threats or that any breach of our IT system will
be detected. Even when a security breach is detected, the full extent of the breach may not be determined immediately. An increasing number of companies
have disclosed security breaches of their IT systems and networks. We believe such incidents are likely to continue, and we are unable to predict the direct
or indirect impact of these future attacks on us. In addition, although we maintain cyber security insurance that we believe is appropriate, this insurance is
subject to deductibles and coverage limitations and there can be no assurances that our insurance coverage will be sufficient, or that insurance proceeds will
be paid to us in a timely manner.
We rely on Internet infrastructure, cloud services and other third-party providers and our own systems for providing services to our clients via
our CloudPAT digital platform, and any failure or interruption in the services provided by these third parties or our own systems could expose us
to litigation and negatively impact our relationships with clients, adversely affecting our brand and our business.
Our ability to deliver and facilitate services through our cloud-based CloudPAT digital health platform is dependent, in part, on the development
and maintenance of the infrastructure of the Internet, telecommunications services, cloud services and other third-party services. This includes maintenance
of a reliable infrastructure and network connection with the necessary speed, data capacity and security for providing reliable Internet access and services.
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Our services are designed to operate without interruption, however, there is no assurance that we will not experience infrastructure failures which
may adversely affect the level of our services in the future. We rely on internal systems as well as on third-party suppliers and service providers to provide
our services. Interruptions in these systems could affect the security, availability or level of our services and prevent or inhibit the ability of our customers
and partners to access our services. If a catastrophic event occurs with respect to one or more of these systems, we may experience an extended period
during which service level decreases or service is not available, which could result in substantial remedial costs, a negative impact on our relationship with
our clients and partners as well as on our reputations, resulting in an adverse effect on our business, results of operations and financial condition.
Any failure of or by our own systems or third-party providers’ systems to handle current or higher volume of use could significantly harm our
business. We exercise limited control over our third-party suppliers, which increases our vulnerability to disruptions of the services they provide. Any
errors, failures, interruptions or delays experienced in connection with these third-party service providers or our own systems could negatively impact our
relationships with clients and partners, adversely affect our business and expose us to third-party liabilities.
The reliability and performance of our Internet connection may be harmed by increased usage or by denial-of-service attacks. The Internet has
experienced a variety of outages and other delays as a result of damages to portions of its infrastructure, and it could face outages and delays in the future.
These outages and delays could reduce the level of Internet usage as well as the availability of the Internet to us for delivery of our cloud-based services.
Consolidation in the healthcare industry or group purchasing organizations could lead to demands for price concessions.
Healthcare costs have risen significantly over the past decade, which has resulted in or led to numerous cost reform initiatives by legislators,
regulators and third-party payors. Cost reform may also trigger a consolidation trend in the healthcare industry to aggregate purchasing power, which may
create more requests for pricing concessions in the future. Additionally, group purchasing organizations, independent delivery networks and large single
accounts may continue to use their market power to consolidate purchasing decisions for hospitals and our other targeted customers. We expect that market
demand, government regulation, third-party coverage and reimbursement policies and social pressures will continue to change the healthcare industry
worldwide, resulting in further business consolidations and alliances among our customers, which may exert further downward pressure on the prices of
our products.
We face risks associated with acquisition of businesses and technologies.
As part of our growth strategy, we intend to evaluate and may pursue acquisitions of, or significant investments in, complementary companies or
technologies to increase our technological capabilities and expand our product offerings. Acquisitions and the successful integration of new technologies,
products, assets or businesses that we may acquire in the future will require significant attention from our management and could result in a diversion of
resources from our existing business, which in turn could have an adverse effect on our business operations. Other risks typically encountered with
acquisitions include disruption of our ongoing business; difficulties in integration of the acquired operations and personnel; inability of our management to
maximize our financial and strategic position by the successful implementation or integration of the acquired technology into our product offerings; being
subject to known or unknown contingent liabilities, including taxes, expenses and litigation costs; and inability to realize expected synergies or other
anticipated benefits which may, among other things, also lead to goodwill impairments or other write-offs. We cannot assure you that we will be successful
in overcoming these risks or any other problems we may encounter in connection with potential future acquisitions. Our inability to successfully integrate
the operations of an acquired business, including a successful implementation of the technologies we acquire, and realize anticipated benefits associated
with an acquisition could have a material adverse effect on our business, financial condition, results of operations and cash flows. Acquisitions or other
strategic transactions may also result in dilution to our existing shareholders if we issue additional equity securities as consideration or partial consideration
as well as in the incurrence of indebtedness if we borrow funds to finance such transactions.
We may face both reputational and SEC enforcement risks with respect to conflict minerals obligations.
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Because of the listing of our ADSs on the Nasdaq Capital Market, we are subject to disclosure requirements under Section 102 of the Dodd-Frank
Wall Street Reform and Consumer Protection Act regarding the source of certain minerals for which such conflict minerals are necessary to the
functionality or production of a product manufactured, or contracted to be manufactured which are mined from the Democratic Republic of Congo, and
adjoining countries, including: Angola, Burundi, Central African Republic, the Republic of the Congo, Rwanda, South Sudan, Tanzania, Uganda and
Zambia. These rules require reporting companies to file a conflict minerals report as an exhibit to a Form SD report with the SEC. The conflict minerals
report is required to set out the due diligence efforts and procedures exercised on the source and chain of custody of such conflict minerals, in accordance
with internationally recognized due diligence framework, and a description of our products containing such conflict minerals. Although we expect that we
will be able to comply with the SEC rules and timely file our initial Form SD report with the SEC, in preparing to do so we are dependent upon information
supplied by certain suppliers of products that contain, or potentially contain, conflict minerals. Such preparation may be costly. To the extent that the
information that we receive from our suppliers is inaccurate or inadequate or our processes in obtaining that information do not fulfill the SEC’s
requirements, we could face both reputational and SEC enforcement risks.
We may require additional funds to support our strategy and long-term operational plans, and, if additional funds are not available, we may need
to significantly scale back or even cease our planned operations.
We plan to expand our business, which would require us to increase our investment in research and development as well as require expansion of
our sales and marketing activities, including investing significant resources in further developing our sales work force and in obtaining insurance
reimbursement of our products in additional territories, to support and drive our sales and marketing efforts. Our ability to take these and other actions may
be limited by our available liquidity. As a result, in the future, we may seek additional financing to meet our working capital and capital expenditure
requirements.
Additional debt or equity financing that we may need may not be available on terms favorable to us, or at all, and if additional funds are raised
through an equity financing, the percentage ownership of our then-current shareholders would be diluted. Additionally, certain financing we obtain may
contain restrictive covenants or other unfavorable terms that limit our operating flexibility or our ability to secure additional financing in the future. If we
are unable to obtain such additional financing on a timely basis, we may have to curtail our development activities and growth plans or be forced to sell
assets, perhaps on unfavorable terms, which would have a material adverse effect on our business, financial condition and results of operations. Further, we
may not be able to continue operating if we do not generate sufficient revenues to finance our operations. In addition, we may incur substantial costs in
pursuing capital financing, including investment banking fees, legal fees, accounting fees, securities law compliance fees, printing and distribution
expenses and other costs.
Risks Related to Our Intellectual Property
We depend on our intellectual property, and our future success is dependent on our ability to protect our intellectual property and not infringe on
the rights of others.
Our success depends, in part, on our abilities to obtain patent protection for our products, register our trademarks in the geographic locations in
which we operate, protect against any infringement or misuse of our patents and trademarks, maintain the confidentiality of our trade secrets and know-
how, operate without infringing on the proprietary rights of others and prevent others from infringing our proprietary rights. We try to protect our
proprietary rights by, among other things, filing United States and foreign patent applications related to our products, inventions and improvements that
may be important to the continuing development of our products and applying for the registration of our trademarks in certain geographic locations in
which we operate. However, we cannot assure you that:
·
·
·
·
any of our future processes or products will be patentable;
we will identify all patentable aspects of the inventions made in the course of development and commercialization activities before it is too
late to obtain patent protection on them;
our processes or products will not infringe upon the patents of third parties;
our patents will protect us in the jurisdictions where our patents have been granted;
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·
·
all of the potentially relevant prior art that may be used to invalidate our patents or that may prevent a patent from issuing from one of our
pending patent applications has been found and been provided to the relevant patent examining authorities; or
we will have the resources to defend against charges of patent infringement or other violation or misappropriation of intellectual property by
third parties or to protect our own intellectual property rights against infringement, misappropriation or violation by third parties.
Because the patent position of medical device companies involves complex legal and factual questions, we cannot predict the validity and
enforceability of our patents, or provide any assurances that any of our patent applications will be found to be patentable, with certainty. Our issued patents
may not provide us with any competitive advantages, may be held invalid or unenforceable as a result of legal challenges by third parties or could be
circumvented. Our competitors may also independently develop processes, technologies or products similar to ours or design around or otherwise
circumvent any patents issued to, or licensed by, us. Thus, any patents that we own or license from others may not provide adequate protection against
competitors. Our pending patent applications, those we may file in the future or those we may license from third parties may not result in patents being
issued. If these patents are issued, they may not provide us with proprietary protection or competitive advantages. The degree of future protection to be
afforded by our proprietary rights is uncertain because legal means afford relatively limited protection and may not adequately protect our rights or permit
us to gain or keep our competitive advantage. After the completion of development and registration of our patents, third parties may still manufacture or
market our products despite our patent protected rights. If the protection of our proprietary rights is inadequate to prevent use or appropriation by third
parties, the value of our brand and other intangible assets may be diminished and competitors may be able to more effectively mimic our technology. If
competitors were to mimic our technology, it may result in loss of sales and material litigation expenses. Such infringement of our patent protected rights is
likely to cause us damage and lead to a reduction in the prices of our products, thereby reducing our anticipated profits.
The patent application and approval process is expensive and time-consuming. We may not be able to file and prosecute all necessary or desirable
patent applications at a reasonable cost or in a timely manner. In addition, due to the extensive time needed to develop, test and obtain regulatory approval
for our products, any patents that protect our products may expire early during commercialization. For example, our original United States patent and
corresponding foreign patents, covering our PAT-based technology and certain embodiments thereof, expired during 2017. Since our products have
undergone substantial development since then, we believe they should be protected by newer patents. However, we cannot be sure that these patents will be
commercially useful in protecting our technology and, even if they are, our granted patents and any patents issued from our currently pending patent
applications, should they issue without terminal disclaimers or other term shortening restrictions, are scheduled to expire between 2020 and 2037. This may
reduce or eliminate any market advantages that such patents may give us. Following patent expiration, we may face increased competition through the
entry of competing products into the market and a subsequent decline in market share and profits.
Changes in patent laws or patent jurisprudence could diminish the value of patents in general, thereby impairing our ability to protect our
product candidates.
The Leahy-Smith America Invents Act, or AIA, which was passed in September 2011, resulted in significant changes to the United States patent
system. An important change introduced by the AIA is that, as of March 16, 2013, the United States transitioned from a “first-to-invent” to a “first-to-file”
system for deciding which party should be granted a patent when two or more patent applications are filed by different parties claiming the same invention.
Under a “first-to-file” system, assuming the other requirements for patentability are met, the first inventor to file a patent application generally will be
entitled to a patent on the invention regardless of whether another inventor had made the invention earlier. A third party that filed or files a patent
application in the United States Patent and Trademark Office, or USPTO, after March 16, 2013 but before us could therefore be awarded a patent covering
an invention of ours even if we made the invention before it was made by the third-party. This will require us to be cognizant going forward of the time
from invention to filing of a patent application and be diligent in filing patent applications, but circumstances could prevent us from promptly filing patent
applications on our inventions.
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Among some of the other changes introduced by the AIA are changes that alter where a patentee may file a patent infringement suit and that
provide opportunities for third parties to challenge any issued patent in the USPTO. This applies to all of our United States patents, even those issued
before March 16, 2013. Because of a lower evidentiary standard in USPTO proceedings compared to the evidentiary standard in United States federal
courts necessary to invalidate a patent claim, a third party could potentially provide evidence in a USPTO proceeding sufficient for the USPTO to hold a
claim invalid even though the same evidence would be insufficient to invalidate the claim if first presented in a district court action.
Accordingly, a third party may attempt to use the USPTO procedures to invalidate our patent claims that would not have been invalidated if first
challenged by the third-party as a defendant in a district court action. It is not clear what, if any, impact the AIA will have on the operation of our business.
However, the AIA and its implementation could increase the uncertainties and costs surrounding the prosecution of our or any licensors’ patent applications
and the enforcement or defense of our or any licensors’ issued patents.
Additionally, the United States Supreme Court has ruled on several patent cases in recent years either narrowing the scope of patent protection
available in certain circumstances or weakening the rights of patent owners in certain situations, and there are other open questions under patent law that
courts have yet to decisively address. In addition to increasing uncertainty with regard to our ability to obtain patents in the future, this combination of
events has created uncertainty with respect to the value of patents, once obtained. Depending on decisions by Congress, the federal courts and the USPTO,
the laws and regulations governing patents could change in unpredictable ways and could weaken our ability to obtain new patents or to enforce our
existing patents and patents that we might obtain in the future. In addition, the European patent system is relatively stringent in the type of amendments that
are allowed during prosecution, and the complexity and uncertainty of European patent laws has also increased in recent years. Complying with these laws
and regulations could limit our ability to obtain new patents in the future that may be important for our business.
Obtaining and maintaining our patent protection depends on compliance with various procedural, document submission, fee payment and other
requirements imposed by governmental patent agencies, and our patent protection could be reduced or eliminated for non-compliance with these
requirements.
The USPTO, European and other patent agencies require compliance with a number of procedural, documentary, fee payment and other similar
provisions during the patent application process. In addition, periodic maintenance and annuity fees on any issued patent are due to be paid to the USPTO,
European and other patent agencies over the lifetime of the patent. While an unintentional failure to make payment of such fees or to comply with such
provisions can in many cases be cured by additional payment of a late fee or by other means in accordance with the applicable rules, there are situations in
which non-compliance with such provisions will result in the abandonment or lapse of the patent or patent application, and the partial or complete loss of
patent rights in the relevant jurisdiction.
Non-compliance events that could result in abandonment or lapse of a patent or patent application include failure to respond to official actions
within prescribed time limits, non-payment of fees and failure to properly legalize and submit formal documents within prescribed time limits. If we or any
licensors fail to maintain the patents and patent applications covering our product candidates or if we or any licensors otherwise allow our patents or patent
applications to be abandoned or lapse, it can create opportunities for competitors to enter the market, which would hurt our competitive position and could
impair our ability to successfully commercialize our product candidates in any indication for which they are approved.
It is possible that defects of form in the preparation, filing or prosecution of our patents or patent applications may exist, or may arise in the future,
for example with respect to proper priority claims, inventorship, claim scope or requests for patent term adjustments. If we fail to establish, maintain or
protect such patent rights and other intellectual property rights, such rights may be reduced or eliminated. If there are material defects in the form,
preparation, prosecution or enforcement of our patents or patent applications, such patents may be invalid and/or unenforceable, and such applications may
never result in valid, enforceable patents. Any of these outcomes could impair our ability to prevent competition from third parties, which may have an
adverse impact on our business.
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Foreign patent protection is particularly uncertain, and if we are involved in opposition proceedings in foreign countries, we may have to expend
substantial sums and management resources.
Patent rights are territorial; thus, the patent protection we currently have will extend only to those countries in which we have issued patents. Even
so, the laws of certain countries do not protect our intellectual property rights to the same extent as do the laws of the United States. For example, certain
countries do not grant patent claims that are directed to the treatment of humans. Competitors may successfully challenge our patents, produce similar
devices that circumvent and do not infringe our patents, or manufacture devices in countries where we have not applied for patent protection or that do not
respect our patents. Furthermore, it is difficult to predict the scope of claims that will be allowed in pending applications and it is also difficult to predict
which claims of granted patents, if any, will be deemed enforceable in a court of law. We may participate in opposition proceedings to determine the
validity of our foreign patents or our competitors’ foreign patents, which would result in substantial costs and diversion of our management’s efforts, thus
adversely affecting our results of operations.
If we are unable to protect the confidentiality of our trade secrets or know-how, such proprietary information may be used by others to compete
against us.
In addition to filing patent applications, we protect our trade secrets, know-how and technology by entering into confidentiality or non-disclosure
agreements with parties that have access to our proprietary information, such as our development or commercialization partners, employees, contractors
and consultants. We also enter into agreements that purport to require the disclosure and assignment to us of the rights to the ideas, developments,
discoveries and inventions of our employees, advisors, research collaborators, contractors and consultants while we employ or engage them. However, we
cannot ensure that all such agreements have been duly executed. Moreover, these agreements can be difficult and costly to enforce or may not provide
adequate remedies. Any of these parties may breach the confidentiality agreements and willfully or unintentionally disclose our confidential information, or
our competitors might learn of the information in some other way. The disclosure to, or independent development by, a competitor of any trade secret,
know-how or other technology not protected by a patent could materially adversely affect any competitive advantage we may have over any such
competitor.
To the extent that any of our employees, advisors, research collaborators, contractors or consultants independently develop, or use independently
developed, intellectual property in connection with any of our projects, disputes may arise as to the proprietary rights to this type of information. If a
dispute arises with respect to any proprietary right, enforcement of our rights can be costly and unpredictable and a court may determine that the right
belongs to a third party, which could materially adversely affect our business, results of operations and ability to capitalize on our proprietary information.
Legal proceedings or third-party claims of intellectual property infringement and other challenges may require us to spend substantial time and
money and could prevent us from developing or commercializing our products.
The development, manufacture, use, sale, offer for sale or importation of our products may infringe third-party patents or other intellectual
property rights. The nature of claims contained in unpublished patent applications around the world is unknown to us and it is not possible to know which
countries patent applicants may choose for the extension of their filings under the Patent Cooperation Treaty, or other mechanisms. Our competitors may
seek or may have already obtained patents that will limit, interfere with or eliminate our ability to make, use and sell our products. We may also be subject
to claims based on the actions of employees and consultants with respect to the usage or disclosure of intellectual property learned at other employers. In
addition, a third party may claim an ownership interest in one or more of our patents or other intellectual property rights. A third party could bring legal
actions against us and seek monetary damages and/or to enjoin testing, manufacturing and marketing of the affected product or products. While we are
presently unaware of any claims or assertions by third parties with respect to our patents or other intellectual property, we cannot guarantee that a third-
party will not assert a claim or an interest in any such patents or intellectual property. The cost to us of any intellectual property litigation or other
infringement proceeding, even if resolved in our favor, could be substantial. Some of our competitors may be able to sustain the costs of such litigation or
proceedings more effectively because of their greater financial resources. Uncertainties resulting from the initiation and continuation or defense of
intellectual property litigation or other proceedings could have a material adverse effect on our ability to compete in the marketplace. Intellectual property
litigation and other proceedings may also absorb significant financial resources and management time. Consequently, there is no assurance that we will be
able to develop or commercialize a product in line with our business objectives, in the event of an infringement action. In the event of patent infringement
claims, or to avoid potential claims, we may choose or be required to seek a license from a third party and would most likely be required to pay license fees
or royalties, or both. These licenses may not be available on acceptable terms, or at all. Even if we were able to obtain a license, the rights may be non-
exclusive, which could potentially limit our competitive advantage. Ultimately, we could be prevented from completing the development or
commercialization of a product if, as a result of actual or threatened patent infringement or other claims, we are unable to enter into licenses on acceptable
terms. This inability to enter into licenses could harm our business significantly. Further, the outcome of intellectual property litigation is subject to
uncertainties that cannot be adequately quantified in advance, including the demeanor and credibility of witnesses and the identity of any adverse party.
This is especially true in intellectual property cases that may turn on the testimony of experts as to technical facts upon which experts may reasonably
disagree.
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We may become involved in lawsuits to protect or enforce our patents or other intellectual property, which could be expensive, time consuming
and unsuccessful.
Our ability to protect our products from unauthorized making, using, selling, offering to sell or importing by third parties or to protect against third
parties purporting to offer their products based on the same or similar technology as our products is dependent on the extent to which we have rights under
valid and enforceable patents that cover these activities and on the extent to which such third parties may circumvent such rights or present their products
as non-infringing. To counter infringement, unauthorized use by our competitors or other third parties of our patents, trademarks, copyrights or other
intellectual property, or the promotion of products as based on the same or similar technology as our products in order to gain marketing advantages based
on the association with our technology, we may be required to file infringement or other claims, which can be expensive and time consuming and divert the
time and attention of our management and scientific personnel. Any claims we assert against perceived infringers or other third parties could provoke these
parties to assert counterclaims against us alleging, among other allegations, that we infringe their patents or other proprietary rights, in addition to
counterclaims asserting that our patents or trademarks are invalid or unenforceable, or both. In any patent infringement proceeding, there is a risk that a
court will decide that a patent of ours is invalid or unenforceable, in whole or in part, and that we do not have the right to stop the other party from using
the invention at issue. There is also a risk that, even if the validity of any patent is upheld, the court will construe the patent’s claims narrowly or decide that
we do not have the right to stop the other party from using the invention at issue on the grounds that our patent claims do not cover the invention. An
adverse outcome in a litigation or proceeding involving one or more of our patents could limit our ability to assert those patents against those parties or
other competitors, and may curtail or preclude our ability to exclude third parties from making or selling similar or competitive products. Similarly, if we
assert trademark infringement claims, a court may determine that the marks we have asserted are unenforceable, that the alleged infringing mark does not
infringe our trademark rights or that the party against whom we have asserted trademark infringement has superior rights to the marks in question. In this
last instance, we could ultimately be forced to cease use of such trademarks.
Even if we establish infringement, the court may decide not to grant an injunction against further infringing activity and instead award only
monetary damages, which may or may not be an adequate remedy for the loss and damages which may be associated with such infringement, including
damage to our brand name and loss of sales to infringing competitors. Furthermore, because of the substantial amount of discovery required in connection
with intellectual property litigation, there is a risk that some of our confidential information could be compromised by disclosure during litigation. There
could also be public announcements of the results of hearings, motions or other interim proceedings or developments. If security analysts or investors
perceive these results to be negative, it could adversely affect the price of our ordinary shares and the ADSs. Moreover, there can be no assurance that we
will have sufficient financial or other resources to file and pursue such infringement claims, nor to defend against counterclaims that may be filed against
us, both of which typically last for years before they are concluded. Even if we ultimately prevail in such claims, the monetary costs of such litigation and
the diversion of the attention of our management and scientific personnel could outweigh any benefit we receive as a result of the proceedings.
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If our trademarks and trade names are not adequately protected, then we may not be able to build name recognition in our markets of interest
and our business may be adversely affected.
If our trademarks and trade names are not adequately protected, then we may not be able to build name recognition in our markets of interest and
our business may be adversely affected. We may not be able to protect our rights to these trademarks and trade names, which we need to build name
recognition among potential partners or customers in our markets of interest. At times, competitors may adopt trade names or trademarks similar to ours,
thereby impeding our ability to build brand identity and possibly leading to market confusion. In addition, there could be potential trade name or trademark
infringement claims brought by owners of other registered trademarks or trademarks that incorporate variations of our unregistered trademarks or trade
names. Over the long term, if we are unable to successfully register our trademarks and trade names and establish name recognition based on our
trademarks and trade names, then we may not be able to compete effectively and our business may be adversely affected. Our efforts to enforce or protect
our proprietary rights related to trademarks, trade secrets, domain names, copyrights or other intellectual property may be ineffective and could result in
substantial costs and diversion of resources and could adversely impact our financial condition or results of operations.
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, 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 agreement between an employer and an employee regarding
consideration for service inventions, the Israeli Compensation and Royalties Committee, or the Committee, a body constituted under the Patent Law, shall
determine whether the employee is entitled to remuneration for his inventions and the scope and conditions for such remuneration. Prior decisions by the
Committee created uncertainty, as it was held that employees may be entitled to remuneration for their service inventions despite having waived any such
rights. 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, without further compensation. Although our employees have agreed to assign
to us service invention rights and have specifically waived their right to receive any special remuneration for such assignment beyond their regular salary
and benefits, as a result of the uncertainty under Israeli law with respect to the efficacy of waivers of service invention rights, we may face claims
demanding remuneration in consideration for assigned inventions. If such claims are successful, we may be required to pay remuneration to our current
and/or former employees which could negatively affect our results of operations.
Risks Related to Our Industry
Our ability to market and sell products depends upon receipt of domestic and foreign regulatory clearances or approvals of our products and, as
required, manufacturing facilities and operations. We and our products are also subject to extensive government regulation and oversight both in
the United States and abroad even after regulatory approvals and clearances are obtained. Our failure to timely obtain or maintain regulatory
clearances and approvals and to maintain compliance with regulatory requirements could negatively affect our business.
Our products are regulated as medical devices. Accordingly, our products and operations are subject to extensive regulation by governmental
authorities such as the FDA in the United States, the European Union National Competent Authorities of the Member States of the European Economic
Area, or EEA, and numerous other national or state governmental authorities in the countries in which we manufacture and sell our products. These
regulations govern, among other things, the research, testing, manufacturing, safety, clinical efficacy, effectiveness and performance, product standards,
packaging requirements, labeling requirements, import/export restrictions, storage, recordkeeping, promotion, distribution, production, post-marketing
surveillance and handling of complaints, tariffs, duties and tax requirements. Our products and operations are also often subject to the rules or norms of
industrial standards bodies, such as the International Standards Organization, or ISO, or the rules of associations of healthcare professionals.
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In the United States, our products are medical devices subject to regulation by the FDA pursuant to its authority under the federal Food, Drug and
Cosmetic Act, or FDCA, and its implementing regulations. In addition, future products, or components thereof, may also be subject to other regulatory
requirements, including regulation by the Federal Communications Commission, or the FCC. Many of the laws and regulations applicable to our products
in other countries, such as the EU Medical Devices Regulation, or MDR, are generally comparable to those of the FDCA in their aim to ensure safety and
effectiveness of medical devices, but the applicable standards and proceedings are not globally harmonized. The regulations to which we are subject are
complex and have tended to become more stringent over time. Regulatory changes could result in restrictions on our ability to carry on or expand our
operations, higher than anticipated costs or lower than anticipated sales. The FDA and other regulators enforce these regulatory requirements through,
among other means, periodic unannounced inspections. There appears to be a trend toward more stringent regulatory oversight throughout the world. We
do not anticipate this trend to diminish in the near future. Due to the movement towards harmonization of standards in the European Union, we expect a
changing regulatory environment in Europe characterized by a shift from a country-by-country regulatory system to a European Union-wide harmonized
regulatory system, while such harmonized regulatory system would not necessarily preclude state specific requirements with which we may have to
comply. We cannot predict the timing of this harmonization and its effect on us. The changing regulatory environment may have a material impact on
existing device marketing authorizations as well as future device registration applications, requirements and timing, which may, in turn, have material
impacts upon our ability to continue or begin to market existing and new devices. Our failure to obtain or maintain regulatory clearances and approvals and
to ensure compliance with regulatory requirements could negatively affect our business.
Modifications to our currently FDA-cleared products or the introduction of new products may require new regulatory clearances or approvals or
require us to recall or cease marketing of our current products until clearances or approvals are obtained. Our products are regulated as medical
devices.
In general, unless an exemption applies, each medical device, or new use of or significant modification to an existing medical device, intended to
be marketed in the United States must first receive one of the following types of FDA premarket review authorizations:
·
·
clearance via Section 510(k) of the FDCA, or 510(k); or
approval of a premarket approval application, or PMA.
All of our medical device products (excluding one 510(k)-exempt product) have received a 510(k) clearance. In the 510(k) clearance process,
before a device may be marketed the FDA must determine if it is “substantially equivalent” to a legally-marketed “predicate device,” which includes a
device that has been previously cleared through the 510(k) process, a device that was legally marketed prior to May 28, 1976 (pre-amendments device) or a
device that was originally on the United States market pursuant to an approved premarket approval and later down-classified. To be “substantially
equivalent,” the proposed device must have the same intended use as the predicate device, and either have the same technological characteristics as the
predicate device or have different technological characteristics and not raise different questions of safety or effectiveness than the predicate device. Clinical
data are sometimes required to support substantial equivalence.
The PMA process is much more costly, lengthy and uncertain than the 510(k) process, and generally must be supported by extensive data from
clinical trials. In the PMA process, the FDA must determine that the proposed device is safe and effective for its intended use based, in part, on extensive
data, including, but not limited to, technical, pre-clinical, clinical and manufacturing data. The PMA process is typically required for devices that are
deemed to pose the greatest risk, such as life-sustaining, life-supporting or implantable devices. We have not received PMA approval for any of our
devices, as they are all subject to either the 510(k) process or are exempt from the requirements of 510(k) clearance. The FDA may not grant future 510(k)
clearances or any PMAs for any future product or product modification we propose to market. Further, any modification to a 510(k)-cleared device that
could significantly affect its safety or effectiveness, or that would constitute a major change in its intended use, design or manufacture, requires a new
510(k) clearance or, possibly, approval of a PMA. The FDA requires every manufacturer to make this determination in the first instance, but the FDA may
review any manufacturer’s decision and may disagree with that manufacturer’s conclusion as to whether a 510(k) or PMA was required for the change. We
have made modifications to our 510(k)-cleared products in the past and have determined based on our review of the applicable FDA regulations and
guidance that in certain instances new 510(k) clearances or PMA approvals were not required. If the FDA requires us to seek 510(k) clearance or premarket
approval of a PMA for modifications to a previously cleared product for which we have concluded that new clearances or approvals are not required, we
may be required to cease marketing or to recall the modified product until we obtain clearance or approval, and we may be subject to significant regulatory
fines or penalties. Further, our products could be subject to recall if we determine that our products have a defect or do not comply with applicable
regulatory authorities’ requirements or if the FDA determines, for any reason, that our products are not safe or effective.
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The application process to receive clearances or approvals of our products by the pertinent regulatory authorities is costly and generally lasts
between approximately three to 24 months. Delays in receipt of, or failure to receive, clearances or approvals, the loss of previously received clearances or
approvals, or the failure to comply with existing or future regulatory requirements could adversely impact our operating results.
The FDA and other regulators can delay, limit or deny clearance or approval of a device for many reasons, including:
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our inability to demonstrate to the satisfaction of the FDA or the applicable regulatory entity or notified body that our products are safe or
effective for their intended uses;
the disagreement of the FDA or the applicable foreign regulatory body with the design or implementation of our clinical trials or the
interpretation of data from pre-clinical studies or clinical trials;
serious and unexpected adverse effects experienced by participants in our clinical trials;
the data from our pre-clinical studies and clinical trials may be insufficient to support clearance or approval, where required;
our inability to demonstrate that the clinical and other benefits of the device outweigh the risks;
the manufacturing process or facilities we use may not meet applicable requirements; and
the potential for clearance or approval policies or regulations of the FDA or applicable foreign regulatory bodies to change significantly in a
manner rendering our clinical data or regulatory filings insufficient for clearance or approval.
If the FDA or a foreign regulatory authority finds that we have failed to comply with these requirements, such authority may institute a wide
variety of enforcement actions, ranging from a public warning letter to more severe sanctions such as:
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fines, injunctions and civil penalties;
recall or seizure of our products;
issuance of public notices or warnings;
imposition of operating restrictions, partial suspension, or total shutdown of production;
refusal of our requests for Section 510(k) clearance or premarket approval of new products;
withdrawal of Section 510(k) clearance or premarket approvals already granted; or
criminal prosecution.
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Countries outside of the United States regulate medical devices in a manner similar to that of the FDA. The marketing and distribution of our
products in the European Union, for example, is subject to the European Union’s Medical Device Directive described above. Devices that comply with the
requirements of the Medical Devices Directive are entitled to bear the CE conformity mark, or the CE Mark, indicating that the device meets minimum
standards of performance, safety and quality (i.e., the essential requirements) and, accordingly, can be commercially distributed throughout the EEA,
Turkey and other countries outside Europe that have accepted the CE marking as a certification of efficiency and safety of medical devices. In Japan, we
must comply with Japan’s Pharmaceuticals and Medical Devices Act, or the PMD Act, and are subject to the Pharmaceutical Medical Devices Authority, or
the PMDA, the regulatory body supervising and regulating the marketing and sale of medical devices such as our products. We currently hold PMDA
authorizations to market and sell our WatchPAT200 Unified and EndoPAT 2000 in Japan. Such authorizations are held by an in-country representative, also
known as MAH/ D-MAH, with whom we maintain a contractual engagement.
Even though we have received FDA clearance, CE Mark certification, PMDA authorizations and other marketing authorizations or regulatory
approvals for our products, there can be no assurance that we will be able to continue to comply with the required annual compliance and auditing
requirements or other international regulatory requirements that may be applicable. Adverse events, manufacturing faults or failures to comply with
regulatory requirements may result in voluntary actions as well as actions imposed by regulators, such as voluntary or mandatory recalls, a requirement to
repair, replace or refund the cost of any medical device we manufacture or distribute, fines, suspension of regulatory clearances or approvals, product
seizures, injunctions or the imposition of civil or criminal penalties which would adversely affect our business, operating results and prospects. In addition,
there can be no assurance that government regulations applicable to our products or the interpretation of those regulations will not change or that we will be
able to obtain required regulatory clearances and approvals for our new products. The extent of potentially adverse government regulation that might arise
from future legislation or administrative action and the impact on our business and results of operations cannot be predicted.
Failure to comply with post-marketing regulatory requirements could subject us to enforcement actions, including substantial penalties, and
might require us to recall or withdraw a product from the market.
We are subject to ongoing and pervasive regulatory requirements governing, among other things, the manufacture, marketing, advertising, medical
device reporting, sale, promotion, import, export, registration and listing of devices. Even after we have obtained the proper regulatory clearance or
approval to market a device, we have ongoing responsibilities under FDA regulations and applicable foreign laws and regulations. The FDA, state and
foreign regulatory authorities have broad enforcement powers. Our failure to comply with applicable regulatory requirements could result in enforcement
action by the FDA, state or foreign regulatory authorities, which may include any of the following:
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untitled letters or warning letters;
fines, injunctions, consent decrees and civil penalties;
recalls, termination of distribution, administrative detention or seizure of our products;
customer notifications or repair, replacement or refunds;
operating restrictions or partial suspension or total shutdown of production;
delays in or refusal to grant our requests for future clearances or approvals or foreign regulatory approvals of new products, new intended uses
or modifications to existing products;
withdrawals or suspensions of our current 510(k) clearances, resulting in prohibitions on sales of our products;
FDA refusal to issue certificates to foreign governments needed to export products for sale in other countries; and
criminal prosecution.
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Any of these actions could result in higher than anticipated costs or lower than anticipated sales and have a material adverse effect on our
reputation, business, financial condition and results of operations.
In addition, regulators may determine that our financial relationships with our principal investigators resulted in a perceived or actual conflict of
interest that may have affected the interpretation of a study. Principal investigators for our clinical trials may serve as speakers or consultants to us from
time to time and receive compensation in connection with such services. Under certain circumstances, we may be required to report some of these
relationships to the FDA or other regulatory authority. The FDA or other regulatory authority may conclude that a financial relationship between us and a
principal investigator has created a conflict of interest or otherwise affected interpretation of the study. The FDA or other regulatory authority may
therefore question the integrity of the data generated at the applicable clinical trial site and the utility of the clinical trial itself may be jeopardized. This
could result in a delay in clearance or approval, or rejection, of our marketing applications by the FDA or other regulatory authority, as the case may be,
and may ultimately lead to the denial of marketing clearance or approval of one or more of our product candidates.
In addition, the FDA or other regulatory authority may change its clearance or approval policies, adopt additional regulations or revise existing
regulations, or take other actions, which may prevent or delay clearance or approval of our future products under development or impact our ability to
modify our currently cleared products on a timely basis. Such policy or regulatory changes could impose additional requirements upon us that could delay
our ability to obtain new clearances or approvals, increase the costs of compliance or restrict our ability to maintain our clearances of our current products.
Our products must be manufactured in accordance with federal and state regulations, and we or any of our suppliers or third-party
manufacturers could be forced to recall products or terminate production if we fail to comply with these regulations.
The methods used in, and the facilities used for, the manufacture of our products must comply with the FDA’s Quality System Regulation, or QSR,
which is a complex regulatory scheme that covers the procedures and documentation of the design, testing, production, process controls, quality assurance,
labeling, packaging, handling, storage, distribution, installation, servicing and shipping of medical devices (also referred to as cGMPs). Furthermore, we
are required to verify that our suppliers maintain facilities, procedures and operations that comply with our quality standards and applicable regulatory
requirements. The FDA enforces the QSR through periodic announced or unannounced inspections of medical device manufacturing facilities, which may
include the facilities of subcontractors. Our products are also subject to similar state regulations and various laws and regulations of foreign countries
governing manufacturing.
Our third-party manufacturers may not take the necessary steps to comply with applicable regulations, which could cause delays in the delivery of
our products. In addition, failure to comply with applicable FDA requirements or later discovery of previously unknown problems with our products or
manufacturing processes could result in, among other things, warning letters or untitled letters, fines, injunctions or civil penalties, suspension or
withdrawal of clearances or approvals, seizures or recalls of our products, total or partial suspension of production or distribution, administrative or
judicially imposed sanctions, the FDA’s refusal to grant pending or future clearances or approvals for our products, clinical holds, refusal to permit the
import or export of our products and criminal prosecution of us or our employees.
Any of these actions could significantly and negatively affect supply of our products. If any of these events occurs, our reputation could be
harmed, we could be exposed to product liability claims and we could lose customers and experience reduced sales and increased costs.
Legislative or regulatory reforms may make it more difficult and costly for us to obtain regulatory clearances or approvals for our products or to
manufacture, market or distribute our products after clearance or approval is obtained.
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From time to time, legislation is drafted and introduced in various countries that could significantly change the statutory provisions governing the
regulation of medical devices. In the U.S., the FDA may change its clearance and approval policies, adopt additional regulations or amend existing
regulations, or take other actions, which may prevent or delay clearance or approval of our future products under development or impact our ability to
modify our currently cleared products on a timely basis. For example, in November 2018, FDA officials announced forthcoming steps that the FDA intends
to take to modernize the premarket notification pathway under Section 510(k) of the Federal Food, Drug, and Cosmetic Act. Among other things, the FDA
announced that it plans to develop proposals to drive manufacturers utilizing the 510(k) pathway toward the use of newer predicates. These proposals
include plans to potentially sunset certain older devices that were used as predicates under the 510(k) clearance pathway, and to potentially publish a list of
devices that have been cleared on the basis of demonstrated substantial equivalence to predicate devices that are more than 10 years old. In May 2019, the
FDA solicited public feedback on these proposals. These proposals have not yet been finalized or adopted, and the FDA may work with
Congress to implement such proposals through legislation. Accordingly, it is unclear the extent to which any proposals, if adopted, could impose
additional regulatory requirements on us that could delay our ability to obtain new 510(k) clearances, increase the costs of compliance, restrict our ability to
maintain our current clearances or otherwise create competition that may negatively affect our business.
More recently, in September 2019, the FDA finalized guidance describing an optional “safety and performance based” premarket review pathway
for manufacturers of “certain, well-understood device types” to demonstrate substantial equivalence under the 510(k) clearance pathway by showing that
such device meets objective safety and performance criteria established by the FDA, thereby obviating the need for manufacturers to compare the safety
and performance of their medical devices to specific predicate devices in the clearance process. The FDA intends to develop and maintain a list device
types appropriate for the “safety and performance based” pathway and will continue to develop product-specific guidance documents that identify the
performance criteria for each such device type, as well as the testing methods recommended in the guidance documents, where feasible. The FDA may
establish performance criteria for classes of devices for which we or our competitors seek or currently have received clearance, and it is unclear the extent
to which such performance standards, if established, could impact our ability to obtain new 510(k) clearances or otherwise create competition that may
negatively affect our business.
In addition, FDA regulations and guidance are often revised or reinterpreted by the FDA in ways that may significantly affect our business and our
products. Any new statutes, regulations or revisions or reinterpretations of existing regulations may impose additional costs or lengthen review times of any
future products or make it more difficult to obtain clearance or approval for, manufacture, market or distribute our products. We cannot determine what
effect changes in regulations, statutes, legal interpretation or policies, when and if promulgated, enacted or adopted may have on our business in the future.
Such changes could, among other things, require: additional testing prior to obtaining clearance or approval; changes to manufacturing methods; recall,
replacement or discontinuance of our products; or additional record keeping. The FDA’s and other regulatory authorities’ policies may change and
additional government regulations may be enacted that could prevent, limit or delay regulatory clearance or approval of our product candidates. We cannot
predict the likelihood, nature or extent of government regulation that may arise from future legislation or administrative action, either in the United States
or abroad. For example, certain policies of the Trump administration may impact our business and industry. Namely, the Trump administration has taken
several executive actions, including the issuance of a number of Executive Orders, that could impose significant burdens on, or otherwise materially delay,
the FDA’s ability to engage in routine oversight activities such as implementing statutes through rulemaking, issuing guidance, and reviewing and issuing
marketing authorizations. It is difficult to predict how these executive actions will be implemented, and the extent to which they will impact the FDA’s
ability to exercise its regulatory authority. If these executive actions impose restrictions on the FDA’s ability to engage in oversight and implementation
activities in the normal course, our business may be negatively impacted. If we are slow or unable to adapt to changes in existing requirements or the
adoption of new requirements or policies, or if we are not able to maintain regulatory compliance, we may lose any marketing clearances or approvals that
we may have obtained and we may not achieve or sustain profitability.
On April 5, 2017, the European Parliament passed the Medical Devices Regulation (Regulation 2017/745), which repeals and replaces the EU
Medical Devices Directive and the Active Implantable Medical Devices Directive. Unlike directives, which must be implemented into the national laws of
the EEA member states, the regulations would be directly applicable, i.e., without the need for adoption of EEA member state laws implementing them, in
all EEA member states and are intended to eliminate current differences in the regulation of medical devices among EEA member states. The Medical
Devices Regulation, among other things, is intended to establish a uniform, transparent, predictable and sustainable regulatory framework across the EEA
for medical devices and ensure a high level of safety and health while supporting innovation.
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The Medical Devices Regulation will, however, only become applicable three years after publication (in 2020). Once applicable, the new
regulations will among other things:
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strengthen the rules on placing devices on the market and reinforce surveillance once they are available;
establish explicit provisions on manufacturers’ responsibilities for the follow-up of the quality, performance and safety of devices placed on
the market;
improve the traceability of medical devices throughout the supply chain to the end-user or patient through a unique identification number;
set up a central database to provide patients, healthcare professionals and the public with comprehensive information on products available in
the EU; and
strengthen the rules for the assessment of certain high-risk devices, such as implants, which may have to undergo an additional check by
experts before they are placed on the market.
These modifications may have an effect on the way we conduct our business in the EEA.
There is also no assurance that legislative or regulatory reforms which may make it more difficult and costly for us to obtain regulatory clearances
or approvals for our products or to manufacture, market or distribute our products, will not be introduced in Japan or in other countries where we may wish
to commercialize our products.
Disruptions at the FDA and other government agencies caused by funding shortages or global health concerns could hinder their ability to hire,
retain or deploy key leadership and other personnel, or otherwise prevent new products and services from being developed, cleared, approved or
commercialized in a timely manner, which could negatively impact our business.
The ability of the FDA to review and clear or approve new products can be affected by a variety of factors, including government budget and
funding levels; statutory, regulatory and policy changes; ability to hire and retain key personnel and accept the payment of user fees; and other events that
may otherwise affect the FDA’s ability to perform routine functions. Average review times at the agency have fluctuated in recent years as a result. In
addition, government funding of other government agencies that fund research and development activities is subject to the political process, which is
inherently fluid and unpredictable.
Disruptions at the FDA and other agencies may also slow the time necessary for new devices to be reviewed and/or cleared or approved by
necessary government agencies, which would adversely affect our business. For example, over the last several years, including for 35 days beginning on
December 22, 2018, the United States government has shut down several times and certain regulatory agencies, such as the FDA, have had to furlough
critical FDA employees and stop critical activities.
Separately, in response to the global pandemic of novel coronavirus, on March 10, 2020 the FDA announced its intention to postpone most
inspections of manufacturing facilities and products through April 2020, and regulatory authorities outside the United States may adopt similar restrictions
or other policy measures in response to the coronavirus pandemic. If a prolonged government shutdown occurs, or if global health concerns continue to
prevent the FDA or other regulatory authorities from conducting their regular inspections, reviews, or other regulatory activities, it could significantly
impact the ability of the FDA to timely review and process our regulatory submissions, which could have a material adverse effect on our business.
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We expect the healthcare industry to face increased limitations on coverage and reimbursement by third-party payors as a result of healthcare
reform, which could adversely how much or under what circumstances healthcare providers will order or administer tests using our products.
In both the United States and other countries, sales of our products will depend in part upon the availability of coverage and reimbursement from
third-party payors, which include governmental authorities, managed care organizations and other private health insurers. Third-party payors are
increasingly challenging the price and examining the cost effectiveness of medical products and services. Changes in regulations, statutes or the
interpretation of existing regulations could impact our business in the future by requiring, for example: (i) changes to our manufacturing arrangements; (ii)
additions or modifications to product labeling; (iii) the recall or discontinuation of our products; or (iv) additional record-keeping requirements. If any such
changes were to be imposed, they could adversely affect the operation of our business.
Increasing expenditures for healthcare have been the subject of considerable public attention in the United States. Both private and government
entities are seeking ways to reduce or contain healthcare costs. Numerous proposals that would effect changes in the United States healthcare system have
been introduced or proposed in Congress and in some state legislatures, including reducing reimbursement for prescription products.
In the U.S., the ACA was signed into law and designed to reform the American healthcare system. Among other things, the ACA:
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established a 2.3% excise tax on sales of medical devices with respect to any entity that manufactures or imports specified medical devices
offered for sale in the United States, which, through a series of legislative amendments, was suspended, effective January 1, 2016, and
subsequently repealed altogether on December 20, 2019;
established a new Patient-Centered Outcomes Research Institute to oversee, identify priorities in and conduct comparative clinical
effectiveness research;
implemented payment system reforms, including a national pilot program to encourage hospitals, physicians and other providers to improve
the coordination, quality and efficiency of certain health care services through bundled payment models; and
created an independent payment advisory board that will submit recommendations to reduce Medicare spending if projected Medicare
spending exceeds a specified growth rate.
There have been a number of significant changes to the ACA and its implementation. By way of example, the Tax Cuts and Jobs Act of 2017, or
Tax Act, effective January 1, 2019, included a provision repealing the tax-based shared responsibility payment imposed by the ACA on certain individuals
who fail to maintain qualifying health coverage for all or part of a year that is commonly referred to as the “individual mandate.” On December 14, 2018, a
U.S. District Court Judge in the Northern District of Texas, or the Texas District Court Judge, ruled that the individual mandate is a critical and inseverable
feature of the ACA, and therefore, because it was repealed as part of the Tax Act, the remaining provisions of the ACA are invalid as well. On December
18, 2019, the Fifth Circuit Court of Appeals also struck down the individual mandate and remanded to the Northern District of Texas the decision as to
whether the remainder of the ACA is valid. It is unclear how this decision, subsequent appeals, and other efforts to repeal and replace the ACA will impact
the ACA and our business. Litigation and legislation over the ACA are likely to continue with unpredictable and uncertain results. We will continue to
evaluate the effect that the ACA and its possible repeal and replacement has on our business.
In addition, other legislative changes have been proposed and adopted since the ACA was enacted. On August 2, 2011, the Budget Control Act of
2011 was signed into law, which, among other things, reduced Medicare payments to providers by 2% per fiscal year, effective on April 1, 2013 and, due to
subsequent legislative amendments to the statute, will remain in effect through 2029 unless additional Congressional action is taken. On January 2, 2013,
the American Taxpayer Relief Act of 2012 was signed into law, which, among other things, reduced Medicare payments to several providers, including
hospitals, and increased the statute of limitations period for the government to recover overpayments to providers from three to five years. The Medicare
Access and CHIP Reauthorization Act of 2015, or MACRA, enacted on April 16, 2015, repealed the formula by which Medicare made annual payment
adjustments to physicians and implemented fixed annual updates and a new system of incentive payments that began in 2019 that are based on various
performance measures and physicians’ participation in alternative payment models such as accountable care organizations. It is unclear what effect new
quality and payment programs, such as MACRA, may have on our business, financial condition, results of operations or cash flows.
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In response to perceived increases in healthcare costs in recent years, there have been and continue to be proposals by the presidential
administrations, members of Congress, state governments, regulators and third-party payors to control these costs and, more generally, to reform the United
States healthcare system, including by repealing or replacing the ACA. Other elements of health care reform such as comparative effectiveness research, an
independent payment advisory board, payment system reforms including shared savings pilots and other provisions could meaningfully change the way
healthcare is developed and delivered, and may materially adversely impact numerous aspects of our business, results of operations and financial condition.
We expect additional state and federal healthcare policies and reform measures to be adopted in the future, any of which could limit
reimbursement for healthcare products and services or otherwise result in reduced demand for our products or other products we may commercialize in the
future or additional pricing pressure and have a material adverse effect on our industry generally and on our customers. Any changes of, or uncertainty with
respect to, future coverage or reimbursement rates could affect demand for our products or other products we may commercialize in the future, which in
turn could impact our ability to successfully commercialize our products or other products we may commercialize in the future and could have a material
adverse effect on our business, financial condition and results of operations.
We are subject to United States and foreign fraud and abuse laws and regulations. Our failure to comply with these laws and regulations could
have adverse consequences.
We are subject to broadly applicable fraud and abuse and other healthcare laws and regulations, including, without limitation, the federal Anti-
Kickback Statute and the federal False Claims Act, which may constrain the business or financial arrangements and relationships through which we sell,
market and distribute our products. In particular, the promotion, sales and marketing of healthcare items and services, as well as certain business
arrangements in the healthcare industry (e.g., healthcare providers, physicians and third-party payors), are subject to extensive laws designed to prevent
fraud, kickbacks, self-dealing and other abusive practices. These laws and regulations may restrict or prohibit a wide range of pricing, discounting,
marketing and promotion, structuring and commission(s), certain customer incentive programs and other business arrangements generally. These laws
impact, among other things, our sales, marketing, support and education programs and constrain our business and financial arrangements and relationships
with third-party payors, physicians and other customers, and marketing partners, and include, but are not limited to, the following:
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the United States federal Anti-Kickback Statute, which prohibits, among other things, persons or entities from knowingly and willfully
soliciting, offering, receiving or paying any remuneration (including any kickback, bribe, or rebate), directly or indirectly, overtly or covertly,
in cash or in kind, to induce or reward either the referral of an individual for, or the purchase, lease, order, or arranging for or recommending
the purchase, lease or order of, any item or service, for which payment may be made, in whole or in part, under federal healthcare programs
such as Medicare and Medicaid. A person or entity does not need to have actual knowledge of the statute or specific intent to violate it in
order to have committed a violation. Violations of the federal Anti-Kickback Statute may result in civil monetary penalties, plus up to three
times the remuneration involved. Violations of the Federal Anti-Kickback Statute can also result in criminal penalties, including criminal fines
and imprisonment. In addition, violations can result in exclusion from participation in government healthcare programs, including Medicare
and Medicaid. In addition, a claim including items or services resulting from a violation of the federal Anti-Kickback Statute constitutes a
false or fraudulent claim for purposes of the False Claims Act. There are a number of statutory exceptions and regulatory safe harbors
protecting some common activities from prosecution;
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the United States federal false claims laws, including the civil False Claims Act (which can be enforced through “qui tam,” or whistleblower
actions, by private citizens on behalf of the federal government), which prohibits any person from, among other things, knowingly presenting,
or causing to be presented false or fraudulent claims for payment of government funds or knowingly making, using or causing to be made or
used, a false record or statement material to an obligation to pay money to the government or knowingly and improperly avoiding, decreasing
or concealing an obligation to pay money to the United States federal government. Manufacturers can be held liable under the False Claims
Act even when they do not submit claims directly to government payors if they are deemed to “cause” the submission of false or fraudulent
claims. DME companies that submit claims directly to payors may be liable under the False Claims Act for the direct submission of such
claims. When an entity is determined to have violated the federal civil False Claims Act, the government may impose civil fines and penalties
ranging from for each false claim, plus treble damages, and exclude the entity from participation in Medicare, Medicaid and other federal
healthcare programs;
HIPAA, which imposes criminal and civil liability for, among other things, knowingly and willfully executing, or attempting to execute, a
scheme to defraud any healthcare benefit program, or knowingly and willfully falsifying, concealing or covering up a material fact or making
any materially false statement, in connection with the delivery of, or payment for healthcare benefits, items or services by a healthcare benefit
program, which includes both government and privately funded benefits programs. Similar to the United States federal Anti-Kickback Statute,
a person or entity does not need to have actual knowledge of the statute or specific intent to violate it in order to have committed a violation;
the Physician Payments Sunshine Act, created under the ACA, implemented as the Open Payments program, and its implementing
regulations, which requires certain manufacturers of drugs, devices, biologics and medical supplies that are reimbursable under Medicare,
Medicaid, or the Children’s Health Insurance Program to report annually to the CMS information related to certain payments made in the
preceding calendar year and other transfers of value to physicians and teaching hospitals, as well as ownership and investment interests held
by physicians and their immediate family members. Effective January 1, 2022, these reporting obligations will extend to include transfers of
value made to certain non-physician providers such as physician assistants and nurse practitioners. Violations of the Physician Payments
Sunshine Act may result in annual civil penalties of up to $1,150,000, adjusted annually, for payments omitted from each annual report;
federal consumer protection and unfair competition laws, which broadly regulate marketplace activities and activities that potentially harm
customers; and
analogous state and foreign laws and regulations, including state anti-kickback and false claims laws, that may apply to our business practices,
including but not limited to, research, distribution, sales and marketing arrangements and claims involving healthcare items or services
reimbursed by any third-party payor, including private insurers; state laws that require medical device companies to comply with the medical
device industry’s voluntary compliance guidelines and the relevant compliance guidance promulgated by the United States federal
government, or otherwise restrict payments that may be made to healthcare providers and other potential referral sources; and state laws and
regulations that require drug and device manufacturers to file reports relating to pricing and marketing information, which requires tracking
gifts and other remuneration and items of value provided to healthcare professionals and entities; state and local laws that require the licensure
of sales representatives; and state laws related to insurance fraud in the case of claims involving private insurers.
The shifting commercial compliance environment and the need to build and maintain robust and expandable systems to comply with different
compliance or reporting requirements in multiple jurisdictions increase the possibility that a healthcare or medical device company may fail to comply fully
with one or more of these requirements. Efforts to ensure that our business arrangements with third parties will comply with applicable healthcare laws and
regulations may involve substantial costs. It is possible that governmental authorities may conclude that our business practices, including, without
limitation, our Cost per Test sales model, the TSS model, the DTC segment model, rebates, competitive trade-in programs and other sales and marketing
practices, or co-marketing arrangements, do not comply with applicable fraud and abuse or other healthcare laws and regulations or guidance. Further,
despite our efforts, we have not timely reported certain of our payments to covered recipients under the Physician Payments Sunshine Act and similar state
laws. We therefore may be subject to the civil penalties described above.
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To enforce compliance with healthcare regulatory laws, certain enforcement bodies have recently increased their scrutiny of interactions between
healthcare companies and healthcare providers, which has led to a number of investigations, prosecutions, convictions and settlements in the healthcare
industry. Responding to investigations can be time- and resource-consuming and can divert management’s attention from the business. Additionally, as a
result of these investigations, healthcare providers and entities may also have to agree to additional compliance and reporting requirements as part of a
consent decree or corporate integrity agreement. Any such investigation or settlements could increase our costs or otherwise have an adverse effect on our
business. Even an unsuccessful challenge or investigation into our practices could cause adverse publicity and be costly to respond to.
Because of the breadth of these laws and the narrowness of the statutory exceptions and regulatory safe harbors available, it is possible that some
of our business activities, could, despite efforts to comply, be subject to challenge under one or more of such laws. It is possible that governmental and
enforcement authorities will conclude that our business practices may not comply with current or future statutes, regulations or case law interpreting
applicable fraud and abuse or other healthcare laws and regulations. If our operations are found to be in violation of any of these laws or any other
governmental regulations that may apply to us, we may be subject to significant civil, criminal and administrative penalties, damages, fines, imprisonment,
exclusion from government funded healthcare programs, such as Medicare and Medicaid, and our ability to contract with government entities, including the
Department of Veteran Affairs, additional oversight and reporting requirements if we become subject to a corporate integrity agreement to resolve
allegations of non-compliance with these laws and the curtailment or restructuring of our operations. If any of the physicians or other providers, marketing
partners or other entities with whom we expect to do business is found not to be in compliance with applicable laws, they may be subject to the same
criminal, civil or administrative sanctions, including exclusions from government funded healthcare programs.
Privacy regulations may impose costs and liabilities on us, limit our use of information, and adversely affect our business.
Our products generate medical information about patients and certain of our services are provided by way of a cloud service. Privacy of personal
information has become a significant issue in the United States, Europe, Israel and many other countries where we operate. There are numerous federal,
state and international laws and regulations regarding privacy, data protection, information security, and the collection, storing, sharing, use, processing,
transfer, disclosure and protection of personal information and other data, and the scope of such laws and regulations may change, be subject to differing
interpretations and be inconsistent among countries and regions we intend to operate in (e.g., the United States, the European Union and Israel), or conflict
with other laws and regulations. The regulatory framework for privacy and data protection worldwide is, and is likely to remain for the foreseeable future,
uncertain and complex, and this or other actual or alleged obligations may be interpreted and applied in a manner that we may not anticipate or that is
inconsistent from one jurisdiction to another and may conflict with other rules or practices including ours. 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 relevant users 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 candidate products, possibly in a material manner, which we may be unable to complete, and may limit our
ability to store and process patients’ data or develop new services and features.
In the United States, we are subject to data protection laws (i.e., laws and regulations that address data privacy and security) at both the federal and
state levels. The legislative and regulatory landscape for data protection continues to evolve, and in recent years there has been an increasing focus on
privacy and data security issues. Numerous federal and state laws, including state data breach notification laws, state health information privacy laws, and
federal and state consumer protection laws, govern the collection, use and disclosure of health-related and other personal information. Failure to comply
with such laws and regulations could result in government enforcement actions and create liability for us (including the imposition of significant civil or
criminal penalties), private litigation and/or adverse publicity that could negatively affect our business. For instance, California enacted the California
Consumer Privacy Act, or CCPA, on June 28, 2018, which took effect on January 1, 2020. The CCPA creates individual privacy rights for California
consumers and increases the privacy and security obligations of entities handling certain personal data. The CCPA provides for civil penalties for
violations, as well as a private right of action for data breaches that is expected to increase data breach litigation. The CCPA may increase our compliance
costs and potential liability, and many similar laws have been proposed at the federal level and in other states. State laws governing the privacy and security
of health information, many of which differ from each other in significant ways and may not have the same effect, may complicate our compliance efforts.
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We are subject to the privacy and security rules established under HIPAA, which establish national standards to protect individually identifiable
health information by health plans, health care clearinghouses and certain health care providers, referred to as “covered entities,” and their respective
business associates, individuals or entities that create, receive, maintain or transmit protected health information in connection with providing a service for
or on behalf of a covered entity. HIPAA also provides patients with certain rights over their health information, including rights to examine and obtain a
copy of their health records, and to request corrections. HIPAA requires covered entities and business associates to develop and maintain policies and
procedures with respect to protected health information that is used or disclosed, including the adoption of administrative, physical and technical safeguards
to protect such information. The Health Information Technology for Economic and Clinical Health Act, or HITECH, expands the notification requirement
for breaches of patient-identifiable health information, restricts certain disclosures and sales of patient-identifiable health information and provides for civil
monetary penalties for HIPAA violations. HITECH also increased the civil and criminal penalties that may be imposed against covered entities and
business associates and gave state attorneys general new authority to file civil actions for damages or injunctions in federal courts to enforce HIPAA and its
implementing regulations and seek attorneys’ fees and costs associated with pursuing federal civil actions. Additionally, certain states have adopted
comparable privacy and security laws and regulations, some of which may be more stringent than HIPAA.
Internationally, many jurisdictions have or are considering enacting privacy or data protection laws or regulations relating to the collection, use,
storage, transfer, disclosure and/or other processing of personal data, as well as certification requirements for the hosting of health data specifically. Such
laws and regulations may include data hosting, data residency or data localization requirements (which generally require that certain types of data collected
within a certain country be stored and processed within that country), data export restrictions, international transfer laws (which prohibit or impose
conditions upon the transfer of such data from one country to another), or may require companies to implement privacy or data protection and security
policies, enable users to access, correct and delete personal data stored or maintained by such companies, inform individuals of security breaches that affect
their personal data or obtain individuals’ consent to use their personal data. For example, the GDPR became effective on May 25, 2018, and European
legislators are now in the process of finalizing the ePrivacy Regulation to replace the European ePrivacy Directive (Directive 2002/58/EC as amended by
Directive 2009/136/EC). The GDPR, supplemented by national laws and further implemented through binding guidance from the European Data Protection
Board, imposes more stringent European Union data protection requirements and provides for significant penalties for noncompliance. Companies that
must comply with the GDPR face increased compliance obligations and risk, including more robust regulatory enforcement of data protection requirements
and potential fines for noncompliance of up to €20 million or 4% of the annual global revenues of the noncompliant company, whichever is greater.
Additionally, following the United Kingdom’s withdrawal from the European Union, we will have to comply with the GDPR and the United Kingdom
GDPR, each regime having the ability to fine up to the greater of €20 million/ £17.5 million or 4% of global turnover. The relationship between the United
Kingdom and the European Union in relation to certain aspects of data protection law remains unclear, for example around how data can lawfully be
transferred between each jurisdiction, which exposes us to further compliance risk.
Changes to laws or regulations affecting privacy in the United States and in other jurisdictions in which we operate could impose additional costs
and liability on us and could limit our use of such information to add value to our customers. If we were required to change our business activities or revise
or eliminate services, or to implement burdensome compliance measures, we may face additional expenditures. In addition, we may be subject to fines,
penalties and potential litigation if we fail to comply with applicable privacy regulations. Regulatory burdens of this sort increase our costs and harm our
financial results.
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We are subject to various laws relating to trade, export controls and foreign corrupt practices, the violation of which could adversely affect our
reputation, operations, business, prospects, operating results and financial condition.
We must comply with all applicable international trade, export and import laws and regulations of the United States and other countries, and we
are subject to export controls and economic sanctions laws and embargoes imposed by the United States Government. Changes in trade sanctions laws may
restrict our business practices, including cessation of business activities in sanctioned countries or with sanctioned entities, and may result in modifications
to compliance programs. Among others, we are subject to the Foreign Corrupt Practices Act, or FCPA, and other anti-bribery and anti-corruption laws that
generally prohibit the offering, promising, giving or authorizing others to give anything of value, either directly or indirectly, to a non-U.S. government
official in order to influence official action, or otherwise obtain or retain business. The FCPA also requires public companies to make and keep books and
records that accurately and fairly reflect the transactions of the corporation and to devise and maintain an adequate system of internal accounting controls.
Our business is heavily regulated and therefore involves significant interaction with public officials, including officials of non-U.S. governments.
We have implemented safeguards and policies to discourage prohibited practices by our employees and agents that would violate applicable anti-bribery
and anti-corruption laws. However, we cannot ensure that our compliance controls, policies and procedures will in every instance protect us from acts
committed by our employees, agents, contractors or collaborators that may violate the laws or regulations of the jurisdictions in which we operate.
Violations of these laws and regulations could result in significant fines, criminal sanctions against us, our officers, or our employees,
requirements to obtain export licenses, disgorgement of profits, cessation of business activities in sanctioned countries, implementation of compliance
programs, exclusion from government programs, prohibitions on the conduct of our business and our inability to market and sell our products in one or
more countries. Additionally, any such violations could materially damage our reputation, our brand, our international expansion efforts, our ability to
attract and retain employees and our business, prospects, operating results and financial condition.
If we do not comply with laws regulating the protection of the environment and health and human safety, our business could be adversely affected.
Our research and development and manufacturing involve the use of hazardous materials and chemicals and related equipment. If an adverse
safety incident occurs, we could be held liable for resulting damages, which could be substantial. We are also subject to numerous environmental, health
and workplace safety laws and regulations, including those governing laboratory procedures and the handling of biohazardous materials. We are also
subject to domestic and foreign waste treatment laws and regulations which may be applicable to waste produced in our manufacturing processes, as well
as in the discarding of our disposable single use WatchPAT ONE and probes. Insurance may not provide adequate coverage against these potential
liabilities and we do not maintain insurance for environmental liability claims that may be asserted against us. Moreover, additional foreign and local laws
and regulations affecting our operations may be adopted in the future. We may incur substantial costs to comply with such regulations and pay substantial
fines or penalties if we violate any of these laws or regulations.
With respect to environmental, safety and health laws and regulations, we cannot accurately predict the outcome or timing of future expenditures
that we may be required to make in order to comply with such laws as they apply to our operations and facilities. We are also subject to potential liability
for the remediation of contamination associated with both present and past hazardous waste generation, handling, and disposal activities. We will be
periodically subject to environmental compliance reviews by environmental, safety and health regulatory agencies. Environmental laws are subject to
change and we may become subject to stricter environmental standards in the future and face larger capital expenditures in order to comply with
environmental laws which could have a material adverse effect on our business.
43
Risks Related to Our Ordinary Shares and ADSs
Prior to the listing of ADSs on Nasdaq there had been no prior public market in the United States for our ordinary shares or ADSs, and an active
trading market in the United States may not develop.
We listed ADSs on the Nasdaq Capital Market in February 2019. Prior to such listing, there was no public market in the United States for ADSs.
An active trading market in the United States may not develop following the aforementioned listing or, if developed, may not be sustained. The lack of an
active market may impair the ability of ADS holders to sell their ADSs at the time they wish to sell them or at a price that they would consider reasonable.
The lack of an active market may also reduce the fair market value of such ADSs. An inactive market may also impair our ability to raise capital by selling
shares of capital stock and may impair our ability to acquire other companies by using our shares as consideration.
Our ordinary shares and ADSs are traded on different markets and this may result in price variations.
Our ordinary shares have been traded on the TASE, since March 2007. We also listed ADSs on the Nasdaq Capital Market in February 2019. Price
variations may result due to this dual listing. Trading in ordinary shares and ADSs on these markets is in different currencies, U.S. dollars on the Nasdaq
Capital Market and NIS on the TASE and at different times (resulting from different time zones, different trading days and different public holidays in the
United States and Israel). Given these and other factors, such as differences in exchange rates, ordinary shares and ADSs may trade at different prices on
the TASE and the Nasdaq Capital Market. In addition, market influences in one market may influence the price in the other.
The price of our ordinary shares and ADSs may be volatile and could be substantially affected by various factors.
The market prices of our ordinary shares and ADSs have been, and may in the future be, highly volatile and fluctuate substantially. For example,
since the listing of our ADSs on Nasdaq in February 2019, the market price of our ADSs on the Nasdaq Capital Market varied between a high price of
$18.33 and a low price of $7.66. Numerous factors, many of which are beyond our control, may cause our market price and trade volume to fluctuate and
decrease in the future, including the following factors:
·
·
·
·
·
·
·
·
actual or anticipated fluctuations in our results of operations;
changes in expectations as to our future financial performance and cash position, including financial estimates by securities analysts and
investors;
announcements of technological innovations, medical findings or new products by us or our competitors;
announcements by us or our competitors of significant business developments, changes in distributor relationships, strategic partnerships,
joint ventures, capital commitments, acquisitions or expansion plans;
changes in the prices of our raw materials or the products we sell;
changes in the status of our intellectual property rights;
our involvement in significant claims or proceedings;
our sales of ordinary shares and ADSs or other securities in the future;
· market conditions in our industry;
·
changes in key personnel;
44
·
·
·
·
the trading volume of our ordinary shares and ADSs;
changes in the estimation of the future size and growth rate of our markets;
general economic and market conditions; and
any of the events underlying any of the other risks or uncertainties set forth elsewhere in this Annual Report actually occurs.
In addition, the stock markets have experienced extreme price and volume fluctuations. Broad market and industry factors may materially harm
the market price of our ordinary shares and ADSs, regardless of our operating performance. In the past, following periods of volatility in the market price
of a company’s securities, securities class action litigation has often been instituted against that company. If we were involved in any similar litigation, we
could incur substantial costs and our management’s attention and resources could be diverted.
Low trading volume may also increase the price volatility of our ordinary shares and ADSs. A thin trading market could cause the price of our
ordinary shares and ADSs to fluctuate significantly more than the stock market as a whole. In addition, domestic and international stock markets and
electronic trading platforms often experience extreme price and volume fluctuations. Market fluctuations, as well as general political and economic
conditions, such as a recession or interest rate or currency rate fluctuations or political events or hostilities in or surrounding Israel or other countries in
which we operate, could also adversely affect the price of our ordinary shares and ADSs.
Holders of ADSs are not treated as shareholders of our Company.
Holders of ADSs are not treated as shareholders of our Company unless they withdraw the ordinary shares underlying the ADSs from the
depositary, which holds the ordinary shares underlying the ADSs. Holders of ADSs therefore do not have any rights as shareholders of our Company, other
than the rights that they have pursuant to the deposit agreement with the depositary. For example, under the deposit agreement, if a holder of ADSs does
not provide the depositary with voting instructions for an agenda item in our shareholders meeting in a timely manner, we may instruct the depositary, if we
reasonably do not know of any substantial opposition to such agenda item and the matter is not materially adverse to the interests of shareholders, to treat
the holder as giving a discretionary proxy to a person designated by us as to that matter.
Our directors and executive officers own a substantial percentage of our ordinary shares.
As of March 15, 2020, our directors and executive officers beneficially own approximately 12.1% of our outstanding ordinary shares (or, when
taken together with the holdings of Viola Growth II A.V. LP, Viola Growth II (A) L.P. and Viola Growth II (B) L.P., or, collectively, Viola, and MS Pace LP,
which are affiliated with certain of these directors, approximately 38.8% of our outstanding ordinary shares). As a result, if these shareholders acted
together, they could exert significant influence on the election of our directors and on decisions by our shareholders on matters submitted to a shareholder
vote, including mergers, consolidations and the sale of all or substantially all of our assets. This concentration of ownership of our ordinary shares could
delay or prevent proxy contests, mergers, tender offers or other purchases of our ordinary shares and ADSs that might otherwise give our shareholders and
ADS holders the opportunity to realize a premium over the then-prevailing market price for our securities and, as a result, may also adversely affect the
price of our ordinary shares and ADSs.
In addition, in connection with the public offering we completed in February 2020, certain of our shareholders and ADS holders, directors and
executive officers, who beneficially own, in the aggregate, approximately 38.8% of our outstanding ordinary shares, have agreed not to sell any of our
ordinary shares or ADSs without the prior written consent of the representatives of the underwriters until July 29, 2020. The representatives of the
underwriters may, however, in their sole discretion and without notice, release all or any portion of these securities from the restrictions in the lock-up
agreements. After these agreements expire, these securities will be eligible for sale in the public market and if these shareholders or holders of our options
or RSUs sell substantial amounts of our ordinary shares or ADSs, the market price of our ordinary shares and ADSs may be adversely affected. Any
substantial sales of our ordinary shares or ADSs in the public market might also make it more difficult for us to sell equity or equity-related securities in the
future at a time and on terms we deem appropriate. Even if there are not a substantial number of sales, the mere existence of this “market overhang” could
have a negative impact on the market for, and the market price of, our ordinary shares and ADSs.
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If equity research analysts do not publish research or reports about our business or if they issue unfavorable commentary or downgrade our
ordinary shares and ADSs, the price of our ordinary shares and ADSs could decline.
The trading market for our ordinary shares and ADSs will rely in part on the research and reports that equity research analysts publish about us
and our business. The price of our ordinary shares and ADSs could decline if one or more securities analysts downgrade our ordinary shares or ADSs or if
those analysts issue other unfavorable commentary or cease publishing reports about us or our business.
As a foreign private issuer with ADSs listed on the Nasdaq Capital Market, we follow certain home country corporate governance practices
instead of certain Nasdaq requirements.
As a foreign private issuer whose ADSs are listed on the Nasdaq Capital Market, we are permitted to follow certain home country corporate
governance practices instead of certain requirements of the Nasdaq rules. As permitted under the Companies Law, our articles of association provide that
the quorum for any meeting of shareholders is two shareholders who hold or represent between them at least 331⁄3% of the voting rights in our Company,
similar to Nasdaq requirements; however, if the meeting is adjourned for lack of quorum, the quorum for such adjourned meeting will be two shareholders
who hold or represent between them at least 10% of the issued and outstanding share capital in our Company, instead of 331⁄3% of the issued share capital.
We also intend to adopt and approve material changes to equity incentive plans in accordance with the Companies Law, which does not impose a
requirement of shareholder approval for such actions and we will not have a nominating committee composed entirely of independent directors with a
written charter addressing the committee’s purpose and responsibilities. In addition, we intend to follow the Companies Law in respect of private
placements instead of Nasdaq requirements to obtain shareholder approval for certain dilutive events (such as issuances that will result in a change of
control, certain transactions other than a public offering involving issuances of a 20% or greater interest in us and certain acquisitions of the stock or assets
of another company). Accordingly, our shareholders may not be afforded the same protection as provided under Nasdaq corporate governance rules for
domestic issuers.
We may in the future elect to follow Israel corporate governance practices in lieu of Nasdaq corporate governance rules with regard to other
matters.
Following our home country governance practices as opposed to the requirements that would otherwise apply to a United States company listed on
the Nasdaq Capital Market may provide less protection than is accorded to investors of domestic issuers.
As a “foreign private issuer”, our disclosure and reporting requirements are different than those of a United States domestic reporting company.
In addition, as a foreign private issuer, we are exempt from the rules and regulations under the Exchange Act related to the furnishing and content
of proxy statements, and our officers, directors and principal shareholders are exempt from the reporting and short-swing profit recovery provisions
contained in Section 16 of the Exchange Act. In addition, we will not be required under the Exchange Act to file annual, 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 incur additional increased costs as a result of the listing of ADSs for trading on the Nasdaq Capital Market, and our management is required
to devote substantial time to compliance initiatives and reporting requirements associated therewith.
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As a public company in the United States, we incur additional significant accounting, legal and other expenses as a result of the listing of ADSs on
the Nasdaq Capital Market. These include costs associated with corporate governance requirements of the SEC and the Marketplace Rules of 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 new costs such as those relating to investor relations, stock exchange listing fees and
shareholder reporting, and make some activities more time consuming or costly, such as increased costs for directors’ and officers’ liability insurance. 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 Nasdaq, as well as applicable Israeli reporting requirements, for so long
as they apply to us, will 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 committees of our Board of Directors or as executive officers.
If we are unable to satisfy the requirements of Section 404 as they apply to us, or our internal controls over financial reporting are not effective,
the reliability of our financial statements may be questioned and the price of ADSs may suffer.
We are subject to the requirements of the Sarbanes-Oxley Act in light of the listing of ADSs on the Nasdaq Capital Market. Section 404 of the
Sarbanes-Oxley Act, or Section 404, requires companies subject to the reporting requirements of the United States securities laws to complete a
comprehensive evaluation of its and its subsidiaries’ internal controls over financial reporting. To comply with this statute, we will be required to document
and test our internal control procedures and our management will be required to assess and issue a report concerning our internal controls over financial
reporting. Pursuant to the JOBS Act, we will be classified as an “emerging growth company.” Under the JOBS Act, emerging growth companies are
exempt from certain reporting requirements, including the independent auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act. Under
this exemption, our independent auditor will not be required to attest to and report on management’s assessment of our internal controls over financial
reporting during a five-year transition period. We will need to prepare for compliance with Section 404 by strengthening, assessing and testing our system
of internal controls to provide the basis for our report. However, the continuous process of strengthening our internal controls and complying with Section
404 is complicated and time-consuming. Furthermore, we believe that our business will grow both domestically and internationally, in which case 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 material weaknesses or significant deficiencies, which may not be remedied in a
timely manner to meet the deadline imposed by the Sarbanes-Oxley Act. If our management cannot favorably assess the effectiveness of our internal
controls over financial reporting, or our independent registered public accounting firm identifies material weaknesses in our internal controls, investor
confidence in our financial results may weaken, and the market price of our securities may suffer.
There can be no assurance that we will not be classified as a passive foreign investment company, which could result in adverse United States
federal income tax consequences to United States Holders of our ordinary shares and ADSs.
We would be a passive foreign investment company, or PFIC, for any taxable year if, after the application of certain look-through rules, either: (i)
75% or more of our gross income for such year is “passive income” (as defined in the relevant provisions of the Internal Revenue Code of 1986, as
amended), or (ii) 50% or more of the value of our assets (determined on the basis of a quarterly average) during such year is attributable to assets that
produce or are held for the production of passive income. Based on our anticipated market capitalization and the composition of our income, assets and
operations, we do not expect to be a PFIC for United States federal income tax purposes for the current taxable year or in the foreseeable future. However,
this is a factual determination that must be made annually after the close of each taxable year. Moreover, the value of our assets for purposes of the PFIC
determination may be determined by reference to the public price of our ordinary shares and ADSs, which could fluctuate significantly. Therefore, there
can be no assurance that we will not be classified as a PFIC in the future. Certain adverse United States federal income tax consequences could apply to a
United States Holder (as defined in Item 10.E. “Taxation— United States Federal Income Tax Considerations”) if we are treated as a PFIC for any taxable
year during which such United States Holder holds ADSs.
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If a United States person is treated as owning at least 10% of our ordinary shares, such holder may be subject to adverse United States federal
income tax consequences.
If a United States person is treated as owning (directly, indirectly or constructively) at least 10% of the value or voting power of our ordinary
shares, such person may be treated as a “United States shareholder” with respect to each controlled foreign corporation, or CFC, in our group (if any). In
addition, because our group includes one or more United States subsidiaries, under recently-enacted rules, certain of our non-U.S. subsidiaries could be
treated as CFCs, regardless of whether or not we are treated as a CFC (although there is currently a pending legislative proposal to significantly limit the
application of these rules). A United States shareholder of a CFC may be required to report annually and include in its United States taxable income its pro
rata share of “Subpart F income,” “global intangible low-taxed income” and investments in United States property by CFCs, regardless of whether we
make any distributions. An individual who is a United States shareholder with respect to a CFC generally is not allowed certain tax deductions or foreign
tax credits that would be allowed to a United States shareholder that is a United States corporation. Failure to comply with these obligations may subject a
United States shareholder to significant monetary penalties and may prevent the statute of limitations with respect to such shareholder’s United States
federal income tax return for the year for which reporting was due from starting. We cannot provide any assurances that we will assist investors in
determining whether any of our non-U.S. subsidiaries are treated as CFCs or whether such investor is treated as a United States shareholder with respect to
any such CFCs or furnish to any United States shareholders information that may be necessary to comply with the aforementioned reporting and tax paying
obligations. The United States Internal Revenue Service has provided limited guidance on situations in which investors may rely on publicly available
information to comply with their reporting and tax paying obligations with respect to foreign-controlled CFCs. A United States investor should consult its
advisors regarding the potential application of these rules to an investment in the ADSs.
The market price of our ordinary shares and ADSs could be negatively affected by future sales of our ordinary shares and ADSs.
As of March 24, 2020, we had approximately 423.1 million ordinary shares issued and outstanding (including ordinary shares underlying the
ADSs) and approximately 52.0 million of additional ordinary shares which are issuable upon exercise of outstanding warrants, stock options and vesting of
RSUs. The issuance of a significant amount of additional ordinary shares or ADSs on account of these outstanding securities will dilute our current
shareholders’ holdings and may depress the price of our ordinary shares and ADSs.
If our existing shareholders and ADS holders or holders of our warrants, options or RSUs sell substantial amounts of our ordinary shares or ADSs,
either on the TASE or Nasdaq, the market price of our ordinary shares and ADSs may be adversely affected. Any substantial sales of our ordinary shares or
ADSs in the public market might also make it more difficult for us to sell equity or equity-related securities in the future at a time and on terms we deem
appropriate. Even if there are not a substantial number of sales, the mere existence of this “market overhang” could have a negative impact on the market
for, and the market price of, our ordinary shares and ADSs.
In 2015, we agreed to grant Viola, our largest shareholder, registration rights that require that we register under the Securities Act the resale of
their shares into the public markets. The market price of our ordinary shares and ADSs may be adversely affected when the restrictions on resale by our
existing shareholders lapse and these shareholders are able to sell our ordinary shares or ADSs into the market or, in the case of Viola, if Viola were to
exercise its registration rights. In connection with our registered public offering in February 2020, we and certain of our shareholders and ADS holders,
directors and officers have agreed not to sell any of our ordinary shares or ADSs without the prior written consent of the representatives of the underwriters
until July 29, 2020. The representatives of the underwriters may, however, in their sole discretion and without notice, release all or any portion of these
securities from the restrictions in the lock-up agreements. After these agreements expire, these securities will be eligible for sale in the public market.
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Provisions of our articles of association and Israeli law as well as the terms of some of our equity-based grants and the Security Agreements may
delay, prevent or make difficult an acquisition of us, which could prevent a change of control and negatively affect the price of our ordinary shares
and ADSs.
Israeli corporate law regulates mergers, requires tender offers for acquisitions of shares or voting rights above specified thresholds, requires
special approvals for certain transactions involving directors, officers or significant shareholders and regulates other matters that may be relevant to these
types of transactions. These provisions of Israeli law may delay, prevent or make difficult an acquisition of us, which could prevent a change of control and
therefore depress the price of our ordinary shares and ADSs. For example, under the Companies Law, upon the request of a creditor of either party to a
proposed merger, the court may delay or prevent the merger if it concludes that there exists a reasonable concern that as a result of the merger the surviving
company will be unable to satisfy the obligations of any of the parties to the merger. In addition, our executive officers and certain other key employees are
entitled to certain benefits in connection with a change of control of our Company and the Security Agreements allow the lender bank to accelerate
repayment of outstanding debt upon a change of control of our Company. These provisions could cause our ordinary shares and ADSs to trade at prices
below the price for which third parties might be willing to pay to gain control of us. Third parties who are otherwise willing to pay a premium over
prevailing market prices to gain control of us may be unable or unwilling to do so because of these provisions of Israeli law.
Furthermore, Israeli tax considerations may make potential transactions unappealing to us or to our shareholders, especially for those shareholders
whose country of residence does not have a tax treaty with Israel which exempts such shareholders from Israeli tax. For example, Israeli tax law does not
recognize tax-free share exchanges to the same extent as United States tax law. With respect to mergers, Israeli tax law allows for tax deferral in certain
circumstances but makes the deferral contingent on the fulfillment of a number of conditions, including, in some cases, a holding period of two years from
the date of the transaction during which sales and dispositions of shares of the participating companies are subject to certain restrictions. Moreover, with
respect to certain share swap transactions, the tax deferral is limited in time, and when such time expires, the tax becomes payable even if no disposition of
the shares has occurred.
We have never paid cash dividends on our share capital, and we do not anticipate paying any cash dividends in the foreseeable future.
We have never declared or paid cash dividends on our share capital, nor do we anticipate paying any cash dividends on our share capital in the
foreseeable future. We currently intend to retain all available funds and any future earnings to fund the development and growth of our business. As a
result, capital appreciation, if any, of our ordinary shares and ADSs will be investors’ sole source of gain for the foreseeable future. Moreover, the Security
Agreements contain limitations on the distribution of dividends and repurchase of our shares. In addition, Israeli law limits our ability to declare and pay
dividends, and may subject our dividends to Israeli withholding taxes. Furthermore, our payment of dividends (out of tax-exempt income) may
retroactively subject us to certain Israeli corporate income taxes, to which we would not otherwise be subject.
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 you the cash dividends or other distributions it or the custodian receives on our 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 but that are not properly registered or distributed under an applicable exemption from registration. The depositary may
also determine that it is not feasible to distribute certain property through the mail. Additionally, the value of certain distributions may be less than the cost
of mailing them. In these cases, the depositary may determine not to distribute such property. We have no obligation to register under United States
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. This means that you may not receive distributions we make
on our ordinary shares or any value for them 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.
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ADSs holders may not be entitled to a jury trial with respect to claims arising under the deposit agreement relating to the ADSs or ordinary
shares, which could result in less favorable outcomes to the plaintiffs in any such action.
The deposit agreement governing the ADSs representing our ordinary shares provides that, to the fullest extent permitted by law, ADS holders
waive the right to a jury trial of any claim they may have against us or the depositary arising out of or relating to our shares, the ADSs or the deposit
agreement, including any claim under the United States federal securities laws. If we or the depositary opposed a jury trial demand based on such jury trial
waiver, the court would determine whether the waiver was enforceable based on the facts and circumstances of that case in accordance with the applicable
state and federal law. To our knowledge, the enforceability of a contractual pre-dispute jury trial waiver in connection with claims arising under the federal
securities laws has not been finally adjudicated by the United States Supreme Court. However, we believe that a contractual pre-dispute jury trial waiver
provision is generally enforceable, including under the laws of the State of New York, which govern the deposit agreement, by a federal or state court in the
City of New York, which has non-exclusive jurisdiction over matters arising under the deposit agreement. In determining whether to enforce a contractual
pre-dispute jury trial waiver provision, courts will generally consider whether a party knowingly, intelligently and voluntarily waived the right to a jury
trial. We believe that this is the case with respect to the deposit agreement and the ADSs.
If you or any other holders or beneficial owners of ADSs bring a claim against us or the depositary in connection with matters arising under the
deposit agreement, including claims under federal securities laws, you or such other holder or beneficial owner may not be entitled to a jury trial with
respect to such claims, which may have the effect of limiting and discouraging lawsuits against us and the depositary. If a lawsuit is brought against either
or both of us and the depositary under the deposit agreement relating to the ADSs or ordinary shares, it may be heard only by a judge or justice of the
applicable trial court, which would be conducted according to different civil procedures and may result in different outcomes than a trial by jury would
have, including results that could be less favorable to the plaintiffs in any such action.
Nevertheless, if this jury trial waiver provision is not permitted by applicable law, an action could proceed under the terms of the deposit
agreement with a jury trial. No condition, stipulation or provision of the deposit agreement or ADSs serves as a waiver by any holder or beneficial owner of
ADSs or by us or the depositary of compliance with the United States federal securities laws and the rules and regulations promulgated thereunder.
Risks Related to Our Operations in Israel
Our headquarters, manufacturing and other significant operations are located in Israel and, therefore, our business and operation may be
adversely affected by political, economic and military conditions in Israel.
We are incorporated under the laws of the State of Israel, and our principal offices and research and development and production facilities are
located in Israel. In addition, the majority of our key employees, officers and directors are residents of Israel. Accordingly, political, economic and security
conditions in the Middle East in general, and in Israel in particular, directly affect our business and operations.
Over the past several decades, a number of armed conflicts have taken place between Israel and its Arab neighbors and a state of hostility, varying
in degree and intensity, has existed between Israel and certain other countries or militant groups in the region. Since late 2000, there has also been an
increase in violence and unrest between Israel and the Palestinians, including during the summer of 2014, when Israel was engaged in an armed conflict
with Hamas, a militia and political group operating in the Gaza Strip. This conflict has strained Israel’s relationship with its Arab citizens, Arab countries
and, to some extent, with other countries around the world. In addition, since the end of 2010, several countries in the region have been experiencing
increased political instability, which has led to changes in government in some of these countries and increases in violence and turbulence, including the
ongoing civil war in Syria which shares a common border with Israel, the effects of which are currently difficult to assess. In addition, Israel faces threats
from more distant neighbors, such as Iran (which has previously threatened to attack Israel and is believed to have influence over Hamas in Gaza and
Hezbollah, a militia and political group operating in Lebanon) and the militant group known as the Islamic State of Iraq and Syria. This situation may
potentially escalate in the future and may also lead to deterioration of the political and trade relationships that exist between the State of Israel and these
countries. Any armed conflicts or political instability in the region, including acts of terrorism as well as cyber-attacks or any other hostilities involving or
threatening Israel, would likely negatively affect business conditions and could make it more difficult for us to conduct our operations in Israel, which
could increase our costs and adversely affect our financial results. Our commercial insurance does not cover losses that may occur as a result of events
associated with the security situation in the Middle East, such as damages to our facilities resulting in disruption of our operations. Although the Israeli
government currently covers the reinstatement value of direct damages that are caused by terrorist attacks or acts of war, we cannot be assured that this
government coverage will be maintained or will be adequate in the event we submit a claim. Any losses or damages incurred by us could have a material
adverse effect on our business. Any armed conflict involving Israel could adversely affect our operations and results of operations.
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Furthermore, some neighboring countries, as well as certain companies, organizations and movements, continue to participate in a boycott of
Israeli firms and others doing business with Israel or with Israeli companies. In the past several years, there have been increased efforts by activists to cause
companies and consumers to boycott Israeli goods based on Israeli government policies. Similarly, Israeli companies are limited in conducting business
with entities from several countries. For example, in 2008, the Israeli legislature passed a law forbidding any investments in entities that transact business
with Iran. Restrictive laws, policies or practices directed towards Israel or Israeli businesses could have an adverse impact on our operating results,
financial condition or the expansion of our business.
Some of our officers and employees are obligated to perform annual military reserve duty, and in the event of a military conflict, these persons
could be called to active duty at any time, for extended periods of time and on very short notice. The absence of a number of our officers and employees for
significant periods could materially adversely affect our business and results of operations. We cannot assess the full impact of these obligations on our
workforce or business if conditions should change.
Our operations may be affected by negative labor conditions in Israel.
Strikes and work-stoppages occur relatively frequently in Israel. If Israeli trade unions threaten additional strikes or work-stoppages and such
strikes or work-stoppages occur, those may, if prolonged, have a material adverse effect on the Israeli economy and on our business, including our ability to
deliver products to our customers and to receive raw materials from our suppliers in a timely manner.
The Israeli government grants that we have received require us to meet several conditions and restrict our ability to manufacture products and
transfer know-how outside of Israel and require us to satisfy specified conditions.
We have in the past received, and in the future may apply for, royalty-bearing grants from the Israeli Innovation Authority (formerly known as the
Office of the Chief Scientist of the Israeli Ministry of Economy and Industry), or the IIA, for research and development programs that meet specified
criteria pursuant to the Law for the Encouragement of Research, Development and Technological Innovation in Industry, 1984 (formerly known as the Law
for Encouragement of Research and Development in Industry, 1984), and the regulations promulgated thereunder, or the R&D Law. The terms of the IIA
grants limit our ability to manufacture products outside of Israel or transfer technologies to any third party if such products or technologies were developed
using know-how developed with or based upon IIA grants. Under the R&D Law, we are prohibited from manufacturing products developed using these
grants outside of the State of Israel without special approvals. We may not receive the required approvals for any proposed transfer of manufacturing
activities. Even if we do receive approval to manufacture products developed with government grants outside of Israel, the royalty rate may be increased
and we may be required to pay up to three times the grant amounts plus interest, depending on the manufacturing volume that is performed outside of
Israel. This restriction may impair our ability to outsource manufacturing or engage in our own manufacturing operations for those products or
technologies.
Additionally, under the R&D Law, we are prohibited from transferring (including by way of license), the IIA-financed technologies and related
rights (including know-how and other intellectual property rights) outside of the State of Israel, except under limited circumstances and only with the
approval of the IIA Research Committee. We may not receive the required approvals for any proposed transfer and, even if received, we may be required to
pay the IIA a portion of the consideration that we receive upon any transfer of such technology to a non-Israeli entity up to 600% of the grant amounts plus
interest. In addition, a change of control in us and the acquisition of 5% or more of our ordinary shares by a non-Israeli may require notification to the IIA
and the provision of an undertaking to comply with the R&D Law, some of the principal restrictions and penalties of which are the transferability limits
described above and elsewhere in this Annual Report.
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Further, the IIA grants may be terminated in the future or the available benefits may be reduced or impacted, including, among other possible
circumstances, should we transfer certain research and development or manufacturing activities outside the State of Israel. The termination or curtailment
of these programs or the loss or reduction of such benefits could have a material adverse effect on our business, financial condition and results of
operations. In addition, the IIA may establish new guidelines regarding the R&D Law, which may affect our existing and/or future IIA programs and
incentives for which we may be eligible. We cannot predict what changes, if any, the IIA may make.
As of December 31, 2019, we have received royalty-bearing grants from the IIA in a total amount of $1.06 million (including interest accrued
through December 31, 2019) for the development of EndoPAT 3000 (the development of which was discontinued before its completion with no sales to
date). In 2009, the IIA notified us that under the terms of such grant, we must pay royalties on the sale of all of our products commencing as of 2012. We
believe that under the terms of the said grant we are not required to repay these grants to the IIA from the sale of our past and currently marketed products.
There is no assurance that we will prevail in our efforts opposing the IIA’s position. We anticipate that, in 2021, we will begin selling our newly developed
EndoPATX, for which we recently received authorization to affix a CE mark. We developed EndoPATX using some of the know-how developed under the
EndoPAT 3000 grant program, and therefore anticipate paying royalties on sales of EndoPATX against the grants received for the development of EndoPAT
3000.
Enforcing a United States judgment against our Company and our executive officers and directors, or asserting United States securities law claims
in Israel may be difficult.
We are incorporated in Israel, our corporate headquarters is located in Israel and several of our current officers and directors reside in Israel.
Service of process upon us, our directors and officers and the Israeli experts, if any, named in this Annual Report, substantially all of whom reside outside
the United States, may be difficult to obtain within the United States. Furthermore, because the majority of our assets and investments, and substantially all
of our directors, officers and such Israeli experts are located outside the United States, any judgment obtained in the United States against us or any of them
may be difficult to collect within the United States and may not be enforced by an Israeli court.
We have been informed by our legal counsel in Israel that it may also be difficult to assert United States securities law claims in original actions
instituted in Israel. Israeli courts may refuse to hear a claim based on an alleged violation of United States securities laws if they determine that Israel is not
the most appropriate forum to bring such a claim. In addition, even if an Israeli court agrees to hear a claim, it may determine that Israeli law and not
United States law is applicable to the claim. There is little binding case law in Israel addressing these matters. If United States law is found to be
applicable, the content of applicable United States law must be proven as a fact, which can be a time-consuming and costly process. Certain matters of
procedure will also be governed by Israeli law.
Subject to specified time limitations and legal procedures, under the rules of private international law currently prevailing in Israel, Israeli courts
may enforce a United States judgment in a civil matter, including a judgment based upon the civil liability provisions of United States securities laws, as
well as a monetary or compensatory judgment in a non-civil matter, provided that the following key conditions are met:
·
·
subject to limited exceptions, the judgment is final and non-appealable;
the judgment was given by a court competent under the laws of the state of the court and is otherwise enforceable in such state;
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·
·
·
·
·
·
the judgment was rendered by a court competent under the rules of private international law applicable in Israel;
the laws of the state in which the judgment was given provide for the enforcement of judgments of Israeli courts;
adequate service of process has been effected and the defendant has had a reasonable opportunity to present his arguments and evidence;
the judgment is enforceable under the laws of State of Israel and its enforcement are not contrary to the law, public policy, security or
sovereignty of the State of Israel;
the judgment was not obtained by fraud and does not conflict with any other valid judgment in the same matter between the same parties; and
an action between the same parties in the same matter was not pending in any Israeli court at the time the lawsuit was instituted in the United
States court.
Your rights and responsibilities as a shareholder will be governed by Israeli law, which differs in some material respects from the rights and
responsibilities of shareholders of United States companies.
The rights and responsibilities of the holders of our ordinary shares and ADSs are governed by our amended and restated articles of association
and by Israeli law. These rights and responsibilities differ in some material respects from the rights and responsibilities of shareholders in United States
corporations. For example, a shareholder of an Israeli company has a duty to act in good faith and in a customary manner in exercising its rights and
performing its obligations towards the company and other shareholders, and to refrain from abusing its power in the company, including, among other
things, voting at a general meeting of shareholders on matters such as amendments to a company’s articles of association, increases in a company’s
authorized share capital, mergers and acquisitions and related party transactions requiring shareholder approval. In addition, a shareholder who is aware
that it possesses the power to determine the outcome of a shareholder vote or to appoint or prevent the appointment of a director or executive officer in the
company has a duty of fairness toward the company. There is limited case law available to assist us in understanding the nature of these duties or the
implications of these provisions. These provisions may be interpreted to impose additional obligations and liabilities on holders of our ordinary shares and
ADSs that are not typically imposed on shareholders of United States corporations.
Item 4. Information on the Company
A. History and Development of the Company
Corporate Information
We are a limited company incorporated under the laws of the State of Israel under the name Itamar Medical (CM) 1997 Ltd. on January 15, 1997
as a company limited by shares. We changed our name to our current name in July 2000. Since March 2007, our ordinary shares have been traded on the
TASE under the symbol “ITMR.” We also listed ADSs, each representing 30 ordinary shares, on the Nasdaq Capital Market in February 2019, also under
the symbol “ITMR.”
Our registered office address is 9 Halamish Street, Caesarea 3088900, Israel and our telephone number is +972-4-6177000. Our agent for service
of process in the United States is Itamar Medical, Inc., which maintains its principal offices at 3290 Cumberland Club Drive, Atlanta, GA 30339 and its
telephone number is 1-888-748-2627.
Our website address is www.itamar-medical.com. The information contained on, or that can be accessed from, our website does not form part of
this Annual Report. The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers,
such as we, that file electronically, with the SEC at www.sec.gov.
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Recent Business Developments
Below is a summary of important business developments in Itamar Medical since January 1, 2019:
·
·
·
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·
In response to anticipated changes in the sleep apnea tests market, resulting from the coronavirus outbreak, we are changing our
manufacturing mix to prioritize WatchPAT ONE production. For more information see Item 5. “Operating and Financial Review and
Prospects — Trend Information.”
On February 4, 2020, we completed a registered public offering of 2,927,267 ADSs at a price of $13.75 per ADS, for total gross proceeds of
approximately $40.25 million. For additional details, see Item 5.B. “Operating and Financial Review and Prospects — Liquidity and Capital
Resources.”
On December 4, 2019, we announced that we entered into a collaboration agreement with a wholly-owned subsidiary of SoClean, Inc. to offer
WatchPAT ONE and other digital health services through DTC channels to the U.S. sleep apnea market. For additional details, see Item 4.B.
“Business Overvoew — Sales and Marketing.”
On February 27, 2019, we announced the first day of trading of our ADSs on the Nasdaq Capital Market under the ticker symbol “ITMR”.
On January 16, 2019 and January 28, 2019, we entered into agreements with several investors as part of a private placement for gross
proceeds of approximately $14.7 million, which was completed in March 2019, whereby we issued ADSs and ordinary shares representing a
total of approximately 46.1 million ordinary shares to the investors. For additional details, see Item 5.B. “Operating and Financial Review
and Prospects — Liquidity and Capital Resources.”
Principal Capital Expenditure and Divestitures
During the year ended December 31, 2019, our capital expenditures and capitalized development costs totaled $0.5 million, compared to $0.3
million during the year ended December 31, 2018 and $0.3 million during the year ended December 31, 2017, most of which were used for the purchase of
production and research and development equipment, office furniture and equipment and computers and self-manufactured equipment (WatchPAT devices
that are used by our customers). Except as described in this Annual Report, we have no significant capital expenditures in progress. For more information
regarding the process of constructions and adjustment of our new manufacturing facilities, see under “Property, Plants and Equipment” below.
We did not affect any principal divestitures in the past three years.
B. Business Overview
Overview
We are a medical technology company focused on the development and commercialization of non-invasive medical devices and solutions to aid in
the diagnosis of respiratory sleep disorders. We use a digital healthcare platform to facilitate the continuum of care for effective sleep apnea management
with a focus on the core sleep, cardiology and direct to consumer, or DTC, markets. We offer a TSS to help physicians provide comprehensive sleep apnea
management in a variety of clinical environments to optimize patient care and reduce healthcare costs. In addition, we have recently begun offering our
WatchPAT family of products and certain components of TSS to the DTC market.
Sleep apnea is a chronic disease impacting 54 million people in the United States and 26% of adults over the age of 40 in the United States. While
sleep apnea used to be perceived as a lifestyle disease, with snoring and tiredness as the main implications, it is now known to be a major underlying risk
factor and disease progression accelerator for most cardiovascular diseases, and many cognitive and neurodegenerative diseases. Despite the availability of
easy to use and cost-effective diagnostic technology for over a decade, approximately 80% of people in the United States suffering from sleep apnea have
never been diagnosed. In recent years, awareness of the importance of sleep in general, and the devastating effects that could result from sleep apnea, has
been on the rise both in medical professional circles as well as with patients.
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We believe a key competitive differentiator for us is the ability to measure and help diagnose sleep apnea through our proprietary software and
algorithms which analyze the PAT biological signal with other measurements, including actigraphy, heart rate, chest motion, body position and snoring. Our
PAT-based technology is available throughout our prescription WatchPAT family of durable or disposable products. These simple to use, non-invasive
watch-like devices utilize finger positioned bio-sensors to measure and record the patient’s PAT signal. This signal is transferred to our local software
product, zzzPAT, or our cloud-based software product, CloudPAT, for analysis and reporting of sleep apnea diagnosis. These proprietary analyses’ results
are automatically populated into an easy to read report that allows physicians to accurately diagnosis sleep apnea.
We keep developing our base core sleep business which consists of sleep physicians and practices, including independent diagnostic testing
facilities, in order to provide services to patients who are suspected of suffering from sleep apnea. We believe that a substantial market share and broad
stakeholders support from this segment are required foundations for success in the Cardiology and DTC markets. We believe that the WatchPAT
technology, which is backed by a large body of evidence and was described by the 2017 American Academy of Sleep Medicine, or AASM, Clinical
Practice Guideline as technically adequate, is positioned as the easiest to use and most comprehensive home sleep apnea test, or HSAT, in the market. We
believe that through education, local sales and support field force and continued investment in traditional and online marketing as well as solid science and
innovation programs, we will continue to gain market share and position WatchPAT as a leading HSAT device.
Our TSS is a comprehensive marketing program we offer to physicians that combines products and services, including our proprietary diagnostic
aid and data analytics, logistic solutions and access to third-party sleep apnea treatment devices and their therapy compliance data and a network of
independent diagnostics testing facilities, or IDTFs, and durable mobile equipment, or DME, providers. TSS is designed to allow any medical practice or
physician that does not specialize in sleep, easy access to a comprehensive suite of products and services to aid in the diagnosis, transportation and
handling, treatment and management of patients they suspect suffer from sleep apnea. We believe the combination of our proprietary test combined with the
ease of having a single point of contact management of the diagnosis and treatment of sleep apnea provided by TSS has been a driver of the increased
usage of our tests. Specific products and services included in the TSS program include CloudPAT, including remote interpretation and remote consultation,
and SleePath for cloud-based data and information mobilization solutions, access to sleep apnea therapeutic products such as continuous positive airway
pressure, or CPAP, devices, patient adherence management services and Mandibular Advancement Devices, or MADs, related services and logistic
solutions such as WatchPAT Direct.
We focus on offering TSS to the cardiology market primarily through our TaaS, also known as Cost per Test model, which is the primary model
we have utilized to date. The medical practice or physician ordering the TaaS pays a fixed fee per HSAT, that includes all the components associated with
the test, including the disposable biosensor, hardware rental fees and access to our CloudPAT platform. We may collaborate with other providers in the
cardiology or sleep market to attempt to leverage their sales force presence at accounts which are of interest to us. For example, in June 2019, we launched
a limited program in two states with BioTel Heart, a division of BioTelemetry, Inc., or BioTel, the largest provider of ambulatory Holter and event
monitoring services in the United States pursuant to which our TSS program is offered to BioTel’s clients in said accounts, namely cardiologists and
cardiology practices and departments, through BioTel Heart. This allows us to capitalize on the significantly larger presence of BioTel sales force in the
United States at cardiology outpatient offices. In addition, the fact that BioTel Heart is already an established provider to cardiologists and cardiology
practices and departments, eliminates the need for commercial and business associate contracting with such cardiologists and cardiology practices and
departments, reduces the burden of IT clearances and streamlines ordering from a single portal. Under this model, cardiologists and cardiology practices
and departments benefit from outsourcing the ownership, handling and billing of HSAT.
In 2019, we began focusing on the DTC market segment in order to address the recent surge in awareness of sleep apnea, harnessing the trend of
consumers to seek more accessible and cost-effective solutions that bypass traditional physician referral systems. In this market segment, we offer our
HSAT products and most of the TSS components, through channel partners, including SoClean Inc., or SoClean, that have a consumer market presence
(whether online or offline) and the desire to identify and treat consumers at risk for sleep apnea, a full digital health sleep apnea solution which can be used
by patients suspected to have sleep related breathing disorders at their home in accordance with a physician’s instructions, as authorized by qualified
medical personnel. This solution is based on our HSAT products and most of the TSS components. We provide high quality digital health patient pathway
management services through these partners. To facilitate the clinical oversight of the patients in this process, we have added remote online consultation
capabilities to our CloudPAT system and created an online marketplace that connects patients in demand for clinical services with board certified
physicians that offer their expertise. As a result, we will facilitate patient access to real time consultation, advice and prescriptions throughout the care
pathway. In addition, we will facilitate access to reputable sleep practices and DME providers that have demonstrated their ability to set up CPAP
therapeutic solutions remotely, as well as monitor and coordinate compliance. We believe that our digital health platform, which can facilitate the journey
of patients from diagnosis to therapy and compliance in an easy, efficient and innovative manner within their homes, positions us for new growth
opportunities.
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Our Solutions
Our prescription WatchPAT proprietary product, which utilizes the PAT signal, is designed to enable patients to easily conduct sleep apnea tests in
the comfort of their home while delivering the treating physicians with comprehensive, accurate and reliable results to aid in the diagnosis of sleep apnea.
We believe that WatchPAT provides several key advantages over both PSG testing as well as other HSAT devices by offering the following key benefits:
ease of use and patient comfort; accuracy; comprehensiveness; reliability; cost-effectiveness; and immediate and easy-to-read results.
We believe these advantages enable a shift in the “point of care” (the focal point at which the disease is being managed) of simple sleep apnea
from sleep centers to the cardiology care point and directly to consumers. In particular, through our WatchPAT-related services, including CloudPAT, our
cloud-based IT platform, and our TSS program, we offer physicians, including those in the cardiology market, an effective solution to manage the entire
care pathway for patients suffering from sleep apnea by covering both the screening and diagnosis stage of sleep apnea, using our WatchPAT family of
products, as well as, through the resale of devices of our business partners, treatment thereof.
Our Competitive Strengths
Our goal is to become a global leader in sleep apnea diagnostic aids and solutions as we continue to focus on advancing the standard of care in at-
home respiratory sleep disorders. We believe that our technology platform, combined with the following competitive strengths, will allow us to grow our
presence and expand our market opportunity:
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An emerging market leader in at-home diagnosis of respiratory sleep disorders. We have developed and are commercializing a novel, non-
invasive medical device to aid in the diagnosis of sleep disorders. Our market leading TSS is optimized in a variety of clinical environments
to optimize patient care and reduce healthcare costs. We believe that we are the market leader in at-home respiratory sleep disorder diagnostic
aids. We also believe we have a significant and scaled first mover advantage over competitors, as our physicians have utilized our technology
for more than 1.5 million patients.
Proprietary technology with unique advantages over competitive devices. Our solutions leverage innovative technological advancements that
we believe give us a competitive advantage in the marketplace. We believe that there are several key advantages over in-lab PSG testing as
well as other HSAT devices, including ease of use, patient comfort, comprehensiveness, enhanced accuracy and reliability with immediate
results. The ease of use in which we are able to measure over seven sleep parameters, including true sleep time, is unmatched by most of our
competitors and a significant differentiator within the HSAT device market.
Significant body of clinical evidence and key opinion leader support. We have developed a significant body of clinical data that demonstrates
the effectiveness, success rate and potential long-term sustained benefits of respiratory sleep disorder diagnosis with our products compared to
PSG tests. Peer-reviewed study results utilizing our products have been consistent across both funded and independent clinical studies that
have evaluated tests from more than nine hundred patients. In recognition of the clinical evidence, the AASM changed their clinical
guidelines in March 2017 to include PAT-based technology as technically adequate for use in HSAT devices to diagnose obstructive sleep
apnea.
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Extensive reimbursement coverage and experience. We work closely with governmental and private payors to educate them on our innovative
features, technology differentiation, and cost benefits. We also work directly with clinicians to help them understand payor requirements for
our products. Our solutions are broadly covered and recognized by third-party payors under Current Procedural Terminology, or CPT, codes,
which are used by the Medicare program to describe sleep apnea testing services and establish payment amounts for those services. The CPT
code that describes PAT-based HSAT services, 95800, is listed by the Medicare reimbursement fee schedule in 2020 at a rate approximately
40% greater than another CPT code describing HSAT devices that do not have sleep time technology, CPT code 95806. Based on our
estimates, our solutions have provider coverage for approximately 220 million lives in the United States. In addition to the United States,
WatchPAT is also covered in Japan, the United Kingdom and other European regions.
Demonstrated healthcare systems cost savings. We believe our solutions offer meaningful cost savings for the healthcare system and patients,
as compared to traditional respiratory sleep disorder diagnostic technologies. As demonstrated by the Health Provider System Study published
in 2014, a transition from in-lab testing to unattended home sleep testing improved Obstructive sleep apnea, or OSA, test accessibility,
reduced waiting time, and reduced overall OSA diagnosis costs while maintaining patient satisfaction.
Strong research and development activities. We are committed to continued technology innovation and investment which will allow us to
achieve significant product improvements. For example, in March 2019 we began commercializing in the United States our latest WatchPAT
300, a new generation of the WatchPAT line of products which is designed to expedite data transfer and allow the use of a lighter and smaller
watch. In June 2019 we received FDA 510(k) clearance for what we believe to be the first and only fully disposable home sleep apnea test,
the WatchPAT ONE, a prescription device for use with patients suspected to have sleep related breathing disorders. The WatchPAT ONE is
indicated as a diagnostic aid for the detection of sleep related breathing disorders, sleep staging, snoring level and body position.
Our Growth Strategy
Our goal is to become a world leader in innovative technology platforms for home-based sleep apnea diagnostic aids and solutions. The key
elements of our strategy include:
·
Expand our market presence and focus on our primary call-points. We plan to leverage our technology platforms to focus on capitalizing on
our four main immediate markets:
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Core sleep market. We will continue to call on sleep physicians and practices, including independent diagnostic testing facilities, in
order to serve patients suspected of suffering from sleep apnea.
Cardiology market. According to published literature there are approximately 92 million cardiovascular patients in the United States,
of which approximately 40-60% are estimated to suffer from sleep apnea. We will continue to call on cardiologists and cardiology
practices, leveraging our digital health platforms and partnerships to facilitate the care continuum at the cardiology care point.
Countries outside of the United States. We will continue to build relationships with local channel partners as well as establish, and
expand upon existing, foreign strategic collaborations with international companies.
Direct to consumer market. We began focusing on the DTC market in 2019, in an attempt to circumvent the barriers of traditional
healthcare systems and increase consumer awareness and adoption. We plan to service this market by highlighting the advantages of
our digital health platforms and our market specific WatchPAT ONE, our disposable home sleep apnea test device. Additionally, we
intend to continue to form collaborative relationships with partners who have direct to consumer scale and demonstrated marketing
expertise.
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Position our products as the leading sleep apnea solution for cardiologists. We intend to continue to capitalize on the linkage between sleep
apnea and cardiovascular disease by adding a point of early diagnosis for sleep apnea at both the cardiology care point and at home. We plan
to continue promoting our WatchPAT family of products and the CloudPAT and SleePath digital health platforms to cardiologists. We will
continue to streamline sleep apnea screening, diagnosis therapy and compliance monitoring with our comprehensive TSS program. We will
continue collaborations with IDTFs and DME service providers and CPAP data sharing and integration with Philips and ResMed Inc., or
ResMed, to maintain a high degree of product availability and benefit patients throughout the continuum of care.
Lead in the DTC market segment. We intend to leverage our WatchPAT family of products, including our disposable WatchPAT ONE, our
relationships with DTC channel partners, and continued investment in digital health to become a leader in Sleep Apnea Digital Patient
Pathway Management. We will continue to enable an easy, efficient and innovative patient pathway management platform that will help
manage the patient journey from diagnosis to treatment. Additionally, we expect to continue to collaborate with channel partners who have
proven direct to consumer expertise. We believe these endeavors will both accelerate our existing business of TaaS while also generating new
revenue opportunities in the online DTC segment demonstrated by our recently announced SoClean collaboration.
Commercialize our technology platforms through expansion of our sales force and enhanced strategic relationships. We currently maintain a
direct sales force in the United States and indirect sales channels through distributors in Europe, Japan and Asia Pacific. We intend to continue
focusing on commercializing our technology platforms by expanding our United States sales and marketing infrastructure and broadening our
reach into additional segments and countries. As of December 31, 2019, we had 27 territories (Including three verticals — Kaiser, VA and
Dental) in the United States, which are supported by 42 employees in our United States direct commercial organization, and we plan to open
six to eight additional territories by the end of 2020. We also maintain strategic relationships with various third parties, such as Philips in
Japan. We will continue expanding our strategic collaborative relationships to increase adoption of our technology.
Broaden Medical Insurer Coverage. We seek to continue our efforts in securing broad and differentiated insurance reimbursement for our
WatchPAT family of products in the United States and internationally. We plan to leverage data demonstrating the health economic benefit of
integrating sleep apnea management to the cardiovascular care pathway to enable innovative payor programs.
Invest in Research and Development. We will continue to make investments in research and development to enhance our WatchPAT family of
products, develop additional applications and indications using our proprietary technologies, expand on our compendium of clinical evidence
to substantiate our claims, enhance our CloudPAT and SleePath platforms, and develop further innovative digital health platforms.
Market Overview
Cardiovascular Disease
Cardiovascular disease, to which we sometimes refer to as CVD or cardiac disease, is a class of diseases that involves the heart or blood vessels,
such as hypertension, heart disease, arrhythmias (including atrial fibrillation) and congestive heart failure.
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CVD is highly prevalent and, quite often, a severe and potentially fatal, medical condition. According to reports published by the American Heart
Association, approximately 92 million (nearly 37.0%) adults in the United States are living with some form of CVD or the after-effects of stroke, and, by
2035, approximately 130 million adults in the United States are projected to have some form of CVD.
It has been shown through several peer-reviewed, published studies that sleep apnea is a direct contributing factor to the incidence of various
forms of CVD. Accordingly, cardiologists have become increasingly aware and focused on the diagnosis and treatment of sleep apnea. In addition,
according to published reports, there were approximately 32,000 cardiologists in the United States in 2019 that practice in approximately 7,800 cardiology
offices.
Sleep Apnea
Sleep apnea is a serious and chronic sleep breathing disorder that negatively impacts a patient’s sleep, health and quality of life. There are two
types of sleep apnea:
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OSA, the most common form of sleep apnea, occurs when a person’s breathing is interrupted during sleep by a partially or completely
blocked airway. When the airway becomes blocked, the brain detects a stress signal from various biological sources including the chest
muscles, lungs and, at times, also a drop in blood oxygen content, which causes the individual to awaken unconsciously (a micro-arousal),
just enough to tighten the airway muscles and allow normal breathing to resume. While regular breathing is restored temporarily, the
obstruction typically occurs again which restarts the apnea cycle. This cycle of obstructions and waking can repeat dozens of times per hour
throughout the night, disrupting the rapid eye movement, or REM, and deep, restorative sleep that are critical to good health as well as
creating negative pressure in the abdomen that causes damage to the organs; and
Central sleep apnea, or CSA, a less common form of sleep apnea, occurs when a person’s breathing is impacted by lack of brain stimulation of
the lungs and diaphragm muscles rather than obstruction. CSA is usually mixed with OSA and rarely appears in a pure form. CSA is known
to be prevalent in heart failure patients as well as residents of high altitudes and opiates addicts and a specific pattern of it is called Cheyne-
Stokes Respiration. To our knowledge, there is a continuing debate in the scientific community and among clinical practitioners whether this
diagnosis impacts the treatment pathway.
A 2014 American Journal of Epidemiology study reported that 26% of adults suffer from sleep apnea. Additionally, according to a 2019 study
published by the American Journal of Respiratory and Critical Care Medicine, sleep apnea impacts more than 936 million people worldwide. At the same
time, and despite the growing awareness of the consequences of OSA, it was estimated in a 2015 study published by the American Thoracic Society that
over 80% of patients with OSA have never been diagnosed.
A 2010 report published by Harvard Medical School estimated the annual economic costs (including the cost of diagnosis and treatment, public
safety costs from OSA-related traffic accidents, and the incremental medical costs of OSA co-morbidities) of untreated moderate to severe OSA in the
United States to be between $65 billion and $165 billion annually, potentially greater than the cost of asthma, heart failure, stroke or hypertensive disease,
which range from $20 billion to $80 billion according to estimates. At the same time, according to an estimate published by Fisher & Paykel Healthcare,
the sleep apnea diagnostic and treatment worldwide market was estimated to exceed $3 billion.
The severity of sleep apnea is typically measured by:
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the number of partial or complete airway blockages in an hour, referred to as the apnea-hypopnea index, or AHI. For example, moderate OSA
patients have an AHI of 15 to 30 events per hour, while severe OSA patients have an AHI of more than 30 events per hour; or
the average number of respiratory disturbances and related arousals, or RERAs, per hour of sleep, referred to as the respiratory disturbance
index, or RDI.
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Left untreated, sleep apnea increases the risk of serious chronic conditions, such as high blood pressure, cardiac arrhythmias (such as atrial
fibrillation) and other cardiovascular disease, metabolic disease, adult type II diabetes and other life-threatening diseases. In particular, published research
shows that, if sleep apnea is untreated: (1) the risk of stroke or death from sudden cardiac arrest doubles; (2) the risk of death from CVD is five times
greater; and (3) the risk of recurrence of atrial fibrillation following ablation increases by 42%. In addition, a 2010 study published in Anesthesiology
Clinics and a 2018 study published by the Journal of the American Heart Association illustrate the following co-morbidities associated with sleep apnea:
drug resistant hypertension (63-83% of the studied patients with drug resistant hypertension were diagnosed with OSA); congestive heart failure (76%);
diabetes type 2 (36%); stroke (71-90%); arrhythmias (58%); ischemic heart disease (38%); and atrial fibrillation (49%).
There are several treatment options for sleep apnea, including: (1) CPAP machines that are used with a variety of breathing masks — the mask,
worn snugly over the nose or mouth during sleep, uses the CPAP machine to supply pressurized air that flows continuously or intermittently into the throat
to prevent the airway from collapsing; (2) MADs also known as sleep apnea oral or dental appliances — that are used to position the lower jaw slightly
forward of its usual rest position, which may be enough to keep the airway open during sleep for patients with mild to moderate OSA; and (3) other
treatment options, such as positional pillows, upper airway neurostimulation devices, tongue ablation and even surgery.
Linkage between Sleep Apnea and Cardiovascular Disease
There is increasing awareness among cardiologists and the general population of the importance of sleep apnea in the causation or promotion of
hypertension, coronary artery disease, heart failure, atrial arrhythmias, and stroke, and, consequently, as a predictor of premature cardiovascular death.
A 2013 study published in American Journal of Epidemiology estimated that sleep apnea is evident in 26% of adults in the general population, but
in certain cardiovascular diseases its prevalence can be 40-60%. Similarly, according to research published in the Journal of the American College of
Cardiology in 2017, sleep apnea is highly prevalent in patients with cardiovascular disease and evidence supports a causal association of sleep apnea with
the incidence and morbidity of hypertension, coronary heart disease, arrhythmia, heart failure and stroke. In many cases, sleep apnea was demonstrated to
increase the risk for cardiovascular disease or its recurrence post treatment — such as in atrial fibrillation, high blood pressures and myocardial infarction.
The 2017 research also indicates that patients undergoing surgery or other invasive procedures who suffer from sleep apnea are at a greater risk to develop
post-operative complications and recurrence of the disease.
Other studies also support the linkage between sleep apnea and cardiovascular disease. For example, a 2017 study published in Circulation:
Arrhythmia and Electrophysiology concluded, among other things, that OSA is associated with structural and functional atrial remodeling, and that in the
sleep apnea cohort, post pulmonary vein, or PV, isolation, additional non-PV triggers elimination improves ablation outcome, compared with the cohort
with no sleep apnea where PV isolation only was sufficient. In addition, this 2017 study calls for conducting sleep studies before ablation, which lead us to
believe that the presence of sleep apnea may help define the ablation strategy.
Current Alternatives for Sleep Apnea Diagnosis and their Limitations
According to the 2017 clinical practice guidelines published by the AASM, a definitive diagnosis of sleep apnea can be made with either (1) a
PSG study or test, conducted during an overnight visit to a sleep laboratory or sleep center, or (2) through the aid of a technically adequate HSAT:
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In-lab PSG Tests. PSG tests have been the standard method of diagnosing sleep apnea. They are performed in a sleep lab while the patient is
constantly monitored by medical professionals, usually sleep technicians. Patients are hooked up to a web of sensors, electrodes and wires
attached to various body parts, as well as chest and abdomen belts and air tubes in the nostrils. PSG tests typically record 12 or more channels
of measurements, including brain waves, eye and chin movements that signal the different stages of sleep; heart rate and rhythm; respiration,
such as nasal air flow; abdominal and chest belts; and oxygen levels in the blood.
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·
Home Sleep Apnea Test. HSATs are low-cost, portable devices that allow patients to be tested in the comfort of their homes. They vary in
terms of the number of channels or parameters that they measure, the simplicity in setting up and using the technology, and the level of
comfort afforded to the patient. Most HSATs are self-administered and the data collected is downloaded and interpreted by a board-certified
sleep physician after the equipment is returned.
We believe that there are several shortcomings to in-lab PSG testing, including:
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Inconvenience. Patients must travel to a sleep lab and stay overnight;
Cost. Third-party reimbursement for PSG is higher than for HSAT devices. We estimate that PSG testing in the United States is reimbursed by
Medicare at an approximate range of between $600 and $1,100, compared to HSAT tests described by codes 95800 and 95806, that are
reimbursed by Medicare at an approximate range between $120 and $170. As a result, patient deductibles or copayments for HSATs can be
considerably lower;
Access to Care. Due to a limited number of sleep centers and higher denial rates by medical insurance companies (requiring an HSAT prior to
approving an in-lab PSG test), patients often have to wait longer for their scheduled appointment; and
Patient Discomfort and Quality of Sleep During a PSG Test. Patients are less likely to have a typical night’s sleep in a sleep lab, compared to
sleeping in their own homes. This is primarily because they are in an unfamiliar setting, hooked up to a web of sensors and wires, while being
watched by strangers, potentially exposed to allergens which do not exist in their home environment (such as pollens and animal particles).
We believe that HSATs address many of the shortcomings of PSG, as HSATs provide easy access to care, are more convenient for the patient, are
less expensive and provide a more typical night sleep recorded in the comfort of the patient’s home.
The importance of HSATs has been recognized by various medical organizations and associations. The AASM approved the usage of home sleep
testing to aid in the diagnosis of sleep apnea with a portable sleep device in 2009. In addition, in 2008, CMS approved HSATs as a new covered technology
alternative and, by 2011, CMS recognized new “Current Procedural Terminology”, or CPT codes, and “Healthcare Common Procedure Coding System”, or
HCPCS codes, for HSAT reimbursement. As such, various commercial payors have been implementing prior authorization programs stipulating that
reimbursement requests for in-lab PSG testing would be rejected, unless an HSAT was first conducted. These all contribute to increased use of HSATs and
we believe that it will become the predominant form of sleep testing in the future, at least in the United States.
Despite the advantages of HSATs over PSG tests, we believe there are several deficiencies in cardio-pulmonary HSAT devices, to which we
sometimes refer herein as traditional HSAT devices. These deficiencies include:
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Possible Misdiagnosis. Most HSATs use Total Recording Time, or TRT, as their denominator to calculate the most critical criteria of the
Apnea Hypopnea Index, or AHI, the index used by physicians to analyze sleep apnea, compared with PSG tests that use Total Sleep Time, or
TST. TST is similar to TRT but deducts the total time that the patient was awake, such as the time it takes the patient to fall asleep, insomniac
episodes and trips to the restroom. The use of TRT without manual scoring of the data by a sleep technician has been proven in recent studies
to result in a net misdiagnosis of up to 20% of patients; and
Completion Rates. The rates of completion of traditional HSATs are relatively low in the first night due to technical challenges, such as
disconnection of sensors, mainly due to finger oximetry and nasal probes, and patient self-setup errors. For example, according to a 2014
study published by Frost & Sullivan, approximately 20% of HSATs fail in the first night.
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Direct to Consumer Market Overview
In 2019, we started focusing on the DTC market, and we plan to launch our DTC activity during the first half of 2020. We believe the raising
awareness of sleep apnea and its adverse health effects, combined with consumer demand for cost effective, accessible solutions, overcome inefficiencies in
traditional healthcare provider systems, may represent an opportunity for us to enhance the sales of our technology platform directly to consumers.
In this market segment we plan to offer through channel partners, who have an off-line and on line consumer market presence, a full digital health
sleep apnea solution for the patient, at the comfort of their home. We plan to address this market with our prescription WatchPAT 300 device as well as the
WatchPAT ONE fully disposable prescription device, combined with our CloudPAT and SleePath digital care continuum management assets.
With the support of our operational capabilities, we have developed in the implantation of our WatchPAT Direct program, we plan to provide best
in class digital health patient pathway management services through these partners.
To facilitate the clinical oversight of the patients in this journey, we plan to facilitate remote on-line consultation through our CloudPAT system in
order to create an on-line market place that allows demand for clinical services to be met with qualified and certified physicians. That way, we will
facilitate patient access to real time consultations, advice and therapy prescriptions throughout the care pathway. In addition, we have partnered with high
quality sleep practices and DMEs that have demonstrated effective ability to set up CPAP therapeutic solution remotely, as well as monitor and drive
compliance.
We believe that our digital health platform can facilitate the journey of patients from diagnosis to therapy and compliance in an easy, efficient and
innovative manner which we believe will make our offering successful in this new market segment and will position the company for new growth
opportunities. Our DTC partner, SoClean, has launched this DTC activity during March 2020.
Our Products and Services
The WatchPAT Family of Products
Overview. Our prescription WatchPAT sleep apnea test line of products, the first generation of which received its initial United States Food and
Drug Administration, or FDA, clearance in 2001, is a watch-like wrist-mounted device with one or two (depending on the model of the WatchPAT product)
single-use disposable bio-sensors connected to the patient’s fingers, designed to non-invasively record, measure and analyze digital pulse volume change,
or changes in arterial blood volume.
The product is based on our proprietary, clinically validated, technology using the PAT signal, which is capable of monitoring the PAT signal to
analyze it for diagnostic purposes. The PAT signal measures changes in the patient’s peripheral arterial pulse volumes as well as various parameters of
arterial activity. These arterial activity parameters accurately reflect the patient’s sympathetic nervous system (autonomous (involuntary) nervous system)
activity. The WatchPAT continuously records and interprets the autonomic or involuntary nervous system activation during sleep, as measured through the
PAT signal. The PAT probe uses optical sensors to non-invasively measure the changes in arterial blood volume while applying sub-diastolic pressure on
the distal two thirds of the finger, including the tip. The pressure fields reduce the arterial wall tension and generate a greater dynamic range of the
measured PAT signal and improved sensitivity to changes in the signal amplitude.
With the original models of the WatchPAT, the patient had an additional oximetry sensor attached to another finger measuring blood oxygen
saturation. In 2014, we introduced WatchPAT 200 Unified, which allows our proprietary sleep apnea test to be performed using only a single finger to
collect both oximetry and PAT data in a unified probe. In the year ended December 31, 2018, the WatchPAT 200 Unified was our main product offering. In
March 2019, we introduced the WatchPAT 300, a new generation of the WatchPAT line of products, which, among other things, is designed to expedite data
transfer and allow the use of a lighter and smaller watch. In June 2019, we received FDA clearance for our WatchPAT ONE, which, to our knowledge, is
the first and only disposable HSAT diagnostic aid on the market. The WatchPAT ONE collects the same data as the WatchPAT 200 Unified and WatchPAT.
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The following pictures depict the WatchPAT 300 device:
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The following pictures depict the WatchPAT ONE device:
Key Features
The key features of WatchPAT are as follows:
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Single-use disposable bio-sensor. WatchPAT 300 and WatchPAT 200 Unified employs a single-use disposable finger bio-sensor to measure
the PAT signal. The bio-sensor is built of external hard shell and sensitive internal membrane that create blood pooling in the finger
circulation as well as sensitive optical sensors designed to accurately measure changes in blood volumes and oxygen levels.
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Reusable WatchPAT 200 Unified and WatchPAT 300 devices. Except for the bio-sensor, the WatchPAT 200 Unified and WatchPAT 300 devices
are reusable and returned to the physician or clinic after patient use.
Data processing. The data acquired by the various sensors is automatically processed by our proprietary algorithm and a final report is
automatically generated to the physicians through local or cloud-based software.
Seven channels. WatchPAT is designed to measure seven unique parameters, also known as channels:
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PAT — which is a physiological signal that mirrors changes in the autonomic nervous system caused by respiratory disturbances
during sleep.
Oximetry — the measurement of oxygen levels in the blood.
Actigraphy — the measurement of body movement while sleeping. WatchPAT actigraphy is equipped with adaptive algorithms that
prevent detection of severe apneic events, such as wakefulness.
Heart Rate — the number of heart beats per minute while sleeping.
Body Position — notes whether the patient is asleep on back (supine), front (prone) or side, all of which influence sleep apnea.
Snoring Intensity — loud snoring is a major indicator of sleep apnea.
Chest Motion — three axial movement of a point on the chest, just under the sternum notch, during the breathing cycle.
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Rich Data Output. WatchPAT uses the seven channels of patient data and our proprietary algorithms to process and provide the physicians
various data outputs to aid their diagnosis, including:
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Total Sleep Time — WatchPAT reports both TST and basic Hypnogram (also known as sleep architecture), even though it does not
employ the traditional airflow and chest and abdominal effort belts channels nor the electroencephalograph, or EEG, and eye
movement detectors used in some other HSAT devices.
Apnea/Hypopnea Index, or AHI, and RDI — WatchPAT provides information on AHI and RDI, the clinically accepted indices that
determine the severity of sleep apnea.
Central Sleep Apnea, or CSA. — With our Central Plus module, WatchPAT can also provide quantification of AHI, which is the
portion of events per hour that are identified as CSA and percent of sleep time with Cheyne- Stokes Respiration.
Oxygen Desaturation Index, or ODI — WatchPAT provides information on ODI, which is the total number of blood oxygen
saturation drops per hour of sleep, as well as statistics about the blood oxygen saturation statistics throughout the night.
Sleep Stages and Architecture — WatchPAT provides information on the cyclical pattern of sleep stages, summarized in a chart
called a hypnogram, which differentiates between the non-REM stages of light sleep, deep sleep and REM (rapid eye movement)
sleep. REM related sleep disorders are associated with significant higher risk for hypertension.
Sleep Fragmentation — WatchPAT detects repeated short interruptions of sleep throughout the night.
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Other — WatchPAT provides data on outputs of various other channels, including heart rate, body position and snoring intensity.
Key Benefits of WatchPAT
We believe that WatchPAT has several key advantages over in-lab PSG testing and competing HSAT products by providing the following key
benefits:
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Ease of Use and Patient Comfort. Composed of a simple wrist worn watch-like device with one finger probe (in the WatchPAT 200 Unified,
WatchPAT 300 and WatchPAT ONE models), the prescription WatchPAT was specifically designed for home sleep apnea testing for
appropriate patients with minimal patient education. As such, we believe it is easy and intuitive to operate for patients, equipped with
validated automated scoring algorithms that reduces time of processing and analyzing the raw data collected to few minutes, compared with
manual scoring that we estimate takes on average between 30 to 40 minutes. We estimate that these advantages also translate to a test
completion rate of 98%, compared with other HSAT devices that have estimated completion rates of 80%.
Accuracy. Based upon, among other things, several studies, including a meta-analysis study, we believe that the WatchPAT offers accuracy
that, while not equivalent, presents a viable alternative to in-lab PSG for confirmation of clinically suspected sleep apnea. In addition, our
WatchPAT devices have several features that are provided by in-lab PSG but we believe are lacking in most traditional HSATs, including:
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The ability to accurately report TST, not just TRT like in traditional HSATs. The TST detection is important for patients who tend to
wake up frequently during the night or suffer from insomnia; and
The ability to detect sleep stages, with a focus on REM sleep. The diagnosis of REM related sleep patients can be missed because
their overall AHI is low, whereas their REM-related AHI is high. According to one study from 2014, if REM related sleep apnea is
left untreated, it is associated with up to a 24% increase in risk for hypertension.
Cost. The total cost of a WatchPAT test is less expensive for third-party payors than an overnight sleep center test. We estimate that PSG
testing is reimbursed by Medicare in the United States at an approximate range of between $600 and $1,100, compared to HSAT tests
described by codes 95800 and 95806 that are reimbursed by Medicare at an approximate range of between $120 and $170 and, consequently,
the deductible to the patient for HSATs is lower. We believe this cost advantage to payors and patients will help drive market penetration.
Provides Immediate and Easy-to-Read Results. Most in-lab PSG and HSATs require a sleep technician to review and interpret the raw data
recording and identify areas of poor signals, wakefulness and other technical issues related to nasal cannula motion. The WatchPAT is
designed to provide validated automated reports, without the need for the additional step of a sleep technician’s review.
WatchPAT 300. In April 2018, we publicly announced that we submitted our application to the FDA for clearance of the prescription WatchPAT
300, a new generation of the WatchPAT line of products that is designed to expedite data transfer, allow the use of a lighter and smaller watch and reduce
manufacturing costs. The WatchPAT 300 also lays the foundation for possible additional future capabilities, such as wireless communication embedded in
the device. In August 2018, we obtained the FDA clearance of the WatchPAT 300 for use with patients suspected to have sleep related breathing disorders
as a diagnostic aid for the detection of sleep related breathing disorders, sleep staging, snoring level and body position, and, in March 2019, we announced
the commercial launch of the WatchPAT 300.
WatchPAT ONE. In January 2019, we publicly announced that we submitted our application to the FDA for clearance of WatchPAT ONE, the first
and only disposable HSAT that does not require the patient to return the WatchPAT to the physician or clinic. In June 2019, we received FDA clearance for
the prescription WatchPAT ONE for use with patients suspected to have sleep related breathing disorders as a diagnostic aid for the detection of sleep
related breathing disorders, sleep staging, snoring level and body position, and commenced with a limited commercial introduction. The WatchPAT ONE
uses an app on a smartphone to guide the patient through the set-up, initiation and completion of the sleep study. Through Bluetooth connection, data is
transferred from the WatchPAT ONE to the smartphone app and then transferred to a secure server through a WiFi or cellular connection.
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WatchPAT Related Services and Accessories
Total Sleep Solution. Our TSS program aims to provide a complete sleep apnea management solution to cardiology customers, either at the
cardiology center or through third-party service providers. The key components of our TSS program, which is currently offered only in the United States,
include:
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Screening — We provide information and best practices that help cardiology clinics to properly implement patients’ systematic screening to
identify patients with high pre-test probability into their practice workflow routine by using validated questionnaires, such as STOP-Bang
(Snoring, Tired Observed stop breathing, high blood Pressure, BMI, Age, Neck size and Gender). This initial screening is a required
documentation step by most insurance companies to qualify for HSAT reimbursement;
Diagnostics — Following initial screening, we aid the diagnostic stage by offering (1) home sleep testing using our WatchPAT family of
products; use of our CloudPAT solution, as described below, to transfer the test results to a board-certified sleep physician for customers who
prefer outsourcing the logistics; or (2) for those customers who prefer to prescribe for the test only, access to a network of IDTF for patient
diagnostic services using the WatchPAT or other HSAT devices;
Treatment — Through arrangements between the clinics and DMEs, providers, patients diagnosed with sleep apnea can be provided with
sleep apnea therapy devices, such as CPAP, or, by the clinic referring to dentists specializing in sleep medicine, with prescriptions for MADs.
Those providers may use third-party therapy devices, if the certified sleep physician assigned to interpret the test results prescribes such
devices; and
Reporting — Using our CloudPAT and SleePath solutions, as described below, we facilitate the cardiology customers’ receipt of status reports
and to otherwise monitor the patients’ sleep apnea management status and compliance, if their DME providers use devices compatible with
our SleePath solutions.
WatchPAT Direct. WatchPAT Direct is a set of logistic support services that we offer from our service center in Atlanta, Georgia. These services
follow the prescription orders and include the coordination and delivery of the WatchPAT to the patient and the shipment back to our service center in
Atlanta. Once the device is returned the data from the device is downloaded and delivered to an assigned physician for interpretation, WatchPAT Direct is
currently offered only in the mainland United States.
CloudPAT. CloudPAT is a cloud-based information technology, or IT, platform, designed to allow customers to transfer the WatchPAT test results
primarily to board-certified sleep physicians, IDTF and DMEs. The board-certified sleep physicians receive and interpret the test results, make a diagnosis
and potentially prescribe therapy. In the United States, the signing off on the diagnostic report by a board-certified sleep physician is required by the
reimbursement guidelines of AASM and CMS. The CloudPAT, together with the SleePath will also be used to deploy our direct to consumer digital health
model and provide digital health patient pathway management services directly to consumers, including through channel partners. We plan to facilitate, via
our CloudPAT, remote on-line consultations in order to create an on-line market place that will allow demand for clinical services to be met with qualified
and certified physicians. The CloudPAT will facilitate patient access to real time consultation, advice and prescriptions throughout the care pathway.
zzzPAT. zzzPAT is an analysis software used in conjunction with our WatchPAT family of products. This software stores the recorded raw signals
and provides a set of both automated as well as manual scoring and analytical functions for interpretation and reporting purposes used in the diagnosis of
sleep apnea.
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SleePath. SleePath is an integrated e-health sleep apnea care pathway monitoring module, included as part of our CloudPAT system, that is
designed to allow cardiologists to monitor a patient’s sleep apnea management status and compliance with CPAP therapeutic devices on demand. Key
features of SleePath include (1) utilizing data from both the CloudPAT and the cloud-based data transmitted and stored by leading CPAP devices
manufacturers, including Philips United States and ResMed, to provide a “cardio sleep dashboard”, which is designed to allow physicians to track the sleep
care pathway status of both the physician practice and the individual patient; and (2) the system monitors and reports CPAP device compliance (the number
of days and hours on CPAP and residual sleep apnea), with the data being presented in a user-friendly visual format that is designed to show progress or
deviation toward specific treatment goals and changes in metrics over time.
The EndoPAT
The EndoPAT device, the first generation of which received FDA clearance in 2003, is designed to diagnose endothelial function by measuring the
ability of blood vessels to dilate as a response to shear stress, or other stimuli, in order to accommodate increased blood flow. The endothelium is the inner
lining of all blood vessels regulating their function and ability to dilate or constrict. The EndoPAT device uses our PAT-based technology to measure the
ability of blood vessels to dilate after an artificially created CVD. In the United States, EndoPAT has no reimbursement and is sold primarily for research
purposes. We anticipate that, in 2020, we will begin selling our newly developed EndoPATX for which we recently received authorization to affix a CE
mark.
Clinical Results and Studies
We have invested in and developed a significant body of clinical studies and data that demonstrates the effectiveness and safety of our WatchPAT
family of products by validating it against “gold-standard” PSG tests. The effectiveness and safety of our WatchPAT family of products have been
consistent across both company-funded and independent clinical studies that have evaluated, in the aggregate, more than nine hundred patients, all of which
have been published in peer-reviewed publications.
The following is a summary that highlights key findings from some of these studies. We believe that (except to the extent indicated under “Impact
of Arterial Stiffness on WatchPAT Variables in Patients With Obstructive Sleep Apnea” below) (1) these studies are the most material, reliable (primarily in
the sense that the study uses commonly adhered procedures for such type of studies) and comprehensive studies conducted that are relevant to our main
product, the WatchPAT, (2) these studies address (whether in a favorable or negative manner) material elements underlying our statements regarding the
key features of the WatchPAT and its comparison to PSG tests, and (3) disclosing such studies is meaningful to investors.
In our discussion of the results of the studies described below, we have indicated the relevant p-values, or P, which demonstrate the statistical
significance, all of which are less than 0.05, which is the commonly accepted threshold for statistical significance and follows the convention used by the
authors of the relevant studies as well as what we believe is standard clinical practice.
Where we have not indicated the p-value in the results of the studies described below, it is either because the relevant result is not a statistical
parameter or the study itself did not publish the p-value for the specific result. We believe such findings, despite the lack of p-value, are still meaningful
and useful to investors primarily because they were part of the findings highlighted or conclusions provided by the authors and are otherwise relevant to an
understanding of our WatchPAT family of products and, with respect to the Health Provider System Study described below, also illustrate how one health
provider has evaluated the transition from PSG tests to HSATs.
Diagnosis of Obstructive Sleep Apnea by Peripheral Arterial Tonometry
This meta-analysis study, which was published in JAMA Otolaryngology — Head & Neck Surgery in December 2013, aimed to assess the
correlation between sleep indexes (namely, RDI, AHI and ODI, which indexes are described under “Marketing Overview and Our Solutions” above)
measured by a PAT-based portable sleep testing device (using our WatchPAT family of products) and those measured by PSG tests, by conducting a review
of multiple studies that, overall, examined 909 patients.
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The key results of this study were that (1) studies comparing the RDI between the PAT-based tests and PSG tests had a correlation of r = 0.879
(P<0.001), where r = 1.00 would indicate the highest correlation; (2) studies comparing the AHI between the PAT-based tests and PSG tests had a
correlation of r = 0.893 (P<0.001); and (3) studies comparing the ODI between the PAT-based tests and PSG tests had a correlation of r = 0.942 (P<0.001).
Based on the results, we believe PAT-based portable devices, such as our WatchPAT family of products, present a viable alternative to PSG for
confirmation of clinically suspected sleep apnea.
Impact of Arterial Stiffness on WatchPAT Variables in Patients with Obstructive Sleep Apnea
This study, which was published in Journal of Sleep Medicine in March 2018, aimed to assess the effects of arterial stiffness on WatchPAT results,
by examining a total of 61 patients with suspected OSA, where each patient initially underwent a home sleep study with WatchPAT, followed, after an
average of 39 days, by both an in-lab full PSG sleep study and an arterial stiffness evaluation using a Brachial-Ankle Pulse Wave Velocity, or baPWV, test.
The key results of this study were that (1) overall, WatchPAT’s apnea-hypopnea index, or AHI, was moderately correlated (r=0.69) to those AHI of
PSG (P<0.0001); (2) for patients with lower baPWV, there was a significant correlation between the WatchPAT and PSG’s AHI (for example, for patients
with baPWV< 1500, r = 0.782 (P≤0.0001)); and (3) for the high baPWV group, there was low or non-significant correlation between the WatchPAT and
PSG’s AHI (for example, for patients with baPWV>1500, r=0.397 (P=0.04)). The study concluded, on a cautionary note, that high arterial stiffness may
affect the respiratory variables measured by WatchPAT.
We note that, while this study addresses (in a positive as well as negative manner) various features of the WatchPAT and its comparison to PSG
tests, we believe its results are limited for the following primary reasons: (1) the WatchPAT validation comparison with the PSG test was conducted after a
delay of 39 days on average, instead of being performed simultaneously as in most WatchPAT validation studies. Based on the literature on the
consequences of delays of such length between repeated studies, we believe the delay may have introduced a substantial degree of variability between
respective tests; and (2) the study used an AHI threshold of 30 to diagnose OSA instead of using other, lower and more commonly used conventional
diagnostic AHI thresholds, such as an AHI threshold of 15.
Sleep Staging Based on Autonomic Signals: A Multi-Center Validation Study
This multi-center study, which was published in the Journal of Clinical Sleep Medicine in June 2011, aimed to assess the WatchPAT-based
algorithm for determining wake, light sleep, deep sleep, and REM sleep based on epoch-by-epoch comparisons to PSG tests, by monitoring a total of 237
patients (of which 38 were normal and 189 were diagnosed with OSA) that underwent simultaneous, synchronized overnight recordings with PSG and the
WatchPAT. As described under “Our Products and Services — The WatchPAT Family of Products — Sleep Stages and Architecture,” the ability to detect the
various sleep stages provides important information on the cyclical pattern of sleep stages, which differentiates between light sleep, deep sleep and REM
sleep. It should be noted that this study, which was authored by, among others, certain of our current or former employees and consultants, was partially
sponsored by us and, to our knowledge, also used certain data from previous studies that we supported.
The key results of this study were that (1) the overall agreement between PSG tests and WatchPAT in detecting light/deep sleep was 88.6% ± 5.9%
(P<0.05); (2) the overall agreement between PSG tests and WatchPAT in detecting REM sleep was 88.7% ± 5.5% (P<0.05); (3) detecting REM latency
provided similar results in PSG tests and WatchPAT (237 ± 148 and 225 ± 159 epochs in PSG and WatchPAT, respectively) (P<0.05); (4) quantifying REM
percentage in PSG tests and WatchPAT was 14.4% ± 6.5% and 19.3% ± 8.7%, respectively (P<0.05); and (5) detecting sleep efficiency in PSG tests and
WatchPAT provided similar results (78.4% ± 9.9% and 78.8% ± 13.4% in PSG and WatchPAT, respectively (P<0.05)). In addition, according to this study,
OSA severity did not affect the sensitivity and specificity of the WatchPAT algorithm.
Based on the results, we believe this study showed that WatchPAT is capable of detecting sleep stages with moderate agreement to PSG tests in
normal subjects and OSA patients and that sleep staging based on actigraphy and signals recorded by the WatchPAT is of reasonable accuracy.
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A Novel Adaptive Wrist Actigraphy Algorithm for Sleep-Wake Assessment in Sleep Apnea Patients
This study, which was published in Sleep in December 2004, aimed to validate an automatic algorithm, developed for actigraphic studies in
normal subjects and patients with OSA, by comparing it on an epoch-by-epoch basis to PSG tests, by monitoring a total of 228 subjects from three different
sleep centers that underwent simultaneous, synchronized recordings with PSG and the WatchPAT (a model with a built-in actigraph). It should be noted
that, to our knowledge, this study used certain data from other previous studies that we have supported.
The key results of this study were that (1) the overall agreement between PSG and WatchPAT ranged from 86% in normal subjects to 86%, 84%,
and 80% in the patients with mild, moderate, and severe OSA, respectively (P<0.05); (2) the overall sensitivity (i.e., the probability that WatchPAT detected
sleep when the PSG detected sleep at that epoch) and specificity (i.e., the probability that WatchPAT detected wake when the PSG detected wake at that
epoch) to identify sleep was 89% and 69%, respectively; and (3) there was a very small statistical difference between WatchPAT and PSG in determining
sleep efficiency (i.e., the total sleep time as percentage of the amount of time spent in bed from first attempting to go to sleep until final waking up) (78.4%
+/- 9.9% and 78.8% +/- 13.4%, respectively) and TST (690 +/- 152 epochs and 690 +/- 154 epochs, respectively) but there was a significant difference in
determining sleep latency (i.e., the time it takes for the patient to fall asleep) (56.8 +/- 31.4 epochs and 43.3 +/- 45.4 epochs, respectively). For most
individuals, the difference between the PSG and actigraphy was relatively small, although for some there was a substantial disagreement up to a maximum
of 37% in sleep efficiency.
Based on the results, we believe this study showed that the WatchPAT actigraphy algorithm provides a reasonably accurate estimation of sleep and
wakefulness in normal subjects as well as in OSA patients.
Health Provider System Study
This study, which was published under the title The Effect of the Transition to Home Monitoring for the Diagnosis of OSAs on Test Availability,
Waiting time, Patients’ Satisfaction, and Outcome in a Large Health Provider System in Sleep Disorders in April 2014, to which we refer as the Health
Provider System Study, aimed to assess the effects of the transition of one of the leading health insurance providers in Israel from PSG tests to HSATs in
terms of accessibility, waiting time, patient satisfaction, costs and CPAP device purchases by patients, by comparing data that was retrieved from the
insurance provider’s database of 650,000 patients between the period of 2007-2008 and 2010-2011 (2009 was excluded during the transition from PSG to
HSAT).
The key results of this study were that (1) 1,471 sleep studies were conducted during 2007-2008 (or, on average, 735.5 studies per year), compared
with 2,794 sleep studies (or, on average, 1,397 studies per year) during 2010-2011 (P<0.05), reflecting a 90% increase of the number of sleep study tests
performed following the transition to HSAT (while the increase in total insured people during same period was less than 5%); (2) despite an increase in the
number of tests, the shift to HSAT was accompanied by a decrease of over 20% in overall expense of OSA diagnosis; (3) the average waiting time
decreased from 9.9 weeks during 2007-2008 to 1.1 week during 2010-2011 (P<0.05); (4) CPAP device purchases increased by 39%, from 597 devices in
2007-2008 to 831 devices in 2010-2011; (5) there were similar outcomes for both HSAT and PSG tests of compliance to CPAP treatment, daily CPAP
usage, improvement in daytime sleepiness and quality of life, and patient satisfaction; and (6) in retrospect, 56% of patients who underwent PSG tests
indicated that they preferred HSAT and 72% of patients who underwent HSATs indicated that they preferred HSAT (P<0.05).
Based on the results, we believe this study showed that a transition from in-lab testing to unattended home sleep testing improved OSA diagnosis
test accessibility reduced waiting time and reduced overall OSA diagnosis costs, while maintaining patient satisfaction.
Sales and Marketing
General. Our WatchPAT family of products and related services are sold and marketed through both direct and indirect channels, including
distributors. Our primary customers are hospitals, medical centers (including sleep centers), health management organizations (HMOs), physicians
(including sleep specialists), research institutions and cardiology practices and departments. The targeted customers for our WatchPAT technology are
primarily cardiologists and electrophysiologists who are interested in integrating sleep medicine into their practice, as well as physicians who specialize in
sleep medicine. Sleep specialists represent a variety of medical backgrounds, including pulmonologists (lung specialists), otolaryngologists (ears, nose, and
throat), neurologists, primary care physicians and dentists. Our physician customers typically practice in office settings, clinics, or hospitals. Our EndoPAT
products and related services are sold primarily through indirect channels to research institutions and directly to pharmaceutical companies to support their
clinical research.
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We offer our WatchPAT family of products to customers in two main business models:
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TaaS whereby our customers pay a fixed fee per each home sleep test conducted with our product. The fee per test includes all the
components associated with the test, including the disposable bio-sensor (one disposable is used once with each WatchPAT test), the hardware
(the WatchPAT device itself) and access to our CloudPAT platform; and
Capital purchase, whereby our customers purchase and own the hardware (the WatchPAT device itself), the disposables bio-sensor (one
disposable is used once with each WatchPAT test) and other related accessories. We also offer our customers capital purchase through a lease
model, whereby the customer leases the product for monthly lease payments, typically over a period of between 18 to 24 months, and
becomes the owner of the product at the end of the lease period in consideration for a nominal amount.
While sleep physicians and traditional sleep business represent the majority of our United States customers today, consistent with our strategy, our
plan is that cardiologists will represent the majority of our growth and will become an increasingly larger component of our United States sleep business
over time.
In the years ended December 31, 2019, 2018 and 2017, a substantial majority of our revenues were derived from our WatchPAT family of products
and related services (92.7% in the year ended December 31, 2019, 92.5% in the year ended December 31, 2018 and 87.5% in the year ended December 31,
2017). In terms of geographic markets in the years ended December 31, 2019, 2018 and 2017, a substantial majority of our revenues were from sales in the
United States (73.5% in the year ended December 31, 2019, 72.7% in the year ended December 31, 2018 and 71.3% in the year ended December 31, 2017).
For additional details regarding the breakdown of our revenues by geographical distribution and by activity, see Item 5.A. “Operating and Financial
Review and Prospects — Operating Results”.
For the year ended December 31, 2019, (1) Kaiser, one of the largest medical insurers and hospital system in the United States, accounted for
approximately 22.4% of our total revenues (compared with 18.9% in the year ended December 31, 2018 and 17.5% in the year ended December 31, 2017);
(2) Philips Japan, a leading global provider of solutions to the sleep and respiratory market, accounted for approximately 11.0% of our total revenues
(compared with 13.3% in the year ended December 31, 2018 and 12.7% in the year ended December 31, 2017); and (3) VA, one of the largest United States
hospital and clinics chains, accounted for approximately 6.6% of our total revenues (compared with 11.9% in the year ended December 31, 2018 and
12.1% in the year ended December 31, 2017).
Direct Sales. We continue to develop our sales and marketing organization that consists of a dedicated sales team that is complemented by a
marketing team as well as sales and marketing support personnel. Our sales force (including marketing, sales and sales and marketing support personnel) as
of December 31, 2019, was comprised of a total of 72 persons, of which 63 persons were located in the United States (in the United States, we had 27
distinct geographic territories (including three verticals) as of December 31, 2019) and 9 persons were located in other locations. Indirect Sales and
Strategic Collaborations. Over the course of the past several years, we have focused on developing long- term strategic partnerships with distributors and
other business partners, including leading global partners such as Medtronic and Philips Respironics:
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Co-Marketing Agreement with Medtronic, Inc. In April 2015, we entered into a co-marketing agreement with Medtronic, Inc., an indirect
wholly owned subsidiary of Medtronic plc. Medtronic currently markets and sells its cardiac ablation products for the treatment of cardiac
arrhythmias, including atrial fibrillation condition. Under the co-marketing agreement, Medtronic was granted exclusive rights to co-market,
with us, our WatchPAT family of products within our Total Sleep Solution framework to electrophysiologists (physicians who specialize in
cardiology arrhythmias) in the United States.
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Distribution Agreement with Philips Respironics GK. In February 2014, we entered into a distribution agreement with Philips Respironics
GK, a subsidiary of Koninklijke Philips NV (also known as Royal Philips), or Philips Japan, which was renewed in December 2018 for an
additional three years’ period until December 2021. Under the distribution agreement, Philips Japan was granted exclusive rights to distribute
our WatchPAT family of products and ancillary accessories in Japan. According to this agreement, we may terminate the agreement if Philips
Japan does not meet certain minimum purchase requirements of our products.
Co-Marketing Agreement with BioTel Heart, a division of BioTelemetry, Inc. In June 2019, we expanded our pilot program to make our Total
Sleep Solution available to select BioTel Heart cardiology customers in the United States. We conducted a successful pilot program with
several BioTel Heart customers and are making the service available in additional targeted regions and we continue to evaluate the expansion
of such collaboration. The collaboration is designed to respond to the growing demand for home sleep apnea testing among cardiologists, who
recognize effective sleep apnea management as a critical strategy for improving health in patients with cardiac disease. Such collaboration
provides the framework for cardiologists to prescribe home sleep apnea tests without worrying about pre-authorization and billing. This next
step in our strategy is intended to simplify the integration of our Total Sleep Solution offering into routine cardiac care pathways.
Direct to Consumer Services Agreement with SoClean. In December 2019, we entered into an agreement with SoClean to provide SoClean
exclusive rights to market WatchPAT ONE directly to consumers in the United States with additional on line services to be facilitated by our
CloudPAT digital health platform. The collaboration is designed to overcome the barriers to sleep apnea testing by enabling consumers to
obtain online sleep consultations and, if prescribed, purchase home based sleep test using the WatchPAT ONE. Under the collaboration,
SoClean has committed to a minimum purchase of $4.5 million worth of WatchPAT ONE devices through 2020 with annual growth
commitments through 2024 to maintain exclusivity to the DTC segment. SoClean will have exclusive DTC rights in the United States through
any and all marketing and sales channels, excluding healthcare providers and facilities.
In order to promote our Total Sleep Solution program, we are also developing partnerships with various business partners whose products or
services are complimentary to ours. For example, we have entered into agreements with Philips United States, an affiliate of Philips Japan and ResMED,
under which (1) we were granted non-exclusive rights to distribute Philips United States sleep apnea treatment devices, such as CPAP devices, to DMEs
that participate in our Total Sleep Solution program to cardiovascular centers in the United States, and (2) Philips United States allowed us to use its cloud-
based CPAP data as part of our SleePath platform.
While we view our partnerships with Medtronic, Philips Respironics and other business partners as strategic, our direct sales to healthcare
providers represented more than 80% of our total revenues in the year ended December 31, 2019.
Marketing. Our marketing efforts are focused on developing a strong reputation with physicians and hospitals that we have identified as key
opinion leaders in cardiology, sleep, and internal medicine based on their knowledge of our technology, clinical expertise and reputation. We do so by
various marketing channels, including hosting clinical education programs and symposium and participating in professional conferences to promote our
products and increase awareness amongst physicians, primarily cardiologists, to the linkage between sleep apnea and CVD and to the advantages of
shifting the point of care for sleep apnea from sleep centers to the cardiology care point.
Third-Party Coverage and Reimbursement
General. In the United States and elsewhere, demand for our products is dependent to a large extent on the availability of coverage and
reimbursement from third-party payors, including governmental payors, such as Medicare and Medicaid, and private payors, such as medical insurance
providers. The manner in which reimbursement is sought and obtained varies based upon the type of payor involved and the setting in which the product is
furnished and utilized. In general, third-party payors will provide coverage and reimbursement for medically reasonable and necessary procedures and tests
that utilize medical devices and may provide separate payments for HSATs, such as our WatchPAT family of products and related professional and
technical services. However, our EndoPAT product has not obtained, and we do not expect it will obtain, coverage or reimbursement from third-party
payors. In determining payment rates, third-party payors are continuously scrutinizing the costs of medical products and services.
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United States. In the United States and markets in other countries, patients who are prescribed medical devices for their conditions and providers
performing the prescribed services generally rely on third-party payors to reimburse all or part of the associated healthcare costs. WatchPAT devices are
typically reimbursed by the patient’s health insurance plan, which include governmental health programs in the United States such a Medicare and
Medicaid, commercial health insurers and managed care organizations. To obtain approval for reimbursement, payors require a physician’s written order, a
history of the patient’s medical condition and past treatment, and demonstration of medical necessity. In 2009, CMS issued a National Coverage
Determination, or NCD, to extend coverage to a number of sleep tests, including the WatchPAT and other sleep testing devices measuring three or more
channels that include actigraphy, oximetry, and peripheral arterial tone when used to aid the diagnosis of OSA in Medicare beneficiaries who have signs
and symptoms indicative of OSA if performed unattended in or out of a sleep lab facility or attended in a sleep lab facility.
In November 2010, the American Medical Association, or AMA, which is responsible for maintaining and updating billing codes for medical
services and procedures, known as CPT codes, created a new a Category I CPT code for sleep studies using home sleep testing devices such as the
WatchPAT: CPT code 95800 (“Sleep study, unattended, simultaneous recording; heart rate, oxygen saturation, respiratory analysis (e.g., by airflow or
peripheral arterial tone), and sleep time”), effective January 1, 2011. After CMS issued the NCD and the AMA created the new CPT code, certain
commercial third-party payors, including Aetna, Cigna, UnitedHealthcare and others, updated their coverage policies to include coverage for these tests,
including the WatchPAT, as described by CPT code 95800. In March 2017, AASM published guidelines establishing updated clinical practice
recommendations to aid in the diagnosis of OSA in adults, pursuant to which devices that measure a minimum of the following sensors are technically
adequate to diagnose OSA in uncomplicated adult patients presenting with signs and symptoms that indicate an increased risk of moderate to severe OSA:
(1) nasal pressure, chest and abdominal respiratory inductance plethysmography, and oximetry, or (2) PAT with oximetry and actigraphy, such as our
WatchPAT device, are technically adequate to diagnose OSA in uncomplicated adult patients presenting with signs and symptoms that indicate an increased
risk of moderate to severe OSA. In November 2017, AIM Specialty Health, or AIM, a specialty benefits management company who advises many United
States health insurance plans on coverage policies, determined that devices utilizing the combination of PAT, actigraphy, EKG/heart rate and oxygen
saturation are considered medically necessary when certain clinical criteria are met.
We believe that AIM Specialty Health’s, or AIM’s, updated clinical guidelines, as well as the July 2019 publication of an updated policy by the
Blue Cross Blue Shield Association’s, or BCBSA’s, Evidence Street organization supporting coverage for HSATs utilizing PAT technology, resulted in
expanded coverage of HSATs by several Blue Cross Blue Shield, or BCBS, payors across the country. Since BCBSA’s Evidence Street publication, seven
BCBS plans covering approximately 15 million lives, most notably Blue Shield of California with 3.7 million covered lives and BCBS Federal Employee
Plan with 5.3 million covered lives, have adopted policies providing coverage for HSATs utilizing PAT-based technology, including the WatchPAT device.
We believe that the Evidence Street report provides important validation of the clinical value of the PAT technology, which we anticipate additional plans
will reference to expand coverage of WatchPAT.
Nevertheless, certain commercial payors and most Medicaid programs currently do not cover HSATs, such as our WatchPAT. In addition, while
private healthcare insurers often follow reimbursement policies adopted by Medicare, this is not always the case and the reimbursement terms of different
private insurers vary. We invest, and plan to continue to invest, resources in our efforts to expand coverage to include sleep tests using our WatchPAT
device.
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In addition to uncertainties surrounding coverage policies, there are periodic changes to reimbursement. Third-party payors regularly update
reimbursement amounts and also from time to time revise the methodologies used to determine reimbursement amounts. This includes annual updates to
payments to physicians for tests using our products. Because the cost of our products generally is recovered by our customers as part of the payment for
performing the test and not separately reimbursed, these updates could directly impact the demand for our products. An example of payment updates is the
Medicare program’s updates to physician payments under the MPFS, which are done on an annual basis using a prescribed statutory formula. In November
2019, CMS issued final revisions to its payment policies under the MPFS, effective January 1, 2020, reducing the work relative value units associated with
certain HSAT codes, including 95800. CMS’s 2020 MPFS update represents the second year of a 3-year plan communicated by CMS to reevaluate
reimbursement in home sleep apnea diagnostic codes. It is unclear the impact, if any, these payment reductions will have on our customers’ willingness to
adopt the broad use of our WatchPAT and other devices. Any changes in coverage and reimbursement that further restrict coverage of our products or lower
reimbursement for tests using our devices could materially affect our business.
International. In other markets outside the United States, HSAT has been endorsed to different degrees. For example, in Sweden, which is
characterized with scattered population, HSATs have been promoted as the only means of diagnosis, and, in Germany, an HSAT is the first-line diagnosis
tool and PSG is only allowed if multiple HSAT attempts failed to deliver conclusive diagnosis. On the other hand, in Japan, local authorities (namely, the
Ministry of Health Labour and Welfare of Japan, or MHLW) have limited HSAT clearance to diagnose OSA for the purpose of prescribing therapy to those
patients who are categorized as suffering from severe OSA (the MHLW set an AHI threshold of 40), and, to our knowledge, PSG remains the dominant
means of sleep apnea diagnosis. In addition, in many foreign markets, including the countries in the European Union, pricing of medical devices is subject
to governmental control. To our knowledge, WatchPAT is covered by medical insurance to different degrees in Japan, the UK, The Netherlands, Sweden,
Germany, Switzerland, Italy, Israel and few smaller countries.
Outlook. In the United States, there have been, and we expect that there will continue to be, a number of federal and state proposals to limit
payments by governmental payors for medical devices, and the procedures in which medical devices are used. For example, in March 2010, comprehensive
healthcare reform legislation was enacted through the passage of the Patient Protection and Affordable Care Act, as amended by the Health Care and
Education and Reconciliation Act, or ACA, which, among other things, imposed, among other things, a new federal excise tax on the sale of certain
medical devices, provided incentives to programs that increase the federal government’s comparative effectiveness research, and implemented payment
system reforms including a national pilot program on payment bundling to encourage hospitals, physicians and other providers to improve the coordination,
quality and efficiency of certain healthcare services through bundled payment models. Since its enactment, there have been judicial and Congressional
challenges to certain aspects of the ACA, and we expect there will be additional challenges and amendments to the ACA in the future.
In addition, other legislative changes have been proposed and adopted since the ACA was enacted. On August 2, 2011, the Budget Control Act of
2011 was signed into law, which, among other things, included reductions to Medicare payments to providers of 2% per fiscal year, which went into effect
on April 1, 2013, and will stay in effect through 2029 unless additional Congressional action is taken. On January 2, 2013, the American Taxpayer Relief
Act of 2012, was signed into law, which, among other things, further reduced Medicare payments to several providers, including hospitals. We cannot
predict whether future healthcare initiatives will be implemented at the federal or state level or internationally, or the effect any future legislation or
regulation will have on us. Such legislation and regulation of healthcare costs may, however, result in decreased lower reimbursements by governmental
and private payors for our products, which may adversely affect our business, financial condition and results of operations.
Competition
Our industry is subject to rapid change from the introduction of new products and technologies and other activities of industry participants. In
particular, the sleep test marketplace is highly competitive and has relatively few barriers to entry. We believe that the primary competitive factors affecting
sales of our products and related services are:
· market acceptance by physicians and key opinion leaders, especially within the cardiology market;
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obtaining required local regulatory approvals or licenses for the sale of our products in the pertinent territories;
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obtaining insurance reimbursement status from the relevant third-party payors, especially within the United States;
company, product and brand recognition;
product efficacy, safety, reliability and durability;
product ease of use and patient comfort; and
technological innovation, product enhancements and speed of innovation.
We compete primarily with international and local vendors of sleep tests, including in the following main categories:
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PSG tests: PSG systems are provided by several companies, including Philips United States (part of Philips Medical), Embla, Nihon Kohden,
Viasys Healthcare, Puritan Bennett, Cadwell Laboratories, Clevemed, Stellate Healthcare, Grass Technologies (a subsidiary of Astro-Med
Inc.). As more fully described under “Business Overview—Our Products and Services—The WatchPAT Family of Products—Key Benefits of
WatchPAT” above, we believe that HSATs in general, and our WatchPAT family of products in particular, are competitive in price and features
and have certain advantages as compared to PSG tests;
HSATs (PSG): Suppliers of home sleep testing for diagnostic purposes that offer devices that perform full PSG tests at home, such as Embla
and Aura-Grass, which, consequently, typically do not provide a significant cost benefit relative to in-lab PSG tests;
HSATs: Suppliers of home sleep testing as diagnostic aids or for diagnostic purposes that offer ambulatory systems, such as Embletta MPR
(provided by Embla Systems), Apnea Link Air (provided by ResMed Corp.), ARES (provided by SleepMed Inc.), Alice NightOne (provided
by Philips United States) and Nox T3 (provided by Nox Medical), which devices typically measure four to five parameters (compared to the
seven parameters measured by WatchPAT), and lack measurement of TST when not used with EEG (which, to our knowledge, is used only by
ARES, which provides total sleep time by a device placed on the forehead with built-in EEG electrodes) and all of which also require nasal
cannula. As more fully described under Key Benefits of WatchPAT above, we believe that, while our WatchPAT family of products may be
more expensive than such HSATs, they offer various features and advantages as compared to such HSATs; and
Pulse oximetry devices: Suppliers of pulse oximetry devices, such as Nonin and Masimo. In contrast to diagnostic devices, pulse oximetry
devices that only measure one or two physiological parameters (oxygen saturation and motion) participate in the sleep space mostly as a
screening tool.
Many of these competitors and potential competitors have significantly greater financial, human and other resources than we do, and have
established relationships with healthcare professionals, customers and third-party payors. In addition, many of our competitors are more established
globally and better positioned with sales and distribution networks, greater resources for product development, additional lines of products and the ability
to offer financial incentives that we cannot provide. Our products and services could also be rendered obsolete or uneconomical by technological advances
developed by one or more of our competitors.
Intellectual Property
General. Our intellectual property and proprietary technology are important to the development, manufacturing and sale of our current and future
pipeline products. We seek to protect our intellectual property, core technologies and other know-how through a combination of patents, copyrights,
trademarks, trade secret laws, non-disclosure and confidentiality agreements and other contractual arrangements with our employees, consultants, partners,
suppliers, customers and others. We primarily rely on our own research and development efforts to enhance and develop our technology and products
although, in some instances that do not involve our core competencies, such as with CloudPAT, we choose to license customized platforms from third
parties.
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Patents. As of December 31, 2019, we have been granted a total of 62 patents and have 11 pending national phase applications directly relating to
our current products. A further 25 granted patents are potentially applicable, pending ongoing research and development. The families of patents that
specifically cover WatchPAT consist of 45 granted patents worldwide and 10 pending patent applications, while EndoPAT is covered by 12 granted patents
worldwide and one pending patent application as well as a further 15 granted patents that are potentially applicable pending ongoing research and
development. In addition, we have 5 granted patents that relate to features which are common to both WatchPAT and EndoPAT, as well as a further 10
patents that are potentially applicable pending ongoing research and development.
We submit applications under the Patent Cooperation Treaty, or PCT, an international patent law treaty that provides a unified procedure for filing
a single initial patent application to reserve the option to seek patent protection for an invention in each of the member states and regions. Although a PCT
application cannot be issued as a patent, it allows for the applicant to seek protection at a later date in any of the member states and regions through
national or regional phase applications. National and regional phase applications are examined by the allocable authorities in each member state or region
in which we elect to file an application. We can elect to file a regional application in Europe, in which case we will not be required to file a separate state
specific application for each member state in Europe, until such time as the European application is granted a patent, whereupon state specific validations
may subsequently be selected.
Patents and patent applications covering our WatchPAT and EndoPAT technology have been issued or are currently pending in the United States,
Japan, Europe and other international markets. Many of our patents and patent applications cover our technology around methods of and related devices for
measuring the PAT signal and the application thereof.
Absent patent-term extensions and excluding granted patents that are potentially applicable pending ongoing research and development, several
patents for (1) the WatchPAT are set to expire between 2021 and 2029 in Europe, Japan, and other foreign jurisdictions and between 2024 and 2030 in the
United States and (2) the EndoPAT are set to expire between 2021 and 2032 in Japan, in 2021 in Europe and other foreign jurisdictions and in 2022 in the
United States. While the original patents covering the PAT signal and certain embodiments thereof expired in July 2017, we believe that since our products
have undergone substantial development and changes since our original products were first introduced, our current products should be protected in the
United States, Japan, and many other countries by newer patents that we obtained and which are scheduled to expire as detailed above. The EndoPAT could
also potentially be protected by additional granted patents, which may be applicable pending ongoing research and development, and are set to expire
between 2027 and 2030 in the United States, and between 2023 and 2025 in Europe, Japan and other foreign jurisdictions. Currently pending patent
applications, should they issue without terminal disclaimers or other term shortening restrictions, for the WatchPAT could expire as late as 2037 in the
United States, Europe, Japan and other foreign jurisdictions. However, we cannot be sure that any of our patents will be commercially useful in protecting
our technology. Moreover, while our policy is to obtain patents by application, license or otherwise, to maintain trade secrets and to seek to operate without
infringing on the intellectual property rights of third parties, technologies related to our business have been rapidly developing in recent years. Additionally,
patent applications that we have filed, may file or may license from third parties may not result in the issuance of patents, and our issued patents and any
issued patents that we may receive in the future may be challenged, invalidated or circumvented. If third parties have prepared and filed patent applications
or prepare and file patent applications in the future that also claim technology to which we have rights, we may have to partake in proceedings to determine
priority of invention or in derivation proceedings, which could result in substantial costs to us, even if the eventual outcome is favorable to us. Moreover,
because of the extensive time required for clinical development and regulatory review of a product we may develop, it is possible that, before our products
can be fully commercialized or commercialized in additional jurisdictions, related patents will have expired or will expire a short period following
commercialization, thereby reducing the advantage of such patent rights.
Other. In addition to patent protection, we also rely on trade secrets, including unpatented know-how, technology innovation, technical
specifications and other proprietary information, as well as trade names, trademarks and service marks and non-disclosure and confidentiality agreements
and other contractual arrangements with our employees, consultants, partners, suppliers, customers and others in attempting to develop and maintain our
competitive position. We have obtained trademark registrations in the United States for PAT, EndoPAT, WatchPAT, EndoScore, ITAMAR, CloudPAT and
SleePath and some of them are also registered in additional jurisdictions, including Europe, Japan, Canada, China, India, Russia, Mexico, Korea and
Singapore.
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However, our trade secrets may become known or be independently discovered by competitors, our confidentiality agreements may be breached,
and our tradenames may not achieve the brand recognition that we pursue.
Research and Development
We devote a significant amount of our resources towards research and development in order to introduce new products and continuously enhance
existing products and to support our growth strategy. We have assembled a core team of experienced research and development professionals as well as an
advisory board comprised of experts in their respective fields. These professionals are involved in advancing our core technologies, as well as in applying
these core technologies to our product development activities.
In order to carry our research and development activities, which take place primarily in Israel, we maintain teams in the following areas:
physiology, hardware development, software, algorithms, data processing, clinical application development and clinical trials. As of December 31, 2019,
we had 20 full-time employees engaged in research and development.
Since our incorporation, we have been engaged in the research of the PAT signal, as well as in the continuous research and development of our
PAT-based technology and additional products and applications based on this technology, including in conjunction with additional technologies.
As part of our research and development activities, we also initiate or monitor, from time to time, clinical and research collaborations, such as with
academic centers, in order to, among other things, achieve scientific backing of our products; promote recognition of our products within the medical
community; support, where necessary, regulatory authorizations required to market and sell our products in applicable territories; and examine the
applicability of our products in various clinical markets, particular population groups and various comorbidities.
Manufacturing and Supply
Our products consist of off-the-shelf and custom-made components. Our manufacturing, quality assurance testing, final integration, packaging and
shipping operations as well as our final assembly activities are primarily performed at our facility in Caesarea, Israel, where we employed, as of December
31, 2019, 56 full-time employees and engaged 28 temporary contractor workers.
We engage various suppliers and subcontractors who deliver us materials and components used in our products, including plastic and electronic
components, as well as development services and database management services. We also engage subcontractors, on an as needed basis, to manufacture
finished products, based on our product specifications and requirements. We are not bound by any minimum purchase volume undertakings with such
subcontractor. Engaging subcontractors to manufacture our finished products on an as needed basis, in addition to our own manufacturing work force,
allows us flexibility to manage and meet our manufacturing goals and we believe that our manufacturing capacity, comprised of our own manufacturing
work force and of our suppliers and subcontractors, is suitable and adequate for our operations as currently conducted and as currently foreseen.
We typically engage our subcontractors by means of a renewable framework agreement or by a particular purchase order. We aim to engage
different subcontractors in various locations, to reduce any potential dependency in any particular subcontractor. In addition, we believe that there are
sufficient alternative subcontractors in the market, which would allow us to replace any subcontractor, if necessary, though such replacement may be a
lengthy process. In addition, if needed, we may transfer some to the final assembly stages, to our own manufacturing facility.
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As of the date of this Annual Report, several of our subcontractors are single source subcontractors. Depending on the type of such subcontractors
and the alternative we choose (such as using alternative subcontractors and manufacturing the component ourselves), we estimate that replacement of such
single source subcontractors may range between six and twelve months. In addition, while we were not able to identify an alternative supplier for a
component incorporated in one of our older models of the WatchPAT, which model we only sell in China, we plan to obtain regulatory approval to sell our
more advanced WatchPAT product model in China. Nevertheless, there is no assurance if and when we will obtain such approval. Due to their nature,
certain components must be ordered from such single source subcontractors a few months in advance, resulting in substantial lead time. In the event that
such limited source suppliers are unable to meet our requirements in a timely manner, we may experience a limited interruption in production until we can
obtain an alternate source of supply and, if we do not accurately forecast such demand, our operating results could be adversely affected. However, as
explained above, we take various steps in order to mitigate this risk, including by (1) providing our relevant suppliers with a purchasing forecast and
estimate of future orders, (2) requiring such single source subcontractors to provide us long prior notice should the subcontractor wish to terminate our
agreement, and (3) we constantly hold safety inventory stock sufficient to meet our estimated manufacturing forecasts, aligned with the lead time of each
component. In this respect, see also the discussion under Item 3.D. “Risk Factors—Risks Related to Our Business and Operations—We are dependent upon
third-party manufacturers and suppliers, which makes us vulnerable to supply disruptions”. We believe that our manufacturing processes and our
subcontractors’ manufacturing processes are in material compliance with pertinent United States and international quality and safety standards, such as ISO
9001:2000 and the FDA’s quality system regulations.
Seasonality
We have not identified seasonal effects in relation to a specific quarter or quarters in our business. However, in the past several years, the results of
our first quarter were typically weaker than other quarters, which may be due to some of our customers capital expenditures cycles, which are not in our
control. In the first quarter, our results can be impacted by the resetting of annual United States patient healthcare insurance plans deductibles, which may
cause delays in patients seeking our solutions.
Government Regulations
Overview
We must comply with the laws, regulations and standards applicable to our activities in the countries in which we operate. In particular, we are
subject to laws, regulations and standards applicable to our manufacturing activities as well as to laws and regulatory requirements in each country in which
we market and sell our products, including the United States, Europe, Japan and Israel. In each country where we seek to market and sell our products, we
typically need to first obtain a local approval or clearance allowing us to market and sell our products in the pertinent territory. The requirements, length of
time and costs associated with obtaining such local approvals differ from country to country. Depending on the pertinent territory, we either hold such
approvals independently or through a local subsidiary or through a local partner with whom we maintain a contractual arrangement securing our rights in
such marketing and sales approvals, such as in Japan where our partner, Philips Japan, is the one holding the marketing approval. Except as described
below, the WatchPAT related services and accessories that we currently offer, do not require any separate regulatory approval or clearance beyond the ones
we obtained for the WatchPAT as described below.
We are also subject to announced and unannounced inspections and audits by such regulatory bodies, primarily of our manufacturing facility in
Israel. Our products and operations are also often subject to the rules or norms of industrial standards bodies, such as the International Standards
Organization, or ISO, or the rules of associations of healthcare professionals. For example, in the United States we maintain certifications of a Nationally
Recognized Testing Laboratory, or NRTL, which is a third-party organization that certifies products for the North American market. NRTLs are recognized
by the Occupational Safety and Health Administration, or OSHA, under United States deferral regulations to provide product safety testing and
certification for products to be used in the United States workplace. Future products, or components thereof, may also be subject to regulation by the
Federal Communications Commission, or the FCC, due to inclusion of digital or communication components.
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In addition, we are subject to certain foreign medical device reporting regulations in the countries in which we market and sell our products. While
the specifics of the reporting regulations in each country in which we market and sell our products may vary, we are generally required to report adverse
events or incidents about which we received or become aware of information that reasonably suggests that one of our marketed devices or a malfunction of
such device has caused or may have caused or contributed to a death or serious injury, or of a recurring malfunction likely to contribute to death or a
serious injury. The decision of whether an adverse event or incident is reportable under the applicable regulations requires our management’s judgment.
Any adverse event or incident involving our products could result in regulatory actions, such as inspection and mandatory product recalls, as well as
voluntary corrective actions that we may initiate for various reasons, such as product recalls or customer notifications.
In Israel, the United States, Europe and other territories we are also subject to environmental regulations governing the use of certain hazardous
materials, such as RoHS and RoHS II, EU directives that require products sold in Europe to meet certain design specifications, which exclude the use of
hazardous substances; REACH, an EU regulation covering the registration, evaluation, authorizations and restriction of chemicals; and EU Directive
2002/96/EC on Waste Electrical and Electronic Equipment (known as the “WEEE” Directive), which requires producers of electrical and electronic
equipment to register in different European countries and to provide collection and recycling facilities for used products.
We invest resources in order to maintain our regulatory compliance, successfully pass audits and maintain our certifications and marketing and
sales approvals.
The United States Market
Our products and our operations are subject to extensive regulation by the FDA, and other federal and state authorities in the United States. Our
products are subject to regulation as medical devices in the United States under the Federal Food, Drug, and Cosmetic Act, or FDCA, as implemented and
enforced by the FDA.
The FDA regulates the development, design, non-clinical and clinical research, manufacturing, safety, efficacy, labeling, packaging, storage,
installation, servicing, recordkeeping, premarket clearance or approval, adverse event reporting, advertising, promotion, marketing and distribution, and
import and export of medical devices to ensure that medical devices distributed domestically are safe and effective for their intended uses and otherwise
meet the requirements of the FDCA.
FDA Premarket Clearance and Approval Requirements
Unless an exemption applies, each medical device commercially distributed in the United States requires either FDA clearance of a 510(k)
premarket notification, or approval of a premarket approval, or PMA, application. Under the FDCA, medical devices are classified into one of three classes
— Class I, Class II or Class III — depending on the degree of risk associated with each medical device and the extent of manufacturer and regulatory
control needed to ensure its safety and effectiveness. Class I includes devices with the lowest risk to the patient and are those for which safety and
effectiveness can be assured by adherence to the FDA’s General Controls for medical devices, which include compliance with the applicable portions of the
Quality System Regulation, or QSR, facility registration and product listing, reporting of adverse medical events, and truthful and non-misleading labeling,
advertising, and promotional materials. Class II devices are subject to the FDA’s General Controls, and special controls as deemed necessary by the FDA to
ensure the safety and effectiveness of the device. These special controls can include performance standards, post-market surveillance, patient registries and
FDA guidance documents.
While most Class I devices are exempt from the 510(k) premarket notification requirement, manufacturers of most Class II 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. The FDA’s
permission to commercially distribute a device subject to a 510(k) premarket notification is generally known as 510(k) 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. Some
pre-amendment devices are unclassified, but are subject to FDA’s premarket notification and clearance process in order to be commercially distributed. Our
currently marketed products are Class II devices subject to 510(k) clearance.
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510(k) Clearance Marketing Pathway
All of our current products (excluding one 510(k)-exempt product) are subject to premarket notification and clearance under section 510(k) of the
FDCA. To obtain 510(k) clearance, we must submit to the FDA a premarket notification submission demonstrating that the proposed device is
“substantially equivalent” to a predicate device already on the market. A predicate device is a legally marketed device that is not subject to premarket
approval, i.e., a device that was legally marketed prior to May 28, 1976 (pre-amendments device) and for which a PMA is not required, a device that has
been reclassified from Class III to Class II or I, or a device that was found substantially equivalent through the 510(k) process. The FDA’s 510(k) clearance
process usually takes from three to twelve months, but often takes longer. The FDA may require additional information, including clinical data, to make a
determination regarding substantial equivalence. In addition, FDA collects user fees for certain medical device submissions and annual fees and for medical
device establishments. For fiscal year 2020, the standard user fee for a 510(k) premarket notification application is $11,594.
If the FDA agrees that the device is substantially equivalent to a predicate device currently on the market, it will grant 510(k) clearance to
commercially market the device. If the FDA determines that the device is “not substantially equivalent” to a previously cleared device, the device is
automatically designated as a Class III device. The device sponsor must then fulfill more rigorous PMA requirements, or can request a risk-based
classification determination for the device in accordance with the “de novo” process, which is a route to market for novel medical devices that are low to
moderate risk and are not substantially equivalent to a predicate device.
After a device receives 510(k) marketing clearance, any modification that could significantly affect its safety or effectiveness, or that would
constitute a major change or modification in its intended use, will require a new 510(k) clearance or, depending on the modification, PMA approval or de
novo reclassification. The FDA requires each manufacturer to determine whether the proposed change requires submission of a 510(k), de novo request or
a PMA in the first instance, but the FDA can review any such decision and disagree with a manufacturer’s determination. If the FDA disagrees with a
manufacturer’s determination, the FDA can require the manufacturer to cease marketing and/or request the recall of the modified device until 510(k)
marketing clearance or until PMA approval is obtained or a de novo request is granted. Also, in these circumstances, the manufacturer may be subject to
significant regulatory fines or penalties.
Over the last several years, the FDA has proposed reforms to its 510(k) clearance process, and such proposals could include increased
requirements for clinical data and a longer review period, or could make it more difficult for manufacturers to utilize the 510(k) clearance process for their
products. For example, in November 2018, FDA officials announced forthcoming steps that the FDA intends to take to modernize the premarket
notification pathway under Section 510(k) of the FDCA. Among other things, the FDA announced that it planned to develop proposals to drive
manufacturers utilizing the 510(k) pathway toward the use of newer predicates. These proposals included plans to potentially sunset certain older devices
that were used as predicates under the 510(k) clearance pathway, and to potentially publish a list of devices that have been cleared on the basis of
demonstrated substantial equivalence to predicate devices that are more than 10 years old. In May 2019, the FDA solicited public feedback on these
proposals. These proposals have not yet been finalized or adopted, and the FDA may work with Congress to implement such proposals through legislation.
More recently, in September 2019, the FDA finalized guidance describing an optional “safety and performance based” premarket review pathway
for manufacturers of “certain, well-understood device types” to demonstrate substantial equivalence under the 510(k) clearance pathway by showing that
such device meets objective safety and performance criteria established by the FDA, thereby obviating the need for manufacturers to compare the safety
and performance of their medical devices to specific predicate devices in the clearance process. The FDA intends to develop and maintain a list device
types appropriate for the “safety and performance based” pathway and will continue to develop product-specific guidance documents that identify the
performance criteria for each such device type, as well as the testing methods recommended in the guidance documents, where feasible.
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PMA Approval Pathway
Class III devices require PMA approval before they can be marketed, although some pre-amendment Class III devices for which FDA has not yet
required a PMA are cleared through the 510(k) process. The PMA process is more demanding than the 510(k) premarket notification process. In a PMA,
the manufacturer must demonstrate that the device is safe and effective, and the PMA must be supported by extensive data, including data from preclinical
studies and human clinical trials. The PMA must also contain a full description of the device and its components, a full description of the methods,
facilities, and controls used for manufacturing, and proposed labeling. Following receipt of a PMA, the FDA determines whether the application is
sufficiently complete to permit a substantive review. If FDA accepts the application for review, it has 180 days under the FDCA to complete its review of a
PMA, although in practice, the FDA’s review often takes significantly longer, and can take up to several years. 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. PMA devices are also subject to the payment of user
fees, which for fiscal year 2020 includes a standard application fee of $340,995 and an annual establishment registration fee of $5,236.
The FDA will approve the new device for commercial distribution if it determines that the data and information in the PMA constitute valid
scientific evidence and that there is reasonable assurance that the device is safe and effective for its intended use(s). The FDA may approve a PMA with
post-approval conditions intended to ensure the safety and effectiveness of the device, including, among other things, restrictions on labeling, promotion,
sale and distribution, and collection of long-term follow-up data from patients in the clinical study that supported PMA approval or requirements to conduct
additional clinical studies post-approval. The FDA may condition PMA approval on some form of post-market surveillance when deemed necessary to
protect the public health or to provide additional safety and efficacy data for the device in a larger population or for a longer period of use. In such cases,
the manufacturer might be required to follow certain patient groups for a number of years and to make periodic reports to the FDA on the clinical status of
those patients. Failure to comply with the conditions of approval can result in material adverse enforcement action, including withdrawal of the approval.
Certain changes to an approved device, such as changes in manufacturing facilities, methods, or quality control procedures, or changes in the
design performance specifications, which affect the safety or effectiveness of the device, require submission of a PMA supplement. PMA supplements
often require submission of the same type of information as a PMA, except that the supplement is limited to information needed to support any changes
from the device covered by the original PMA and may not require as extensive clinical data or the convening of an advisory panel. Certain other changes to
an approved device require the submission of a new PMA, such as when the design change causes a different intended use, mode of operation, and
technical basis of operation, or when the design change is so significant that a new generation of the device will be developed, and the data that were
submitted with the original PMA are not applicable for the change in demonstrating a reasonable assurance of safety and effectiveness. None of our
products are currently marketed pursuant to a PMA.
Clinical Trials
Clinical trials are almost always required to support a PMA and are sometimes required to support a 510(k) submission. All clinical investigations
of devices to determine safety and effectiveness must be conducted in accordance with the FDA’s investigational device exemption, or IDE, regulations
which govern investigational device labeling, prohibit promotion of the investigational device, and specify an array of recordkeeping, reporting and
monitoring responsibilities of study sponsors and study investigators. If the device presents a “significant risk,” to human health, as defined by the FDA,
the FDA requires the device sponsor to submit an IDE application to the FDA, which must become effective prior to commencing human clinical trials. If
the device under evaluation does not present a significant risk to human health, then the device sponsor is not required to submit an IDE application to the
FDA before initiating human clinical trials, but must still comply with abbreviated IDE requirements when conducting such trials. A significant risk device
is one that presents a potential for serious risk to the health, safety or welfare of a patient and either is implanted, used in supporting or sustaining human
life, substantially important in diagnosing, curing, mitigating or treating disease or otherwise preventing impairment of human health, or otherwise presents
a potential for serious risk to a subject. An IDE application must be supported by appropriate data, such as animal and laboratory test results, showing that
it is safe to test the device in humans and that the testing protocol is scientifically sound. The IDE will automatically become effective 30 days after receipt
by the FDA unless the FDA notifies the company that the investigation may not begin. If the FDA determines that there are deficiencies or other concerns
with an IDE for which it requires modification, the FDA may permit a clinical trial to proceed under a conditional approval.
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Regardless of the degree of risk presented by the medical device, clinical studies must be approved by, and conducted under the oversight of, an
Institutional Review Board, or IRB, for each clinical site. The IRB is responsible for the initial and continuing review of the IDE, and may pose additional
requirements for the conduct of the study. If an IDE application is approved by the FDA and one or more IRBs, human clinical trials may begin at a
specific number of investigational sites with a specific number of patients, as approved by the FDA. If the device presents a non-significant risk to the
patient, a sponsor may begin the clinical trial after obtaining approval for the trial by one or more IRBs without separate approval from the FDA, but must
still follow abbreviated IDE requirements, such as monitoring the investigation, ensuring that the investigators obtain informed consent, and labeling and
record-keeping requirements. Acceptance of an IDE application for review does not guarantee that the FDA will allow the IDE to become effective and, if
it does become effective, the FDA may or may not determine that the data derived from the trials support the safety and effectiveness of the device or
warrant the continuation of clinical trials. An IDE supplement must be submitted to, and approved by, the FDA before a sponsor or investigator may make
a change to the investigational plan that may affect its scientific soundness, study plan or the rights, safety or welfare of human subjects.
During a study, the sponsor is required to comply with the applicable FDA requirements, including, for example, trial monitoring, selecting
clinical investigators and providing them with the investigational plan, ensuring IRB review, adverse event reporting, record keeping and prohibitions on
the promotion of investigational devices or on making safety or effectiveness claims for them. The clinical investigators in the clinical study are also
subject to FDA’s regulations and must obtain patient informed consent, rigorously follow the investigational plan and study protocol, control the disposition
of the investigational device, and comply with all reporting and recordkeeping requirements. Additionally, after a trial begins, we, the FDA or the IRB
could suspend or terminate a clinical trial at any time for various reasons, including a belief that the risks to study subjects outweigh the anticipated
benefits.
Post-market Regulation
After a device is cleared or approved for marketing, numerous and pervasive regulatory requirements continue to apply. These include:
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establishment registration and device listing with the FDA;
QSR requirements, which require manufacturers, including third-party manufacturers, to follow stringent design, testing, control,
documentation and other quality assurance procedures during all aspects of the design and manufacturing process;
labeling regulations and FDA prohibitions against the promotion of investigational products, or the promotion or advertising of “off-label”
uses of cleared or approved products;
requirements related to promotional activities;
clearance or approval of product modifications to 510(k)-cleared devices that could significantly affect safety or effectiveness or that would
constitute a major change in intended use of one of our cleared devices, or approval of certain modifications to PMA-approved devices;
· medical device reporting regulations, which require that a manufacturer report to the FDA if a device it markets may have caused or
contributed to a death or serious injury, or has malfunctioned and the device or a similar device that it markets would be likely to cause or
contribute to a death or serious injury, if the malfunction were to recur;
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correction, removal and recall reporting regulations, which require that manufacturers report to the FDA field corrections and product recalls
or removals if undertaken to reduce a risk to health posed by the device or to remedy a violation of the FDCA that may present a risk to
health;
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the FDA’s recall authority, whereby the agency can order device manufacturers to recall from the market a product that is in violation of
governing laws and regulations; and
post-market surveillance activities and regulations, which apply when deemed by the FDA to be necessary to protect the public health or to
provide additional safety and effectiveness data for the device.
Our manufacturing processes are required to comply with the applicable portions of the QSR, which cover the methods and the facilities and
controls for the design, manufacture, testing, production, processes, controls, quality assurance, labeling, packaging, distribution, installation and servicing
of finished devices intended for human use. The QSR also requires, among other things, maintenance of a device master file, device history file, and
complaint files. As a manufacturer, we are subject to periodic scheduled or unscheduled inspections by the FDA. Our failure to maintain compliance with
the QSR requirements could result in the shut-down of, or restrictions on, our manufacturing operations and the recall or seizure of our products, which
would have a material adverse effect on our business. The discovery of previously unknown problems with any of our products, including unanticipated
adverse events or adverse events of increasing severity or frequency, whether resulting from the use of the device within the scope of its clearance or off-
label by a physician in the practice of medicine, could result in restrictions on the device, including the removal of the product from the market or voluntary
or mandatory device recalls.
The FDA has broad regulatory compliance and enforcement powers. If the FDA determines that we failed to comply with applicable regulatory
requirements, it can take a variety of compliance or enforcement actions, which may result in any of the following sanctions:
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warning letters, untitled letters, fines, injunctions, consent decrees and civil penalties;
recalls, withdrawals, or administrative detention or seizure of our products;
operating restrictions or partial suspension or total shutdown of production;
refusing or delaying requests for 510(k) marketing clearance or PMA approvals of new products or modified products;
withdrawing 510(k) clearances or PMA approvals that have already been granted;
refusal to grant export approvals for our products; or
criminal prosecution.
Healthcare Regulatory Laws
Within the United States, our products and our customers are subject to extensive regulation by a wide range of federal and state agencies that
govern business practices in the medical device industry. These laws include federal and state anti-kickback, fraud and abuse, false claims and physician
payment transparency laws and regulations.
The federal Anti-Kickback Statute prohibits, among other things, knowingly and willfully offering, paying, soliciting or receiving any
remuneration (including any kickback, bribe or rebate), directly or indirectly, overtly or covertly, to induce or in return for purchasing, leasing, ordering or
arranging for or recommending the purchase, lease or order of any good, facility, item or service reimbursable, in whole or part by Medicare, Medicaid or
other federal healthcare programs. The term “remuneration” has been broadly interpreted to include anything of value, including cash, improper discounts,
and free or reduced price items and services. Among other things, the Anti-Kickback Statute has been interpreted to apply to arrangements between
medical device manufacturers on the one hand and prescribers and purchasers on the other. Although there are a number of statutory exceptions and
regulatory safe harbors protecting some common activities from prosecution, the exceptions and safe harbors are drawn narrowly. Practices that involve
remuneration that may be alleged to be intended to induce prescribing, purchases or recommendations may be subject to scrutiny if they do not qualify for
an exception or safe harbor.
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Failure to meet all of the requirements of a particular applicable statutory exception or regulatory safe harbor does not make the conduct per se
illegal under the Anti-Kickback Statute. Instead, the legality of the arrangement will be evaluated on a case-by-case basis based on a cumulative review of
all of its facts and circumstances. Several courts have interpreted the statute’s intent requirement to mean that if any one purpose of an arrangement
involving remuneration is to induce referrals of federal healthcare covered business, the Anti-Kickback Statute has been violated. In addition, a person or
entity does not need to have actual knowledge of the statute or specific intent to violate, in order to have committed a violation. Further, a claim including
items or services resulting from a violation of the federal
Anti-Kickback Statute also constitutes a false or fraudulent claim for purposes of the federal civil False Claims Act. Many states have adopted
laws similar to the Anti-Kickback Statute. Some of these state prohibitions apply to referral of patients for healthcare items or services reimbursed by any
payor, not only the Medicare and Medicaid programs. Commercial payors may also bring a private cause of action for treble damages against a
manufacturer for a pattern of causing false claims to be filed under the federal Racketeer Influenced and Corrupt Organizations Act, or RICO.
The federal civil False Claims Act prohibits, among other things, any person or entity from knowingly presenting, or causing to be presented, a
false or fraudulent claim for payment to or approval by the federal government or knowingly making, using or causing to be made or used a false record or
statement material to a false or fraudulent claim to the federal government. A claim includes “any request or demand” for money or property presented to
the U.S. government. The qui tam provisions of the False Claims Act allow a private individual to bring actions on behalf of the federal government
alleging that the defendant has submitted a false claim to the federal government, and to share in any monetary recovery. In recent years, the number of
suits brought against healthcare providers by private individuals has increased dramatically. The government has obtained multi-million and multi-billion
dollar settlements under the False Claims Act in addition to individual criminal convictions under applicable criminal statutes. In addition, the federal civil
monetary penalties statute imposes penalties against any person or entity that, among other things, is determined to have presented or caused to be
presented a claim to a federal health program that the person knows or should know is for an item or service that was not provided as claimed or is false or
fraudulent. Given the significant size of actual and potential settlements, it is expected that the government will continue to devote substantial resources to
investigating healthcare providers’ and manufacturers’ compliance with applicable fraud and abuse laws. Various states have also enacted false claim laws
analogous to the federal civil False Claims Act, although many of these state laws apply where a claim is submitted to any third-party payor and not merely
a federal healthcare program.
The federal Health Insurance Portability and Accountability Act of 1996, as amended by the Health Information Technology for Economic and
Clinical Health Act, or HIPAA, among other things, created two new federal crimes: healthcare fraud and false statements relating to healthcare matters.
The HIPAA healthcare fraud statute prohibits, among other things, knowingly and willfully executing, or attempting to execute, a scheme to defraud any
healthcare benefit program, including private payors. A violation of this statute is a felony and may result in fines, imprisonment and/or exclusion from
government sponsored programs. The HIPAA false statements statute prohibits, among other things, knowingly and willfully falsifying, concealing or
covering up a material fact or making any materially false, fictitious or fraudulent statement or representation in connection with the delivery of or payment
for healthcare benefits, items or services. A violation of this statute is a felony and may result in fines and/or imprisonment. Similar to the Anti-Kickback
Statute, a person or entity does not need to have actual knowledge of these statutes or specific intent to violate them in order to have committed a violation.
Additionally, there has been a recent trend of increased federal and state regulation of payments made to physicians and other healthcare
providers. The ACA, imposed, among other things, new annual reporting requirements for covered manufacturers for certain payments and “transfers of
value” provided to physicians and certain other healthcare providers and teaching hospitals, as well as ownership and investment interests held by
physicians and their immediate family members. In addition, certain states require implementation of compliance programs and compliance with the device
industry’s voluntary compliance guidelines and the relevant compliance guidance promulgated by the federal government, impose restrictions on marketing
practices, and/or tracking and reporting of gifts, compensation and other remuneration or items of value provided to physicians and other healthcare
professionals and entities.
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Data Privacy and Security
Medical device companies may be subject to U.S. federal and state and foreign health information privacy, security and data breach notification
laws, which may govern the collection, use, disclosure and protection of health-related and other personal information. In the U.S., HIPAA imposes
privacy, security and breach reporting obligations with respect to individually identifiable health information upon “covered entities” (health plans, health
care clearinghouses and certain health care providers), and their respective business associates, individuals or entities that create, received, maintain or
transmit protected health information in connection with providing a service for or on behalf of a covered entity. HIPAA mandates the reporting of certain
breaches of health information to HHS, affected individuals and if the breach is large enough, the media. Entities that are found to be in violation of HIPAA
as the result of a breach of unsecured protected health information, a complaint about privacy practices or an audit by HHS, may be subject to significant
civil, criminal and administrative fines and penalties and/or additional reporting and oversight obligations if required to enter into a resolution agreement
and corrective action plan with HHS to settle allegations of HIPAA non-compliance. Even when HIPAA does not apply, according to the Federal Trade
Commission or the FTC, failing to take appropriate steps to keep consumers’ personal information secure constitutes unfair acts or practices in or affecting
commerce in violation of Section 5(a) of the Federal Trade Commission Act, or the FTCA, 15 U.S.C § 45(a). The FTC expects a company’s data security
measures to be reasonable and appropriate in light of the sensitivity and volume of consumer information it holds, the size and complexity of its business,
and the cost of available tools to improve security and reduce vulnerabilities. Individually identifiable health information is considered sensitive data that
merits stronger safeguards. The FTC’s guidance for appropriately securing consumers’ personal information is similar to what is required by the HIPAA
security regulations.
In addition, certain state and non-U.S. laws, such as the European Union General Data Protection Regulation 2016/679, or GDPR, govern the
privacy and security of health information in certain circumstances, some of which are more stringent than HIPAA and many of which differ from each
other in significant ways and may not have the same effect, thus complicating compliance efforts. Failure to comply with these laws, where applicable, can
result in the imposition of significant civil and/or criminal penalties and private litigation. For example, California recently enacted legislation, the
California Consumer Privacy Act, or CCPA, which went into effect January 1, 2020. The CCPA, among other things, creates new data privacy obligations
for covered companies and provides new privacy rights to California residents, including the right to opt out of certain disclosures of their information. The
CCPA also creates a private right of action with statutory damages for certain data breaches, thereby potentially increasing risks associated with a data
breach. Although the law includes limited exceptions, including for “protected health information” maintained by a covered entity or business associate, it
may regulate or impact our processing of personal information depending on the context. In Europe, the GDPR went into effect in May 2018 and
introduces strict requirements for processing the personal data of European Union data subjects. Companies that must comply with the GDPR face
increased compliance obligations and risk, including more robust regulatory enforcement of data protection requirements and potential fines for
noncompliance of up to €20 million or 4% of the annual global revenues of the noncompliant company, whichever is greater. Additionally, following the
United Kingdom’s withdrawal from the European Union, we will have to comply with the GDPR and the United Kingdom GDPR, each regime having the
ability to fine up to the greater of €20 million/ £17.5 million or 4% of global turnover. The relationship between the United Kingdom and the European
Union in relation to certain aspects of data protection law remains unclear, for example around how data can lawfully be transferred between each
jurisdiction, which exposes us to further compliance risk. The State of Israel has also implemented data protection laws and regulations, including the
Israeli Protection of Privacy Law, 1981.
Health Care Reform
The United States has enacted or proposed legislative and regulatory changes affecting the healthcare system that could affect our ability to
profitably sell our products. Changes in regulations, statutes or the interpretation of existing regulations could impact our business in the future by
requiring, for example: (i) changes to our manufacturing arrangements; (ii) additions or modifications to product labeling; (iii) the recall or discontinuation
of our products; or (iv) additional record-keeping requirements. If any such changes were to be imposed, they could adversely affect the operation of our
business.
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In the United States, there have been and continue to be a number of legislative initiatives and judicial challenges to contain healthcare costs. For
example, in March 2010, the ACA was passed, which substantially changed the way healthcare is financed by both governmental and private insurers, and
significantly impacted the United States medical device industry to which we sell our products. Among other things, the Affordable Care Act:
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established a 2.3% excise tax on sales of medical devices with respect to any entity that manufactures or imports specified medical devices
offered for sale in the United States, which, through a series of legislative amendments, was suspended, effective January 1, 2016, and
subsequently repealed altogether on December 20, 2019;
established a new Patient-Centered Outcomes Research Institute to oversee, identify priorities in and conduct comparative clinical
effectiveness research;
implemented payment system reforms, including a national pilot program to encourage hospitals, physicians and other providers to improve
the coordination, quality and efficiency of certain health care services through bundled payment models; and
created an independent payment advisory board that will submit recommendations to reduce Medicare spending if projected Medicare
spending exceeds a specified growth rate.
There have been a number of significant changes to the ACA and its implementation. By way of example, the Tax Cuts and Jobs Act of 2017, or
Tax Act, effective January 1, 2019, included a provision repealing the tax-based shared responsibility payment imposed by the ACA on certain individuals
who fail to maintain qualifying health coverage for all or part of a year that is commonly referred to as the “individual mandate.” On December 14, 2018, a
U.S. District Court Judge in the Northern District of Texas, or the Texas District Court Judge, ruled that the individual mandate is a critical and inseverable
feature of the ACA, and therefore, because it was repealed as part of the Tax Act, the remaining provisions of the ACA are invalid as well. On December
18, 2019, the Fifth Circuit Court of Appeals also struck down the individual mandate and remanded to the Northern District of Texas the decision as to
whether the remainder of the ACA is valid. It is unclear how this decision, subsequent appeals, and other efforts to repeal and replace the ACA will impact
the ACA and our business. Litigation and legislation over the ACA are likely to continue with unpredictable and uncertain results. We will continue to
evaluate the effect that the ACA and its possible repeal and replacement has on our business.
The European Market
In order to sell our products in member countries of the European Economic Area, or the EEA, our products must comply with the essential
requirements of the European Union, or EU, Medical Devices Directive (Council Directive 93/42/EEC). Compliance with these requirements is a
prerequisite to be able to affix the CE mark to our products, without which they cannot be sold or marketed in the EEA. To demonstrate compliance with
the essential requirements we must undergo a conformity assessment procedure, which varies according to the type of medical device and its classification.
Except for low risk medical devices (Class I non sterile, non-measuring devices), where the manufacturer can issue an EC Declaration of Conformity based
on a self-assessment of the conformity of its products with the essential requirements of the EU Medical Devices Directive, a conformity assessment
procedure requires the intervention of an organization accredited by a member state of the EEA to conduct conformity assessments, or a Notified Body.
Depending on the relevant conformity assessment procedure, the Notified Body would typically audit and examine the technical file and the quality system
for the manufacture, design and final inspection of our devices. The Notified Body issues a certificate of conformity following successful completion of a
conformity assessment procedure conducted in relation to the medical device and its manufacturer and their conformity with the essential requirements.
This certificate entitles the manufacturer to affix the CE mark to its medical devices after having prepared and signed a related EC Declaration of
Conformity.
As a general rule, demonstration of conformity of medical devices and their manufacturers with the essential requirements must be based, among
other things, on the evaluation of clinical data supporting the safety and performance of the products during normal conditions of use. Specifically, a
manufacturer must demonstrate that the device achieves its intended performance during normal conditions of use, that the known and foreseeable risks,
and any adverse events, are minimized and acceptable when weighed against the benefits of its intended performance, and that any claims made about the
performance and safety of the device are supported by suitable evidence. If we fail to remain in compliance with applicable European laws and directives,
we would be unable to continue to affix the CE mark to our products, which would prevent us from selling them within the EEA.
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On April 5, 2017, the European Parliament passed the Medical Devices Regulation (Regulation 2017/745), which repeals and replaces the MDD
and the Active Implantable Medical Devices Directive. Unlike directives, which must be implemented into the national laws of the EEA member states, the
regulations would be directly applicable, i.e., without the need for adoption of EEA member state laws implementing them, in all EEA member states and
are intended to eliminate current differences in the regulation of medical devices among EEA member States. The Medical Devices Regulation, among
other things, is intended to establish a uniform, transparent, predictable and sustainable regulatory framework across the EEA for medical devices and
ensure a high level of safety and health while supporting innovation. The Medical Devices Regulation will, however, only become applicable three years
after publication (in May 2020). Once applicable, the new regulations will among other things:
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strengthen the rules on placing devices on the market and reinforce surveillance once they are available;
establish explicit provisions on manufacturers’ responsibilities for the follow-up of the quality, performance and safety of devices placed on
the market;
improve the traceability of medical devices throughout the supply chain to the end-user or patient through a unique identification number;
set up a central database to provide patients, healthcare professionals and the public with comprehensive information on products available in
the EU; and
strengthen the rules for the assessment of certain high-risk devices, such as implants, which may have to undergo an additional check by
experts before they are placed on the market.
Starting May 2020, no new applications under the previous directives will be permitted. By that date, we will need to update our technical
documentation and other quality management system processes to meet the new MDR requirements.
During 2017, we decided to transition to a new Notified Body. As part of the transition, a quality audit was performed and the technical dossier of
one product was reviewed. In January 2018, we received a new CE certificate from our new Notified Body, BSI Group, bearing an expiration date of
October 10, 2019, the same expiration date as the previous certificate issued by our former Notified Body, for our WatchPAT 200 Unified (including one of
its probes) and EndoPAT 2000, to which we refer as the main certificate. The main certificate was renewed by the BSI Group in October 2019 with an
expiration date of May 26, 2024, and was broadened to also cover EndoPATX. In addition, we have obtained a CE certificate for our accessories, such as
probes and sensors that we sell for use with such products, to which we refer as the accessory certificate, which certificate does not bear any expiration date
(and is not required to be issued by a Notified Body like the main certificate). It should be noted that under the MDR requirements, CE certificates issued
under the previous directives prior to May 2020 shall remain valid in accordance with their term, beyond the expiration of the transition period, however
certain limitations set forth in the MDR, such as the need to use classifications that are different from the previous directives, would apply. We do not
expect such limitations to have any material impact on our ability to maintain our accessory certificate (or obtain a new one if such new classifications shall
apply) beyond May 2020.
We currently have a CE mark for our WatchPAT 200 Unified, EndoPAT 2000 and WatchPAT 300 (which, for the WatchPAT 300, was granted in
February 2019).
The Japanese Market
In Japan, the Pharmaceutical Medical Devices Authority, or PMDA, is the regulatory body supervising and regulating the marketing and sale of
medical devices such as our products, similarly to the FDA in the United States. In order to market and sell medical devices, such as ours, in Japan, we
must comply with Japan’s Pharmaceuticals and Medical Devices Act, or the PMD Act. Among other requirements, as part of the approval process, medical
device manufacturers must comply with the MHLW Ordinance No. 169 related to quality management systems, register design and manufacturing
facilities, and appoint an in-country representative, also known as MAH/D-MAH.
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We currently hold PMDA authorizations to market and sell our WatchPAT 200 Unified and EndoPAT 2000 in Japan. Such authorizations are held
by the local MAH/D-MAH with whom we maintain a contractual engagement.
The Canadian Market
Health Canada is the Canadian authority supervising and regulating the marketing and sale of medical devices such as our products, similarly to
the FDA in the United States.
We previously had authorizations of Health Canada to market and sell our WatchPAT 200 Unified and EndoPAT 2000. However, in August 2018,
we announced that we will not renew such authorizations and therefore, in January 2019, we ceased offering our products for sale in Canada.
The Israeli Market
General. All of our products are approved for sale and distribution in Israel by the Israeli Ministry of Health. Our manufacturing activities in Israel
are also subject to regulation by the Israeli Ministry of Health. In addition to marketing and selling our products, we or our partners also must obtain
pertinent approvals or permits to perform our clinical trials in the countries in which we perform such trials, such as in compliance with an international
guideline for the ethical conduct of clinical research known as the Declaration of Helsinki. In Israel, our clinical trials require a permit for a research plan
(protocol) by the Helsinki Committee, operating under the Israeli Public Health Regulations (Clinical Trials in Human Subject Research), 1980.
Israeli Innovation Authority
From time to time, eligible participants may receive grants under programs of the Israeli Innovation Authority, or IIA. Grants received are
generally repaid through mandatory royalties based on revenues from the sale of products (and ancillary services) incorporating know-how developed, in
whole or in part, with the grants. This governmental support is conditioned upon the participant’s ability to comply with certain applicable requirements
and conditions specified in the IIA’s programs and the R&D Law.
Under the R&D Law, research and development programs that meet specified criteria and are approved by the Research Committee of the IIA are
eligible for grants of certain approved expenditures of such programs, as determined by said committee. In exchange, the recipient of such grants is
required to pay the IIA royalties from the revenues derived from products incorporating know-how developed within the framework of each such program
or derived therefrom (including ancillary services in connection therewith), up to an aggregate of 100% of the U.S. dollar-linked value of the total grants
received in respect of such program, plus interest.
The R&D Law also provides that know-how developed under an approved research and development program or rights associated with such
know-how (1) may not be transferred to third parties in Israel without the approval of the IIA; and (2) may not be transferred to any third parties outside
Israel, except in certain special circumstances and subject to the IIA’s prior approval, which approval, if any, may generally be obtained in the following
cases: (a) the grant recipient pays to the IIA a portion of the sale price paid in consideration for such IIA-funded know-how (according to certain formulas,
which may result in repayment of up to 600% of the grant amounts plus interest), or (b) the grant recipient receives know-how from a third-party in
exchange for its IIA-funded know-how. Such approval is not required for the export of any products resulting from such research or development.
The R&D Law provides that products developed under an approved research and development program should, as a general matter, be
manufactured in Israel. Manufacturing products developed under an approved research and development program outside of the State of Israel is prohibited
without receiving prior approval from the Innovation Authority (except for the transfer of less than 10% of the manufacturing capacity in the aggregate
which requires only a notice). If a company receives approval to manufacture products developed with government grants outside of Israel, it will be
required to pay increased royalties to the IIA, up to 300% of the grant amount plus interest, depending on the manufacturing volume that is performed
outside of Israel. The company may also be subject to accelerated royalty repayment rates. 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 following the
receipt of the grant.
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The abovementioned restrictions continue to apply even after a grant recipient has repaid the full amount of the grants received in connection with
an approved research and development program.
The R&D Law imposes reporting requirements with respect to certain changes in the ownership of a grant recipient. The law generally requires
the grant recipient and its controlling shareholders and foreign interested parties to notify the IIA of a change in control of the recipient or a change in the
holdings of the “means of control” of the recipient that would make a non-Israeli an “interested party” and that non-Israeli “interested parties” provide an
undertaking to the IIA to comply with the R&D Law. In addition, the rules of the IIA may require additional information or representations in respect of
certain of such events. For these purposes, “control” is defined as the ability to direct the activities of a company other than any ability arising solely from
serving as an officer or director of the company. A person is presumed to have control if such person holds 50% or more of any of the means of control of a
company. “Means of control” refers to voting rights or the right to appoint directors or the chief executive officer. An “interested party” of a company
includes a holder of 5% or more of its outstanding share capital or voting rights, its chief executive officer and directors, someone who has the right to
appoint its chief executive officer or at least one director, and a company with respect to which any of the foregoing owns 25% or more of the outstanding
share capital or voting rights or has the right to appoint 25% or more of the directors. Accordingly, a change of control in us and the acquisition of 5% or
more of our ordinary shares by a non-Israeli may require notification to the IIA and the provision of an undertaking to comply with the R&D Law.
The Israeli authorities have indicated in the past that the government may reduce or abolish the IIA grants in the future. Even if these grants are
maintained, we cannot presently predict what would be the amounts of future grants, if any, that we might receive.
Our research and development efforts for the development of EndoPAT 3000, a new generation of our EndoPAT product (the development of
which was discontinued before its completion with no sales to date), during the period between 2003 and 2005, were financed in part through royalty-
bearing grants from the IIA, in a total amount of approximately $0.9 million. The amount of the grants including interest accrued as of December 31, 2019
was approximately $1.06 million. In 2009, the IIA notified us that we are required to pay royalties on the sale of all of our products commencing as of
2012. Although we believe that we are not required to repay these grants to the IIA from the sale our past and currently marketed products, we may be
required to pay royalties with respect to sales of future products that incorporate the know-how developed under these grant programs. There is no
assurance that we will prevail in our efforts opposing the IIA’s position. Since we made a full accrual in our financial statements for such possible liability,
in the event that our efforts with the IIA are not successful, the primary effect will be on our cash flows and financial condition. We anticipate that in 2021
we will begin selling our newly developed EndoPATX, for which we recently received authorization to affix a CE mark. We developed EndoPATX while
using some of the knowledge and developments of the EndoPAT 3000, and therefore anticipate paying royalties on all sales of EndoPATX, against the
grants received for the EndoPAT 3000.
C. Organizational Structure
Our wholly owned subsidiaries act primarily as sales, marketing and customer service organizations in the countries where they are incorporated
and in most instances for neighboring countries. The following table sets forth the legal name, location and country of incorporation and percentage
ownership of each of our current principal operating subsidiaries:
Subsidiary Name
Itamar Medical, Inc.
Itamar Medical Japan Co. Ltd.*
I.M.E. 2016 B.V.
* Currently in the process of dissolution.
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Country of
Incorporation
Ownership
Percentage
Delaware, United States
Japan
The Netherlands
100%
100%
100%
D. Property, Plants and Equipment
Our headquarters, manufacturing and research and development facilities as well as our sales offices are located in the Northern Caesarea Business
Park, Caesarea, Israel, where we lease approximately 14,000 square feet of office and manufacturing space pursuant to a lease that is currently scheduled to
expire in July 2021. Our current monthly rent is NIS 96,000 (equivalent to approximately $26,244) and we have provided the lessor with a bank guarantee
of NIS 637,000 (equivalent to approximately $174,139) to secure our obligations thereunder.
During 2019, we entered into a lease agreement for new manufacturing facilities located in the Southern Caesarea Business Park, Caesarea, Israel,
where we lease approximately 14,000 square feet This lease is currently scheduled to expire in February 2023, but provides for two optional extensions
until February 2030. Our current monthly rent is NIS 45,000 (equivalent to approximately $12,302) and we have provided the lessor with a bank guarantee
of NIS 217,000 (equivalent to approximately $59,322) to secure our obligations thereunder. We are currently in the process of construction and adjustment
of these new manufacturing facilities to our manufacturing requirements and expect the construction to be completed and the new manufacturing facilities
to be operative during the third quarter of 2020. We estimate our total expenditures related to these construction works to amount to approximately $1
million and estimate that our production capacity capabilities after completion of construction will increase by approximately 350%, compared to 2019
capacity.
In addition, we lease storage facilities in the Northern Caesarea Business Park, Caesarea, Israel, where we lease approximately 1,900 square feet
of storage space pursuant to a lease that is scheduled to expire in June 2021. Our current monthly rent is NIS 9,000 (equivalent to approximately $2,460)
and we have provided the lessor with a deposit of NIS 55,000 (equivalent to approximately $15,036) to secure our obligations thereunder.
In addition to the above, we lease approximately 10,900 square feet of office space in Atlanta, Georgia, pursuant to a lease that expires in March
2022, with an optional extension until March 2025. Our current monthly rent is $17,000 and we have provided the lessor with a bank guarantee of $15,000
to secure our obligations thereunder.
Item 4A. Unresolved Staff Comments
None.
Item 5. Operating and Financial Review and Prospects
You should read the following discussion and analysis of our financial condition and results of operations in conjunction with the section entitled
Item 3.A. “Selected Financial Data” and our consolidated financial statements and the related notes included elsewhere in this Annual Report. This
discussion contains forward-looking statements and involves numerous risks and uncertainties, including, but not limited to, those described in Item 3.D.
“Risk Factors”. Actual results could differ materially from those contained in any forward-looking statements.
Overview
We are a medical technology company focused on the development and commercialization of non-invasive medical devices and solutions to aid in
the diagnosis of respiratory sleep disorders. We use a digital healthcare platform to facilitate the continuum of care for effective sleep apnea management
with a focus on the core sleep, cardiology and direct to consumer, or DTC, markets. We offer TSS to help physicians provide comprehensive sleep apnea
management in a variety of clinical environments to optimize patient care and reduce healthcare costs. In addition, we have recently begun offering our
WatchPAT family of products and certain components of TSS to the DTC market.
Since our incorporation in 1997, we have incurred operating and net losses in most of our years of operation and, as of December 31, 2019, we
had an accumulated deficit of $109.6 million. We expect to continue to incur operating and net losses for the foreseeable future, as we continue to invest in
research and development and marketing and sales operations aimed at growing our business.
In the years ended December 31, 2019, 2018 and 2017, we have generated revenues of $31.3 million, $24.2 million and $20.7 million,
respectively. We have grown our WatchPAT family of products revenue from approximately $18.1 million for the year ended December 31, 2017 to $22.4
million for the year ended December 31, 2018, reflecting a growth rate of 23.6%, and from $22.4 million for the year ended December 31, 2018 to $29.0
million for the year ended December 31, 2019, reflecting a growth rate of 29.5%.
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Trend Information
The following is a description of the significant trends and uncertainties that we believe will continue to materially influence our market, financial
condition and the demand for our products.
We expect to continue to generate revenues mainly from the sales of our WatchPAT family of products in the United States, Japan, Europe, Asia
Pacific and China, which is consistent with our strategy to expand our sales of the WatchPAT in general and in those markets in particular. The level of our
future revenues, however, is hard to predict and depends on many factors which are outside of our control.
We expect that the sales of our EndoPAT product will continue to fluctuate. There are few factors that may cause a decrease in our sales of the
EndoPAT product, including (i) our strategic decision to reduce our sales and marketing efforts for such product, (ii) the reduction of research funds
available to research institutions, which represent the vast majority of customers who purchase this product from us and (iii) the ongoing difficulties
associated with obtaining coverage or reimbursement from third-party payors for the use of such product for clinical use in the United States. However, we
expect to continue to sell EndoPAT to pharmaceutical companies’ large studies and may, from time to time, yield relatively material revenue from EndoPAT
sales, as we did in the year ended December 31, 2019.
We market our products, directly or through distributers and other sales channels, primarily to health facilities, physicians and research
institutions, many of whom rely on coverage or reimbursement for the healthcare services they receive or provide to their patients, from third-party payors,
such as private insurance plans offered by medical insurance companies. Currently, many medical insurers cover or allow only partial reimbursement of
expenses associated with medical tests that use our products. However, we believe that the changes in the guidelines issued by the American Academy of
Sleep Medicine, or AASM and coverage policies of third-party payors in the past two years may lead to the inclusion by more medical insurers of the
WatchPAT test in the basket of medical examinations and procedures covered. In addition, we believe that continuing changes to Medicare reimbursement
amounts for HSAT services will continue to support and expand the use of our WatchPAT technology. In particular, in November 2019, CMS published its
annual update to the MPFS, which included changes to the Medicare reimbursement levels for CPT codes describing HSATs. The 2020 MPFS continued
with the second year of a four-year schedule that has reduced and is expected to further reduce the Medicare payment associated with CPT code 95806,
which describes HSAT services that do not utilize PAT technology. Medicare payment for CPT code 95800, which can describe PAT-based HSAT services
like our WatchPAT, remained relatively stable from 2019 to 2020, with an approximate 2% reduction.
Based upon, among other things, CMS publications regarding the number of home sleep tests conducted in the United States during 2017 and
2018, we estimate that tests conducted with WatchPAT represent approximately 19.0%, and 18.0% of the total home sleep tests conducted in the United
States in 2018 (approximately 1.5 million tests) and 2017 (approximately 1.4 million tests), respectively.
We estimate that the costs for our selling and marketing expenses will increase in future years, as we continue to build our business, including by
expanding our footprint and the territories in which we operate. We also estimate that the costs for developing our products will increase in future years, as
we execute our plan to develop new products and services, including new applications that are based on our PAT-based technology, to accelerate adoption
by sleep physicians and cardiologists. We estimate that our general and administrative expenses will increase, primarily due to the continued expansion of
our management team as well as compliance costs associated with being subject to reporting and other requirements under applicable United States
securities laws and Nasdaq rules.
We intend to continue to invest in selling and marketing, in developing new products and services and otherwise implementing our strategy. We
believe that this strategy will enable us to support continued sales growth and enhance market acceptance for our offerings. However, we expect to continue
to incur operating losses in the near future as we increase our sales and marketing activities associated with implementing our strategy, mainly in the United
States, Japan, Europe, Asia Pacific and China, and otherwise continue to invest capital in the development and expansion of our products and our business
generally, including the commitment of substantial resources toward reimbursements and clinical studies.
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In December 2019, a novel strain of coronavirus was reported in Wuhan, China. While, initially, the coronavirus outbreak was largely
concentrated in China, it has now spread globally, including to the U.S., Europe, Japan and Israel. Many countries around the world, including in the U.S.,
Europe, Japan and Israel, have since implemented significant measures in an attempt to control the spread of the virus, such as temporary limitations on
international and domestic travel, restrictions with respect to public gatherings, including the number of employees who may be present at a work place at
any given time, limitations on access and entrance to various facilities, such as healthcare institutes, and other material limitations.
These measures have resulted in work stoppages, particularly in China, which disrupted our supply chain. While, prior to the coronavirus
outbreak, we maintained a safety inventory which was designed to allow us to meet demand for our products during at least the first quarter of 2020, and
while our supplies in China are resuming operations with first deliveries recently arriving to Israel, there is no assurance that we will not suffer additional
supply chain interruptions or limitations on access to our facilities as a result of the various measures taken or that will be implemented to contain the
coronavirus outbreak.
Limitations on access to healthcare facilities, including those who typically service our products, as well as a potential shift of respiratory
personnel and resources toward a focus on addressing the coronavirus outbreak, could adversely impact demand for our multi-use reusable products. At the
same time, in the U.S., the AASM has recently issued guidance encouraging sleep clinicians to use disposable single use home sleep tests, instead of
traditional in-lab PSG tests or multi-use reusable home sleep tests, to reduce risk of infections, especially during the coronavirus outbreak. While demand
for our multi use reusable home sleep test devices may be adversely impacted by the coronavirus outbreak, we believe that we are well positioned in the
U.S. to benefit from this AASM guidance, with our single-use WatchPAT ONE home sleep test, combined with our CloudPAT digital health platform. We
are also accelerating our efforts in Europe and in other parts of the world, in order to obtain regulatory approvals for our WatchPAT ONE disposable device.
In response to these anticipated changes in the market, we are changing our manufacturing mix to prioritize WatchPAT ONE production. To that end, we
are also currently investing considerable resources, including hiring of additional production and production related employees, to increase our WatchPAT
ONE production capacity, while, given the rapidly changing market environment, there is no certainty as to when such investments and regulatory
approvals will materialize into additional WatchPAT ONE sales.
The extent to which the coronavirus impacts our manufacturing, operations, demand for our products and business results, will depend on future
developments, which are rapid and highly uncertain and cannot be predicted with confidence, including the duration and severity of the outbreak, and the
actions that may be implemented in an attempt to contain the coronavirus or treat its impact. As such, the continued spread of the coronavirus globally and
uncertainty about current global economic conditions, could adversely impact our operations and workforce, including our manufacturing and sales and
marketing activities, which in turn, could have a material adverse impact on our business, financial condition and results of operation.
Our ability to continue our growth and achieve profitability depends, in part, on the global economy, including the potential effects of the
coronavirus outbreak as described above and elsewhere in this Annual Report, the growth rates and changes in trends in industries in which we operate,
including the availability of reimbursement for the use of our products by medical insurance companies as described elsewhere in this Annual Report, and
the level of market acceptance of our products and services. As such, our results may be adversely affected if, among other things, there is an economic
slowdown, a failure of our products to achieve market recognition or demand or interruption to our supply chains.
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Financial Overview
Revenues
Our revenues consist primarily of sales of our WatchPAT family of products and, to a lesser extent, our EndoPAT product and related services to
hospitals, clinics and physicians’ practices, including health management organizations (HMOs), directly as well as through distribution channels. These
products are offered mainly as a combination of TaaS (as part of our TSS program in the cardiology field in the United States), capital equipment (which
can be used for several years) and one-time disposable probes. For additional details regarding the manner in which we recognize revenues, see the
discussion under the caption “Critical Accounting Policies and Significant Judgments and Estimates — Revenue Recognition” below.
Cost of Revenues
Our cost of revenues consists of costs of raw materials and subcontractors, as well as labor, utility and maintenance costs associated with the
operation of our manufacturing facility, depreciation and shipping and handling.
Operating Expenses
Our current operating expenses consist of three components:
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Selling and Marketing. Our selling and marketing expenses consist primarily of salaries, including share-based compensation and related
personnel expenses to selling, marketing and business development personnel, sales commission and related personnel expenses, sales offices
maintenance, administrative costs conferences and trade shows, advertising and marketing, cost of third-party consultants (including in
respect of our efforts to increase the number of insurers entitled to reimbursement for use of our products) and travel expenses.
Research and Development. Our research and development expenses consist primarily of salaries, including share-based compensation and
related personnel expenses, cost of third-party consultants, advisory board, raw materials, costs related to conducting clinical studies, patent
costs, regulatory costs and travel expenses. Some development costs that relate to development of products or processes that are technically
and commercially feasible and for which we have sufficient resources to complete development and intent to use or sell them are capitalized
and subsequently amortized.
General and Administrative. General and administrative expenses consist primarily of salaries, including share-based compensation and
related personnel expenses, professional service fees for accounting, legal, bookkeeping, directors’ fees and associate costs, and doubtful
debts.
Financial Expenses and Income
Financial expenses and income consist primarily of interest expenses and exchange rate differences on loans and lease liabilities, interest income
and exchange rate differences on bank deposits and marketable securities and changes in the fair value of warrants which expired in May 2019, and
embedded warrants of our convertible notes that were fully repaid in February 2018, interest expenses and exchange rate differences on such convertible
notes, change in the fair value of marketable securities and foreign currencies gains or losses. The warrants, including the embedded warrants in our
convertible notes, were measured on each reporting date and the results from the changes in their fair value which was being impacted, among other things,
by the changes in our share price were included in financial expenses or income, net. Typically, when the share price increased, the fair value of the
warrants and the embedded warrants increased, which resulted in higher net financial expenses, and when share price decreased, the fair value of the
embedded warrants decreased, which resulted in lower net financial expenses or in net financial income.
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Taxes on Income
We are subject to income taxes in Israel, the United States, the Netherlands and Japan. Our Japanese subsidiary is in the process of being
dissolved.
Critical Accounting Policies and Significant Judgments and Estimates
The preparation of financial statements in conformity with IFRS requires us to make estimates and assumptions that affect the reported amounts of
assets and liabilities and the disclosure of contingent liabilities at the date of the financial statements and the reported amounts of assets, liabilities,
revenues and expenses during the reporting period.
The accounting estimates used in the preparation of our financial statements require management to make assumptions regarding circumstances
and events that involve considerable uncertainty. Management prepares the estimates based on past experience, various facts, external circumstances, and
reasonable assumptions according to the pertinent circumstances of each estimate. Actual results may differ from these estimates under different
assumptions or conditions. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in
the period in which the estimates are revised and in any affected future periods.
While our significant accounting policies are more fully described in Note 2 to our audited consolidated financial statements included elsewhere in
this Annual Report, we believe the following accounting policies are most critical to understanding and evaluating our reported financial results.
Revenue Recognition
As of January 1, 2018, we apply the following accounting policies under IFRS 15, Revenues from Contracts with Customers.
We recognize revenues when the customer obtains control over the products or services that have been secured, net of provision for returns and
discounts. The revenue is measured according to the amount of consideration that we expect to be entitled to in return for the transfer of products or
services promised to the customer, other than amounts collected in favor of third parties.
We recognize estimated sales discounts as a reduction of sales in the same period at which revenue is recognized. We adjust reserves to reflect
differences between estimated and actual. We estimate our sales returns reserve based on historical return rates and analysis of specific accounts.
When we sell our products through distributors, revenue is being recognized upon delivery of the product to the distributor, as the distributor does
not have the right to return and the control over the products is transferred at this point in time.
We account for a contract with a customer only when the following conditions are met: (i) 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; (ii) we can
identify the rights of each party in relation to the products or services that will be transferred; (iii) we can identify the payment terms for the products or
services that will be transferred; (iv) 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 (v) it is probable that the consideration, to which we are entitled to in exchange for the products or services
transferred to the customer, will be collected.
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: (i) we have no remaining obligations to transfer products or services to the customer and any
consideration promised by the customer has been received and cannot be returned; or (ii) the contract has been terminated and the consideration received
from the customer cannot be refunded.
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We identify products or services promised to the customer as being distinct performance obligations when the customer can benefit from the
products or services on their own or in conjunction with other readily available resources and our promise to transfer the products or services to the
customer is separately identifiable from other promises in the contract. In order to examine whether a promise to transfer products or services is separately
identifiable, we examine whether we are providing a significant service of integrating the products or services with other products or services promised in
the contract into one integrated outcome that is the purpose of the contract.
Products or services that are not considered as being distinct are grouped together as a single performance obligation. The revenue from each such
performance obligation is recognized upon transfer of control over the promised products or services to customer. In general, we allocate the transaction
price to the identified performance obligations in the contract, based on the relative stand-alone selling prices when the products or services are sold
separately. In cases where the products or services are not sold separately, for example, in the case of installations or training, we establish the stand-alone
selling price assigned to that performance obligation, based on estimated costs plus a reasonable margin. Significant financing component in installment
sales is separated in determining the transaction price.
As applicable to us, revenues from sales agreements consisting of multiple products or services, such as devices, consumables, access to our
CloudPAT application, WatchPAT Direct logistic services and support, extended warranty and other service agreements, are separated into different
performance obligations, based on its relative fair values, and revenue is separately recognized for each performance obligation.
We recognize revenue from renting our products over the rent term, in conformity with the agreement with the customer.
Since 2015, we have focused on offering TSS to our customers focusing on the cardiology market through various business models; however,
TaaS, is the primary model we utilized to date. In the TaaS model, the medical practice or physician ordering the TaaS pays a fixed fee per HSAT that
includes all the components associated with the test, including the disposable biosensor, hardware rental fees and access to our CloudPAT platform. Under
the TaaS model, some rent agreements of the WatchPAT family of products are made for a period of one to two years. The rental fees are separated under
the relative fair value approach.
In some cases, we handle sale transactions of these devices as a finance lease and recognize revenue in respect of the products supplied at the
commencement date of the lease. When these transactions include multiple performance obligations, revenue is recognized based on the relative stand-
alone selling prices of each performance obligation in the transaction when they are sold separately.
Revenue is recognized when we satisfy a performance obligation by transferring control over the promised products or services to the customer.
Sale of devices and disposables are generally recognized upon shipment. Services (including extended warranty) are recognized ratably over the service
period.
A contract asset is recognized when we have a right to consideration for products or services, we transferred to the customer that is conditional on
other than the passing of time, such as our future performance. Contract assets are classified as receivables when the rights in their respect become
unconditional.
A contract liability is recognized when we have an obligation to transfer products or services to the customer for which we received consideration
(or the consideration is payable) from the customer. An asset and liability relating to the same contract are presented on a net basis in the statement of
financial position. On the other hand, a contract asset and contract liability deriving from different contracts are presented on a gross basis in the statement
of financial position.
As to the accounting policy applied in periods prior to January 1, 2018, see Note 2r to our audited consolidated financial statements included
elsewhere in this Annual Report.
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Discount Rate for Lease liabilities
Lease contracts that give us control over the use of the leased asset over a period of time for consideration, are treated as leases. At the initial
recognition, we recognize a liability at the present value of the lease payments (these payments do not include certain variable lease payments) discounted
using the interest rate implicit in the lease or, if that rate cannot be readily determinable, our incremental borrowing rate, and at the same time we recognize
a right-of use asset at the same amount of the lease liability, adjusted for prepaid or accrued lease payments, plus any direct costs incurred in respect of the
lease.
An increase or decrease in the incremental borrowing rate will be reflected in a decrease or increase in the lease liability or in the right-of use asset
and in the depreciation and financial expenses that will be recognized in the statement of operations.
Derivatives
We recognize all derivative instruments as assets or liabilities in the statements of financial position at their estimated fair values, and the changes
in such fair values are recognized in the statements of operations within “financial income (expenses), net” for the period in which they occur. During the
reported periods, we did not have derivatives designated as hedges. We review our contracts to identify the existence of embedded derivatives. Identified
embedded derivatives are analyzed to determine if they need to be separated from the host contract and recognized in the statements of financial position as
assets or liabilities, applying the same valuation rules used for other derivative instruments.
Derivatives with either a conversion price or an exercise price that are denominated in NIS, a currency different than our functional currency, are
accounted for as a derivative financial instrument measured at fair value through the statements of operations on each reporting date and constitute a
liability.
The fair value of derivatives which are embedded in our formerly outstanding convertible notes is measured based on direct or indirect observed
market data, using the binomial model, based on relevant parameters of the conditions of the convertible notes which have been identified for determining
the fair value of the warrant component.
The Warrants (Series 4), which were traded on the TASE, and the Viola Warrants were essentially identical in their conditions (both expired in
May 2019). We believed that there was no active market for the traded Warrants (Series 4), primarily due to an ongoing gradual decline in the frequency
and volume of trading in such warrants with significant variance in the transactions prices of the warrants without a corresponding material change in the
share price, and often with a negative correlation between the change in the share price and the change in the warrants price. Consequently, we estimated
the fair value of the Warrants (Series 4) and the Viola Warrants based on observable market data, directly or indirectly, based on the binomial model and
based on relevant parameters of the terms of the Warrants (Series 4) and the Viola Warrants.
The following parameters were used in the calculation of the fair value of the above derivatives, using the binomial model: discount rate for notes
(yield to maturity of the notes), the discount rate of the Viola Warrants and Warrants (Series 4) (risk free interest), the share price and standard deviation of
the share price.
Recently Issued Accounting Pronouncements
For information with respect to recent accounting pronouncements, see Note 2g to our audited consolidated financial statements included
elsewhere in this Annual Report.
A. Operating Results
For a discussion of our results of operations for the year ended December 31, 2017, including a year-to-year comparison between 2018 and 2017,
and a discussion of our liquidity and capital resources for the year ended December 31, 2017, refer to “Management's Discussion and Analysis of
Financial Condition and Results of Operations” in our final prospectus filed with the SEC pursuant to Rule 424(b)(4) on January 31, 2020.
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The following discussion of our results of operations for the years ended December 31, 2019 and December 31, 2018, including the following
tables, which present selected financial information data in U.S. dollars and as a percentage of total revenues, is based upon our consolidated statements of
operations contained in our consolidated financial statements and the related notes included elsewhere in this Annual Report.
Consolidated Statements of Operations Data:
Revenues
Cost of revenues
Gross profit
Operating expenses:
Selling and marketing
Research and development
General and administrative
Total operating expenses
Operating loss
Financial income from cash, deposits and investments
Financial expenses from leases, notes, loans and other
Gain from derivative instruments, net
Financial income (expenses), net
Loss before income taxes
Taxes on income
Net loss
Loss per share:
Basic
Diluted
Revenues
Cost of revenues
Gross profit
Operating expenses:
Selling and marketing
Research and development
General and administrative
Total operating expenses
Operating loss
Financial income from cash, deposits and investments
Financial expenses from leases, notes, loans and other
Gain from derivative instruments, net
Financial income (expenses), net
Loss before income taxes
Taxes on income
Net loss
Year Ended December 31,
2018
2019
(in thousands, except per share
and share data)
$
$
$
$
31,258
6,984
24,274
18,294
4,520
6,354
29,168
(4,894)
454
(1,233)
442
(337)
(5,231)
(37)
(5,268)
(0.02)
(0.02)
$
$
$
$
24,189
5,726
18,463
12,699
3,638
5,247
21,584
(3,121)
244
(1,161)
2,433
1,516
(1,605)
(124)
(1,729)
(0.01)
(0.01)
Year Ended December 31,
2018
2019
100.0%
22.3
77.7
58.5
14.5
20.3
93.3
(15.6)
1.5
(3.9)
1.4
(1.1)
(16.7)
(0.1)
(16.8)%
100.0%
23.7
76.3
52.5
15.0
21.7
89.2
(12.9)
1.0
(4.8)
10.1
6.3
(6.6)
(0.5)
(7.1)%
Comparison of the Year Ended December 31, 2019 to the Year Ended December 31, 2018
Revenues
The following tables provide a breakdown of our revenues, by line of product and by geographic area, during the years ended December 31, 2019
and 2018, as well as the percentage change between such years:
WatchPAT and other related services
Endo PAT and other related services
Total
Year Ended December 31,
2018
2019
(in thousands)
Increase
%
$
$
28,988 $
2,270
31,258 $
22,384
1,805
24,189
29.5
25.8
29.2
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United States and Canada
Japan
Europe
Asia Pacific (excluding Japan)
Other
Total
Year Ended December 31,
2018
2019
(in thousands)
Increase
%
$
$
22,960 $
3,489
3,383
912
514
31,258 $
17,582
3,374
1,885
849
499
24,189
30.6
3.4
79.5
7.4
3.0
29.2
Our revenues in 2019 increased by 29.2% to $31.3 million, compared with $24.2 million in 2018. The increase is mainly attributable to an
increase of 29.5% in revenues from sales of our WatchPAT family of product and an increase of 25.8%, in the revenues from sales of our EndoPAT product
in 2019, compared with 2018.
The increase in revenues from sale of our WatchPAT family of products in 2019, is mainly associated with the following: (i) an increase of 30.0%
in sales of disposables in the United States which is attributable to an increase in the volume of disposables being used with each WatchPAT test sold in the
United States and an increase of 53.2% in revenues from a significant customer as a result of an order of $2.3 million for WatchPAT 300, mostly for an
upgrade and expansion of such customer's current WatchPAT fleet; (ii) an increase of 58.1% in WatchPAT sales in Europe, which is attributable to an
increase in the volume of sales in such territory; and (iii) an increase of 13.8% sales of WatchPAT in Japan, which is attributable to an increase in the
volume of sales of WatchPAT in such territory.
The increase in revenues from sales of our EndoPAT product in 2019, is primarily associated with a purchase order of approximately $1.1 million
for EndoPAT, from an existing customer in the pharmaceutical industry, pursuant to an existing framework agreement with such customer, out of which
revenues of $1.0 million were recognized in 2019.
The portion of revenues from the sale of disposables out of our total revenues in 2019 increased to 56.5%, from 54.9% in 2018 (such portion in the
United States increased from 62.4% 2018 to 64.2% in 2019 (or, if we exclude the $2.3 million order from the significant customer mentioned above, to
70.9%)), while the ratio of revenues from the sale of devices out of our total revenues in 2019 decreased to 31.5%, from 33.9% in 2018. The change in the
ratio between revenues from sale of disposables and sale of devices in the comparison years was mainly attributed to an increase in the number of
WatchPAT tests (and hence, use of disposables) conducted during such years, primarily in the United States.
Revenues from each of the other services, such as access to our CloudPAT platform, WatchPAT Direct logistic services and support and other
service agreements were also immaterial in each of 2019 and 2018 and represented less than 5% of our total revenues during such years.
Cost of Revenues and Gross Profit
Our cost of revenues for 2019 increased by 22.0% to $7.0 million, compared with $5.7 million in 2018, whereas our gross profit for 2019
increased by 31.5% to $24.3 million, compared with $18.5 million in 2018. The increase in absolute gross profit is primarily due to our increased volume
of sales. The increase in our gross profit margin to 77.7% in 2019, from 76.3% in 2018 is primarily attributable to: (i) increased efficiency and cost
reduction in the production process; and (ii) allocation of fixed costs and overhead expenses on a higher volume of sales.
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Operating Expenses
The following table sets forth a breakdown of our operating expenses (excluding cost of revenues) for the years ended December 31, 2019 and
2018 as well as the percentage change between such years:
Selling and marketing
Research and development
General and administrative
Total
Selling and Marketing
Year Ended December 31,
2018
2019
(in thousands)
Increase
%
$
$
18,294 $
4,520
6,354
29,168 $
12,699
3,638
5,247
21,584
44.1
24.2
21.1
35.1
Selling and marketing expenses for 2019 increased by 44.1% to $18.3 million, compared with $12.7 million in 2018. This increase is primarily
due to an increase in employee related costs (including payroll, share-based compensation, sales commissions and travel expenses) associated with the
expansion of our U.S. sales team into new geographical territories and verticals (27 territories and verticals as of December 31, 2019, compared to 19
territories and verticals as of December 31, 2018).
Research and Development
Research and development, or R&D, expenses increased by 24.2% to $4.5 million in 2019, compared with $3.6 million in 2018. This increase is
primarily due to an increase in employee related costs related to recruitment of new R&D personnel, offset by a decrease in expenses associated with
clinical studies.
General and Administrative Expenses
General and administrative, or G&A, expenses increased by 21.1% to $6.4 million in 2019, compared with $5.2 million in 2018. This increase is
primarily due to due to additional legal, audit and other expenses relating to the listing of the ADSs, on Nasdaq in February 2019, to an increase in
employee related costs and to an increase of $0.2 million in allowance for doubtful debts.
Operating Loss
Based on the foregoing, our operating loss increased from $3.1 million in 2018 to $4.9 million in 2019.
Financial Income, Net
Financial expenses, net for 2019 were $0.3 million, compared to financial income, net of $1.5 million in 2018. The change is primarily because in
2018, we incurred net gain from changes in the fair value of derivative instruments, which amounted to $2.4 million, compared with $0.4 million in 2019.
This was offset by an increase of $0.2 million in financial income from cash, bank deposits and investments, as a result of an increase in cash balances
resulting from the cash raised in a private placement in the first quarter of 2019.
The decrease in gain with respect to derivative instruments in 2019 is due to the decrease in the fair value of the Warrants (Series 4) and the Viola
Warrants as a result of their expiration in May 2019. According to IFRS, a valuation at each reporting date of such derivative instruments is required since
they are denominated in NIS. The fair value is primary impacted by our share price and the reduction of the maturity period.
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Net Loss
Net loss for 2019 increased by $3.5 million, or 204.7%, to $5.3 million, compared with a net loss of $1.7 million in 2018. This increase is
primarily attributable to the transition from net financial income to net financial expenses and an increase in our operating loss, as described above.
Impact of Currency Fluctuations and of Inflation
Our financial results may be impacted by foreign currency fluctuations and inflation although, except as set forth below, foreign currency
fluctuations and the rate of inflation did not have a material impact on our financial results in the past three years.
Since the majority of our revenues are paid in or linked to the U.S. dollar, we believe that inflation and fluctuations in the NIS and U.S. dollar
exchange rate have no material effect on our revenues. However, a significant portion of the cost of our Israeli operations, mainly personnel and facility-
related, is incurred in NIS and, consequently, inflation in Israel and fluctuations in the U.S. dollar/NIS exchange rate may have an impact on our expenses
and, as a result, on our net income or loss. Our NIS costs, as expressed in U.S. dollars, are influenced by the extent to which any increase in the rate of
inflation in Israel is not offset (or is offset on a lagging basis) by a devaluation of the NIS in relation to the U.S. dollar. To protect against the changes in
value of forecasted foreign currency cash flows resulting from payments in NIS, we maintain liquid means on hand in NIS and U.S. dollar and we execute,
from time to time, hedging transactions in accordance with our needs. As of December 31, 2019, we did not enter into any hedging transactions. Even if we
enter into such hedging transactions, these measures may not adequately protect us from material adverse effects due to the impact of currency fluctuations
or inflation.
For additional details, see Item 11. “Quantitative and Qualitative Disclosures about Market Risk.”
B. Liquidity and Capital Resources
Since our incorporation in 1997, we have incurred operating and net losses in most of our years of operation. As of December 31, 2019, we had an
accumulated deficit of approximately $109.6 million. We expect to continue to incur operating and net losses for the foreseeable future, as we continue to
invest in research and development and marketing and sales operations aimed at growing our business.
In the past several years, we financed our operations primarily through issuance of equity and debt to the public, private placements of our
ordinary shares and ADSs to institutional and other investors and loans from our major shareholders and commercial banks.
Our funding and treasury activities are conducted within corporate practices to maximize investment returns while maintaining appropriate
liquidity for both our short and long-term needs. Cash and cash equivalents are held primarily in U.S. dollars and NIS.
Principal Financing Activities
Since January 1, 2018, we have engaged in the following principal financing activities:
Credit Line. On March 29, 2017, we entered into a credit line agreement with an Israeli commercial bank, to which we refer, as amended on
January 30, 2018 and May 28, 2018, as the Credit Agreement. Under the Credit Agreement, we secured a credit line in a total amount of up to $10 million
comprised of (i) up to $6 million in long-term loan, or Loan; and (ii) up to $4 million of revolving credit line against our trade accounts receivable, or
Revolving Credit Line. The Credit Agreement was replaced by new credit line agreements entered into on March 12, 2019, or the 2019 Credit Agreement,
and on February 9, 2020, as detailed below:
·
In connection with the Credit Agreement, we issued the bank warrants exercisable into up to 798,088 ordinary shares at an exercise price of
NIS 1.36 per share (equivalent to approximately $0.37 per share), subject to adjustments. The warrants were initially exercisable until May
14, 2022 (see extensions below).
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·
·
·
In order to secure our obligations to the bank, we pledged and granted to the bank a first priority floating charge on all of our assets and a first
priority fixed charge on (i) our intellectual property, goodwill, holdings in our subsidiaries and certain other, immaterial, assets and (ii) all of
the assets of the U.S. Subsidiary. We refer to the agreements relating to such charges and other security interests (as amended or replaced, as
described below) as the Security Agreements. The Security Agreements contain a number of customary restrictive terms and covenants that
limit our operating flexibility, such as (i) limitations on the creation of additional liens, on the incurrence of indebtedness, on the provision of
loans and guarantees and on distribution of dividends; and (ii) the ability of the bank to accelerate repayment in certain events, such as breach
of covenants, liquidation, and a change of control of our Company. Such provisions may hinder our future operations or the manner in which
we operate our business, which could have a material adverse effect on our business, financial condition or results of operations.
On March 12, 2019, we and the bank entered into the 2019 Credit Agreement under which the total credit line to be available under the credit
facility was increased from $10 million under the Credit Agreement to $15 million under the 2019 Credit Agreement, comprised of: (i) up to
$9 million in long-term or short-term loan; and (ii) and up to $6 million of credit facility against trade accounts receivable. As part of the 2019
Credit Agreement, we (i) issued to the bank additional warrants exercisable into 399,044 ordinary shares at an exercise price of NIS 1.30 per
share (equivalent to approximately $0.36 per share), which were initialy exercisable until March 28, 2023 (see extension below), and (ii)
extended the exercise period of the original warrants issued in connection with the Credit Agreement until March 28, 2023 (see extension
below). In addition, we have amended certain of the Security Agreements and replaced certain of them in order to secure our obligations
under the 2019 Credit Agreement.
On February 9, 2020, we and the bank entered into the Credit Facility under which the total credit line to be available under the credit facility
was increased from $15 million under the 2019 Credit Agreement to $17 million under the Credit Facility, comprised of: (i) up to $10 million
in long-term or short-term loan, or the Loan; and (ii) and up to $7 million of credit facility against trade accounts receivable, or the Revolving
Credit Line. The amount of $10 million may increase in July 2020 by an additional $3 million, to a total of $13 million (and, consequently,
the total amount of the credit line will increase from up to $17 million to up to $20 million), if we will achieve certain revenue targets in the
first half of 2020.
·
·
·
·
The Loan may be drawn until October 25, 2020 and bears interest at the annual interest rate of the quarterly dollar LIBOR rate plus 5.5%,
except that the additional $3 million of long-term or short-term loan, if available and drawn, will bear annual interest of the quarterly
dollar LIBOR rate plus 7.0%.
The Revolving Credit Line may be drawn until October 25, 2020 and bears interest at the annual interest rate of the monthly dollar
LIBOR rate plus 4.25%.
The right to make any draws, whether under the Loan or the Revolving Credit Line, is conditioned upon us having cash balances in our
account with the lending bank of not less than 30% of the total amount drawn for draws of up to $10 million in the aggregate and 40% of
the aggregate amount exceeding $10 million.
As part of the Credit Facility, we (i) issued to the bank additional warrants exercisable into 359,140 ordinary shares at an exercise price of
NIS 1.04 per share (equivalent to $0.29 per share), which will be exercisable until November 30, 2023, and (ii) extended the exercise
period of the original warrants issued in connection with the Credit Agreement and the 2019 Credit Agreement until November 30, 2023.
In addition, we have amended certain of the Security Agreements in order to secure our obligations under the Credit Facility.
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·
As of December 31, 2019, we had a total outstanding principal amount of $5.0 million under the 2019 Credit Agreement, of which (i) $1.6
million were drawn on November 20, 2019 as a short-term loan; and (ii) $3.4 million were drawn under the Revolving Credit Line. On
February 20, 2020, as part of the new Credit Facility, we renewed the term of the $5.0 million loan and changed the mix of the amount, such
that $1.2 million were drawn as a short-term loan for three months, until May 20, 2020; and $3.8 million were drawn under the Revolving
Credit Line for three months, until May 20, 2020.
2018 Repayment of Series L Convertible Notes. In February 2018, we repaid all of the outstanding principal amount and accrued interest of our
then outstanding Series L Convertible Notes, or the convertible notes, which were issued as part of a public offering we conducted in 2013 and had a
conversion price of NIS 1.92 per share (equivalent to approximately $0.54, based on the exchange rate on the last exercise date, i.e., on February 12, 2018).
The full repayment, which totaled in a sum of NIS 32.1 million (equivalent to approximately $9.2 million, based on the exchange rate as of the repayment
date), did not include (i) repayment to Dr. Giora Yaron (through a company wholly owned by him), our Chairman of the Board of Directors and a major
shareholder, and Medtronic, our former shareholder, both of whom held convertible notes and agreed to waive such repayment and used the funds
otherwise owed to them to make the investment described under “2018 Private Placement” below; and (ii) repayment of NIS 1.6 million (equivalent to
approximately $0.5 million, based on the exchange rate as February 28, 2018) to Mr. Martin Gerstel, a member of our Board of Directors and a major
shareholder, who held convertible notes and agreed to postpone such repayment from February 2018 to June 2018.
2018 Shareholders’ Loan. As described under “2018 Repayment of Series L Convertible Notes” above, the repayment of the convertible notes
did not include (i) the repayment to Dr. Giora Yaron (through a company wholly owned by him) and Medtronic, who agreed to waive such repayment and
used the funds otherwise owed to them to make the investment described under “2018 Private Placement” below; and (ii) repayment of NIS 1.6 million
(equivalent to approximately $0.5 million, based on the exchange rate as February 28, 2018) to Mr. Martin Gerstel who held convertible notes and agreed
to postpone such repayment from February 2018 to June 2018. Such amounts were treated as shareholders’ loan until repaid or converted to investment in
shares as part of the 2018 private placement described in the next paragraph.
2018 Private Placement. On March 22, 2018, we entered into separate securities purchase agreements with Dr. Giora Yaron (through a company
wholly owned by him), our Chairman of the Board of Directors and a major shareholder; Viola, our largest shareholder; and Medtronic, a former
shareholder, and various funds affiliated with three Israeli institutional investors, Yelin Lapidot, Meitav Dash and The Phoenix Holdings Ltd., or Phoenix:
·
·
·
On May 27, 2018, following approval by our shareholders of the private placement contemplated by these securities purchase agreements, we
completed the transaction and issued to the investors a total of 22,013,893 ordinary shares (representing as of such date approximately 7.7%
of our issued and outstanding shares on a post-issuance basis) at a purchase price of NIS 0.947 per share (equivalent to approximately $0.27,
based on the exchange rate as of that date), resulting in aggregate proceeds (before expenses) of NIS 20.8 million (equivalent to
approximately $6.0 million, based on the exchange rate as of that date). Out of the total NIS 20.8 million investment, Dr. Yaron, Viola and
Medtronic invested NIS 2.1 million, NIS 5.2 million and NIS 2.4 million, respectively.
The ordinary shares issued to the investors were subject to resale restrictions under Israeli law as applicable to private placements, including
an initial six-month full lockup resale restriction that expired in late November 2018.
The securities purchase agreements contained customary terms and conditions, including limited representations and warranties of the parties
which survived the completion of the transaction and, in general, expire on May 27, 2019.
2019 Private Placement. On January 16, 2019 and January 28, 2019, we entered into separate securities purchase agreements with several U.S.
and Israeli accredited investors: a fund managed by Deerfield Special Situations Fund, L.P., or Deerfield; Triple Gate Capital, L.P., or Triple Gate; West Elk
Partners, L.P., or West Elk; Alpha Capital Anstalt, or Alpha; More Trust Fund Management (2013) Ltd., or More Trust; More Alternative Investments, L.P.,
or More Alternative; Hatzavim, L.P. (in the process of being acquired by Meitav Dash, one of our former major shareholders), or Hatzavim; Tachlit
Complex Instruments Ltd. (wholly owned by Meitav Dash, one of our former major shareholders) , or Tachlit; Noked Long L.P.; and Noked Bonds, L.P.:
102
·
·
·
·
·
Under the securities purchase agreements, we undertook to issue to the investors, upon and subject to the closing, (i) a total of 1,170,707
ADSs, at a price per ADS of $9.55, to the investors (other than More Investment House), or U.S. Tranche; and (ii) a total of 10,944,185
ordinary shares to More Trust, at a price per ordinary share of NIS 1.1693 (equivalent to approximately $0.32, based on the exchange rate as
of the date of the agreement), or Israeli Tranche, or, in the aggregate, we will issue to the investors a total of 46,115,395 ordinary shares
(including ordinary shares underlying the ADSs) representing, as of January 28, 2019, approximately 13.8% of our issued and outstanding
shares on a post-issuance basis, resulting in aggregate proceeds (before expenses) of approximately $14.7 million. Out of the total $14.7
million investment, Deerfield, Triple Gate, West Elk, Alpha, More Trust, More Alternative, Hatzavim, Tachlit, Noked Long, and Noked Bond
undertook to invest approximately $3.0 million, $2.0 million, $2.0 million, $1.0 million, $3.5 million, $0.5 million, $0.5 million, $0.5 million,
$1.4 million and $0.3 million, respectively.
On February 3, 2019, we completed the private placement with More Trust and issued to More Trust, 10,994,185 ordinary shares, and on
March 6, 2018, we completed the private placement with the U.S. Tranche and issued to the investors under the U.S, Tranche 1,170,707
ADSs.
Pursuant to the securities purchase agreements, we agreed, subject to customary exceptions, not to raise additional funds or issue equity
securities until the earlier of 180 days following the closing or an initial public offering of our ADSs. In addition, our directors and executive
offices have entered into customary lockup agreements, whereby each of them agreed not to sell their ordinary shares from January 16, 2019
until the earlier of (i) 180 days following the closing of the U.S. Tranche, (ii) the termination of the securities purchase agreement, or ten (10)
months following the signing (November 15, 2019).
The ordinary shares and ADSs issued to the investors are subject to resale restrictions under applicable U.S. and Israeli securities laws. None
of the investors were granted registration rights under the securities purchase agreements.
The securities purchase agreements contain other customary terms and conditions, including customary representations and warranties of the
parties which survive the completion of the transaction until the date on which the investors no longer hold any of the ADSs or shares, as
applicable.
2020 Public Offering. In February 2020, we completed a registered public offering of 2,927,267 ADSs, each representing 30 ordinary shares of
the Company, at a price of $13.75 per ADS, for total gross proceeds of approximately $40.25 million, or total net proceeds of approximately $35.5 million
after deducting underwriting discounts and commissions of approximately $2.8 million and offering expenses of approximately $2.0 million. In connection
with the public offering, we and certain of our shareholders and ADS holders, directors and officers have agreed not to sell any of our ordinary shares or
ADSs without the prior written consent of the representatives of the underwriters until July 29, 2020. The representatives of the underwriters may, however,
in their sole discretion and without notice, release all or any portion of these securities from the restrictions in the lock-up agreements. After these
agreements expire, these securities will be eligible for sale in the public market.
Working Capital
As of December 31, 2019, we had $15.1 million in cash and cash equivalents, compared with $6.5 million as of December 31, 2018. The increase
in the year ended December 31, 2019, compared to the year ended December 31, 2018 derives primarily from the $14.0 million net proceeds from the
private placement we completed in January and February 2019, partially offset by the cash flows used in operating activities in an amount of $4.2 million
(which includes interest payments for our credit line).
As of December 31, 2019 and 2018, we did not have any debt to a third party, other than the short-term loans from a bank under the Credit
Agreement or the 2019 Credit Agreement.
103
As of December 31, 2019, our working capital amounted to $15.0 million, compared with $6.2 million as of December 31, 2018. The increase in
the year ended December 31, 2019, compared to the year ended December 31, 2018 was derived primarily from the private placement we completed in
January and February 2019, partially offset by the decrease in cash and cash equivalents resulting from the financing of our operating activities.
Cash Flows
The following table presents the major components of net cash flows used in and provided by operating, investing and financing activities for the
periods presented
Net cash used in operating activities*
Net Cash provided by (used in) investing activities
Net Cash provided by (used in) financing activities
Increase (decrease) in cash and cash equivalents
* Including interest on our convertible notes and bank loans.
Operating Activities
Year Ended December 31,
2019
2018
(in thousands)
(4,232) $
(615)
13,292
8,445 $
(3,883)
2,799
(85)
(1,169)
$
$
Cash flows from operating activities consist primarily of loss adjusted for various non-cash items, including depreciation and amortization, share-
based compensation expenses and gain or loss from reevaluation of derivatives. In addition, cash flows from operating activities are impacted by changes in
operating assets and liabilities, which include inventories, accounts receivable and other assets and accounts payable.
Net cash used in operating activities for the year ended December 31, 2019 was $4.2 million. This net cash used in operating activities primarily
reflects a net loss of $5.3 million, net of non-cash expenses, net of $3.1 million, as well as an increase of $2.1 million in trade receivables due to an increase
in revenues in 2019, an increase of $1.6 million in inventories due to the aforesaid increase in revenues and the launch of the WatchPAT 300 and WatchPAT
ONE product, an increase of $0.4 million in other accounts receivable, and interest of $0.4 million paid on our bank loan and leases, offset by an increase
of $2.2 million in accounts payable and an increase of $0.2 million in employee benefits. Net non-cash expenses of $3.1 million consisted primarily of
depreciation and amortization of $1.4 million, net financial cost of $0.5 million, share-based compensation of $1.3 million, and an increase of $0.3 million
in provision for doubtful and bad debt, offset by a net gain from changes in fair value of derivative instruments of $0.4 million relating to warrants, mainly
attributable to share price decrease.
Net cash used in operating for the year ended December 31, 2018 was $3.9 million. This net cash used in operating activities primarily reflects a
net loss of $1.7 million, net of non-cash expenses, net of $0.1 million, an increase of $1.0 million in trade receivables due to an increase in revenues in
2018, an increase of $0.3 million in other accounts receivable, and an increase of $0.3 million in inventories due to the aforesaid increase in revenues and
the desire to hold inventory levels for one additional quarter, offset by an increase of $0.3 million in accounts payable and interest of $0.8 million paid on
our convertible notes and bank credit line. Net non-cash expenses of $0.1 million consisted primarily of depreciation and amortization of $0.5 million, net
financial cost of $0.9 million, share-based compensation of $1.0 million, and an increase of $0.1 million in provision for doubtful and bad debt, offset by a
net gain from changes in fair value of derivative instruments of $2.4 million relating to warrants, including warrants embedded in our convertible notes,
mainly attributable to share price decrease.
Investing Activities
Net cash used in investing activities for the year ended December 31, 2019 was $0.6 million. This net cash used in investing activities is primarily
attributable to capital expenditure and capitalized development costs of $0.5 million.
104
Net cash provided by investing activities for the year ended December 31, 2018 was $2.8 million. This net cash provided by investing activities is
primarily attributable to realization of marketable securities in the amount of $3.1 million, offset by capital expenditures and capitalized development costs
of $0.3 million.
Financing Activities
Net cash provided by financing activities for the year ended December 31, 2019 was $13.3 million. This net cash provided by financing activities
is primarily due to net proceeds from issuance of shares in a private placement in the net amount of $14.0 million, offset by principle element of lease
payments in the amount of $0.8 million.
Net cash used in financing activities for the year ended December 31, 2018 was $0.1 million. This net cash used in financing activities is primarily
due to the second and final repayment of our convertible notes in the amount of $9.9 million and repayment of shareholders’ loan in the amount of $0.4
million, offset by the proceeds of $5.2 million from the private placement in May 2018 and a draw of $5.0 million out of our bank credit line.
Principal Capital Expenditure and Divestitures
During the year ended December 31, 2019, our capital expenditures and capitalized development costs totaled $0.5 million, compared to $0.3
million during the year ended December 31, 2018, most of which were used for the purchase of production and research and development equipment,
office furniture and equipment and computers and self-manufactured equipment (WatchPAT devices that are used by our customers). Except as described in
this Annual Report, we have no significant capital expenditures in progress. For more information regarding the process of constructions and adjustment of
our new manufacturing facilities, see under Item 4.D. “Information on the Company — Property, Plants and Equipment”.
We did not affect any principal divestitures in the past three years.
Outlook
Currently, our principal commitments consist mainly of our lease obligations and bank credit line. In light of our cash balances and other factors,
including our ability to use our bank credit line, we believe that our existing capital resources will be adequate to satisfy our working capital and capital
expenditure requirements for a period of no less than 12 months from the date of this Annual Report. However, from time to time, we may seek additional
financing sources to maintain and grow our business.
C. Research and Development, Patents and Licenses, etc.
We view sleep medicine in general and in particular, sleep in cardiology, as our main business. Therefore, our research and development efforts in
recent years were focused on (i) enhancing and improving the technology underlying our main platform, the WatchPAT 200, primarily in order to address
market needs (such as by adding the ability to identify central sleep apnea and Cheyne-Stokes respiration that is typical to cardiac patients); (ii) evolution of
our product lines by introducing a new generation of products (such as the WatchPAT 300, for which we obtained FDA clearance In August 2018 and the
WatchPATONE for which we obtained FDA clearance in June 2019); and (iii) improving our solutions in collaboration with other companies in the sleep
arena, with the goal of introducing a superior solution to our customers.
We also invest in clinical research to support the expansion of our sleep apnea solutions in the cardiology market and in the sleep medicine market
in general, as well as in order to substantiate and support the data which is at the basis of the products we are developing or enhancing. We also use such
research to gain recognition in the medical community and for scientific publications.
Our research and development activities for all our products principally take place in Israel with the exception of clinical trials that are also
conducted outside of Israel. As of December 31, 2019, we employed 20 persons in research and development, compared to 17 persons as of December 31,
2018 and 14 persons as of December 31, 2017.
105
We have committed substantial financial resources to our research and development efforts. During the years ended December 31, 2019, 2018 and
2017, our research and development expenditures were $4.7 million, $3.7 million and $4.2 million, respectively (including development costs of $0.1
million in each of those years, which were capitalized).
As described in Item 4.B “Information on the Company — Business Overview — Government Regulations,” we participated in the past in
programs sponsored by the IIA.
D. Trend Information
Other than as disclosed elsewhere in this Annual Report, including in 5.B “Operating and Financial Review and Prospects — Trend Information,
we are not aware of any trends, uncertainties, demands, commitments or events since December 31, 2019 that are reasonably likely to have a material
adverse effect on our revenues, income, profitability, liquidity or capital resources, or that would cause the disclosed financial information to be not
necessarily indicative of future operating results or financial conditions.
E. Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements, as such term is defined under Item 5.E of the instructions to Form 20-F, that have or are
reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations,
liquidity, capital expenditures or capital resources that is material to investors.
F. Tabular Disclosure of Contractual Obligations
The following table summarizes our significant contractual obligations and commercial commitments, as of December 31, 2019:
Total
Less than 1
Year
1-3 Years
(in thousands)
3-5 Years
More than 5
Years
Operating leases (1)
$
3,424 $
1,081 $
1,073 $
344 $
926
(1) Includes lease payments for our facilities, offices and motor vehicles.
Severance payments of $1.9 million are payable only upon termination, retirement or death of the respective employee. Of this amount, $0.2
million is unfunded. Since we are unable to reasonably estimate the timing of settlement, the timing of such payments is not specified in the table. See also
Note 11 to our audited consolidated financial statements included elsewhere in this Annual Report.
As required by IFRS, our obligation to pay royalties to the IIA is presented in our consolidated financial statements as part of our long-term
liabilities and accrued expenses in respect of future sales of our products. However, since these obligations are contingent upon the volume and timing of
sales of our products, we are unable to reasonably estimate the timing and scope of such payments and they are not specified in the table. See also Item 4.B.
“Business Overview—Government Regulations—The Israeli Market - Israeli Innovation Authority” above and Note 13 to our audited consolidated financial
statements included elsewhere in this Annual Report.
G. Safe Harbor
See the section entitled “Cautionary Statement Regarding Forward-Looking Statements” at the beginning of this Annual Report.
106
Item 6. Directors, Senior Management and Employees
A. Directors and Senior Management
Executive Officers and Directors
The following table presents information about our current executive officers and members of our Board of Directors, including their ages as of
March 24, 2020:
Name
Executive Officers
Gilad Glick
Shy Basson
Itay Kariv
Dan Shlezak
Efrat Litman
Eilon Livne
Shiri Shneorson, PhD
Non-Employee Board Members
Giora Yaron, PhD
Martin Gerstel(1)(3)
Ilan Biran(2)
Jonathan Kolber
Sami Totah
Christopher M. Cleary
Yaffa Krindel Sieradzki(2)(3)
Zipora (Tzipi) Ozer-Armon(2)(3)
Age
Position
47
48
61
55
46
49
45
71
78
73
58
62
59
65
55
President and Chief Executive Officer, Acting Vice President Marketing and
Sales, Acting President of our U.S. subsidiary
Chief Financial Officer and U.S. Chief Operating Officer
Vice President of Research and Development
Vice President of Engineering and Operations
Vice President of Advanced Research and Development
Vice President of Sales and Channels Development EMEA
Vice President and General Manager of Digital Health Business Unit
Director
Director
Director
Director
Director
Director
External Director
External Director
(1) Mr. Gerstel intends to retire at the end of his term, which is scheduled to expire at the annual general meeting of shareholders to be held in 2020, and
not seek reelection at such meeting.
(2) Member of the audit committee of the Board of Directors, or the Audit Committee.
(3) Member of the compensation committee of the Board of Directors, or the Compensation Committee.
The current business addresses for our executive officers and directors is c/o Itamar Medical Ltd., 9 Halamish Street, Caesarea 3088900, Israel.
Executive Officers
Gilad Glick has served as our Chief Executive Officer and President since July 2013. Mr. Glick also serves as a director and as acting president of
our U.S. subsidiary, Itamar Medical, Inc. Prior to joining the Company, Mr. Glick served in various positions in the medical devices industry, spanning
across multiple countries in Europe and the U.S. in a variety of functional areas including sales, marketing, service and research & development. Between
June 2008 and July 2013, Mr. Glick held the position of worldwide vice president of sales and marketing of Biosense Webster, a Johnson & Johnson
company, overseeing all strategic and commercial activities. Mr. Glick earned an M.B.A from the Maastricht School of Management, majoring in general
and strategic management. He is also a graduate of the Strategic Marketing Management Executive Program at the Stanford Graduate School of Business.
Shy Basson has served as our Chief Financial Officer since May 2017 and U.S. Chief Operating Officer since May 2019. Mr. Basson also serves
as a director of our U.S. subsidiary, Itamar Medical, Inc. Prior to joining the Company, between January 2008 and October 2016, Mr. Basson served as
Chief Financial Officer, Business and Strategy of WeFi, Inc., a provider of mobile data collection and Wi-Fi connectivity solutions. Prior thereto Mr.
Basson served as Director of Business Development at AOL (a Time Warner Company). Prior thereto, Mr. Basson served as the CFO of ICQ. Mr. Basson
holds a B.A. degree in business administration and accounting from the College of Management in Rishon Lezion and an M.B.A. from the Kellogg-
Recanati Business School of the Tel Aviv University and is a Certified Public Accountant in Israel.
107
Itay Kariv has served as our Vice President of Research and Development since October 2018. Between January 2015 and October 2018, Mr.
Kariv served as our Vice President of Advanced Research and Development. Mr. Kariv has more than 25 years of experience in research and development
managerial roles. Prior to joining the Company, Mr. Kariv held several managerial positions, including as a Program Director at St. Jude Medical between
2008 and 2014 and as Research and Development Director and subsequently as Program Director at Biosense Webster, a Johnson & Johnson company,
between 2001 and 2008. Prior to that, between 1999 and 2001, Mr. Kariv served as Vice President of Research and Development at MeetU.com, Ltd., and
as Vice President of Research and Development at Lognet Systems Ltd. between 1997 and 1999. Mr. Kariv holds a Landscape Architect degree and a B.Sc.
and M.Sc. in Computer Science, all from the Technion — Israel Institute of Technology.
Dan Shlezak has served as our Vice President of Operations and Engineering since 2020. Prior to joining the Company, between 2006 and 2019,
Mr. Shlezak served as General Manager at Carestream Health Ltd., a worldwide provider of dental and medical imaging systems and healthcare IT
solutions. Between 2003 and 2006 Mr. Shlezak served as Vice President Operations at Advanced Dicing Technologies Ltd., a company specialized in the
development and manufacturing of dicing systems and blades for the semiconductor industry. Between 2000 and 2003, Mr. Shlezak served as Operations
General Manager at Kulicke and Sofa (Israel) Ltd. and prior to that, he served between 1992 and 2000 in additional operational roles in Israeli based
companies. Mr. Shlezak holds a B.Sc. degree in Mechanical Engineering, from the Technion — Israel Institute of Technology (graduated with honors); a
M.Sc. degree in Mechanical Engineering, from the Technion; an MBA from the Technion, and an M.A. in Law from Haifa University.
Efrat Litman has served as our Vice President of Advanced Research and Development since October 2018. Between April 2017 and October
2018, Ms. Litman served as our Vice President of Research, Development and Technology and from March 2011 to April 2017 as Vice President of
Research and Development. Ms. Litman has 25 years of experience in research and development work. Prior to joining the Company, Ms. Litman held
several positions as a project and product manager and algorithm team leader in high-tech and bio-tech industries and the Israel Defense Forces, including
over eight years at Orbotech Ltd. Ms. Litman holds a B.Sc. degree in Physics and Mathematics from the Talpiot program of the Hebrew University of
Jerusalem.
Eilon Livne has served as our Vice President of Sales and Channels Development, EMEA Region since 2015. Between 2014 and 2015, Mr. Livne
served as our Head of Wellness Activity, USA. Between 2013 and 2014, Mr. Livne served as the VP Sales and Marketing of Adhestick Ltd., leading the
international sales and marketing of its consumer goods products line. Between 2002 and 2013, Mr. Livne served as the CEO of Silverline Jewelry Ltd.
Between 2001 and 2002, Mr. Livne served as Product Manager of Giteko Technologies, and prior to that, he served as Senior Consultant at the
Governmental Incentives Department at Ernst & Young Israel. Mr. Livne holds a B.A. degree in Economy and Accountancy from the Rupin Academic
Institute and is a Certified Public Accountant in Israel.
Shiri Shneorson, PhD, has served as our Vice President and General Manager of the Digital Health Business Unit since June 2019. Between
October 2005 and May 2019, Dr. Shneorson served in multiple management roles at Intel Corporation in Israel and California, as Vice President of
Strategic Planning, key customers and strategic initiatives, Vice President and General Manager, Laptop Products and Director of Product — Mobile
Clients Platforms. Dr. Shneorson holds a B.S. degree in Industrial Engineering and Management from the Technion — Israel Institute of Technology, an
M.S. in statistics from the Stanford University School of Humanities and Science and a PhD in Operations Information and Technology from the Stanford
University Graduate School of Business.
Non-Employee Directors
Giora Yaron, PhD, is one of the co-founders of our Company and has served as Chairman of our Board of Directors since 2016. Between 1997
and 2016, Dr. Yaron served as Co-Chairman of our Board of Directors. Dr. Yaron also serves as a member of the Board of Directors of Amdocs Limited
(Nasdaq: DOX), on the Board of Directors of Excelero (ExpressIO), a provider of ultra-fast block storage solutions and as the Chairman of the Board of
Directors of Equalum, a provider of a real-time Data Beaming for Big Data Analytics. Dr. Yaron co-founded several privately-held technology companies,
sold to multinational corporations, including, P-cube, Pentacom, Qumranet, Exanet, Comsys and Hyperwise Security. Dr. Yaron continues to invest in
technology companies and most recently invested in Vulcan Security, Salto and Apolicy. From 2010 until December 2018, Dr. Yaron served as Chairman of
the Executive Council of the Tel Aviv University. He also served as Chairman of Ramot, the Tel Aviv University technology transfer company from 2010
until 2015. In 2009, Dr. Yaron also co-founded Qwilt, Inc., a privately-held video technology provider and serves on its Board of Directors. Between 1996
and 2006, Dr. Yaron served as a member of the Board of Directors of Mercury Interactive, a publicly-traded IT optimization software provider, acquired by
Hewlett-Packard, including as its Chairman of the Board of Directors between 2004 and 2006. Between 1992 and 1995, Dr. Yaron served as President of
Indigo NV. Prior to joining Indigo, Dr. Yaron served as Corporate Vice President of National Semiconductor. Dr. Yaron has previously served on the
advisory board of Rafael Advanced Defense Systems, Ltd., a developer of high-tech defense systems, and on the advisory board of the Israeli Ministry of
Defense. Dr. Yaron holds a PhD in device physics, and a Bachelor’s degree in physics and mathematics from the Hebrew University of Jerusalem.
108
Martin S. Gerstel is one of the co-founders of Itamar Medical and has served as a director on our Board of Directors since 1997. Between 1997
and 2016, Mr. Gerstel also served as the Co-Chairman of our Board of Directors. Mr. Gerstel also serves as the Chairman of the Board of Directors of
Evogene Ltd. (Nasdaq and TASE: EVGN), a developer of novel products for life science markets since 2004. In addition, between 1997 and 2017,
Mr. Gerstel served as the Chairman of the Board of Directors of Compugen Ltd., (Nasdaq and TASE: CGEN), a predictive drug discovery and development
company. Mr. Gerstel currently serves as a director of YEDA Research and Development Company Ltd., the technology transfer company for the
Weizmann Institute of Science and served as a director of Yissum Ltd., the technology transfer company of the Hebrew University of Jerusalem, between
2003 and 2015. Mr. Gerstel is also a member of the Board of Governors and the executive committee of the Weizmann Institute of Science and the Board
of Governors of the Hebrew University of Jerusalem. Prior to relocating to Israel in 1994, Mr. Gerstel was the Co-Chairman and CEO of ALZA
Corporation, a U.S. pharmaceutical company specializing in advanced drug delivery (sold to Johnson & Johnson). Mr. Gerstel holds an M.B.A. degree
from Stanford Graduate School of Business and a B.Sc. from Yale University.
Ilan Biran has served as a director on our Board of Directors since 2013. Mr. Biran has previously served as Bezeq’s Chief Executive Officer.
Mr. Biran serves as a director of Kinneret College on the Sea of Galilee (R.A). Mr. Biran has previously served as the Chairman of the Board of Directors
of Rafael — Advanced Defense Systems Ltd. between 2007 and 2013 and as a member of the Board of Directors of Israel Discount Bank Ltd. between
2008 and 2017. Mr. Biran served in the Israel Defense Forces for 32 years, most notably as the former General Director of the Ministry of Defense, and in
various staff and command positions, including commanding general, central command, head of the technology and logistics branch, and head of the
operations division at the general staff. Mr. Biran has received an honorary degree of PHD from the Technion Israel Institute of Technology in 2013.
Mr. Biran holds an Associate Diploma in Strategy and Political Economic Research from Georgetown University and the United States Marine Corps
Command and Staff College. Mr. Biran also holds a B.A. in Economics and Business Administration from the Bar Ilan University.
Jonathan Kolber has served as a director on our Board of Directors since 2015. Mr. Kolber is a Partner and Senior Advisor at Viola Growth, a
technology buyout and growth capital fund that is an affiliate of the Viola Group. In addition, he is an investor in numerous Israeli technology companies,
including Fiverr, Eyeclick, ViTrainer, REAL and MoonActive. Mr. Kolber also serves as Chairman of the Board of Directors of ION Asset Management
Ltd., an Israeli hedge fund and Chairman of the Board of Directors of Panaxia Pharmaceutical Industries Ltd. Mr. Kolber founded and managed Claridge
Israel, together with the Canadian Bronfman family, from 1986 to 1997. Between 1998 and 2006, Mr. Kolber served as the Chief Executive Officer of Koor
Industries, one of Israel’s then largest conglomerates, with investments in the agrochemical, telecommunications and defense industries, which was sold in
2006 to the IDB Group. Between 1997 and 2007, he also served on the Board of Directors of ECI Telecom Ltd., and as Chairman thereof between 1999
and 2002. Mr. Kolber currently serves as a member of the board of directors of several companies, including Fiverr International Ltd., Optimax Ltd. and
Kidbox Ltd. and during his career has served as chairman of the board of directors, chief executive officer or director in over 60 public and private
companies in Israel and North America. He holds a Bachelor’s degree in Near Eastern Language and Literature from Harvard University and a Certificate
of Advanced Arabic Language from the American University of Cairo.
109
Sami Totah has served as a director on our Board of Directors since 2015. Mr. Totah is a partner of Viola Growth, a technology buyout and
growth capital fund that is an affiliate of the Viola Group. Mr. Totah has served as chairman of the board of directors of several Israeli start-up companies
since 2003, including Pilat Media, Sheer Networks, Red Bend, and Flash Networks. Between 1984 and 2002, Mr. Totah served in various positions at
Amdocs, including the position of Chief Operating Officer. Mr. Totah is a practical software engineer and participated in professional courses over the
years, including courses of the Executive M.B.A. program of the Hebrew University of Jerusalem Business School.
Christopher M. Cleary has served as a director on our Board of Directors since 2017. Since 2014, Mr. Cleary has served as the Vice President of
Corporate Development for Medtronic plc. Prior to 2014, Mr. Cleary was the CEO for Alesia Capital Services LLC, providing advisory and financial
analysis services to Fortune 500 companies, including Medtronic. Prior to that Mr. Cleary served in a multitude of managerial roles at GE Capital. Mr.
Cleary holds a B.A. from Colorado College.
Yaffa Krindel Sieradzki has served as an external director on our Board of Directors since 2016. Ms. Krindel also serves as a director of Sol-Gel
Technologies Ltd. (Nasdaq: SLGL), a pharmaceutical company, BGN Technologies Ltd., the technology transfer company of Ben Gurion University, and
two medical device start-up companies and has served on the boards of directors of numerous companies publicly traded on Nasdaq. Between 1997 and
2007, Ms. Krindel served as Partner and Managing Partner of Star Ventures, a private venture capital fund headquartered in Munich, Germany. Between
1993 and 1997, Ms. Krindel served as CFO and later as director of BreezeCOM Ltd., an Israeli telecommunications company, which was traded on Nasdaq
and the TASE. Between 1992 and 1996, Ms. Krindel served as CFO and VP Finance of Lannet Data Communications Ltd., an Israeli telecommunications
company, publicly traded on Nasdaq which is now part of Avaya Inc. Ms. Krindel also served on the board of directors of Fundtech Ltd., which was traded
on Nasdaq until its acquisition by GTCR, Voltaire Ltd. until its acquisition by Mellanox Technologies Ltd. and Syneron Medical until its acquisition by
Apax. Ms. Krindel holds an M.B.A. degree from the Tel Aviv University and a B.A. in Economics and Japanese Studies from the Hebrew University of
Jerusalem.
Zipora (Tzipi) Ozer-Armon has served as an external director on our Board of Directors since 2016. She is the Chief Executive Officer of
Lumenis Ltd. since 2012. Before joining Lumenis, Ms. Ozer-Armon headed the Japanese market activities of Teva Pharmaceutical Industries Ltd. and
served as Senior Vice President of Sales and Marketing at SanDisk. Previously, she also served as VP & General Manager at MSystems. Ms. Ozer-Armon
is a director at ICI Ltd., Rambam MedTech, Israel’s National Technological Innovation Authority’s Commission and Tel Aviv University. Ms. Ozer-Armon
holds a BA in Economics and an MBA majoring in Finance and Marketing from Tel Aviv University and she is an AMP graduate of the Harvard Business
School.
Additional Information
There are no family relationships between any of the directors or members of senior management named above.
Our articles of association provide for a Board of Directors of not less than five and not more than nine members, including two external directors
as required by the Companies Law. Our Board of Directors is currently composed of eight directors (including the two external directors). Officers serve at
the pleasure of the Board of Directors, subject to the terms of any agreement between the officer and us.
Dr. Yaron and Messrs. Biran, Kolber, Cleary and Totah will serve as directors until our annual general meeting of shareholders to be held in 2020.
Ms. Krindel Sieradzki and Ms. Ozer-Armon were reelected as external directors in May 2019 for a three-year term. Mr. Gerstel intends to retire at the end
of this term and not seek reelection at our annual general meeting of shareholders to be held in 2020.
We are not aware of any arrangements or understandings with major shareholders, customers, suppliers or others, pursuant to which any person
referred to above was selected as a director or member of senior management.
110
B. Compensation
Aggregate Executive Compensation
Our objective is to attract, motivate and retain highly skilled personnel who will assist the Company in reaching its business objectives,
performance and the creation of shareholder value and otherwise contribute to its long-term success. In March 2020, our shareholders approved our
amended policy governing the compensation of office holders as required under the Companies Law, or our Compensation Policy. The Compensation
Policy was designed to correlate executive compensation with our objectives and goals and otherwise embrace a performance culture that is based on merit,
and differentiates and rewards excellent performance in the long term.
The following table sets forth all compensation we paid with respect to all of our directors and executive officers as a group for the period
indicated(1):
All directors and executive officers as a group, consisting of 16 persons(2) for
the year ended
Salaries, fees,
commissions
and bonuses
Pension,
retirement
and similar
benefits
(in thousands)
Share-based
compensation
December 31, 2019
$
2,262 $
152 $
938
(1) The cost reflected in this table for the year ended December 31, 2019 is calculated in accordance with IFRS and is as recognized in our financial
statements for such year. It is noted that, in accordance with IFRS, cash compensation amounts denominated in currencies other than the U.S. dollar
were converted into U.S. dollars at the exchange rate between the NIS and the U.S. dollar as of the end of each month during 2019, the period covered
by the table (which, on average for 2019, was approximately NIS 3.56 per $1.00).
(2) Including two persons who served as our executive officers in 2019 and are no longer serving as our executive officers and one executive officer who
was appointed during 2019.
We provide leased cars or reimbursement of car expenses to our executive officers in Israel (which amounts are included in the amounts provided
in the above table) and reimbursement of other expenses pursuant to our standard policies and procedures.
During the year ended December 31, 2019, we also granted our directors and executive officers:
·
·
options to purchase, in the aggregate, 6,367,241 ordinary shares at a weighted average exercise price per share of NIS 1.21 (equivalent to
approximately $0.33), of which (i) 787,721 are performance-based options that will vest in December 2022 if the price of our ordinary shares
is, at such time, at least NIS 5.32 per share (equivalent to approximately $1.45), or 50% of such options will vest if the price of our ordinary
shares is, at such time, at least NIS 2.66 per share (equivalent to approximately $0.73), or if, on the applicable measurement date, the price of
our ordinary shares is between these two vesting-trigger share prices, the percentage of options that will vest will be determined based on
linear interpolation, and (ii) 5,579,520 options will vest over a period of four years following the grant date. Of the 6,367,241 options,
1,210,000 options will expire five years from the grant date and the balance of 5,157,241 options will expire in May 2029. The weighted
average fair value of these options as of the grant date was NIS 0.53 (equivalent to approximately $0.14) per option; and
201,372 ordinary shares issuable upon the vesting of outstanding performance-based RSUs, which will vest in if the price of our ordinary
shares is, at such time, at least NIS 5.32 per share (equivalent to approximately $1.45), or 50% of such RSUs will vest if the price of our
ordinary shares is, at such time, at least NIS 2.66 per share (equivalent to approximately $0.73), or if, on the applicable measurement date, the
price of our ordinary shares is between these two vesting-trigger share prices, the percentage of RSUs that will vest will be determined based
on linear interpolation. The weighted average fair value of these RSUs as of the grant date was NIS 0.29 (equivalent to approximately $0.08)
per RSU.
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On May 20, 2019, our Board of Directors resolved to allow six executive officers to be granted new 4,504,664 performance options and 921,873
performance RSUs, in lieu of 4,504,664 performance options and 921,873 performance RSUs previously granted that have not yet vested. The new
performance options and RSUs will vest in December 2022 if the price of our ordinary shares is, at such time, at least NIS 5.32 per share (equivalent to
approximately $1.45), or 50% of such options will vest if the price of our ordinary shares is, at such time, at least NIS 2.66 per share (equivalent to
approximately $0.73), or if, on the applicable measurement date, the price of our ordinary shares is between these two vesting-trigger share prices, the
percentage of options that will vest will be determined based on linear interpolation. Out of the new options and RSUs, a grant of 3,019,864 performance
options and 609,232 performance RSUs to our President and Chief Executive Officer was approved by our shareholders on March 18, 2020. All such
executive officers, including our President and Chief Executive Officer accepted our proposal and the new options and RSU were granted to all such
employees.
Individual Compensation of Covered Executives
The table and summary below outline the compensation granted to our five most highly compensated “office holders” during or with respect to the
year ended December 31, 2019 as required by the Companies Law. The Companies Law defines the term “office holder” of a company to include the chief
executive officer (referred to in the Companies Law as the general manager), the chief business manager, deputy general manager, vice general manager,
any other person assuming the responsibilities of any of these positions regardless of that person’s title, a director and any other manager directly
subordinate to the general manager. We refer to the five individuals for whom disclosure is provided herein as our “Covered Executives.”
For purposes of the table and the summary below, “compensation” includes base salary, bonuses (including sales commissions), equity-based
compensation, retirement or termination payments, benefits and perquisites such as car, and social benefits and any undertaking to provide such
compensation to each Covered Executive. All amounts reported in the table are in terms of cost to the Company for the year ended December 31, 2019*, as
reflected in the financial statements for the year then ended and calculated in accordance with IFRS.
Name and Principal Position(1)
Annual Base
Salary (2)
Bonus (3)
Sales
Commissions
(4)
Share-Based
Compensation
(5)
All Other
Compensation
(6)
Total
(in thousands)
Gilad Glick, President and Chief Executive Officer
$
346 $
194 $
— $
421 $
21 $
982
Shy Basson, Chief Financial Officer and U.S. Chief
Operating Officer
202
126
Itay Kariv, Vice President of Research and Development
163
21
—
—
141
66
69
538
59
309
Efrat Litman, Vice President of Advanced Research and
Development
Eilon Livne, Vice President of Sales and Channel
Development EMEA Region
156
21
—
64
49
290
126
—
71
72
12
281
*
The cost reflected in this table is calculated in accordance with IFRS and is as recognized in our financial statements for the year ended December
31, 2019. It is noted that, in accordance with IFRS, cash compensation amounts denominated in currencies other than the U.S. dollar were
converted into U.S. dollars at the exchange rate between the NIS and the U.S. dollar as of the end of each month during 2019, the period covered
by the table (which, on average for 2019, was approximately NIS 3.56 per $1.00).
(1) Unless otherwise indicated herein, all Covered Executives are engaged on a full-time (100%) basis.
112
(2) Reflects the annual gross salary of the Covered Executives, other than Mr. Glick and Mr. Livne, who are engaged through consultancy agreements,
where such figures reflect their annual fixed compensation, including social benefits.
(3) Amounts reported in this column represent annual bonuses granted to the Covered Executives. Consistent with our Compensation Policy, such
bonuses are based upon (i) for Mr. Glick, see note (7) below; and (ii) for the other executive officers — achievement of targets of revenues
generated by the individual and/or his/her team or division and/or the Company, as well as, in appropriate circumstances, other measurable
criteria, which, in general, may not exceed nine monthly salaries. The calculation of Mr. Glick’s $194,000 bonus for 2019 is comprised of: (i) a
$119,000 performance bonus based on the achievement of certain milestones under the his bonus plan, as more fully described below; and (ii) a
special bonus of $75,000. The calculation of Mr. Basson’s $126,000 bonus for 2019 is comprised of: (i) a $71,000 performance bonus based on the
achievement of certain milestones under his bonus plan; and (ii) a special bonus of $55,000.
(4) Amounts reported in this column represent sales commission, which are based on the achievement of certain sales targets.
(5) Amounts reported in this column represent the accounting expense recognized by the Company associated with stock-based compensation in
accordance with accounting guidance for stock-based compensation. For a discussion of the assumptions used in reaching this valuation, see Note
15 to our audited consolidated financial statements. All of the awards were in the form of stock options or RSUs, and were made pursuant to one
of our equity incentive plans. Vesting of the options and RSUs will accelerate upon certain change of control events.
(6) Amounts reported in this column include benefits and perquisites, including those mandated by applicable law. Such benefits and perquisites may
include, to the extent applicable to the Covered Executive, payments, contributions and/or allocations for savings funds (e.g., Managers Life
Insurance Policy), education funds, or Keren Hishtalmut, pension, severance, vacation, car or car allowance, medical insurances and benefits, risk
insurances (e.g., life, or work disability insurance), convalescence or recreation pay, relocation, employers payments for social security, tax gross-
up payments and other benefits and perquisites consistent with Itamar’s guidelines.
(7) Consistent with our Compensation Policy, and as approved by our shareholders in May 2018, Mr. Glick is entitled to an annual bonus, subject to
Mr. Glick achieving certain criteria and milestones set by our Compensation Committee and Board of Directors. The milestone for the annual
bonus for the years 2018 through 2022 is based upon our annual revenue in such years, which is tied to our annual budget for the applicable year.
The annual bonus payable (not including any special bonus) to Mr. Glick for each year may, generally, not exceed an amount equal to 7.7 monthly
base salaries of Mr. Glick in such year, which is currently equal to a maximum annual bonus of approximately $192,200.
Executive Officer Employment and Consultancy Agreements
We have entered into written employment or services agreements with each of our executive officers. All of these agreements contain customary
provisions regarding confidentiality, intellectual property assignment and non-solicitation provisions as well as an undertaking not to compete with us or in
our field of business. However, the enforceability of the noncompetition provisions may be limited under applicable law. Members of our senior
management may also be eligible for bonuses in accordance with our Compensation Policy and as set forth by our Compensation Committee and Board of
Directors.
On May 23, 2018, we held our annual meeting of shareholders for 2018, at which our shareholders approved, among other matters, the following
changes to the compensation payable to Mr. Glick, our President and Chief Executive Officer:
· monthly payment — effective April 1, 2018, the monthly payment was denominated in NIS (rather than in U.S. dollars) and such payment
was increased by 10% (at the time of the shareholder approval), from a monthly payment of $26,176 plus VAT to NIS 102,450 (equivalent to
approximately $28,007) plus VAT; this amount includes the equivalent of base salary and the total cost of social benefits payable to Mr. Glick;
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· modification of the performance criteria related to the vesting of stock options and RSUs previously granted to our President and Chief
Executive Officer — Mr. Glick received in March 2016 a grant of (i) options to purchase up to 2,043,111 ordinary shares, at an exercise price
of NIS 1.55 (equivalent to approximately $0.42), of which 510,778 options vest one year after the grant date, with the balance vesting in 12
equal quarterly installments; and (ii) 10,080,824 ordinary shares issuable upon the exercise of 8,388,512 outstanding performance-based stock
options and the vesting of 1,692,312 outstanding performance-based RSUs, which will vest on December 20, 2020 if the price of our ordinary
shares is, at such time, at least NIS 4.24 per share (equivalent to approximately $1.16), or 50% of such options and RSUs will vest if the price
of our ordinary shares is, at such time, at least NIS 2.13 per share (equivalent to approximately $0.58). Our shareholders approved that (i) the
above minimum trading price will be reduced from NIS 2.13 (equivalent to approximately $0.58) to NIS 1.70 (equivalent to approximately to
$0.46) and (ii) a change of the January 21, 2020 vesting date to December 20, 2020; and
·
an annual cash bonus in each of the years 2018 to 2022 (inclusive), or the bonus years, as follows:
·
·
·
·
·
a maximum bonus of up to 7.7 monthly base salaries per year.
the bonus is payable subject to meeting sales revenue goals that reflect growth in our revenues at a rate to be determined by the
Compensation Committee and the Board of Directors by the end of the first quarter of each bonus year as part of the annual budget
approval. The sales revenue goal for each bonus year is divided into three levels of sales revenues: the minimum goal, the target goal
and the maximum entitlement goal.
in the event that the actual sales revenues in any bonus year are within the range between two goals (the minimum goal and the target
goal or between the target goal and the maximum entitlement goal), the amount of the bonus shall be calculated linearly based on the
increase in sales revenue in that bonus year.
payment of the bonus is also contingent on meeting a minimum operating income or a maximum operating loss goal. Such operating
income or operating loss is on an adjusted, non-IFRS basis, which neutralizes certain non-cash and non-recurring components.
for the purpose of examining compliance with the said goals at the end of each relevant year, the effects of the following events
(relative to that bonus year’s budget) will be neutralized: (1) an increase our expenses for clinical trials (both in view of the entry into
a new clinical trial and in light of the expansion of existing clinical trial); (2) increase or decrease in our costs in respect of payments
to sales personnel (including costs of recruiting new sales personnel); (3) expenses associated with changing the reimbursement
policy of medical insurers during the budget year and/or changes in the standard requirements applicable to our products; (4)
expenses related to the process of listing on Nasdaq; (5) expenses incurred by our Company in respect of listing of securities for
trading or sale in the United States solely for sales by our shareholders that exercise their registration rights or expenses in respect of
unsuccessful capital raising; and (6) expenses related to the annual bonus to our chief executive officer or to any other officer in that
year.
·
the annual bonus is payable once a year, following the approval of our annual financial statements for the preceding year.
On May 29, 2019, we held our annual meeting of shareholders for 2019, at which our shareholders approved, among other matters, the grant of a
special bonus of NIS 259,000 (equivalent to approximately $72,700) to Mr. Glick in consideration of his performance during 2018.
Additionally, on March 18, 2020, we held a special meeting of shareholders, at which our shareholders approved, among other matters, the
following grants to Mr. Glick:
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·
·
·
a special bonus of NIS 258,762 (equivalent to approximately $75,000) in consideration of his performance during 2019;
a grant of performance-based stock options, exercisable into 3,019,864 ordinary shares at an exercise price per share of NIS 1.22 (equivalent to
approximately $0.33), and of performance-based RSUs exercisable into 609,232 ordinary shares at a purchase price per share of NIS 0.30
(equivalent to approximately $0.08),in lieu of 3,019,864 performance-based options and 609,232 performance-based RSUs previously granted
that have not yet vested; and
a grant of service stock options exercisable into 1,676,425 ordinary shares at an exercise price per share of NIS 1.28 (equivalent to
approximately $0.35).
For additional details regarding the aforesaid grants approved at the special meeting of shareholders held on March 18, 2020, see Item 3 of the
Notice and Proxy Statement filed as Exhibit 99.1 to our Report of Foreign Private Issuer on Form 6-K submitted to the SEC on February 11, 2020, which is
incorporated herein by reference.
Non-Employee Directors Remuneration
All of our directors are entitled to reimbursement of expenses. In addition, other than Mr. Cleary (who is entitled only to reimbursement of
expenses), our non-employee directors, including external directors, receive the following compensation:
·
Dr. Yaron, the chairman of our Board of Directors, is entitled, pursuant to the consultancy agreement we entered into with a company wholly
owned by Dr. Yaron in May 2001 (as amended), to a monthly payment of $6,250, plus VAT. Under the agreement, Dr. Yaron is required to
provide us with consulting services, including service as a chairman of our Board of Directors, on a part-time basis of 40% of the work week.
· Mr. Biran, Ms. Krindel Sieradzki and Ms. Ozer-Armon are each entitled to an annual fee of NIS 49,305 (equivalent to approximately
$13,479) and attendance fees of NIS 3,300 (equivalent to approximately $902) per meeting attended, linked to the Israeli CPI.
· Messrs. Gerstel, Kolber and Totah are each entitled (in the case of Messrs. Kolber and Totah, by payment to an affiliate of Viola) to an annual
fee of NIS 37,040 (equivalent to approximately $10,126) and attendance fees of NIS 2,475 (equivalent to approximately $677) per meeting
attended, linked to the Israeli CPI.
According to the Compensation Policy, directors and officers may be granted equity-based compensation subject to certain criteria and limitations
set forth therein, including the following:
·
·
·
equity-based awards shall vest as determined by us at the time of grant. However, other than in the event of acceleration, no portion of any
grant may vest prior to the end of the one-year anniversary of the date of grant or from the commencement date of the directors’ or officers
engagement with us;
the equity-based award shall have a fair value that will not exceed, with respect to each year of vesting (measured on a linear basis), the
equivalent of (i) the value of 24 months’ salary with respect to the chief executive officer, (ii) 12 months’ salary with respect to each other
officer, and (iii) NIS 300,000 (equivalent to approximately $82,012) for each director; and
the exercise price of options whose vesting is subject to the passage of time (and not subject to meeting milestones) will be no less than the
average price of the ordinary shares of the Company on the TASE for the thirty (30) trading days prior to the date such grant was approved by
our Board of Directors.
115
Consistent with the Compensation Policy and as further approved by our shareholders, we made the following grants of equity-based awards to
our non-employee directors from January 1, 2019 to December 31, 2019:
·
·
·
·
In June 2019, we granted 330,000 service options to each of our two external directors which will be divided into three equal portions:
the first portion of 110,000 options shall vest in four equal installments of 27,500 options each on June 17 of each of the years 2020, 2021,
2022 and 2023. The exercise price of the first portion of options is NIS 1.47 (equivalent to approximately $0.40) per share;
the second portion of 110,000 options shall vest in four equal installments of 27,500 options each on June 17 of each of the years 2021, 2022,
2023 and 2024. The exercise price of the second portion of options shall be average of the closing share price during the 30 trade days
preceding June 17, 2020 plus 10%, but not less than NIS 0.30 (equivalent to approximately $0.08); and the third portion of 110,000 options
shall vest in four equal installments of 27,500 options each on June 17 of each of the years 2022, 2023, 2024 and 2025. The exercise price of
the third portion of options shall be average of the closing share price during the 30 trade days preceding June 17, 2021 plus 10%, but not less
than NIS 0.30 (equivalent to approximately $0.08).
In June 2019, we granted 110,000 service options to each of our five non-employee directors at an exercise price of NIS 1.47 (equivalent to
approximately $0.40) per ordinary share. The options shall vest in four equal installments of 27,500 options each on May 29 of each of the
years 2020, 2021, 2022 and 2023.
As approved by our shareholders on March 18, 2020, the vesting of stock options granted to non-employee directors are subject to acceleration as
follows: (i) upon the completion of a full term of service of a director (three years for external directors and one year for other directors) without being
reelected at the annual or special general meeting of shareholders; or (ii) upon termination of the service of a director in the middle of the term due to the
consummation of certain change of control events (the date of such completion of the term or termination for such change of control events, the Trigger
Date), all outstanding stock options vested on the Trigger Date shall expire within 180 days thereafter and all outstanding unvested stock options shall
accelerate and be fully vested on the Trigger Date and shall expire within 180 days thereafter, similar to the acceleration to which some of our executive
officers are entitled. For additional details regarding the vesting terms approved at the special meeting of shareholders held on March 18, 2020, see Item 2
of the Notice and Proxy Statement filed as Exhibit 99.1 to our Report of Foreign Private Issuer on Form 6-K submitted to the SEC on February 11, 2020,
which is incorporated herein by reference.
Other than the foregoing payments, fees, reimbursement for expenses and the award of stock options and RSUs, we do not compensate our
directors for serving on our Board of Directors.
Change of Control Arrangements
All of our executive officers as well as certain additional key employees are entitled to accelerated vesting of the ordinary shares subject to
outstanding options and RSUs granted to them in connection with a sale of the Company or similar change of control events.
C. Board Practices
Introduction
According to the Companies Law and our articles of association, the management of our business is vested in our Board of Directors. The Board
of Directors may exercise all powers and may take all actions that are not specifically granted to our shareholders and, according to the Companies Law
and our articles of association is primarily responsible for outlining our policies and supervising our chief executive officer.
Election of Directors; Board Meetings
Under our articles of association, our Board of Directors must consist of not less than five and not more than nine members, including two
external directors as required by the Companies Law. Our Board of Directors is currently composed of eight directors, including two directors who are
intended to qualify as external directors and whose appointment fulfills the requirements of the Companies Law for the Company to have at least two
external directors (see below under “External Directors”). Pursuant to applicable Nasdaq rules, director nominees are recommended for the Board of
Directors’ selection by a majority of our “independent directors” within the meaning of the Nasdaq rules.
116
Pursuant to our articles of association, other than the external directors, for whom special election and removal requirements apply under the
Companies Law (as further described below), the vote required to appoint a director is a simple majority vote of holders of our ordinary shares
participating and voting at the relevant shareholders meeting. Our articles of association provide that, unless otherwise provided by law, our directors
(other than external directors and “independent directors” as such term is defined by the Companies Law) may be elected solely at our shareholders
annual general meetings, which are required to be held at least once during every calendar year and not more than fifteen months after the last preceding
annual general meeting. However, our articles of association allow our Board of Directors to appoint directors to fill vacancies on our Board of Directors,
which occur for any reason, or as additional directors, provided that the number of board members shall not exceed the maximum number of directors, as
mentioned above. The appointment of a director by the Board of Directors shall remain in effect until the annual general meeting of our shareholders
following the appointment or until the end of his tenure, in accordance with our articles of association.
Except for our external directors (as described below), our directors hold office until the next annual meeting of shareholders following the annual
meeting at which they were appointed.
Under our articles of association and the Companies Law, (i) directors (other than external directors and “independent directors” as such term is
defined by the Companies Law) may be removed by our shareholders before the expiration of their term by a special majority vote of at least 75% of the
votes of shareholders present and voting at the meeting, not taking into account abstentions; (ii) external directors may be removed by our shareholders
before the expiration of their term only in limited circumstances as described under the section titled “External Directors” below; and (iii) “independent
directors” (as such term is defined by the Companies Law) may be removed before the expiration of their term only by a simple majority of the
shareholders, or by a court, and then only if the independent directors cease to meet the statutory qualifications with respect to their appointment or if they
violate their duty of loyalty to the Company. In addition, under the Companies Law, directors may be removed upon the occurrence of disqualifying
events, such as bankruptcy or conviction of the director in certain criminal offenses.
Under the Companies Law, our Board of Directors is required to determine the minimum number of directors who must have “accounting and
financial expertise” (as such term is defined in regulations promulgated under the Companies Law). Our Board of Directors determined that the Board of
Directors should consist of at least two directors who have “accounting and financial expertise”. In this respect, our Board of Directors has determined that
each of Ms. Krindel Sieradzki, Ms. Ozer-Armon and Mr. Ilan Biran have the requisite “accounting and financial expertise”.
Meetings of the Board of Directors are generally held at least once each quarter, with additional special meetings scheduled when required.
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. The alternate director will be regarded as a director. However, the appointment of an
alternate director does not negate the responsibilities of the appointing director and such responsibilities prior to the appointment will continue to be the
responsibilities of the appointing director, giving consideration to the circumstances of the 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 so long as he or she is not already serving as a member of such committee, and if the
alternate director is to replace an external director, he or she is required to be an external director and to have either “accounting and financial expertise” or
“professional qualifications,” depending on the qualifications of the external director he or she is replacing. The term of appointment of an alternate
director may be for one meeting of the Board of Directors or until notice is given of the cancellation of the appointment.
117
External Directors
The Companies Law requires Israeli companies with shares that have been offered to the public, such as the Company, to appoint at least two
external directors. Israeli companies whose shares are traded on specified U.S. stock exchanges, including Nasdaq, which do not have a controlling
shareholder, may (but are not required to) elect to opt out of the requirement to maintain external directors and the composition requirements under the
Companies Law with respect to either or both of the audit and compensation committees, subject to such companies satisfying certain additional
conditions. We have not opted out and are currently subject to the foregoing requirements of the Companies Law. However, we may elect to opt out of
such requirements in the future.
To qualify as an external director, an individual (or the individual’s relative, partner, employer, a person to whom such individual is subordinate
(directly or indirectly) or any entity under the individual’s control) may not have, and may not have had at any time during the previous two years, (i) in
a company that has a controlling shareholder, any “affiliation” with such company, the company’s controlling shareholder or its relative, at the time of
the appointment, or another entity affiliated with the company or its controlling shareholder, or (ii) in a company without a controlling shareholder (or a
shareholder that owns more than 25% of its voting power), such as the Company, any “affiliation” with any person who, at the time of appointment, is
the chairman, the chief executive officer, the chief financial officer or a 5% shareholder of the company. The term affiliation includes:
·
·
·
·
an employment relationship;
a business or professional relationship;
control; and
service as an “office holder,” excluding service as a director that was appointed to serve as an external director of a company that is about to
make its initial public offering.
In addition, pursuant to the Companies Law, (i) an external director must have either “accounting and financial expertise” or “professional
qualifications” (as such terms are defined in regulations promulgated under the Companies Law); and (ii) at least one of the external directors must
have “accounting and financial expertise”. Our external directors are Ms. Krindel Sieradzki and Ms. Ozer-Armon. We have determined that both Ms.
Krindel Sieradzki and Ms. Ozer-Armon have the requisite “accounting and financial expertise”.
No person may serve as an external director if the person’s position or other activities create, or may create a conflict of interest with the
person’s responsibilities as an external director or may otherwise interfere with the person’s ability to serve as an external director. If, at the time an
external director is to be appointed, all current members of the Board of Directors who are not controlling shareholders or their relatives are of the same
gender, then the external director must be of the other gender. External directors are elected by a majority vote of the shareholders, provided that either (i)
such majority includes at least a majority of the shares of the non-controlling shareholders of the company who do not have a personal interest in the
appointment (excluding a personal interest that did not result from the shareholder’s relationship with the controlling shareholder) who voted on the
matter; or (ii) the total shareholdings of such non-controlling shareholders who vote against their election represent 2% or less of all of the voting rights
in the company.
118
The initial term of an external director is three years and he or she may be reelected for up to two additional three-year terms. Thereafter, in a
company whose shares are listed for trading on, among others, the Nasdaq Capital Market, such as the Company, he or she may be re-elected by our
shareholders for additional periods of up to three years each, if our Audit Committee and the Board of Directors confirm that, in light of the external
director’s expertise and special contribution to the work of the Board of Directors and its committees, the reelection for such additional period is beneficial
to the Company. Reelection of an external director may be effected through one of the following mechanisms: (i) the Board of Directors proposed the
reelection of the nominee and the election was approved by the shareholders by the majority required to appoint external directors for their initial term as
described above; or (ii) a shareholder holding 1% or more of the voting rights proposed the reelection of the nominee or the external director himself or
herself proposed their own reelection, and the reelection is approved by a majority of the votes cast by the shareholders of the company, excluding the
votes of controlling shareholders and those who have a personal interest in the matter as a result of their relations with the controlling shareholders;
provided that the aggregate votes cast in favor of the reelection by such non-excluded shareholders constitute more than 2% of the voting rights in the
company.
External directors can be removed from office only by the same special percentage of shareholders as can elect them, or by a court, and then only
if the external directors cease to meet the statutory qualifications with respect to their appointment or if they violate their duty of loyalty to the company.
Any committee of the Board of Directors that is authorized to exercise powers of the Board of Directors must include at least one external
director and the audit and compensation committees must include all of the external directors. An external director is entitled to compensation as
provided in regulations adopted under the Companies Law and is otherwise prohibited from receiving any other compensation, directly or indirectly, in
connection with such service.
Independent Directors
Under the Nasdaq rules, a majority of our Board of Directors must qualify as independent directors within the meaning of Nasdaq Listing Rule
5605(a)(2). Our Board of Directors has determined that all of our directors qualify as “independent directors” within the meaning of such rule.
Under the Companies Law, a public company, such as the Company, may classify one or more of its directors as an “independent director”
within the meaning of the Companies Law if they are either external directors or directors who: (i) meet the qualification requirements of an external
director (as described above), other than the requirement to possess accounting and financial expertise or professional qualifications, with audit
committee confirmation of such; and (ii) have been directors in the company for an uninterrupted duration of less than nine years (and any interim
period during which such person was not a director which is less than two years shall not be deemed to interrupt the duration). Our Board of Directors
has determined, following confirmation of our Audit Committee, to classify Mr. Ilan Biran as an “independent director” within the meaning of the
Companies Law.
Committees of the Board of Directors
Subject to the provisions of the Companies Law, our Board of Directors may delegate its powers to committees consisting of board members.
Our Board of Directors has established an audit committee and a compensation committee, and, from time to time, establishes other “ad-hoc”
committees of members of the Board of Directors for specific duties or assignments and limited duration.
Audit Committee
Pursuant to applicable SEC and Nasdaq rules, we are required to have an audit committee of at least three members, each of whom must satisfy
the independence requirements of the SEC and Nasdaq. In addition, pursuant to Nasdaq rules, all of the members of the audit committee must be
financially literate and at least one member must possess accounting or related financial management expertise. The audit committee must also have a
written charter specifying the committee’s duties and responsibilities, which include, among other things, the selection and evaluation of our independent
auditors.
119
Under the Companies Law, our Board of Directors is required to appoint an audit committee, which must be comprised of at least three directors,
including all of the external directors, a majority of its members must satisfy the independence standards under the Companies Law, and the chairman of
the audit committee is required to be an external director. An audit committee may not include the chairman of a company’s board of directors, a
controlling shareholder of the company, a relative of a controlling shareholder, a director employed by or providing services on a regular basis to the
company, to a controlling shareholder or to an entity controlled by a controlling shareholder, or a director who derives most of his or her income from a
controlling shareholder. The duties of an audit committee under the Companies Law include, among other things, identifying flaws in the business
management of the company and suggesting remedial measures to its board of directors, assessing the company’s internal audit system and the
performance of its internal auditor, establishing whistleblower procedures and approval of certain interested party transactions.
Our Audit Committee adopted a written charter specifying the committee’s duties and responsibilities, which include, among other things,
overseeing the accounting and financial reporting processes of our Company and audits of our financial statements, reviewing our financial statements;
reviewing our compliance with legal and regulatory requirements; recommending the appointment of our independent public accountants and reviewing
their independence; examining the performance of our internal audit function and the internal auditor; finding any defects in the business management of
our Company for which purpose the Audit Committee may consult with our independent auditors and internal auditor and proposing to the Board of
Directors ways to correct such defects; approving related party transactions; and such other duties as may be directed by our Board of Directors or required
by applicable law or applicable Nasdaq rules.
In addition, pursuant to the audit committee charter, our Audit Committee functions as our Qualified Legal Compliance Committee, or the
QLCC. In its capacity as the QLCC, the Audit Committee is also responsible for investigating reports made by attorneys appearing and practicing
before the SEC in representing us of perceived material violations of U.S. federal or state securities laws, breaches of fiduciary duty or similar
violations by us or any of our agents.
Our Audit Committee is currently composed of Ms. Krindel Sieradzki, the chairperson of our Audit Committee, Ms. Ozer-Armon and Mr.
Ilan Biran, all of whom satisfy the respective “independence” requirements of the Companies Law and the SEC and Nasdaq rules for audit
committee members.
Compensation Committee
Pursuant to applicable Nasdaq rules, the compensation payable to a company’s chief executive officer and other executive officers must generally
be approved by a compensation committee comprised solely of independent directors. Under the Companies Law, our Board of Directors is required to
appoint a compensation committee, which must be comprised of at least three directors, include all of the external directors, its other members must satisfy
certain independence standards under the Companies Law, and the chairman is required to be an external director. Under the Companies Law, the role of
the compensation committee is to recommend to the board of directors, for ultimate shareholder approval by a special majority, a policy governing the
compensation of office holders based on specified criteria; to recommend to the board of directors, from time to time, modifications to the compensation
policy and examine its implementation; to approve, as more fully described under “Approval of Related Party Transactions Under Israeli Law” below, the
actual compensation terms of office holders prior to approval thereof by the board of directors; and to resolve whether to exempt the compensation terms of
a candidate for chief executive officer from shareholder approval.
Our Compensation Committee adopted a written charter specifying the committee’s duties and responsibilities, which include, among other things,
the duties and roles assigned to it pursuant to the Companies Law and applicable Nasdaq rules described above; and oversight and administration of our
equity based plans. In March 2020, our shareholders approved our Compensation Policy.
Our Compensation Committee is currently composed of Ms. Ozer-Armon, the chairperson of our Compensation Committee, Ms. Krindel
Sieradzki and Mr. Gerstel, all of whom satisfy the respective “independence” requirements of the Companies Law, SEC and Nasdaq rules for compensation
committee members. The committee meets at least once each quarter, with additional special meetings scheduled when required.
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Internal Auditor
Under the Companies Law, our Board of Directors is also required to appoint an internal auditor proposed by the audit committee. The role of the
internal auditor is to examine, among other things, whether our activities comply with the law and orderly business procedure. The internal auditor may not
be an interested party or office holder, or a relative of any interested party or office holder, and may not be a member of our independent accounting firm.
The Companies Law defines the term “interested party” to include a person who holds 5% or more of a company’s outstanding share capital or voting
rights, a person who has the right to appoint one or more directors or the general manager, or any person who serves as a director or as the general manager.
Ms. Irena Ben-Yakar of Deloitte Israel & Co. serves as our internal auditor.
Directors’ Service Contracts
Our Chairman of the Board. We entered into a services agreement with a company wholly owned by Dr. Giora Yaron, the Chairman of our
Board of Directors. See Item 6.B. “Directors, Senior Management and Employees — Compensation — Individual Compensation of Covered Executives.”
Other. Except as set forth above and in Item 6.B. “Directors, Senior Management and Employees — Compensation,” there are no arrangements or
understandings between us and any of our current directors or executive officers for benefits upon termination of service.
Fiduciary Duties of Office Holders
The Companies Law imposes a duty of care and a duty of loyalty on all office holders of a company.
·
The duty of care requires an office holder to act with the level of skill with which a reasonable office holder in the same position would have
acted under the same circumstances. The duty of care of an office holder includes a duty to use reasonable means to obtain:
·
·
information on the advisability of a given action brought for his approval or performed by him by virtue of his position; and
all other important information pertaining to these actions.
·
The duty of loyalty of an office holder requires an office holder to act in good faith and for the benefit of the company, and includes a duty to:
·
·
·
·
refrain from any conflict of interest between the performance of his duties in the company and his performance of his other duties or
personal affairs;
refrain from any action that constitutes competition with the company’s business;
refrain from exploiting any business opportunity of the company to receive a personal gain for himself or others; and
disclose to the company any information or documents relating to the company’s affairs which the office holder has received due to his
position as an office holder.
Each person listed in the table under Item 6.A. “Directors, Senior Management and Employees — Directors and Senior Management” is
considered an office holder under the Companies Law.
Approval of Related Party Transactions under Israeli Law
General
Under the Companies Law, a company may approve an action by an office holder from which the office holder would otherwise have to refrain, as
described above, if:
·
the office holder acts in good faith and the act or its approval does not cause harm to the company; and
121
·
the office holder disclosed the nature of his or her interest in the transaction (including any significant fact or document) to the company at a
reasonable time before the company’s approval of such matter.
Disclosure of Personal Interests of an Office Holder
The Companies Law requires that an office holder disclose to the company, promptly, and, in any event, not later than the board meeting at which
the transaction is first discussed, any direct or indirect personal interest that he or she may have and all related material information known to him or her
relating to any existing or proposed transaction by the company. If the transaction is an extraordinary transaction, the office holder must also disclose any
personal interest held by:
·
·
the office holder’s relatives. Relatives are defined to include the spouse, siblings, parents, grandparents, descendants, spouse’s descendants
and the spouses of any of these people; or
any corporation in which the office holder or his or her relatives holds 5% or more of the shares or voting rights, serves as a director or
general manager or has the right to appoint at least one director or the general manager.
Under the Companies Law, an extraordinary transaction is a transaction:
·
·
·
not in the ordinary course of business;
not on market terms; or
that is likely to have a material impact on the company’s profitability, assets or liabilities.
The Companies Law does not specify to whom within the company nor the manner in which required disclosures are to be made. We require our
office holders to make such disclosures to our Board of Directors.
Under the Companies Law, once an office holder complies with the above disclosure requirement, the Board of Directors may approve a transaction
between the company and an office holder, or a third party in which an office holder has a personal interest, unless the articles of association provide
otherwise and provided that the transaction is not detrimental to the company’s interest. If the transaction is an extraordinary transaction, first the audit
committee and then the board of directors of the company, in that order, must approve the transaction. Under specific circumstances, shareholder approval
may also be required. A director who has a personal interest in an extraordinary transaction, which is considered at a meeting of the board of directors or
the audit committee, may not be present at this meeting or vote on this matter, unless a majority of the board of directors or the audit committee, as the
case may be, has a personal interest. If a majority of the board of directors or the audit committee has a personal interest, then shareholder approval is
generally also required.
Approval of Office Holder Compensation
Pursuant to the Companies Law, every Israeli public company, such as the Company, must adopt a compensation policy, recommended by the
compensation committee, and approved by the Board of Directors and the shareholders, in that order. The shareholder approval must be by a simple
majority of all votes cast, provided that (i) such majority includes a simple majority of the votes cast by non-controlling shareholders having no personal
interest in the matter or (ii) the total number of votes of shareholders mentioned in clause (i) above who voted against the approval of the policy does not
exceed 2% of the total voting rights in the company. Even if the shareholders do not approve the compensation policy, the board of directors may resolve
to approve the compensation policy, subject to certain conditions. In general, all office holders’ terms of compensation — including fixed remuneration,
bonuses, equity compensation, retirement or termination payments, indemnification, liability insurance and the grant of an exemption from liability —
must comply with the company’s compensation policy. The compensation policy must take into account certain factors, including advancement of the
company’s objectives, the company’s business plan and its long-term strategy, and creation of appropriate incentives. It must also consider, among other
things, the company’s risk management, size and the nature of its operations. The compensation policy must include certain principles, such as: a link
between variable compensation and long-term performance and measurable criteria; the relationship between variable and fixed compensation; and the
minimum holding or vesting period for variable, equity-based compensation. In May 2019, our shareholders approved our Compensation Policy (as then
amended).
122
In addition, the compensation terms of directors, the chief executive officer, and any employee or service provider who is considered a
controlling shareholder, must be approved separately by the compensation committee, the board of directors and, subject to certain exceptions, the
shareholders of the company (by the same majority noted above), in that order. The compensation terms of other officers require the approval of the
compensation committee and the board of directors.
Exculpation, Indemnification and Insurance of Directors and Officers
Exculpation of Office Holders. Under the Companies Law, an Israeli company may not exempt an office holder from his or her liability for a
breach of the duty of loyalty to the company, but may exempt an office holder, in advance, from his or her liability, in whole or in part, for a breach of his
or her duty of care to the company (except with regard to distributions), if the articles of association so provide. Our articles of association permit us to
exempt our office holders, retroactively or in advance, from his or her liability, in whole or in part, for a breach of his or her duty of care to the Company,
up to the highest amount permitted by law.
Office Holders’ Insurance. As permitted by the Companies Law, our articles of association provide that, subject to the provisions of the
Companies Law, we may enter into a contract for the insurance of the liability of any of our office holders concerning an act performed by him or her in
his or her capacity as an office holder for:
·
·
·
·
·
·
a breach of his or her duty of care to us or to another person;
a breach of his or her duty of loyalty to us, provided that the office holder acted in good faith and had reasonable cause to assume that his or
her act would not prejudice our interests;
a financial liability imposed upon him or her in favor of another person;
a financial liability that may be instituted against him or her in favor of a payment for a breach offended at an administrative proceeding, or an
Administrative Proceeding, pursuant to Section 52(54)(a)(1)(a) of the Israeli Securities Law, 5728-1968, or the Israeli Securities Law, if
applicable, and payments made to injured persons under specific circumstances thereunder;
expenses he or she incurs as a result of administrative proceedings that may be instituted against him or her, including reasonable litigation
expenses; and
any other matter in respect of which it is permitted or will be permitted under applicable law to insure the liability of an office holder in the
Company.
Indemnification of Office Holders. As permitted by the Companies Law, our articles of association provide that we may indemnify any of our
office holders for an act performed in his or her capacity as an office holder, retroactively (after the liability has been incurred) or in advance against the
following:
·
·
a financial liability incurred by, or imposed on, him or her in favor of another person by any judgment, including a settlement or an arbitration
award approved by a court;
provided that our undertaking to indemnify with respect to such events on a prospective basis is, according to the Companies Law, limited to
events that our Board of Directors believes are foreseeable in light of our actual operations at the time of providing the undertaking and to a
sum or standard that our Board of Directors determines to be reasonable under the circumstances, and further provided that such events and
amount or criteria are set forth in the undertaking to indemnify;
123
·
·
·
·
·
reasonable litigation expenses, including attorney’s fees, incurred by the office holder as a result of an investigation or proceeding instituted
against him by a competent authority, provided that such investigation or proceeding concluded without the filing of an indictment against
him or concluded with the imposition of a financial liability in lieu of criminal proceedings with respect to a criminal offense that does not
require proof of criminal intent, all according to the law, or in connection with a financial sanction;
reasonable litigation expenses, including attorneys’ fees, incurred by the office holder or charged to him or her by a court, resulting from the
following: proceedings we institute against him or her or instituted on our behalf or by another person; a criminal indictment from which he or
she was acquitted; or a criminal indictment in which he or she was convicted for a criminal offense that does not require proof of intent;
a financial liability that that may be instituted against him or her in favor of a payment for a breach offended at an Administrative Proceeding,
if applicable, and payments made to injured persons under specific circumstances thereunder;
expenses paid in connection with an administrative proceeding which was instituted against him or her, including reasonable litigation
expenses, such as attorneys’ fees; and
any other matter in respect of which it is permitted or will be permitted under applicable law to indemnify an office holder in the Company.
Limitations on Exculpation, Insurance and Indemnification. The Companies Law provides that a company may not indemnify an office holder nor
exculpate an office holder nor enter into an insurance contract which would provide coverage for any monetary liability incurred as a result of any of the
following:
·
·
·
·
a breach by the office holder of his or her duty of loyalty, unless with respect to indemnification and insurance for a breach of the duty of
loyalty in which the office holder acted in good faith and had a reasonable basis to believe that the act would not prejudice the company;
a breach by the office holder of his or her duty of care if the breach was committed intentionally or recklessly, unless it was committed only
negligently;
any act or omission committed with the intent to derive an illegal personal benefit; or
any fine levied against the office holder.
In addition, under the Companies Law, exculpation of, an undertaking to indemnify or indemnification of, and procurement of insurance coverage
for, our office holders must be approved by our Compensation Committee and our Board of Directors and, in specified circumstances, such as if the office
holder is a director or a controlling shareholder, is generally required to be approved by our shareholders.
We have entered into agreements with each of our current directors and executive officers to indemnify them to the fullest extent permitted by law,
subject to limited exceptions. The maximum aggregate amount of indemnification that we may pay to our directors and executive officers based on such
indemnification agreements is, generally, NIS 15.0 million (equivalent to approximately $4.1 million) (linked to the Israeli CPI) for all office holders.
We also currently maintain directors’ and officers’ liability insurance with an aggregate coverage limit of $25 million, with a Side A coverage of
an additional $5 million, for an annual premium of approximately $0.9 million.
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D. Employees
The following table details certain data on the workforce of Itamar and its consolidated subsidiaries as of the dates indicated:
Numbers of employees by geographic location
United States
Israel
Japan
Total workforce
Numbers of employees by category of activity
Sales and marketing
Support in sales and marketing
Management and administrative
Operations, engineering and manufacturing
Research, development and technologies
Total workforce
2019
As of December 31,
2018
2017
80
103
1
184
53
19
25
67
20
184
55
97
1
153
31
21
21
63
17
153
43
94
1
138
27
15
20
62
14
138
The overall increase in our workforce, from 153 employees in 2018 to 184 employees in 2019, was primarily due to recruitment of sales and
marketing personnel (including support in sales and marketing personnel), mainly in the United States, as a result of the expansion into new geographic
territories in the United States and an increase in research, development and technologies personnel in Israel. The overall increase in our workforce, from
138 employees in 2017 to 153 employees in 2018, was primarily due to recruitment of sales and marketing personnel (including support in sales and
marketing personnel), mainly in the U.S., as a result of the expansion into new geographic territories in the U.S. and an increase in research, development
and technologies personnel in Israel.
We consider our relations with our employees to be good and we have never experienced a strike or work stoppage.
Our employees are not represented by labor unions. Nevertheless, with respect to our employees in Israel, certain provisions of the collective
bargaining agreements between the ‘Histadrut’ (General Federation of Labor in Israel) and the Coordination Bureau of Economic Organizations (including
the Industrialists’ Association) may be applicable to our employees by virtue of an order of the Israeli Ministry of Labor, Social Affairs and Social
Services. These provisions concern mainly the length of the workday, minimum daily wages, insurance for work-related accidents, determination of
severance pay and other conditions of employment. We generally provide our employees with benefits and working conditions beyond the required
minimums.
Pursuant to Israeli law, we are legally required to pay severance benefits upon certain circumstances, including the retirement or death of an
employee or the termination of employment of an employee without due cause. Israeli employers and employees are required to pay predetermined
amounts to the National Insurance Institute, which is substantially similar to the United States Social Security Administration.
E. Share Ownership
Beneficial Ownership of Executive Officers and Directors
For information regarding the share ownership of directors and officers, see Item 7.A. “Major Shareholders and Related Party Transactions—
Major Shareholders.”
Equity Incentive Plans
Our Equity Incentive Plans
125
In February 2007, we adopted the 2007 Israeli Share Option Plan, or 2007 Option Plan, under which stock options were granted to employees
employed by us or by our affiliates, to permit our Israeli employees to benefit from tax advantages that became available at that time under Section 102 of
the Israeli Tax Ordinance. The 2007 Option Plan had a term of 10 years and expired in February 2017, although we still have outstanding options under the
2007 Option Plan. An amendment to the 2007 Option Plan was approved by our Board of Directors on March 12, 2019.
In February 2007, we also adopted the 2007 Equity Incentive Plan, or 2007 Incentive Plan, under which stock options were granted to employees,
officers, directors and consultants of our Company and our subsidiaries that are non-Israeli residents. The 2007 Incentive Plan had a term of 10 years and
expired in February 2017, although we still have outstanding options under the 2007 Incentive Plan.
In January 2016, we adopted the Israeli Equity Incentive Plan for Israeli directors, officers, employees and consultants, or 2016 Israeli Plan, and
the 2016 U.S. Equity Incentive Plan for non-Israeli directors, officers, employees and consultants, or 2016 Non-Israeli Plan. We refer to these two plans
together as the 2016 Plans. Under such plans, we may grant stock options, RSUs and other equity-based awards to employees, officers, directors and
consultants of our Company and our subsidiaries. The 2016 Plans have a term of ten years and will terminate in January 2026.
Each of the aforesaid equity incentive plans, to which we refer together as the Equity Plans, is administered by our Board of Directors (although
our Board of Directors may delegate such authority to any committee thereof). Subject to the Equity Plans and applicable law, our Board of Directors has
the authority to make all determinations deemed necessary or advisable for the administration of such plans, including to whom equity awards may be
granted, the time and the extent to which these awards may be exercised, the exercise or purchase price of shares covered by each option or other award,
the type of awards and how to interpret such plans. Among others, the Board has the authority to provide for, or, where applicable, recommend for approval
by the Board of Directors, accelerated vesting of the ordinary shares subject to outstanding awards.
As of March 15, 2020, 25,545,132 ordinary shares remained available for grant of awards under the Equity Plans.
Grants in 2019
In 2019, we granted under the Equity Plans (i) options exercisable into up to 13,601,699 ordinary shares (compared with options exercisable into
up to 3,016,330 ordinary shares that we granted in 2018); and (ii) up to 981,472 ordinary shares issuable upon the vesting of performance-based RSUs
(compared with up to 295,726 ordinary shares issuable upon the vesting of performance-based RSUs that were granted during 2018).
Total Outstanding Options and RSUs
The following table sets forth, as of December 31, 2019, the number of options outstanding under our Equity Plans and their respective exercise
prices and expiration dates:
Number of
Outstanding Options
17,042,814
21,183,309
3,544,111
560,730
42,330,964
Total(*)(**):
Range of exercise
prices
$0.28 - $0.35
$0.36 - $0.43
$0.44 - $0.57
$0.58 - $0.68
Weighted average remaining
contractual life (in years)
5.96
5.70
3.53
2.75
5.59
(*) Includes 10,127,684 options that were vested and exercisable as of December 31, 2019.
126
(**) Includes:
15,944,306 performance-based options, with exercise prices that ranging between NIS 1.02 and NIS 1.40 (equivalent to approximately $0.28
and $0.38, respectively), which performance criteria is that they will vest in December 2020 if the price of our ordinary shares is, at such time,
at least NIS 4.24 per share (equivalent to approximately $1.16), or 50% of such options will vest if the price of our ordinary shares is, at such
time, at least NIS 1.70 per share (equivalent to approximately $0.46). If, on the applicable measurement date, the price of our ordinary shares
is within the range between these two vesting-trigger share prices, the relative quantity of the options will vest.
4,431,867 performance-based options, with exercise prices ranging between NIS 1.15 and NIS 1.22 (equivalent to approximately $0.31 and
$0.33, respectively), which performance criteria is that they will vest in December 2022 if the price of our ordinary shares is, at such time, at
least NIS 5.32 per share (equivalent to approximately $1.45), or 50% of such options will vest if the price of our ordinary shares is, at such
time, at least NIS 2.66 per share (equivalent to approximately $0.73). If, on the applicable measurement date, the price of our ordinary shares
is within the range between these two vesting-trigger share prices, the relative quantity of the options will vest.
The following table sets forth, as of December 31, 2019, the number of RSUs outstanding under our Equity Plans and their respective weighted
average grant date fair value:
RSUs
Outstanding at beginning of the year
Granted
Vested
Forfeited
Outstanding at end of the year (*)
Weighted average
grant date
fair value
Number
3,441,420 $
981,472 $
-
(94,497) $
4,328,395 $
0.16
0.11
0.14
0.15
(*)
3,289,898 RSUs are performance-based RSUs, which performance criteria is that they will vest in December 2020 if the price of our
ordinary shares is, at such time, at least NIS 4.24 per share (equivalent to approximately $1.16), or 50% of such RSUs will vest if the price
of our ordinary shares is, at such time, at least NIS 1.70 per share (equivalent to approximately $0.46). If, on the applicable measurement
date, the price of our ordinary shares is within the range between these two vesting-trigger share prices, the relative quantity of the RSUs
will vest.
1,038,497 RSUs are performance-based RSUs, which performance criteria is that they will vest in December 2022 if the price of our
ordinary shares is, at such time, at least NIS 5.32 per share (equivalent to approximately $1.45), or 50% of such RSUs will vest if the price
of our ordinary shares is, at such time, at least NIS 2.66 per share (equivalent to approximately $0.73). If, on the applicable measurement
date, the price of our ordinary shares is within the range between these two vesting-trigger share prices, the relative quantity of the RSUs
will vest.
Out of these performance-based RSUs, only 1,741,344 RSUs, which were granted to one employee and two consultants (of which 1,790,376
RSUs were granted in 2016 to our President and Chief Executive Officer), have a purchase price. The purchase price for such RSUs is NIS
0.30 per share (equivalent to approximately $0.08).
For additional details and a discussion of the accounting method and assumptions used in valuation of such options and RSUs, see Note 16 to our
audited consolidated financial statements included elsewhere in this Annual Report.
127
Grants Since January 1, 2020
Since January 1, 2020, we also granted (i) options exercisable into 3,942,284 ordinary shares at exercise prices ranging between NIS 1.28 and NIS
1.73 (equivalent to approximately $0.35 and $0.47, respectively) per share, which expire between 2025 and 2029; and (ii) 194,887 performance-based
RSUs.
Item 7. Major Shareholders and Related Party Transactions
A. Major Shareholders
The following table sets forth information relating to the beneficial ownership of our ordinary shares as of March 15, 2020, for:
(a) each person, or group of affiliated persons, known by us to beneficially own 5% or more of our outstanding ordinary shares;
(b) each of our executive officers and members of our board of directors individually; and
(c) all of our executive officers and members of our board of directors as a group.
For further information regarding material transactions between us and principal shareholders, see “Related Party Transactions” below.
The number of ordinary shares beneficially owned by each entity, person, executive officer or board member is determined in accordance with the
rules of the SEC, and the information is not necessarily indicative of beneficial ownership for any other purpose. Under such rules, beneficial ownership
includes any shares over which the individual has sole or shared voting power or investment power, or the right to receive the economic benefit of
ownership, as well as any shares that the individual has the right to acquire within 60 days of March 15, 2020 through the exercise of any option, warrant or
other right. Except as otherwise indicated, and subject to applicable community property laws, the persons named in the table have sole voting and
investment power and the right to receive the economic benefit of ownership with respect to all ordinary shares held by that person.
The percentage of ordinary shares beneficially owned is calculated on the basis of 423,103,011 ordinary shares outstanding as of March 15, 2020.
Ordinary shares that a person has the right to acquire within 60 days of March 15, 2020 are deemed outstanding for purposes of computing the percentage
ownership of the person holding such rights, but are not deemed outstanding for purposes of computing the percentage ownership of any other person,
except with respect to the percentage ownership of all board members and executive officers as a group.
Unless otherwise indicated below, the address for each beneficial owner listed is c/o Itamar Medical Ltd., 9 Halamish Street, Caesarea 3088900,
Israel.
Name of beneficial owner
5% or Greater Shareholders
Entities affiliated with the Viola Group(1)
MS Pace LP(2)
Executive Officers and Board Members
Giora Yaron, Ph.D.(3)
Gilad Glick(4)
Shy Basson(5)
Itay Kariv(6)
Dan Shlezak
Efrat Litman(7)
Eilon Livne(8)
Shiri Shneorson
Martin Gerstel(9)
Ilan Biran(10)
Jonathan Kolber(11)
Sami Totah(12)
Christopher M. Cleary(13)
Yaffa Krindel Sieradzki(14)
Zipora (Tzipi) Ozer-Armon(15)
All executive officers and board members as a group (15 persons)(16)
128
Shares beneficially
owned
Number
Percent
72,841,918
40,307,413
30,461,062
3,925,862
275,661
168,286
-
708,377
119,346
-
15,104,724
616,316
-
-
-
337,639
165,000
51,882,274
17.2%
9.5%
7.2%
*
*
*
-
*
*
-
3.6%
*
-
-
-
*
*
12.1%
*
Indicates beneficial ownership of less than 1% of the total outstanding ordinary shares.
(1) This information is based on information provided to the Company by Viola Growth II GP Ltd., a Cayman Islands company, as of May 2019, in
connection with our 2019 annual meeting of shareholders. The number of ordinary shares reported in the table consists of (a) 72,346,918 ordinary
shares held by Viola Growth 2 A.V. Limited Partnership, or Viola 2 AV, an Israeli limited partnership; and (b) 495,000 ordinary shares issuable upon
exercise of options to purchase ordinary shares held by Viola Growth Management Fund 2 Ltd., or Viola 2, an Israeli company, that are or will be
immediately exercisable within 60 days of March 15, 2020. The general partner of Viola 2 AV is Viola Growth II Limited Partnership, a Cayman
Island limited partnership. The general partner of Viola Growth II Limited Partnership is Viola Growth II GP Ltd., a Cayman Islands company, which
is wholly owned by Viola 2. Messrs. Shlomo Dovrat, Harel Beit-On and Avi Zeevi, all of whom are Israeli citizens, hold indirect interests in, and are
the controlling shareholders of, Viola 2 and, consequently, may be deemed to be the beneficial owners of the ordinary shares held by Viola 2 AV and
Viola 2. However, each of Messrs. Dovrat, Beit-On and Zeevi disclaims beneficial ownership of all of the foregoing shares, except to the extent of
their respective pecuniary interest therein. The business address of Viola is Ackerstein Towers, Building D, 12 Abba Eban Avenue, Herzeliya
4672530, Israel.
(2) This information is based on a Schedule 13G/A filed on August 8, 2019, by MS Pace LP, or MSP, a Delaware limited partnership, MS Pace
Management, LLC, or MSP Management, a Delaware limited liability company and Sightline MS GP, LLC, or Sightline, a Delaware limited liability
company. The general partner of MSP is MSP Management which is 51% held by an affiliate of Medtronic International Technology, Inc., or
Medtronic, and the remaining 49% interest therein is held by Sightline, a third party unrelated to Medtronic. Medtronic also holds 20% of the limited
partnership interests in MSP. Medtronic is an indirect wholly owned subsidiary of Medtronic plc, an Irish corporation whose shares are traded on the
NYSE. The number of ordinary shares reported in the table consists of 40,307,413 ordinary shares held by MSP The business address of MS Pace is
8500 Normandale Lake Boulevard, Suite 1070, Bloomington, Minnesota 55437.
(3) Consists of (a) 29,944,746 ordinary shares and (b) 516,316 ordinary shares issuable upon exercise of options to purchase ordinary shares that are or
will be immediately exercisable within 60 days of March 15, 2020. Some of these securities are held through a company wholly owned by Dr. Yaron.
(4) Consists of (a) 398,622 ordinary shares and (b) 3,527,240 ordinary shares issuable upon exercise of options to purchase ordinary shares that are or
will be immediately exercisable within 60 days of March 15, 2020.
(5) Consists of 275,661 ordinary shares issuable upon exercise of options to purchase ordinary shares that are or will be immediately exercisable within
60 days of March 15, 2020.
(6) Consists of 168,286 ordinary shares issuable upon exercise of options to purchase ordinary shares that are or will be immediately exercisable within
60 days of March 15, 2020.
(7) Consists of (a) 50,452 ordinary shares and (b) 657,925 ordinary shares issuable upon exercise of options to purchase ordinary shares that are or will
be immediately exercisable within 60 days of March 15, 2020.
(8) Consists of 119,346 ordinary shares issuable upon exercise of options to purchase ordinary shares that are or will be immediately exercisable within
60 days of March 15, 2020.
(9) Consists of (a) 14,838,891 ordinary shares and (b) 265,833 ordinary shares issuable upon exercise of options to purchase ordinary shares that are or
will be immediately exercisable within 60 days of March 15, 2020.
(10) Consists of (a) 100,000 ordinary shares and (b) 516,316 ordinary shares issuable upon exercise of options to purchase ordinary shares that are or will
be immediately exercisable within 60 days of March 15, 2020.
(11) Mr. Kolber is a partner in Viola Growth, which is an affiliate of Viola.
(12) Mr. Totah is a partner in Viola Growth, which is an affiliate of Viola.
(13) Mr. Cleary is a Vice President of Corporate Development for Medtronic plc, which is an affiliate of MS Pace.
(14) Consists of (a) 172,369 ordinary shares and (b) 165,000 ordinary shares issuable upon exercise of options to purchase ordinary shares that are or will
be immediately exercisable within 60 days of March 15, 2020.
(15) Consists of 165,000 ordinary shares issuable upon exercise of options to purchase ordinary shares that are or will be immediately exercisable within
60 days of March 15, 2020.
(16) Consists of (a) 45,505,350 ordinary shares and (b) 6,376,924 ordinary shares issuable upon exercise of options to purchase ordinary shares that are or
will be immediately exercisable within 60 days of March 15, 2020.
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Change in Control
To our knowledge, (i) we are not directly or indirectly owned or controlled by another corporation, by any foreign government or by any other
natural or legal person severally or jointly, except as disclosed in the above table regarding our major shareholders, and (ii) there are no arrangements
which would result in our change in control at a subsequent date.
Significant Changes in the Ownership of Major Shareholders
To our knowledge, other than as disclosed in the table above, our other filings with the SEC and this Annual Report, there has been no significant
change in the percentage ownership held by any major shareholder since January 1, 2017.
Major Shareholders Voting Rights
Our major shareholders do not have different voting rights.
Record Holders
Bank of New York Mellon, or BNY, is the holder of record for the Company’s American Depositary Receipt program, pursuant to which each
ADS represents 30 ordinary shares. As of March 31, 2020, BNY held 137,778,111 ordinary shares representing 32.6% of our issued share capital held at
that date. To our knowledge, as of March 31, 2020, we had no additional holders of record of our shares with addresses in the United States. As a number
of our shares are held in book-entry form, we are not aware of the identity of all of our shareholders.
B. Related Party Transactions
The following is a description of our related party transactions since January 1, 2019.
Medtronic Co-Marketing Agreement
In March 2014, we entered into a co-marketing agreement with Medtronic, Inc., whereby Medtronic, Inc. was granted exclusive rights to co-
market our WatchPAT family of products to electrophysiologists (physicians specializing in cardiology arrhythmias) in the United States and undertook to
make specified investments in marketing of the product as well as meet minimum sales quotas. In April 2015, as part of several amendments to the
marketing agreement, the aforesaid obligation to make specified investments and meet minimum sales quotas was canceled. Pursuant to this agreement,
Medtronic, Inc. markets WatchPAT as part of a comprehensive solution offered by Medtronic to physicians. Since June 30, 2017, the term of this agreement
(as amended) is automatically renewed for 30-day intervals, unless earlier terminated by either party upon 14 days prior notice.
Medtronic, Inc. is entitled to a portion of the net sales made under this agreement. However, the total net sales under this agreement (and,
consequently, the consideration payable to Medtronic, Inc.) have been immaterial to us in the past three years (net sales under this agreement were
approximately $0.20 million in the year ended December 31, 2019, $0.21 million in the year ended December 31, 2018, and $0.31 million in the year
ended December 31, 2017).
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Financing Transactions
See Item 5.B “Operating and Financial Review and Prospects — Liquidity and Capital Resources — Principal Financing Activities” with respect
to certain investments and loans made by, or repaid to, our major shareholders and members of our Board of Directors.
Transactions with Our Executive Officers and Directors
We have entered into employment or services agreements with each of our executive officers. See Item 6.B. “Directors, Senior Management and
Employees — Compensation — Executive Officer Employment and Consultancy Agreements” for additional information. In addition, we have entered into
consultancy agreements with certain of our directors. See Item 6.B. “Directors, Senior Management and Employees — Compensation — Non-Employee
Directors Remuneration” for additional information.
Viola Share Purchase Agreement
In August 2015, we entered into a share purchase agreement with Viola P.E. II A.V. LP and certain of its affiliates, and on November 5, 2015 (and,
as a second stage of the transaction, on February 1, 2016), we completed the transaction. As part of the transaction, we granted Viola customary registration
rights subject to obtaining the applicable regulatory approvals to the extent required under applicable law, including, at a minimum, two demand
registration rights and unlimited piggyback and Form F-3 registrations.
Indemnity Agreements
We have entered into agreements with each of our current directors and executive officers to indemnify them to the fullest extent permitted by law,
subject to limited exceptions. See Item 6.B. “Directors, Senior Management and Employees — Compensation — Insurance and Indemnification” for
additional information.
Related Person Transaction Policy
Our Board of Directors has adopted an interested party transaction policy, which governs the identification, reporting and approval of transactions
with interested parties.
C. Interests of Experts and Counsel
Not applicable.
Item 8. Financial Information
A. Consolidated Statements and Other Financial Information
Consolidated Financial Statements
See Item 18. “Financial Statements.”
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Export Sales
In the year ended December 31, 2019, the amount of our export sales (i.e., sales outside of Israel) was approximately $31.0 million, which
represents 99.1% of our total sales.
Legal and Arbitration Proceedings
From time to time, we may be involved in various claims and legal proceedings related to claims arising out of our operations. We are not
currently a party to any material legal proceedings, including any such proceedings that are pending or threatened, of which we are aware.
Dividend Policy
We have never declared or paid cash dividends on our ordinary shares or ADSs and do not intend to pay cash dividends on our ordinary shares or
ADSs in the foreseeable future. Our earnings and other cash resources will be used to continue the development and expansion of our business. Any future
dividend policy will be determined by our Board of Directors and will be based upon conditions then-existing, including our results of operations, financial
condition, current and anticipated cash needs, contractual restrictions and other conditions.
Subject to any preferential, deferred or other rights or restrictions attached to any special class of shares with regard to dividends, the profits of the
Company available for dividend and resolved to be distributed shall be applied in payment of dividends upon the shares of the Company in the same
manner with respect to all of the shares granting a right to receive dividends on the date that resolution is adopted (or on later date, as determined by the
Board of Directors). Generally, our Board of Directors may declare dividends only out of profits legally available for distribution, in accordance with the
provisions of the Companies Law as described below, and is entitled to invest or utilize any unclaimed amount of dividend in any manner to our benefit
until it is claimed. We are not obligated to pay interest or linkage on an unclaimed dividend.
The Companies Law imposes restrictions on our ability to declare and pay dividends. According to the Companies Law, a company may distribute
dividends only out of its “profits,” as such term is defined in the Companies Law and provided that there is no reasonable concern that payment of the
dividend will prevent such company from satisfying its existing and foreseeable obligations as they become due. Notwithstanding the foregoing, dividends
may be paid with the approval of a court, provided that there is no reasonable concern that payment of the dividend will prevent us from satisfying our
existing and foreseeable obligations as they become due. “Profits”, for purposes of the Companies Law, means the greater of retained earnings or earnings
accumulated during the preceding two years, after deduction of previous distributions that were not already deducted from the surpluses, as evidenced by
the most recent audited or reviewed financial statements of the company prepared no more than six months prior to the date of distribution. Our articles of
association provide that dividends will be declared and paid at the discretion of, and upon resolution by, our Board of Directors, subject to the provisions of
the Companies Law. In addition, the Security Agreements contain a number of customary restrictive terms and covenants, including with respect to the
distribution of dividends.
Payment of dividends may be subject to Israeli withholding taxes. See Item 10.E. “Additional Information—Taxation—Israeli Tax
Considerations” for additional information.
B. Significant Changes
Except as otherwise disclosed in this Annual Report, no significant change has occurred since December 31, 2019.
Item 9. The Offer and Listing
A. Offer and Listing Details
Our ordinary shares have been trading on the TASE under the symbol “ITMR” since March 13, 2007. Our ADSs have been trading on the Nasdaq
Capital Market under the symbol “ITMR” since February 27, 2019.
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B. Plan of Distribution
Not applicable.
C. Markets
Our ordinary shares are listed and traded on the TASE, and our ADSs, each representing 30 ordinary shares and evidenced by an American
Depositary Receipt, or ADR, are traded on the Nasdaq Capital Market under the symbol “ITMR”. The ADRs were issued pursuant to a Depositary
Agreement entered into with The Bank of New York Mellon.
D. Selling Shareholders
Not Applicable.
E. Dilution
Not applicable.
F. Expenses of the Issue
Not applicable.
Item 10. Additional Information
A. Share Capital
Not applicable.
B. Memorandum and Articles of Association
Copies of our amended and restated memorandum of association and our amended and restated articles of association are filed as Exhibits 1.1 and
1.2 to this Annual Report. The information called for by this Item 10.B. is included in Exhibit 2.6 to this Annual Report and is incorporated herein by
reference.
C. Material Contracts
In addition to the contracts described elsewhere in this Annual Report, the following are summaries of each material contract, other than material
contracts entered into in the ordinary course of business, to which we are a party for the two years preceding the date of this Annual Report.
Agreement with Kaiser
On April 22, 2019, Itamar Medical, Inc., our wholly owned U.S. Subsidiary, entered into a new master products and services agreement with
Kaiser Foundation Health Plan, Inc., or Kaiser, one of the largest medical insurers and hospital systems in the U.S., or the Kaiser Agreement.
The Kaiser Agreement, which replaced the previous master products and services agreement with Kaiser, is essentially a framework agreement
that allows Kaiser to place purchase orders for our products from time to time, with no minimum purchase requirements. Under the Kaiser Agreement, we
undertook to supply Kaiser and its affiliates with our products as well as offer maintenance services for the products supplied by us. The Kaiser Agreement
also contains provisions regarding (1) the pricing terms of the products and services offered by us to Kaiser, (2) payment terms, (3) the warranty we provide
with respect to the supply of our products, including in case of product recalls, and (4) our undertaking to indemnify Kaiser in case that our products
infringe upon the intellectual property rights of third parties.
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Unless terminated earlier in accordance with its terms, the term of the Kaiser Agreement is until March 31, 2022, and may be extended thereafter
by prior notice from Kaiser, for two (2) additional one (1) year periods.
Philips Japan Distribution Agreement
On February 24, 2014, we entered into a distribution agreement with Philips Respironics GK, a subsidiary of Koninklijke Philips NV (also known
as Royal Philips), or Philips Japan, or the Distribution Agreement (as amended).
The Distribution Agreement is essentially a framework agreement that allows Philips Japan to place purchase orders for our products from time to
time, with no minimum purchase requirements except to the limited extent described below. Under the agreement, Philips Japan was granted exclusive
rights to distribute our WatchPAT products and ancillary accessories in Japan. The agreement contains other customary provisions, including (1) the pricing
terms of the products offered by us to Philips Japan, (2) payment terms, (3) the terms of warranty for defective products, and (4) our undertaking to
indemnify Philips in case that our products infringe upon the intellectual property rights of third parties. Philips Japan does not have the right to return the
products that we deliver them pursuant to the Distribution Agreement.
We may terminate the agreement if, among other things, Philips Japan does not meet certain minimum annual and quarterly purchase requirements
of our products specified in the Distribution Agreement (which, commencing with 2016, were adjusted by Philips Japan and us to reflect the prices for our
products under the then prevailing local market conditions, including reimbursement levels). It is clarified that, under the agreement, such termination right
is our sole remedy if Philips Japan does not meet such minimum purchase requirements. In addition, each of Philips Japan and us may terminate the
agreement for convenience by providing 90 days advance notice to the other party.
The Distribution Agreement provided that its initial term will expire (i) on December 31, 2018, or (ii) three (3) years from the date that the MHLW
grants reimbursement approval of therapy for patients diagnosed by HSATs (such as our WatchPAT) with AHI (apnea hypopnea index) above 20, or the
“MHLW approval, whichever is earlier. If the MHLW approval were obtained, it would have had the effect of expanding the reimbursement of therapy to
patients suffering from moderate, and not only severe OSA. Since the MHLW approval has not been obtained to date, the initial term of the agreement was
scheduled to expire on December 31, 2018. However, following an amendment to the Distribution Agreement, the term of the agreement was extended and
is currently scheduled to expire on December 31, 2021. It should be noted that, as part of such amendment, the Distribution Agreement contemplates the
preparation of a business plan to be mutually agreed by the parties, which business plan is expected to include, among other things, the submission of an
application to seek the MHLW approval. There is no assurance, however, that, even if such business plan is agreed and implemented by the parties, the
submission of such application will result in obtaining the MHLW approval and, if so, when.
Upon termination of the agreement, Philips Japan, which holds the Japanese’s regulatory approval for marketing the WatchPAT in Japan, is
required to transfer the regulatory approval to us.
Agreement with VA
On October 12, 2011 and March 12, 2014, our U.S. Subsidiary entered into a Solicitation/Contract/Order for Commercial Items agreement with
the Department of Veterans Affairs, or VA, one of the largest U.S. hospital and clinics chains, or the VA Framework Agreement (as amended).
The VA Framework Agreement is essentially a framework agreement that allows VA to place purchase orders for our products from time to time,
with no minimum purchase requirements, under the terms of the agreement. Under the agreement, we undertook to supply VA and its affiliates with our
WatchPAT and Endo PAT products and ancillary accessories as well as offer maintenance services for the products supplied by us under the agreement. The
agreement also contains provisions regarding (1) the pricing terms of the products and services offered by us to VA, (2) payment terms, (3) the warranty we
provide with respect to the supply of our products, including in case of product recalls, and (4) our undertaking to indemnify VA in case that our products
infringe upon the intellectual property rights of third parties.
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The current term of the VA Framework Agreement is until June 14, 2023.
Credit Line
See the summary under Item 5.B. “Operating and Financial Review and Prospects — Liquidity and Capital Resources — Principal Financing
Activities — Credit Line.”
2018 Private Placement
See the summary under Item 5.B. “Operating and Financial Review and Prospects — Liquidity and Capital Resources — Principal Financing
Activities — 2018 Private Placement.”
2019 Private Placement
See the summary under Item 5.B. “Operating and Financial Review and Prospects — Liquidity and Capital Resources — Principal Financing
Activities — 2019 Private Placement.”
D. Exchange Controls
Israeli law and regulations do not impose any material foreign exchange restrictions on non-Israeli holders of our ordinary shares. There are
currently no Israeli currency control restrictions on payments of dividends or other distributions with respect to our ordinary shares or the proceeds from
the sale of the shares, except for the obligation of Israeli residents to file reports with the Bank of Israel regarding certain transactions. However, legislation
remains in effect pursuant to which currency controls can be imposed by administrative action at any time.
The ownership or voting of our ordinary shares by non-residents of Israel, except with respect to citizens of countries which are in a state of war
with Israel, is not restricted in any way by our memorandum of association or articles of association or by the laws of the State of Israel.
E. Taxation
Israeli Tax Considerations
The following is a summary of the principal Israeli tax laws applicable to Israeli companies, with special reference to their effect on us. The
following also contains a discussion of the material Israeli tax consequences to purchasers of our ordinary shares or ADSs. This summary does not discuss
all the aspects of Israeli tax law that may be relevant to a particular investor in light of his or her personal investment circumstances or to some types of
investors subject to special treatment under Israeli law, including investors whose business is dealing in securities. Some parts of this discussion are based
on tax legislation which has not been subject to judicial or administrative interpretation. We cannot assure you that the views expressed in the discussion
will be accepted by the appropriate tax authorities or the courts. The discussion is not intended, and should not be construed, as legal or professional tax
advice and is not exhaustive of all possible tax considerations.
YOU ARE URGED TO CONSULT YOUR OWN TAX ADVISORS AS TO THE ISRAELI OR OTHER TAX CONSEQUENCES OF THE
PURCHASE, OWNERSHIP AND DISPOSITION OF OUR ORDINARY SHARES OR ADSs, INCLUDING, IN PARTICULAR, THE EFFECT OF ANY
FOREIGN, STATE OR LOCAL TAXES.
General Corporate Tax Structure
Most of our production facilities have been granted “Approved Enterprise” and “Benefited Enterprise” status under the Law for the
Encouragement of Capital Investments, 1959, or the Investment Law. As such, we may be entitled to tax benefits for taxable income arising from our
Approved or Benefited Enterprise status.
Generally, Israeli companies are subject to Israeli corporate tax on their taxable income at the rate of 23% for the 2018 tax year and thereafter.
However, the effective tax rate payable by a company that generates income qualifying for benefits under the Investment Law may be considerably less.
Israeli companies are generally subject to capital gains tax at the regular corporate tax rate.
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We are permitted to measure our Israeli taxable income in U.S. dollars pursuant to regulations published by the Israeli Minister of Finance, subject
to satisfying the conditions set forth therein. We believe that we meet, and we expect that we will continue to meet, the necessary conditions and as such,
starting with our 2016 tax year, we measure our results for Israeli tax purposes based on the U.S. dollar and the NIS exchange rate on December 31 of the
relevant tax year.
Tax Benefits under the Law for the Encouragement of Capital Investments, 1959
Most of our production facilities have been granted “Approved Enterprise” and “Benefited Enterprise” status under the Investment Law. As such,
we may be entitled to tax benefits for taxable income arising from our Approved or Benefited Enterprise status. Since our incorporation, we incurred
significant losses and therefore we have not benefited from such status to date. To be eligible for these tax benefits, we must continue to meet certain
conditions stipulated in the Investment Law and its regulations and the criteria set out in the specific certificate of approval, including that we meet a
minimum threshold (25%) of export sales (i.e., sales outside of Israel). In the event that we are considered as having failed to comply with these conditions,
in whole or in part, the eligibility for the benefits may be canceled and we may be required to refund the amount of the benefits, as adjusted for inflation
and interest. However, since we have accumulated carryforward tax losses of approximately $111 million as of December 31, 2018, we did not benefit from
such tax benefits and do not expect to benefit from such tax benefits in the foreseeable future. Once we utilize all of our accumulated tax losses, we expect
to derive tax benefits in Israel relating to our “Approved Enterprise” and “Benefited Enterprise” for which we are eligible. Our income from sources other
than from our “Approved Enterprise” and “Benefited Enterprise” status are taxable at regular corporate tax rates.
A company having an Approved Enterprise or Benefited Enterprise, like us, that distributes a dividend from income that was tax exempt, will be
required in the tax year of the dividend distribution to pay corporate tax on the amount of the dividend distributed (including the company tax required as a
result of the distribution) at the corporate tax rate that would have been applicable to it in the year the income was generated if it had not been exempt from
tax.
Amendments to the Investment Law in 2011 and in 2017 introduced new tax benefits for income generated by a “Preferred Enterprise,” “Preferred
Technological Enterprise” and “Special Preferred Technological Enterprise,” in accordance with the definition of such terms in the Investment Law. We
currently do not have Preferred Enterprise or Preferred Technology Enterprise programs.
Tax Benefits and Grants for Research and Development
Israeli tax law allows, under specified conditions, a tax deduction for expenditures related to scientific research and development projects,
including capital expenditures, for the year in which they are incurred, provided that the expenses are approved by the relevant Israeli government ministry,
determined by the field of research, and the research and development is conducted for the promotion of the company and carried out by or on behalf of the
company seeking such deduction. However, the amount of such deductible expenses will be reduced by the sum of any funds received through government
grants for the financing of such scientific research and development projects. In addition, no deduction under these research and development deduction
rules is allowed if such deduction is related to an expense invested in an asset depreciable under the general depreciation rules of the Israeli Income Tax
Ordinance (New Version) 1961, or the Tax Ordinance. Expenditures not so approved are deductible over a three-year period.
From time to time, we may apply to the IIA for approval to allow a tax deduction for research and development expenses during the year incurred.
There can be no assurance that such application will be accepted.
Tax Benefits under the Law for the Encouragement of Industry (Taxes), 1969
Under the Law for the Encouragement of Industry (Taxes), 1969, or the Industry Encouragement Law, Industrial Companies (as defined below)
are entitled to the following tax benefits, among others:
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·
·
·
amortization over an eight-year period of the cost of purchased know-how and patents and rights to use a patent and know-how which are
used for the development or advancement of the Industrial Enterprise, commencing from the tax year where the Industrial Enterprise began to
use them;
deductions of expenses related to a public offering of its shares on a stock market in equal amounts over a three-year period commencing in
the year of the offering;
the right to elect, under specified conditions, to file a consolidated tax return with other related Israeli Industrial Companies; and
accelerated depreciation rates on equipment and buildings.
Eligibility for benefits under the Industry Encouragement Law is not subject to receipt of prior approval from any governmental authority. Under
the Industry Encouragement Law, an “Industrial Company” is defined as a company which is an Israeli resident for tax purposes and was incorporated in
Israel, at least 90% of the income of which, in any tax year, determined in Israeli currency, exclusive of income from government loans, capital gains,
interest and dividends, is derived from an “Industrial Enterprise” owned by it. An “Industrial Enterprise” is defined as an enterprise whose major activity in
a given tax year is industrial production activity. We believe that we currently qualify as an Industrial Company within the definition of the Industry
Encouragement Law. No assurance can be given that we will continue to qualify as an Industrial Company or that the benefits described above will be
available to us in the future.
Capital Gains Tax on Sales of our Ordinary Shares and ADSs
The following discussion refers to the sale of our ordinary shares. However, the same tax treatment would apply to the sale of the ADSs.
Israeli law generally imposes a capital gains tax on the sale of any capital assets by Israeli residents, as defined for Israeli tax purposes, and on the
sale of assets located in Israel, including shares in Israeli companies, by both Israeli residents and non-Israeli residents, unless a specific exemption is
available or unless a tax treaty between Israel and the shareholder’s country of residence provides otherwise. The Tax Ordinance distinguishes between real
gain and inflationary surplus. The inflationary surplus is a portion of the total capital gain equivalent to the increase of the relevant asset’s purchase price
attributable to an increase in the Israeli consumer price index, or a foreign currency exchange rate, between the date of purchase and the date of sale. The
real gain is the excess of the total capital gain over the inflationary surplus. Inflationary surplus is not currently subject to tax in Israel.
Taxation of Israeli Residents
The tax rate generally applicable to the capital gains derived from the sale of shares, whether listed on a stock market or not, is 25% for Israeli
individuals, unless such shareholder is considered a “significant shareholder” at any time during the 12-month period preceding such sale (i.e., such
shareholder holds directly or indirectly, including jointly with others, at least 10% of any means of control in the company (which includes, among other
things, the right to receive profits of the company, voting rights, the rights to receive proceeds upon the company’s liquidation and the right to appoint a
director)), in which case the tax rate will be 30%. Israeli companies are subject to the corporate tax rate on capital gains derived from the sale of listed
shares.
Taxation of Non-Israeli Residents
Non-Israeli residents are generally exempt from Israeli capital gains tax on any gains derived from the sale of shares purchased upon or after the
registration of the shares on the TASE or on a regulated market outside of Israel (such as Nasdaq), provided such gains did not derive from a permanent
establishment of such shareholders in Israel. However, non-Israeli corporations will not be entitled to such exemption if Israeli residents, whether directly
or indirectly, (i) hold more than 25% of the means of control in such non-Israeli corporation, or (ii) are the beneficiaries of or are entitled to 25% or more of
the revenues or profits of such non-Israeli corporation.
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In addition, the sale of our ordinary shares by a shareholder who is a U.S. resident (for purposes of the Convention Between the Government of
the United States and the Government of the State of Israel with respect to Taxes of Income, as amended, or the U.S.-Israel Tax Treaty), and who holds
ordinary shares as a capital asset, is also exempt from Israeli capital gains tax under the U.S.-Israel Tax Treaty unless (i) such shareholder holds, directly or
indirectly, shares representing 10% or more of the voting power of our company during any part of the 12-month period preceding such sale, (ii) the capital
gains arising from such sale are attributable to a permanent establishment of such shareholder located in Israel, (iii) the gain is from sale of shares of a real
estate association (as defined in the Israeli Land Tax Law (Appreciation Tax), 1963), or (iv) the U.S. shareholder, being an individual, is present in Israel
for a period or periods aggregating 183 days or more during the relevant taxable year. If the above conditions are not met, the U.S. resident would be
subject to Israeli tax, unless exempt under the Israeli domestic law as described above. Under the U.S.-Israel Tax Treaty, the gain may be treated as foreign
source income for United States foreign tax credit purposes, upon an election by the U.S. resident, and such U.S. resident may be permitted to claim a
credit for such taxes against the United States federal income tax imposed on such sale, subject to the limitations under the United States federal income tax
laws applicable to foreign tax credits.
The payment of the consideration on the sale of ordinary shares may be subject to withholding tax in Israel. Shareholders may be required to
demonstrate that they are exempt from tax on their capital gains in order to avoid withholding at the time of sale.
Taxation of Dividends Paid on our Ordinary Shares and ADSs
The following discussion refers to dividends paid on our ordinary shares. However, the same tax treatment would apply to dividends paid on the
ADSs. We cannot assure you that, in the event we declare a dividend, we will designate the profits that we distribute in a way that will reduce shareholders’
tax liability.
Taxation of Israeli Residents
Israeli resident individuals are generally subject to Israeli income tax on the receipt of dividends paid on our ordinary shares. The tax rate
generally applicable to such dividends is 25%, or 30% for an individual shareholder that is considered a significant shareholder (described above) at any
time during the 12-month period preceding such distribution. Israeli resident companies are generally exempt from income tax from dividends sourced
from income produced or accrued in Israel, received directly or indirectly from another company that is liable to Israeli corporate tax. Dividends paid from
income derived from our Approved and Benefited Enterprises are subject to withholding tax at the rate of 20%. Dividends paid from income derived from a
Preferred Enterprise and Preferred Technology Enterprise will be subject to withholding tax at the rate of 20%.
Taxation of Non-Israeli Residents
Non-Israeli residents, both companies and individuals, are generally subject to Israeli income tax on the receipt of dividends paid on our ordinary
shares, at the rate of 25%, or 30% for a shareholder that is considered a significant shareholder (described above) at any time during the 12-month period
preceding such distribution, which tax will be withheld at source, unless a different rate is provided in a treaty between Israel and the shareholder’s country
of residence (subject to the receipt in advance of a valid tax certificate from the Israel Tax Authority allowing for a reduced tax rate).
Under the U.S.-Israel Tax Treaty, the following withholding rates will apply in respect of dividends distributed by an Israeli resident company to a
U.S. resident: (i) if the U.S. resident is a corporation which holds during that portion of the taxable year which precedes the date of payment of the dividend
and during the whole of its prior taxable year (if any), at least 10% of the outstanding voting shares of the Israeli resident paying corporation and not more
than 25% of the gross income of the Israeli resident paying corporation for such prior taxable year (if any) consists of certain type of interest or dividends
— the withholding tax rate is 12.5%, (ii) if both the conditions mentioned in (i) above are met and the dividend is paid from an Israeli resident company’s
income which was entitled to a reduced tax rate applicable to an Approved Enterprise, Benefited Enterprise or Preferred Enterprise — the withholding tax
rate is 15% if a certificate for a reduced withholding tax rate would be provided in advance from the ITA and (iii) in all other cases, the withholding tax rate
is 25%. The aforementioned rates under the
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U.S.-Israel Tax Treaty will not apply if the dividend income was derived through a permanent establishment of the U.S. resident in Israel.
A non-Israeli resident who receives a dividend derived from or accrued in Israel, from which tax was withheld at source, is generally exempt from
the duty to file tax returns in Israel with respect to such income, provided that such income was not derived from a business conducted in Israel by the
taxpayer and the taxpayer has no other taxable sources of income in Israel with respect to which a tax return is required to be filed.
Israeli Excess Tax
Individuals who are subject to tax in Israel (whether such individual is an Israeli resident or non-Israeli resident) are also subject to an additional
tax at a rate of 3% on annual income exceeding a certain threshold (NIS 649,560 (equivalent to approximately $189,874) for 2019), which amount is linked
to the Israeli consumer price index, including, but not limited to, income derived from dividends, interest and capital gains.
United States Federal Income Tax Considerations
The following summary describes certain United States federal income tax considerations generally applicable to United States Holders (as
defined below) of the ADSs. This summary deals only with the ADSs held as capital assets within the meaning of Section 1221 of the Internal Revenue
Code of 1986, as amended, or Internal Revenue Code. This summary also does not address the tax consequences that may be relevant to holders in special
tax situations including, without limitation, dealers in securities, traders that elect to use a mark-to-market method of accounting, holders that own the
ADSs as part of a “straddle,” “hedge,” “conversion transaction,” or other integrated investment, banks or other financial institutions, individual retirement
accounts and other tax-deferred accounts, insurance companies, tax-exempt organizations, United States expatriates, holders whose functional currency is
not the U.S. dollar, holders subject to the alternative minimum tax, holders that acquired the ADSs in a compensatory transaction, holders subject to special
tax accounting rules as a result of any item of gross income with respect to the ADSs being taken into account in an applicable financial statement, holders
which are entities or arrangements treated as partnerships for United States federal income tax purposes or holders that actually or constructively through
attribution own 10% or more of the total voting power or value of our outstanding ordinary shares or ADSs.
This summary is based upon the Internal Revenue Code, applicable United States Treasury regulations, administrative pronouncements and
judicial decisions, in each case as in effect on the date hereof, all of which are subject to change (possibly with retroactive effect). No ruling will be
requested from the Internal Revenue Service, or IRS, regarding the tax consequences described herein, and there can be no assurance that the IRS will
agree with the discussion set out below. This summary does not address any United States federal tax consequences other than United States federal income
tax consequences (such as the estate and gift tax or the Medicare tax on net investment income).
As used herein, the term “United States Holder” means a beneficial owner of the ADSs that is, for United States federal income tax purposes, (i) a
citizen or resident of the United States, (ii) a corporation or other entity taxable as a corporation created or organized under the laws of the United States or
any state thereof or therein or the District of Columbia, (iii) an estate the income of which is subject to United States federal income taxation regardless of
its source, or (iv) a trust (a) that is subject to the supervision of a court within the United States and the control of one or more United States persons as
described in Internal Revenue Code Section 7701(a)(30), or (b) that has a valid election in effect under applicable United States Treasury regulations to be
treated as a “United States person.”
If an entity or other arrangement treated as a partnership for United States federal income tax purposes acquires the ADSs, the tax treatment of a
partner in the partnership generally will depend upon the status of the partner and the activities of the partnership. Partners of a partnership considering an
investment in the ADSs should consult their tax advisers regarding the United States federal income tax consequences of acquiring, owning, and disposing
of the ADSs.
Generally, a holder of an ADS will be treated for United States federal income tax purposes as holding the ordinary shares represented by the
ADS. Accordingly, no gain or loss will be recognized upon an exchange of ADSs for ordinary shares.
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THE SUMMARY OF UNITED STATES FEDERAL INCOME TAX CONSEQUENCES SET OUT BELOW IS FOR GENERAL
INFORMATION ONLY. ALL PROSPECTIVE INVESTORS SHOULD CONSULT THEIR TAX ADVISERS AS TO THE PARTICULAR TAX
CONSEQUENCES TO THEM OF OWNING THE ADSs, INCLUDING THE APPLICABILITY AND EFFECT OF STATE, LOCAL AND NON-U.S.
TAX LAWS AND POSSIBLE CHANGES IN TAX LAW.
Dividends
Subject to the discussion below under “Passive Foreign Investment Company,” the amount of dividends paid to a United States Holder with
respect to ADSs before reduction for any Israeli taxes withheld therefrom generally will be included in the United States Holder’s gross income as ordinary
income from foreign sources to the extent paid out of our current or accumulated earnings and profits (as determined for United States federal income tax
purposes). Distributions in excess of earnings and profits will be treated as a non-taxable return of capital to the extent of the United States Holder’s
adjusted tax basis in those ADSs and thereafter as capital gain. However, we do not intend to calculate our earnings and profits under United States federal
income tax principles. Therefore, United States Holders should expect that a distribution will generally be treated as a dividend even if that distribution
would otherwise be treated as a non-taxable return of capital or as capital gain under the rules described above. The amount of any distribution paid in
foreign currency will be equal to the U.S. dollar value of such currency, translated at the spot rate of exchange on the date such distribution is received,
regardless of whether the payment is in fact converted into U.S. dollars at that time.
Foreign withholding tax (if any) paid on dividends on ADSs at the rate applicable to a United States Holder (taking into account any applicable
income tax treaty) will, subject to limitations and conditions, be treated as foreign income tax eligible for credit against such holder’s United States federal
income tax liability or, at such holder’s election, eligible for deduction in computing such holder’s United States federal taxable income. Dividends paid on
ADSs generally will constitute “passive category income” for purposes of the foreign tax credit. Foreign withholding tax (if any) paid on dividends on
ADSs at the rate applicable to a United States Holder (taking into account any applicable income tax treaty) will, subject to limitations and conditions, be
treated as foreign income tax eligible for credit against such holder’s United States federal income tax liability or, at such holder’s election, eligible for
deduction in computing such holder’s United States federal taxable income. However, if we are a “United States-owned foreign corporation,” solely for
foreign tax credit purposes, a portion of the dividends allocable to our United States source earnings and profits may be re-characterized as United States
source. A “United States-owned foreign corporation” is any foreign corporation in which United States persons own, directly or indirectly, 50% or more
(by vote or by value) of the stock. In general, United States-owned foreign corporations with less than 10% of earnings and profits attributable to sources
within the United States are excepted from these rules. Although we don’t believe we are currently a “United States-owned foreign corporation,” we may
become one in the future. In such case, if 10% or more of our earnings and profits are attributable to sources within the United States, a portion of the
dividends paid on the ADSs allocable to our United States source earnings and profits will be treated as United States source, and, as such, a United States
Holder may not offset any foreign tax withheld as a credit against United States federal income tax imposed on that portion of dividends. The rules
governing the treatment of foreign taxes imposed on a United States Holder and foreign tax credits are complex, and United States Holders should consult
their tax advisors about the impact of these rules in their particular situations.
Dividends paid to a non-corporate United States Holder by a “qualified foreign corporation” may be subject to reduced rates of taxation if certain
holding period and other requirements are met. “Qualified foreign corporation” generally includes a foreign corporation (other than a foreign corporation
that is a PFIC with respect to the relevant United States Holder for the taxable year in which the dividends are paid or for the preceding taxable year) (i)
whose ordinary shares are readily tradable on an established securities market in the United States, or (ii) which is eligible for benefits under a
comprehensive United States income tax treaty that includes an exchange of information program and which the United States Treasury Department has
determined is satisfactory for these purposes. ADSs are expected to be readily tradable on the Nasdaq Capital Market, an established securities market.
United States Holders should consult their tax advisors regarding the availability of the reduced tax rate on dividends paid with respect to ADSs. The
dividends will not be eligible for the dividends received deduction available to corporations in respect of dividends received from other United States
corporations.
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Disposition of ADSs
Subject to the discussion below under “Passive Foreign Investment Company,” a United States Holder generally will recognize capital gain or loss
for United States federal income tax purposes on the sale or other taxable disposition of ADSs equal to the difference, if any, between the amount realized
and the United States Holder’s adjusted tax basis in those ADSs. If any Israeli tax is imposed on the sale, exchange or other disposition of ADSs, a United
States Holder’s amount realized will include the gross amount of the proceeds of the deposits before deduction of the Israeli tax. In general, capital gains
recognized by a non-corporate United States Holder, including an individual, are subject to a lower rate under current law if such United States Holder held
shares for more than one year. The deductibility of capital losses is subject to limitations. Any such gain or loss generally will be treated as United States
source income or loss for purposes of the foreign tax credit. A United States Holder’s initial tax basis in shares generally will equal the cost of such shares.
Because gain for the sale or other disposition of ADSs will be treated as United States source income, and you may use foreign tax credits against only the
portion of United States federal income tax liability that is attributed to foreign source income in the same category, your ability to utilize a foreign tax
credit with respect to the Israeli tax imposed on any such sale or other disposition, if any, may be significantly limited. In addition, if you are eligible for the
benefit of the income tax convention between the United States and the State of Israel and pay Israeli tax in excess of the amount applicable to you under
such convention or if the Israeli tax paid is refundable, you will not be able to claim any foreign tax credit or deduction with respect to such Israeli tax. You
should consult your tax advisor as to whether the Israeli tax on gains may be creditable or deductible in light of your particular circumstances and your
ability to apply the provisions of an applicable treaty.
If the consideration received upon the sale or other taxable disposition of ADSs is paid in foreign currency, the amount realized will be the U.S.
dollar value of the payment received, translated at the spot rate of exchange on the date of taxable disposition. If ADSs are treated as traded on an
established securities market, a cash basis United States Holder and an accrual basis United States Holder who has made a special election (which must be
applied consistently from year to year and cannot be changed without the consent of the IRS) will determine the U.S. dollar value of the amount realized in
foreign currency by translating the amount received at the spot rate of exchange on the settlement date of the sale. An accrual basis United States Holder
that does not make the special election will recognize exchange gain or loss to the extent attributable to the difference between the exchange rates on the
sale date and the settlement date, and such exchange gain or loss generally will constitute ordinary income or loss.
Passive Foreign Investment Company
We would be a PFIC for any taxable year if, after the application of certain look-through rules, either: (i) 75% or more of our gross income for
such year is “passive income” (as defined in the relevant provisions of the Internal Revenue Code of 1986, as amended), or (ii) 50% or more of the value of
our assets (determined on the basis of a quarterly average) during such year is attributable to assets that produce or are held for the production of passive
income. Based on our anticipated market capitalization and the composition of our income, assets and operations, we do not expect to be a PFIC for United
States federal income tax purposes for the current taxable year or in the foreseeable future. However, this is a factual determination that must be made
annually after the close of each taxable year. Moreover, the value of our assets for purposes of the PFIC determination may be determined by reference to
the public price of ADSs, which could fluctuate significantly. Therefore, there can be no assurance that we will not be classified as a PFIC in the future.
Certain adverse United States federal income tax consequences could apply to a United States Holder if we are treated as a PFIC for any taxable year
during which such United States Holder holds ADSs. Under the PFIC rules, if we were considered a PFIC at any time that a United States Holder holds
ADSs, we would continue to be treated as a PFIC with respect to such holder’s investment unless (i) we cease to be a PFIC, and (ii) the United States
Holder has made a “deemed sale” election under the PFIC rules.
If we are a PFIC for any taxable year that a United States Holder holds ADSs, any gain recognized by the United States Holder on a sale or other
disposition of ADSs would be allocated pro-rata over the United States Holder’s holding period for the ADSs. The amounts allocated to the taxable year of
the sale or other disposition and to any year before we became a PFIC would be taxed as ordinary income. The amount allocated to each other taxable year
would be subject to tax at the highest rate in effect for individuals or the highest rate in effect for corporations, as appropriate, for that taxable year, and an
interest charge would be imposed. Further, to the extent that any distribution received by a United States Holder on ADSs exceeds 125% of the average of
the annual distributions on the ADSs received during the preceding three years or the United States Holder’s holding period, whichever is shorter, that
distribution would be subject to taxation in the same manner as gain on the sale or other disposition of ADSs if we were a PFIC, described above. Certain
elections may be available that would result in alternative treatments (such as mark-to-market treatment) of the ADSs. If we are treated as a PFIC with
respect to a United States Holder for any taxable year, the United States Holder will be deemed to own shares in any of our subsidiaries that also are PFICs.
A timely election to treat us as a qualified electing fund under the Internal Revenue Code would result in an alternative treatment. However, we do not
intend to prepare or provide the information that would enable United States Holders to make a qualified electing fund election. If we are considered a
PFIC, a United States Holder also will be subject to annual information reporting requirements. United States Holders should consult their own tax adviser
about the potential application of the PFIC rules to an investment in the ADSs.
141
Information Reporting and Backup Withholding
Dividend payments and proceeds paid from the sale or other taxable disposition of ADSs may be subject to information reporting to the IRS. In
addition, a United States Holder (other than an exempt holder who establishes its exempt status if required) may be subject to backup withholding on cash
payments received in connection with dividend payments and proceeds from the sale or other taxable disposition of ADSs made within the United States or
through certain U.S.-related financial intermediaries.
Backup withholding will not apply, however, to a United States Holder who furnishes a correct taxpayer identification number, makes other
required certification and otherwise complies with the applicable requirements of the backup withholding rules. Backup withholding is not an additional
tax. Rather, any amount withheld under the backup withholding rules will be creditable or refundable against the United States Holder’s United States
federal income tax liability, provided the required information is timely furnished to the IRS.
Foreign Financial Asset Reporting
Certain United States Holders are required to report their holdings of certain foreign financial assets, including equity of foreign entities, if the
aggregate value of all of these assets exceeds certain threshold amounts. The ADSs are expected to constitute foreign financial assets subject to these
requirements unless the ADSs are held in an account at certain financial institutions. United States Holders should consult their tax advisors regarding the
application of these reporting requirements.
F. Dividends and Paying Agents
Not applicable.
G. Statement by Experts
Not applicable.
H. Documents on Display
We are subject to the reporting requirements of the Exchange Act, as applicable to “foreign private issuers” as defined in Rule 3b-4 under the
Exchange Act, and in accordance therewith, we file reports and other information with the SEC, including annual reports on Form 20-F and reports on
Form 6-K.
As a foreign private issuer, we are exempt from certain provisions of the Exchange Act. Accordingly, our proxy solicitations is not be subject to
the disclosure and procedural requirements of Regulation 14A under the Exchange Act and transactions in our equity securities by our officers and
directors is exempt from reporting and the “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 periodic reports and financial statements as frequently or as promptly as U.S.
companies whose securities are registered under the Exchange Act.
As permitted under the Israeli Securities Law, 1968, or the ISL, we comply with the Israeli regime for dual listed companies under Chapter E3 of
the ISL, which allows us to use in Israel the same periodic reports, financial and other relevant disclosure information (in English) that we submit to the
SEC and Nasdaq. Copies of our filings with the Israeli Securities Authority can be retrieved electronically through the MAGNA distribution site of the ISA
(www.magna.isa.gov.il) and the TASE website (www.maya.tase.co.il).
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The SEC maintains an internet website that contains reports and other information regarding issuers that file electronically with the SEC. This
annual report and the exhibits thereto and any other document we file pursuant to the Exchange Act may be viewed on the SEC’s website atwww.sec.gov
and on our website at www.itamar-medical.com. The information contained on our website is not incorporated by reference into this Annual Report.
The documents concerning our Company which are referred to in this Annual Report may also be inspected at our offices located at 9 Halamish
Street, Caesarea 3088900, Israel.
I. Subsidiary Information
Not applicable.
Item 11. Quantitative and Qualitative Disclosures About Market Risk
General
Market risk is the risk of loss related to changes in market prices, including interest rates and foreign exchange rates, of financial instruments that
may adversely impact our consolidated financial position, results of operations or cash flows.
We are exposed to a variety of these market risks, primarily changes in interest rates and foreign currency fluctuations. To manage the volatility
related to the foreign currency exposure, we may enter from time to time into various derivative transactions. However, we do not use financial
instruments for trading purposes and are not a party to any leveraged derivative.
As of December 31, 2019, we had cash and cash equivalents of approximately $15.1 million. As of such date, most of such cash and cash
equivalents were held in U.S. dollars and NIS. The majority of our cash and cash equivalents are invested in banks in Israel and, to a smaller extent, in
banks in the United States. The Israeli bank deposits are not insured, while the deposits made in the United States are in excess of insured limits and are not
otherwise insured.
Interest Rate Risk
We are subject to market risk from exposure to changes in interest rates relating to borrowings under our bank credit line, which carries interest at
a rate that is based on the LIBOR. As of March 15, 2020, we had borrowings of approximately $5.0 million under the bank credit line. Based on the
scheduled amount of the borrowings expected to be outstanding under such credit line in 2020, we estimate that each 10% increase in our borrowing rates
would result in additional interest expense to us of approximately $50,000.
Currently, we invest our free cash in bank deposits which are exposed to market risk due to fluctuation in interest rates, which may affect our
interest, except that given the low levels of interest rates worldwide, our interest income is not material and a reduction in interest rates would not cause us
a significant reduction in the absolute amounts of interest income to us. Our investment balances are comprised mainly of bank deposits. Because of their
short-term nature, the carrying value of the bank deposits usually approximates their fair value.
Foreign Currency Exchange Risk
Our functional and reporting currency is the U.S. dollar. Although the U.S. dollar is our functional currency, a significant portion of our expenses
are denominated in NIS and a relatively small portion of our expenses is denominated in Euros, and currently most of our revenues are denominated in U.S.
dollars. Therefore, our foreign currency exposures give rise to market risk associated with exchange rate movements of the U.S. dollar, mainly against the
NIS and the Euro. Our NIS and Euro expenses consist principally of payroll to our employees in Israel, payments made to subcontractors for purchasing
components to our products, research and development activities and marketing and sales activities. We anticipate that a significant portion of our expenses
will continue to be denominated in currencies other than the U.S. dollar. If the U.S. dollar fluctuates significantly against either the NIS or the Euro, it may
have a negative impact on our results of operations. To date, fluctuations in the exchange rates have not materially affected our results of operations or
financial condition.
143
Due to the fact that exchange rates between the U.S. dollar and the NIS (as well as between the U.S. dollar and other currencies) fluctuate
continuously, such fluctuations have an impact on our results and period-to-period comparisons of our results. The effects of foreign currency
remeasurements are reported in our consolidated statements of operations. In order to reduce some of this currency exposure, we keep cash balances in
NIS. These measures, however, may not adequately protect us from the material adverse effects of such fluctuations.
As of December 31, 2019, we did not enter into any hedge transactions but we may do so in the future. Even if we do enter into such hedge
transactions in the future, we cannot guarantee that such measures will effectively protect us from adverse effects due to the impact of fluctuations in
currency exchange rates.
In addition, we have balance sheet exposure arising from assets and liabilities denominated in currencies other than the dollar, mainly in NIS and
Euros. Any change of the conversion rates between the U.S. dollar and these currencies may create financial gain or loss.
The tables below provide information as of the dates indicated regarding our foreign currency-denominated monetary assets and liabilities as of
December 31, 2019 (U.S. dollars in thousands).
$
$
1,687
1,283
96
3,066
4,665
88
4,753
(1,687)
Assets:
New Israeli Shekels
Euros
Other currencies
Total
Liabilities:
New Israeli Shekels
Euros
Total
Net liabilities
Item 12. Description of Securities Other than Equity Securities
A. Debt Securities
Not applicable.
B. Warrants and Rights
Not applicable.
C. Other Securities
Not applicable.
D. American Depositary Shares
Set forth below is a summary of certain provisions in relation to charges and other payments under the Deposit Agreement, dated February 26,
2019, among Itamar, the Bank of New York Mellon, as depositary, or Depositary, and the owners and holders from time to time of ADSs issued thereunder,
or the Deposit Agreement). A summary of other provisions of the Deposit Agreement and related description of the ADSs is included in Exhibit 2.6 to this
Annual Report. These summaries are not complete and are qualified in their entirety by the Deposit Agreement, a form of which has been filed as Exhibit
2.1 to this Annual Report.
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Fees and Expenses
Holders of our ADSs are required to pay the following fees under the terms of the deposit agreement:
Persons depositing or withdrawing shares or ADS holders must pay:
U.S.$5.00 (or less) per 100 ADSs (or portion of 100 ADSs)
For:
•
U.S.$0.05 (or less) per ADS
A fee equivalent to the fee that would be payable if securities distributed
to you had been ordinary shares and the ordinary shares had been
deposited for issuance of ADSs
Expenses of the depositary
Taxes and other governmental charges the depositary or the custodian
has to pay on any ADSs or shares underlying ADSs, such as stock
transfer taxes, stamp duty or withholding taxes
Any charges incurred by the depositary or its agents for servicing the
deposited securities
•
•
•
•
•
Issuance of ADSs, including issuances resulting from a distribution of
shares or rights or other property
Cancellation of ADSs for the purpose of withdrawal, including if the
deposit agreement terminates
Any cash distribution made to ADS holders
Distribution of securities distributed to holders of deposited securities
(including rights) that are distributed by the depositary to ADS holders
Cable (including SWIFT) and facsimile transmissions (when expressly
provided in the deposit agreement)
converting foreign currency to U.S. dollars
As necessary
* The depositary is only entitled to reimbursement of such fees if its local custodian charges such fees. To our knowledge, the depositary’s Israeli
local custodians do not currently charge any such fees. However, if you hold your shares or ADSs through a bank or broker, you should check whether your
bank or broker charge you any similar fees.
The depositary collects its fees for delivery and surrender of ADSs directly from investors depositing shares or surrendering ADSs for the purpose
of withdrawal or from intermediaries acting for them. The depositary collects fees for making distributions to investors by deducting those fees from the
amounts distributed or by selling a portion of distributable property to pay the fees. The depositary may collect its annual fee for depositary services by
deduction from cash distributions or by directly billing investors or by charging the book-entry system accounts of participants acting for them. The
depositary may collect any of its fees by deduction from any cash distribution payable (or by selling a portion of securities or other property distributable)
to ADS holders that are obligated to pay those fees. The depositary may generally refuse to provide fee-attracting services until its fees for those services
are paid.
From time to time, the depositary may make payments to us to reimburse us for costs and expenses generally arising out of establishment and
maintenance of the ADS program, waive fees and expenses for services provided to us by the depositary or share revenue from the fees collected from
ADS holders. In performing its duties under the deposit agreement, the depositary may use brokers, dealers, foreign currency dealers or other service
providers that are owned by or affiliated with the depositary and that may earn or share fees, spreads or commissions.
145
The depositary may convert currency itself or through any of its affiliates and, in those cases, acts as principal for its own account and not as
agent, advisor, broker or fiduciary on behalf of any other person and earns revenue, including, without limitation, transaction spreads, that it will retain for
its own account. The revenue is based on, among other things, the difference between the exchange rate assigned to the currency conversion made under
the deposit agreement and the rate that the depositary or its affiliate receives when buying or selling foreign currency for its own account. The depositary
makes no representation that the exchange rate used or obtained in any currency conversion under the deposit agreement will be the most favorable rate that
could be obtained at the time or that the method by which that rate will be determined will be the most favorable to ADS holders, subject to the depositary’s
obligations under the deposit agreement. The methodology used to determine exchange rates used in currency conversions is available upon request.
Payment of Taxes
Holders of our ADSs are responsible for any taxes or other governmental charges (including any penalties and/or interest) payable on their ADSs
or on the deposited securities represented by any of their ADSs. All registered holders and beneficial owners of ADRs, and all prior holders and beneficial
owners thereof, jointly and severally, agree to indemnify us, the depositary and our and the depositary’s respective agents in respect of such taxes or other
governmental charges. The depositary may refuse to register any transfer of ADSs, to effect any split up or combination of ADRs, or allow holders of our
ADSs to withdraw the deposited securities represented by their ADSs until such taxes or other charges are paid. It may deduct from any distributions owed
to a holder of our ADSs or sell deposited securities represented by such holder’s ADSs to pay any taxes owed and such holder will remain liable for any
deficiency. If the depositary sells deposited securities, it will, if appropriate, reduce the number of ADSs to reflect the sale and pay to ADS holders any
proceeds, or send to ADS holders any property, remaining after it has paid the taxes.
By holding an ADR or an interest therein, holders of ADRs have agreed to indemnify us, the depositary, its custodian and any of our or their
respective officers, directors, employees, agents and affiliates against, and hold each of them harmless from, any claims by any governmental authority
with respect to taxes, additions to tax, penalties or interest arising out of any refund of taxes, reduced rate of withholding at source or other tax benefit
obtained, which obligations shall survive any transfer or surrender of ADSs or the termination of the deposit agreement.
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Item 13. Defaults, Dividend Arrearages and Delinquencies
None.
Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds
PART II
A. None.
B. None.
C. None.
D. None.
E. Use of Proceeds
In February 2020, we completed a registered public offering of our American Depositary Shares in the United States. In the public offering we
issued and sold 2,927,267 ADSs, including 381,817 ADSs issued and sold upon the exercise of the underwriters pursuant to their overallotment option to
purchase additional ADSs, at a public offering price of $13.75 per ADS.
The offer and sale of all of the ADSs in the public offering was registered under the Securities Act pursuant to a registration statement on Form F-
1 (File No. 333- 236120) , which was declared effective by the SEC on January 30, 2020, and a registration statement on Form F-1 to register additional
securities (File No. 333- 236179), which was immediately effective upon filing on January 30, 2020, or, together, the Registration Statement. Under the
Registration Statement, we registered 2,927,267 ADSs, including 381,817 ADSs issuable upon exercise of the underwriters’ option to purchase additional
ADSs, at a public offering price of $13.75 per ADS, for a registered aggregate offering price of approximately $40.25 million. Following the sale of the
ADSs in connection with the closing of the public offering, the offering terminated. The offering commenced on January 30, 2020, and did not terminate
until the sale of all of the shares offered. Piper Sandler acted as sole bookrunner for the offering and Ladenburg Thalmann and A.G.P./Alliance Global
Partners acted as co-managers for the offering.
We received aggregate gross proceeds from the offering of approximately $40.25 million, or aggregate net proceeds of approximately $35.45
million after deducting underwriting discounts and commissions of approximately $2.8 million and offering expenses of $1.98 million. No payments for
such expenses were made directly or indirectly to (i) any of our officers, members of our board of directors, or their associates, (ii) any persons owning
10% or more of any class of our equity securities or (iii) any of our affiliates.
There has been no material change in our planned use of the net proceeds from the public offering as described in our final prospectus filed with
the SEC pursuant to Rule 424(b)(4) under the Securities Act with the SEC on January 31, 2020.
Item 15. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Limitations on Effectiveness of Controls and Procedures
In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and
procedures must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible
controls and procedures relative to their costs.
147
Disclosure Controls and Procedures
Our management, with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of our
disclosure controls and procedures (as defined in Rules 13a- 15(e) and 15d- 15(e) under the Exchange Act), as of the end of the period covered by this
Annual Report. Based on such evaluation, our principal executive officer and principal financial officer have concluded that as of such date, our disclosure
controls and procedures were effective at the reasonable assurance level.
Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over our financial reporting, as such term is defined in
Rule 13a-15(f) under the Exchange Act.
Our management conducted an assessment of the effectiveness of our internal control over financial reporting based on the criteria set forth in
“Internal Control – Integrated Framework (2013)” issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Based on this assessment, our management concluded that, as of December 31, 2019, our internal control over financial reporting was effective.
Attestation Report of the Registered Public Accounting Firm
This Annual Report does not include an attestation report of our registered public accounting firm due to an exemption established by the JOBS
Act for “emerging growth companies.”
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the period
covered by this Annual Report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 16. [Reserved]
Item 16A. Audit Committee Financial Expert
Our Board of Directors has determined that Yaffa Krindel Sieradzki is an “audit committee financial expert” as defined in Item 16.A. of Form 20-
F and qualifies as an “independent director” in accordance with applicable Exchange Act rules and Nasdaq rules.
Item 16B. Code of Ethics
We have adopted a Code of Ethics and Business Conduct, or the Code, that applies to all our directors, officers and employees and certain our
consultants.
We have also adopted a Code of Ethics for Senior Financial Officers, or the Financial Conduct Code, that applies to our President and Chief
Executive Officer, Chief Financial Officer, chief accounting officer or controller, and persons performing similar functions. The Financial Conduct Code
has been posted on our website, www.itamar-medical.com.
We intend to satisfy the disclosure requirement under Item 16.B(d) and (e) of Form 20-F regarding amendment to, or waiver from, a provision of
the Code or the Financial Conduct Code, as well as Nasdaq’s requirement to disclose waivers with respect to directors and executive officers, by posting
such information in the “Investors” section of our website at www. itamar-medical.com.
148
Item 16C. Principal Accounting Fees and Services
Somekh Chaikin, Certified Public Accountants (Israel), a member of KPMG International, or KPMG, has served as our independent public
accountants for each of the years in the three-year period ended December 31, 2019. The following table presents the aggregate fees for professional audit
services and other services rendered by KPMG in the years indicated.
Audit fees (1)
Audit related fees
Tax services fees (2)
All other fees
Total
Year Ended December 31,
2019
2018
(in thousands)
172 $
-
23
-
195 $
150
-
36
-
186
$
$
(1) Audit fees consist of fees billed for the annual audit of the Company’s consolidated financial statements and the statutory financial statements of the
Company. They also include fees billed for other audit services, which are those services that only the external auditor reasonably can provide, the
provision of consents and the review of documents filed with the SEC.
(2) Tax services fees include fees billed for tax compliance services, including professional services rendered for tax compliance and tax advice, other than
in connection with tax audit. Tax compliance involves audit of original and amended tax returns, tax planning and tax advice.
Pre-Approval Policies and Procedures
Our Audit Committee has adopted a policy and procedures for the pre-approval of audit and non-audit services rendered by KPMG, or Policy.
Under the Policy, proposed services either (i) may be pre-approved by the Audit Committee without consideration of specific case-by-case
services as general pre-approval; or (ii) require the specific pre-approval of the Audit Committee as specific pre-approval. The Audit Committee may
delegate either type of pre-approval authority to one or more of its members. The appendices to the Policy set out the audit, audit-related, tax and other
services that have received the general pre-approval of the audit committee, including those described in the notes to the table, above; these services are
subject to annual review by the Audit Committee. All other audit, audit-related, tax and other services must receive a specific pre-approval from the Audit
Committee.
The Audit Committee pre-approves fee levels annually for the audit services. Non-audit services are pre-approved as required. The Chairperson of
the Audit Committee may approve non-audit services of up to $25,000 annually and then request the Audit Committee to ratify his decision.
All of the fees in the table above were approved in accordance with these policies and procedures.
Item 16D. Exemptions from the Listing Standards for Audit Committees
Not applicable.
Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers
None.
Item 16F. Change in Registrant’s Certifying Accountant
None.
149
Item 16G. Corporate Governance
As a “foreign private issuer,” as defined by the SEC, we are permitted to follow home country corporate governance practices, instead of certain
corporate governance practices required by Nasdaq for U.S. domestic issuers. While we follow most Nasdaq corporate governance rules, we follow Israel
corporate governance practices in lieu of Nasdaq corporate governance rules as follows:
· We currently do not follow Nasdaq Rule 5620(c) regarding quorum requirements applicable to meetings of shareholders that requires that an
issuer have a quorum requirement for shareholders meetings of at least one-third of the outstanding shares of the issuer’s common voting
stock. As permitted under the Companies Law, our Articles of Association provide that the quorum for any meeting of shareholders is 331⁄3%
or more of the voting rights in the Company, similar to Nasdaq requirements, however, if the meeting is adjourned for lack of quorum, the
quorum for such adjourned meeting will be two shareholders who hold or represent between them at least 10% of the issued and outstanding
share capital, instead of 331⁄3% of the voting rights in the Company.
· We currently do not follow Nasdaq Rule 5635(c) that requires shareholder approval of stock option plans and other equity compensation
arrangements available to officers, directors or employees and any material amendments thereto. We have decided to follow home country
practice in lieu of obtaining shareholder approval for our current or future equity incentive plans. However, subject to exceptions permitted
under the Companies Law, we are required to seek shareholder approval of any grants of equity incentive awards to directors, chief executive
officer and controlling shareholders or plans that require shareholder approval for other reasons.
· We currently do not follow Nasdaq Rules 5635(a), 5635(b) and 5635(d) that require shareholder approval for certain dilutive events (such as
issuances that will result in a change of control, certain transactions other than a public offering involving issuances of a 20% or greater
interest in us and certain acquisitions of the stock or assets of another company). Instead, we intend to follow the Companies Law in respect
of private placements.
·
Also, we have chosen to follow our home country practice in lieu of the requirements of Nasdaq Listing Rule 5250(d)(1) relating to an
issuer’s furnishing of its annual report to shareholders. Specifically, we file annual reports on Form 20-F, which contain financial statements
audited by an independent accounting firm, electronically with the SEC and post a copy on our website.
Although we may rely on certain home country corporate governance practices, we must comply with Nasdaq Rule 5640 Notification of
Noncompliance and Rule 5640 Voting Rights. Further, we must have an audit committee that satisfies Rule 5605(c)(3), which addresses audit committee
responsibilities and authority, and that consists of committee members that meet the independence requirements of Rule 5605(c)(2)(A)(ii).
We may in the future elect to follow Israel corporate governance practices in lieu of Nasdaq corporate governance rules with regard to other
matters.
Item 16H. Mine Safety Disclosure
Not applicable.
150
Item 17. Financial Statements
We have provided financial statements pursuant to Item 18.
Item 18. Financial Statements
PART III
The audited consolidated financial statements as required under Item 18 are attached hereto starting on page F-1 of this Annual Report. The audit
report of KPMG, independent registered public accounting firm, is included herein preceding the audited consolidated financial statements.
Item 19. Exhibits
Exhibit
No.
Description
Form
Incorporation by Reference
Exhibit
No.
Date
File No.
1.1#
Memorandum of Association of the Registrant, as amended and restated.
20-F
001-38775
1.2#
Amended and Restated Articles of Association of the Registrant.
20-F
001-38775
2.1
Form of Deposit Agreement between the Registrant, The Bank of New
20-F
001-38775
York Mellon as Depositary, and owners and holders from time to time of
ADSs issued thereunder, including the Form of American Depositary
Shares.
Specimen of Ordinary Share Certificate.
20-F
001-38775
Closing Warrant Agreement by and between the Registrant and Viola P.E.
20-F
001-38775
2 A.V. Limited Partnership, dated as of November 5, 2015.
1.1
1.2
2.1
2.2
2.3
12/31/2018
12/31/2018
12/31/2018
12/31/2018
12/31/2018
Warrant Agreement by and between the Registrant and Mizrahi Tefahot
Bank Ltd., or Mizrahi, dated as of May 14, 2017, as amended on July 9,
2017, and as further amended on January 29, 2018.
20-F
001-38775
2.4
12/31/2018
2.2
2.3
2.4##
2.4/A
Warrant extension agreement by and between the Registrant and Mizrahi,
dated February 9, 2020.
2.5
Warrant Agreement by and between the Registrant and Mizrahi, dated as
of February 9, 2020.
2.6
Description of the Rights of Each Class of Securities Registered under
Section 12 of the Securities Exchange Act of 1934.
4.1†
2007 Israeli Share Option Plan.
F-1
333-236120
10.4
1/28/2020
151
Filed/
Furnished
*
*
*
Filed/
Furnished
*
Exhibit
No.
4.2†
4.3†
4.4†
2007 Equity Incentive Plan.
Israeli Equity Incentive Plan 2016.
2016 U.S. Equity Incentive Plan.
4.5†
Form of Indemnification Letter.
Description
Form
Incorporation by Reference
Exhibit
No.
Date
File No.
20-F
001-38775
20-F
001-38775
20-F
001-38775
20-F
001-38775
4.2
4.3
4.4
4.5
12/31/2018
12/31/2018
12/31/2018
12/31/2018
2/11/2020
4.6#†
Compensation Policy for Executive Officers and Directors, as amended on
6-K
001-38775
March 18, 2020.
99.1
(Appendix A
to the Proxy
Statement)
4.7#
Lease Agreement by and between the Registrant and The Caesarea
20-F/A 001-38775
4.7
1/30/2019
Edmond Benjamin De Rothschild Assets Corp. (2001) Ltd., dated July 19,
2007, as amended by Amendment No. 1 on December 25, 2008, and as
further amended by Amendment No. 2 in 2013, and as further amended by
Amendment No. 3 on March 23, 2015, and as further amended by
Amendment No. 4 on August 9, 2015, and as further amended by
Amendment No. 5 on January 19, 2019.
4.8+
Distribution Agreement by and between the Registrant and Philips
20-F
001-38775
4.8
12/31/2018
Respironics GK, dated February 24, 2014, as amended by the Amendment
to the Distribution Agreement, dated December 22, 2018.
4.9++
Master Products and Services Agreement, by and between Kaiser
F-1
333-236120
10.13
1/28/2020
Foundation Health Plan, Inc. and Itamar Medical, Inc., a wholly owned
subsidiary of the Registrant, or Itamar US, dated April 1, 2019.
4.10
Solicitation/Contract/Order for Commercial Items issued by Department
of Veterans Affairs, or VA, to Itamar US, dated October 12, 2011 as
amended by the Solicitation/Contract/Order for Commercial Items issued
by VA to Itamar US, dated March 12, 2014, and as further amended by the
Amendment of Solicitation/Modification of Contract, dated August 1,
2018, and as further amended by the Product Addition Request for
Modification Form, dated September 25, 2018, and as further amended by
the Amendment of Solicitation/Modification of Contract, dated October
15, 2018, and as further amended by the Amendment of
Solicitation/Modification of Contract, dated December 1, 2018.
20-F/A 001-38775
4.10
2/13/2019
4.11++
Amendments to the Solicitation/Contract/Order for Commercial Items
F-1
333-236120
10.15
1/28/2020
issued by VA to Itamar US, dated August 13, 2019, September 25, 2019,
and December 23, 2019.
4.12##
Credit Framework Agreement by and between the Registrant and Mizrahi,
dated February 9, 2020; the Deed of Amendment, February 9, 2020, to
The Secured Debenture issued by the Registrant to Mizrahi, dated May 28,
2017; the Continuing Guarantee in an Unlimited Amount to Secure all
Debts issued by Itamar US to Mizrahi, dated March 12, 2019; the
Unlimited Security Agreement by and between Itamar US and Mizrahi,
dated March 12, 2019
4.13
Form of Securities Purchase Agreements, dated March 22, 2018, by and
20-F
001-38775
4.12
12/31/2018
between the Registrant and the Purchasers signatory thereto.
4.14
Form of Securities Purchase Agreements, dated January 16, 2019, by and
20-F/A 001-38775
4.13
1/30/2019
between the Registrant and the Purchasers signatory thereto, for the
issuance of ADSs of the Registrant.
4.15
Form of Securities Purchase Agreements, dated January 16, 2019, by and
20-F/A 001-38775
4.14
1/30/2019
between the Registrant and the Purchasers signatory thereto, for the
issuance of ordinary shares of the Registrant.
4.16
Form of Securities Purchase Agreements, dated January 28, 2019, by and
20-F/A 001-38775
4.15
1/30/2019
between the Registrant and the Purchasers signatory thereto, for the
issuance of ADSs of the Registrant.
4.17
The Secured Debenture issued by the Registrant to Mizrahi, dated May 28,
20-F
001-38775
4.11
4/10/2019
2017; the Negative Charge Irrevocable Undertaking issued by I.M.E. 2016
B.V. to Mizrahi, dated May 29, 2017.
4.18
Lease Agreement, dated July 8, 2019, by and between the Registrant and
F-1
333-236120
10.11
1/28/2020
Willer Properties (1985) Ltd.
8.1
List of Subsidiaries.
20-F
001-38775
8
12/31/2018
152
Exhibit
No.
12.1
12.2
Description
Form
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and
Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended.
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and
Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended.
13.1
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section
1350
13.2
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section
1350
15.1
Consent of Somekh Chaikin, Certified Public Accountants (Israel), a
member of KPMG International.
101.INS
XBRL Instance Document.
101.SCH XBRL Taxonomy Extension Schema Document.
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF
XBRL Taxonomy Definition Linkbase Document.
101.LAB XBRL Taxonomy Extension Label Linkbase Document.
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document
Incorporation by Reference
Exhibit
No.
Date
File No.
Filed/
Furnished
*
*
**
**
*
*
*
*
*
*
*
*
**
#
##
+
++
†
Filed herewith.
Furnished herewith.
Unofficial English translation from Hebrew original.
Certain parts, as indicated therein, contain unofficial English translation from Hebrew original.
Confidential treatment has been granted with respect to certain portions of this exhibit pursuant to 17.C.F.R. §240.24b-2. Omitted portions
were filed separately with the SEC.
Portions of this exhibit have been redacted in compliance with Regulation S-K Item 601(b)(10)(iv).
Indicates management contract or compensatory plan or arrangement.
Certain agreements filed as exhibits to this Annual Report contain representations and warranties that the parties thereto made to each other. These
representations and warranties have been made solely for the benefit of the other parties to such agreements and may have been qualified by certain
information that has been disclosed to the other parties to such agreements and that may not be reflected in such agreements. In addition, these
representations and warranties may be intended as a way of allocating risks among parties if the statements contained therein prove to be incorrect, rather
than as actual statements of fact. Accordingly, there can be no reliance on any such representations and warranties as characterizations of the actual state of
facts. Moreover, information concerning the subject matter of any such representations and warranties may have changed since the date of such
agreements.
153
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the
undersigned to sign this Annual Report on its behalf.
SIGNATURES
Date: April 3, 2020
Itamar Medical Ltd.
By: /s/ Gilad Glick
Name: Gilad Glick
Title: Chief Executive Officer
154
ITAMAR MEDICAL LTD.
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2019
Table of Contents
Report of Independent Registered Public Accounting Firm
Consolidated Statements of Financial Position
Consolidated Statements of Operations
Consolidated Statements of Comprehensive Income (Loss)
Consolidated Statements of Changes in Equity
Consolidated Statements of Cash Flows
Notes to the Consolidated Financial Statements
F-1
Page
F-2
F-3
F-4
F-5
F-6
F-7
F-8
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors
Itamar Medical Ltd.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated statements of financial position of Itamar Medical Ltd. and its subsidiaries (the “Company”) as of
December 31, 2019 and 2018, and the related consolidated statements of operations, comprehensive income (loss), changes in equity, and cash flows, for
each of the years in the three-year period ended December 31, 2019, and the related notes (collectively, the “consolidated financial statements”). In our
opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and
2018, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2019, in conformity with
International Financial Reporting Standards, as issued by the International Accounting Standards Board.
Change in Accounting Principle
As discussed in Note 2g to the consolidated financial statements, the Company has changed its method of accounting for leases as of January 1, 2019 due
to the adoption of International Financial Reporting Standards 16, Leases.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board
(United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the
applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not
required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain
an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal
control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or
fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and
disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis
for our opinion.
/s/ Somekh Chaikin
Certified Public Accountants (Isr.)
Member firm of KPMG International
We have served as the Company’s auditor since 1997.
Tel-Aviv, Israel, March 30, 2020
F-2
ITAMAR MEDICAL LTD.
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
Note
December 31,
2019
2018*
U.S. dollars in thousands
Assets
Current assets
Cash and cash equivalents
Trade receivables
Other receivables
Inventories
Total current assets
Non-current assets
Long-term restricted deposits and prepaid expenses
Long-term trade receivables
Property and equipment
Intangible assets
Right-of-use assets
Total non-current assets
Total assets
Liabilities
Current liabilities
Short-term bank loan
Current maturities of lease liabilities
Trade payables
Other accounts payable
Accrued expenses
Provisions
Short-term employee benefits
Total current liabilities
Non-current liabilities
Lease liabilities, net of current maturities
Derivative instruments
Recognized liability for defined benefit plan, net
Other long-term liabilities
Total non-current liabilities
Total liabilities
Equity
Ordinary share capital
Additional paid-in capital
Accumulated deficit
Total equity
Total liabilities and equity
$
$
$
3
3
4
3
5
6
7
8a
7
9
10
11
7
12
11
13
15
15,115 $
8,384
1,404
3,363
28,266
476
156
1,472
395
2,442
4,941
33,207 $
5,000 $
890
2,028
3,455
1,317
273
352
13,315
1,708
-
260
1,260
3,228
16,543
6,471
6,549
1,018
2,235
16,273
365
243
1,213
298
-
2,119
18,392
5,000
-
1,517
2,063
1,034
215
222
10,051
-
442
159
1,052
1,653
11,704
878
125,435
(109,649)
16,664
33,207 $
748
111,486
(105,546)
6,688
18,392
$
*
See Note 2g regarding initial application of IFRS 16, Leases. According to the transitional method that was chosen, comparative data was not restated.
The accompanying notes are an integral part of these consolidated financial statements.
F-3
ITAMAR MEDICAL LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
Revenues
Cost of revenues
Gross profit
Operating expenses:
Selling and marketing
Research and development
General and administrative
Total operating expenses
Operating loss
Financial income (expenses):
Financial income from cash, bank deposits and investments
Financial expenses from leases, notes, loans and other
Gain from derivatives instruments, net
Financial income (expenses), net
Loss before taxes on income
Taxes on income
Net loss
Loss per share (in U.S. dollars):
Basic
Diluted
Note
17
18
$
19
19
19
14
20
$
$
$
Year Ended December 31,
2018*
U.S. dollars in thousands (except per share data)
2017*
2019
31,258 $
6,984
24,274
18,294
4,520
6,354
29,168
(4,894)
454
(1,233)
442
(337)
(5,231)
(37)
(5,268) $
24,189 $
5,726
18,463
12,699
3,638
5,247
21,584
(3,121)
244
(1,161)
2,433
1,516
(1,605)
(124)
(1,729) $
(0.02) $
(0.02) $
(0.01) $
(0.01) $
20,701
5,002
15,699
12,140
4,129
5,278
21,547
(5,848)
1,591
(4,884)
3,925
632
(5,216)
(85)
(5,301)
(0.02)
(0.02)
*
See Note 2g regarding initial application of IFRS 16, Leases. According to the transitional method that was chosen, comparative data was not restated.
The accompanying notes are an integral part of these consolidated financial statements.
F-4
ITAMAR MEDICAL LTD.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Net loss
Other comprehensive income (loss) items that will not be carried to the
statements of operations
Actuarial gains (losses) of defined benefit plan, net of tax
Total other comprehensive income (loss) for the year that will not be carried
to the statements of operations, net of tax
Other comprehensive income (loss) items that after preliminary recognition
in comprehensive income (loss), were or will be carried to the statements of
operations
Net change in fair value of marketable securities available-for-sale, net of tax
Net change in fair value of marketable securities through other comprehensive
income (loss), net of tax that was transferred to the statements of operations
Total other comprehensive income (loss) items that after preliminary
recognition in comprehensive income, were or will be carried to the
statements of operations, net of tax
Total other comprehensive income (loss)
Total comprehensive loss
Note
2019
Year Ended December 31,
2018*
U.S. dollars in thousands
(1,729) $
(5,268) $
$
11
(94)
(94)
-
-
166
166
-
(113)
2017*
(5,301)
(112)
(112)
158
-
-
(94)
(5,362) $
(113)
53
(1,676) $
158
46
(5,255)
$
*
See Note 2g regarding initial application of IFRS 16, Leases. According to the transitional method that was chosen, comparative data was not restated.
The accompanying notes are an integral part of these consolidated financial statements.
F-5
ITAMAR MEDICAL LTD.
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
Capital
reserve
from
marketable
securities
available-
for-sale
U.S. dollars in thousands
Ordinary
share
capital
Additional
paid-in
capital
Accumulated
deficit
Total
For the year ended December 31, 2017
Balance as of January 1, 2017
Total comprehensive loss:
Net loss
Other comprehensive income, net of tax
Total comprehensive loss
Transactions carried directly to equity:
Issuance of shares due to the exercise of stock options
Share-based payment
Balance as of December 31, 2017
For the year ended December 31, 2018
Balance as of January 1, 2018
Total comprehensive loss:
Net loss
Other comprehensive income, net of tax
Total comprehensive loss
Transactions carried directly to equity:
Issuance of shares due to the exercise of stock options
Issuance of shares, net of issuance costs in the amount of $103
thousand
Share-based payment
Capital reserve from transactions with shareholders
Balance as of December 31, 2018
For the year ended December 31, 2019
Balance as of January 1, 2019
Total comprehensive loss:
Net loss
Other comprehensive loss, net of tax
Total comprehensive loss
Transactions carried directly to equity:
Issuance of shares due to the exercise of stock options
Issuance of shares, net of issuance costs in the amount of $714
thousands
Share-based payment
Balance as of December 31, 2019
$
679 $
105,492 $
(45) $
(100,885) $
5,241
-
-
-
-
-
-
4
-
683 $
93
-
105,585 $
-
158
158
-
-
113 $
(5,301)
(112)
(5,413)
-
1,294
(105,004) $
(5,301)
46
(5,255)
97
1,294
1,377
683 $
105,585 $
113 $
(105,004) $
1,377
-
-
-
3
-
-
-
77
62
-
-
748 $
5,739
-
85
111,486 $
-
(113)
(113)
(1,729)
166
(1,563)
(1,729)
53
(1,676)
-
-
-
-
- $
-
80
-
1,021
-
(105,546) $
5,801
1,021
85
6,688
748 $
111,486 $
- $
(105,546) $
6,688
-
-
-
4
-
-
-
109
126
-
878 $
13,840
-
125,435 $
-
-
-
-
-
-
- $
(5,268)
(94)
(5,362)
(5,268)
(94)
(5,362)
-
113
-
1,259
(109,649) $
13,966
1,259
16,664
$
$
$
$
$
The accompanying notes are an integral part of these consolidated financial statements.
F-6
ITAMAR MEDICAL LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
2019
Year Ended December 31,
2018*
U.S. dollars in thousands
2017*
$
(5,268) $
(1,729) $
(5,301)
Cash flows from operating activities:
Net loss
Adjustments for:
Depreciation and amortization
Share-based payment
Capital gain from sale of property and equipment
Change in provision for doubtful and bad debt
Net financial cost
Gain from reevaluation of derivatives
Increase in trade receivables
Decrease (increase) in other accounts receivable
Increase in inventories
Increase (decrease) in trade payables
Increase in other accounts payable and accrued expenses
Increase in provisions
Increase in employee benefits
Income tax expenses
Taxes paid during the year
Net interest paid during the year
Net cash used in operating activities
Cash flows from investing activities:
Sale of marketable securities
Purchase of property and equipment, intangible assets and capitalization of development
expenditure
Investment in restricted long-term deposits
Net cash provided by (used in) investing activities
Cash flows from financing activities:
Proceeds from issuance of shares and warrants, net of issuance costs
Short-term bank loan
Payment of principal of lease liabilities
Repayment of convertible notes
Repayment of shareholders’ loans
Issuance of shares due to the exercise of stock options
Net cash provided by (used in) financing activities
Increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
Effect of exchange rate fluctuations on balances of cash and cash equivalents
Cash and cash equivalents at end of year
Non-cash financing activity – conversion of notes to loans from shareholders and to
shares
$
$
1,446
1,259
-
349
490
(442)
(2,097)
(410)
(1,579)
537
1,650
58
137
37
(22)
(377)
(4,232)
481
1,021
-
104
914
(2,433)
(1,061)
(330)
(340)
237
61
32
14
124
(176)
(802)
(3,883)
-
3,109
(547)
(68)
(615)
13,966
-
(787)
-
-
113
13,292
8,445
6,471
199
15,115 $
(310)
-
2,799
5,209
5,000
-
(9,939)
(435)
80
(85)
(1,169)
7,643
(3)
6,471 $
509
1,294
(8)
147
3,133
(3,925)
(833)
169
(711)
(66)
669
16
67
85
(83)
(1,344)
(6,182)
-
(296)
(22)
(318)
-
-
-
(10,421)
-
97
(10,324)
(16,824)
23,358
1,109
7,643
- $
1,076 $
-
*
See Note 2g regarding initial application of IFRS 16, Leases. According to the transitional method that was chosen, comparative data was not restated.
The accompanying notes are an integral part of these consolidated financial statements.
F-7
ITAMAR MEDICAL LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – GENERAL
a. Reporting Entity
Itamar Medical Ltd. (the “Company”) is a company incorporated in Israel, with registered office at 9 Halamish Street, North Industrial
Zone, Caesarea, Israel. The consolidated financial statements of the Company and its subsidiaries as of December 31, 2019 and 2018 and
for each of the three years in the period ended December 31, 2019 comprise the Company and its subsidiaries (together referred to as the
“Group”). The Company is a medical technology company focused on the development and commercialization of non-invasive medical
devices and solutions to aid in the diagnosis of respiratory sleep disorders. The Company uses a digital healthcare platform to facilitate
the continuum of care for effective sleep apnea management with a focus on the core sleep, cardiology and direct to consumer (“DTC”)
markets. The Company offers a Total Sleep Solution (“TSS”), to help physicians provide comprehensive sleep apnea management in a
variety of clinical environments to optimize patient care and reduce healthcare system costs. In addition, the Company has recently begun
offering its WatchPAT™ family of products and certain components of TSS to the DTC market. The ordinary shares of the Company are
listed on the Tel Aviv Stock Exchange Ltd. (“TASE”). On February 27, 2019, the Company’s American Depositary Shares (“ADSs”),
each of which represents 30 ordinary shares of the Company, represented by American Depositary Receipts (“ADRs”), were registered
for trade on the Nasdaq Capital Market.
b. 2020 Public Offering
On February 4, 2020, the Company completed a public offering of 2,927,267 ADSs, which included the full exercise of the underwriters’
option to purchase 381,817 additional ADSs, at a public offering price of $13.75 per ADS, for total gross proceeds of approximately
$40.25 million, before deducting underwriting discounts and commissions of 7% and estimated offering expenses of approximately $2.0
million payable by the Company.
NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES
The accounting policies set out below have been consistently applied for all years presented in these consolidated financial statements, except
for the new accounting standards and amendments to accounting standards, that the Group adopted commencing January 1, 2019, as
described below:
a.
International financial reporting standards
These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”), as
issued by the International Accounting Standards Board (“IASB”).
These consolidated financial statements were approved by the Company’s Board of Directors on March 30, 2020.
b. Reporting and functional currency
These consolidated financial statements are presented in U.S. dollars (“dollar” or “$”), which is the Company’s functional currency
representing the principal economic environment in which the Company operates and have been rounded to the nearest thousand unless
otherwise indicated.
c. Basis of measurement
These consolidated financial statements have been prepared on the historical cost basis, except for certain investments and derivatives
and other financial instruments measured at fair value through profit or loss, provisions, and assets and liabilities with respect to
employee benefits.
d. Principles of consolidation
Subsidiaries are entities controlled by the Company. The financial statements of the subsidiaries, which are wholly owned, are included in
the consolidated financial statements of the Company from the date of their incorporation. Intercompany balances and transactions
between Group companies are eliminated in consolidation.
F-8
ITAMAR MEDICAL LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
e. Use of estimates and critical assumptions
The preparation of financial statements in accordance with IFRS requires management to make estimates and assumptions that affect
reported amounts of assets and liabilities, and the disclosure of contingent assets and liabilities at the date of the financial statements as
well as affect the reported amounts of revenues and expenses during the period. These estimates and assumptions are reviewed on an
ongoing basis using available information. Actual results could differ from these estimates and assumptions. The items subject to
significant estimates and assumptions by management include share-based compensation (see Note 16), the discount rate for lease
liabilities (see g. below), the measurement of financial instruments at fair value, the fair value of the embedded warrant component of
convertible notes, and the fair value of warrants where there is no active market (see Note 12).
f. Foreign currency transactions and balances
Transactions in foreign currency are translated to the respective functional currency of the Group entities at exchange rates as of the
transaction dates.
Monetary assets and liabilities denominated in foreign currencies at the reporting date are translated to the functional currency at the
exchange rate at that date. The foreign currency gain or loss on monetary items is the difference between the amortized cost in the
functional currency at the beginning of the year, adjusted for effective interest and payments during the year, and the amortized cost in
foreign currency, translated at the exchange rate at the end of the year. Non-monetary assets and liabilities denominated in foreign
currency that are measured in terms of historical cost, are translated using the exchange rate at the date of the transaction.
Foreign currency differences arising from translation into the functional currency are recognized in the statements of operations.
g. Changes in accounting policies - initial application of new standards and interpretations
IFRS 16, Leases (“IFRS 16")
As of January 1, 2019 (the “date of initial application”), the Group applied IFRS 16, which replaced IAS 17, Leases.
The main effect of the application of IFRS 16 is expressed by eliminating the existing requirement for lessees to classify the lease as
operating (off-balance sheet) or as finance lease, and to present a uniform model for lessees to account for all leases in a similar manner
to the accounting treatment of finance leases in accordance with IAS 17. Through the date of initial application of IFRS 16, the Group
has classified most of the leases in which it leases as operating leases, as it has not materially borne all the risks and returns from the
assets.
In accordance with IFRS 16, for agreements in which the Group is the lessee, the Group recognizes a right-of-use asset and a lease
liability at the inception of the lease contract for all the leases in which the Group has a right to control identified assets for a specified
period of time, other than exceptions specified in IFRS 16. Accordingly, the Group recognizes depreciation and amortization expenses in
respect of a right-of-use asset, tests a right-of-use asset for impairment in accordance with IAS 36, Impairment of Assets, and recognizes
financial expenses on a lease liability. Therefore, from the date of initial application, lease payments relating to assets leased under an
operating lease, which were presented in operating expenses in the statement of operations, are capitalized to assets and the depreciation
expenses related to those assets are presented as depreciation and amortization expenses.
The Group elected to apply IFRS 16 using the modified retrospective approach, with an adjustment to the balance of retained earnings as
at January 1, 2019 and without restating comparative data. In respect of all the leases, the Group elected to apply the transitional
provisions such that on the date of initial application, it recognized a liability at the present value of the balance of future lease payments
discounted at its incremental borrowing rate at that date calculated according to the average duration of the remaining lease period as
from the date of initial application, and concurrently recognized a right-of-use asset at the same amount of the liability, adjusted for any
prepaid or accrued lease payments that were recognized as an asset or liability before the date of initial application. Therefore, application
of IFRS 16 had no effect on the Group’s equity at the date of initial application.
F-9
ITAMAR MEDICAL LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Furthermore, as part of the initial application of IFRS 16, the Group elected to adopt the following expedients:
(1) Applying the practical expedient regarding the recognition and measurement of leases where the underlying asset has a low value on
an individual lease basis;
(2) Applying a single discount rate for lease contracts having similar characteristics in a reasonable manner;
(3) Applying the practical expedient regarding the recognition and measurement of short-term leases, for both leases that end within 12
months from the date of initial application and leases for a period of up to 12 months from the date of their inception for all groups of
underlying assets to which the right-of-use relates; and
(4) Excluding initial direct costs from the measurement of the right-of-use asset at the date of initial application.
As a result of the application of IFRS 16, in respect of operating leases under IAS 17, the Group recognized the right-of-use assets and
lease liabilities for leases as of January 1, 2019 in the amount of approximately $1,149 thousand. The range of nominal discount rates
used for measuring lease liabilities ranges from 8.5% - 11.5% in respect of NIS-denominated leases to 5.3% in respect of dollar-
denominated leases. This range is affected by differences in the length of the lease period, differences in the various asset groups, and a
change between the discount rates of the Group companies.
The impact of IFRS 16 implementation for the reported year:
As a result of the implementation of IFRS 16, in connection with leases classified as operating leases under IAS 17, the Group recognized
the right-of-use assets and lease liabilities as of December 31, 2019 in the amount of $2,442 thousand and $2,598 thousand, respectively,
see Note 7. In addition, instead of recognition of rental expenses relating to such leases for the year ended December 31, 2019, the Group
recognized additional depreciation expenses of $830 thousand and additional financial expenses of $279 thousand.
h. Cash and Cash Equivalents
Cash and cash equivalents are comprised of available amounts of cash and cash equivalents, mainly represented by highly-liquid short-
term investments (with original maturities of three months or less), which are readily convertible into known amounts of cash, and which
are not subject to significant risks of changes in their values.
i.
Financial instruments:
The accounting policy applied as from January 1, 2018
As from January 1, 2018, the Group applies the following accounting policies under IFRS 9 (2014), Financial Instruments (“IFRS 9”).
Non-derivative financial assets
Initial recognition and measurement of financial assets
The Group initially recognizes trade receivables and debt instruments issued on the date that they are created. All other financial assets
are recognized initially on the trade date at which the Group becomes a party to the contractual provisions of the instrument. A financial
asset is initially measured at fair value plus transaction costs that are directly attributable to the acquisition or issuance of the financial
asset. A trade receivable without a significant financing component is initially measured at the transaction price. Receivables originating
from contract assets are initially measured at the carrying amount of the contract assets on the date classification was changed from
contract asset to receivables.
F-10
ITAMAR MEDICAL LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Derecognition of financial assets
Financial assets are derecognized when the contractual rights of the Group to the cash flows from the asset expire, or the Group transfers
the rights to receive the contractual cash flows on the financial asset in a transaction in which substantially all the risks and rewards of
ownership of the financial asset are transferred. When the Group retains substantially all of the risks and rewards of ownership of the
financial asset, it continues to recognize the financial asset.
Classification of financial assets into categories and the accounting treatment of each category
Financial assets are classified at initial recognition, based on the business model objectives and nature of the investment: amortized cost;
fair value through other comprehensive income (loss) – investment in equity instruments; or fair value through profit and loss.
Financial assets are not reclassified in subsequent periods unless, and only if, the Group changes its business model for the management
of financial debt assets, in which case the affected financial debt assets are reclassified at the beginning of the period following the
change in the business model.
A financial asset (including debt instrument) is measured at amortized cost if it meets both of the following conditions and is not
designated at fair value through profit or loss:
-
-
it is held within a business model whose objective is to hold assets so as to collect contractual cash flows; and
the contractual terms of the financial asset give rise to cash flows representing solely payments of principal and interest (“SPPI”) on
the principal amount outstanding on specified dates.
A debt instrument can also be classified to fair value through other comprehensive income category if its business model objective is
achieved by both collecting contractual cash flows and selling financial assets, and it meets the SPPI criteria as above. In certain cases, a
debt instrument can be designated at initial acquisition to fair value through profit or loss.
As applicable to the Group, the Group’s debt instruments that are classified to amortized cost category include: deposits, trade and other
accounts receivable (including long-term trade receivables). These assets are subsequently measured at amortized cost using the effective
interest method. The amortized cost is reduced by impairment losses. Interest income, foreign exchange gains and losses and impairment
are recognized in profit or loss. Any gain or loss on derecognition is recognized in profit or loss. The Group’s debt instruments that were
classified at fair value through other comprehensive income include debt marketable securities. These securities were realized in the
beginning of 2018.
The Group classifies its financial assets to fair value through profit and loss category, when:
-
-
-
it is a debt instrument that does not meet the above criteria;
it is an investment at fair value through other comprehensive income (loss) in equity securities; or
it is part of a portfolio of financial assets that are held for trading or are managed and whose performance is evaluated on a fair value
basis.
These assets are subsequently measured at fair value. As of December 31, 2019 and 2018, the Group did not have such assets.
Financial assets are not reclassified in subsequent periods unless, and only if, the Group changes its business model for the management
of financial debt assets, in which case the affected financial debt assets are reclassified at the beginning of the period following the
change in the business model.
F-11
ITAMAR MEDICAL LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Impairment of financial assets
IFRS 9 replaces the impairment model of IAS 39 (“incurred loss” model), with an ‘expected credit loss’ (“ECL”) model. The model
applies to financial assets measured at amortized cost, investments in debt instruments measured at fair value through other
comprehensive income, contract assets (as defined in IFRS 15) and lease receivables, but not to investments in equity instruments.
Under the new model, the Group assesses the expected credit losses in advance as follows:
-
-
for debt instruments that have low credit risk or for which no significant deterioration has occurred in their credit quality since initial
recognition, the impairment loss will be assessed based on the expected credit loss in the period during the 12 months following the
reporting date; and
for debt instruments for which a significant deterioration has occurred in their credit quality since initial recognition and their credit
risk is not low, the impairment loss will be assessed based on the remaining life of the instrument.
The Group applies the IFRS 9 simplified approach to measuring expected credit losses which uses a lifetime expected loss allowance for
all trade receivables and contract assets.
Non-derivative financial liabilities
Non-derivative financial liabilities include loans and borrowings from banks and others, convertible notes, and trade and other payables.
Initial recognition of financial liabilities
The Group initially recognizes debt securities issued on the date that they originated. All other financial liabilities are recognized initially
on the trade date at which the Group becomes a party to the contractual provisions of the instrument. Liabilities, which are convertible
into shares, denominated in a currency different than the functional currency of the Company or linked to the Israeli Consumer Price
Index (the “Israeli CPI”), constitute a hybrid instrument presented in full as a financial liability. For measurement, the instrument is
separated into two components: (i) a liability component with no conversion feature, which is classified to amortized cost category, and
(ii) a conversion option, which constitutes an embedded derivative accounted for as a derivative financial instrument at fair value and is
measured through the statements of operations as part of “Financial income (expenses), net”.
Subsequent measurement of financial liabilities
Financial liabilities (other than financial liabilities at fair value through profit or loss) and the liability component of the hybrid
instrument above are recognized initially at fair value, less any directly attributable transaction costs. Subsequent to initial recognition
these financial liabilities are measured at amortized cost using the effective interest method. Financial liabilities are designated at fair
value through profit or loss, if the Group manages such liabilities and their performance is assessed based on their fair value in
accordance with the Group’s documented risk management strategy, providing that the designation is intended to prevent an accounting
mismatch, or the liability is a combined instrument including an embedded derivative.
Derecognition of financial liabilities
Financial liabilities are derecognized when the obligation of the Group, as specified in the agreement, expires or when it is discharged or
cancelled.
F-12
ITAMAR MEDICAL LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Substantial modification in terms of debt instruments
An exchange of debt instruments having substantially different terms, is accounted for as an extinguishment of the original financial
liability and the recognition of a new financial liability. Furthermore, a substantial modification of the terms of an existing financial
liability, or an exchange of debt instruments having substantially different terms between an existing borrower and lender, are accounted
for as an extinguishment of the original financial liability and the recognition of a new financial liability at fair value.
In such cases, the entire difference between the amortized cost of the original financial liability and the fair value of the new financial
liability is recognized in profit or loss as financial income or expense.
The terms are substantially different if the discounted present value of the cash flows according to the new terms, including any
commissions paid, less any commissions received and discounted using the original effective interest rate, is different by at least ten
percent from the discounted present value of the remaining cash flows of the original financial liability.
Upon the swap of debt instruments with equity instruments, equity instruments issued at the extinguishment and de-recognition of all or
part of a liability, are a part of “consideration paid” for purposes of calculating the gain or loss from de-recognition of the financial
liability.
The equity instruments are initially recognized at fair value, unless fair value cannot be reliably measured, in which case the issued
instruments are measured at the fair value of the derecognized liability. Any difference between the amortized cost of the financial
liability and the initial measurement amount of the equity instruments is recognized in profit or loss under financial income or expenses.
Non-substantial modification in terms of debt instruments
In a non-substantial modification in terms (or exchange) of debt instruments, the new cash flows are discounted using the original
effective interest rate, and the difference between the present value of the new financial liability and the present value of the original
financial liability is recognized in profit or loss.
Offset of financial instruments
Financial assets and liabilities are offset and the net amount presented in the statement of financial position when, and only when, the
Group currently has a legal right to offset the amounts and intends either to settle on a net basis or to realize the asset and settle the
liability simultaneously.
Issuance of bundle of securities
The consideration received from the issuance of a bundle of securities is attributed initially to financial liabilities measured each period at
fair value, and then to financial liabilities measured only upon initial recognition at fair value. The remaining amount is the value of the
equity component. Direct issuance costs are attributed to the specific securities in respect of which they were incurred, whereas joint
issuance costs are attributed to the securities on a proportionate basis according to the grant of the consideration from the issuance of the
bundle, as described above.
Derivative financial instruments
The Group recognizes all derivative instruments as assets or liabilities in the statements of financial position at their estimated fair values,
and the changes in such fair values are recognized in the statements of operations within “Financial income (expenses), net” for the
period in which they occur. During the reported years, the Group did not have derivatives designated as hedges. The Group reviews its
contracts to identify the existence of embedded derivatives. Identified embedded derivatives in hybrid contracts where the host is not an
asset, are analyzed to determine if they need to be separated from the host contract and recognized in the statements of financial position
as assets or liabilities, applying the same valuation rules used for other derivative instruments.
F-13
ITAMAR MEDICAL LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Fair value measurements
Under IFRS, fair value represents an “Exit Value”, which is the price that would be received to sell an asset or paid to transfer a liability
in an orderly transaction between market participants at the measurement date, considering the counterparty’s credit risk in the valuation.
The concept of Exit Value is premised on the existence of a market and market participants for the specific asset or liability. When there
is no market and/or market participants willing to make a market, IFRS establishes a fair value hierarchy that gives the highest priority to
unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to
measurements involving significant unobservable inputs (Level 3 measurements).
The three levels of the fair value hierarchy are as follows:
Level 1 — Quoted prices (unadjusted) in active markets for identical assets or liabilities that the Group has the ability to access at the
measurement date. A quote price in an active market provides the most reliable evidence of fair value and is used without
adjustment to measure fair value whenever available.
Level 2 — Inputs, other than quoted prices in active markets, that are observable for the asset or liability, either directly or indirectly,
and are used mainly to determine the fair value of securities, investments or loans that are not actively traded.
Level 3 — Unobservable inputs for the asset or liability are used when little or no market data is available. The Group used
unobservable inputs to determine fair values, to the extent there are no Level 1 or Level 2 inputs, in valuation models such
as Black-Scholes, binomial, discounted cash flows or multiples, including risk assumptions consistent with what market
participants would use to arrive at fair value.
The accounting policy applied in periods prior to January 1, 2018
Trade accounts receivable and other accounts receivable
Trade accounts receivable and other accounts receivable are classified as loans and receivables and are recorded at their amortized cost
representing the net present value of the consideration receivable or payable as of the transaction date.
Due to their short-term nature, the Group initially recognizes these receivables at the original invoiced amount. Allowances for doubtful
accounts are recognized, based on incurred loss estimates against general and administrative expenses.
Long-term trade receivables and other investments
Long-term trade receivables are initially recognized at their amortized cost. Subsequent changes in net present value are recognized in the
statements of operations as part of “Financial income (expenses), net”.
Investments in financial instruments held for trading as well as those investments available-for-sale, are recognized at their estimated fair
value, in the first case through the statements of operations as part of “Financial income (expenses), net” and in the second case, changes
in valuations are recognized as part of “Other comprehensive income (loss)” for the year within “Capital reserve” until their time of
disposition, when all valuation effects accrued in equity are reclassified to “Financial income (expenses), net” in the statements of
operations. These investments are tested for impairment upon the occurrence of a significant adverse change or at least once a year during
the last quarter.
Debt and other financial obligations
Bank loans and notes payable, are recognized at their amortized cost. Interest accrued on financial instruments is recognized within
“Other accounts payable and accrued expenses” against financial expenses. Direct costs incurred in debt issuances or borrowings, adjust
the carrying amount of the related debt and are amortized as interest expense as part of the effective interest rate of each instrument over
its maturity. These costs include commissions and professional fees.
F-14
ITAMAR MEDICAL LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
In the statements of cash flows, interest received and interest paid on bank loans and notes payable are presented in cash flows from
operating activities.
Liabilities, which are convertible into shares, denominated in a currency different than the functional currency of the Company or linked
to the Israeli CPI, constitute a hybrid instrument presented in full as a financial liability. For measurement, the instrument is separated
into two components: (i) a liability component with no conversion feature, which is measured at amortized cost according to the effective
interest method, and (ii) a conversion option, which constitutes an embedded derivative accounted for as a derivative financial instrument
at fair value and is measured through the statements of operations as part of “Financial income (expenses), net”.
Issuance of bundle of securities
The consideration received from the issuance of a bundle of securities is attributed initially to financial liabilities measured each period at
fair value, and then to financial liabilities measured only upon initial recognition at fair value. The remaining amount is the value of the
equity component. Direct issuance costs are attributed to the specific securities in respect of which they were incurred, whereas joint
issuance costs are attributed to the securities on a proportionate basis according to the grant of the consideration from the issuance of the
bundle, as described above.
Derivative financial instruments
The Group recognizes all derivative instruments as assets or liabilities in the statements of financial position at their estimated fair values,
and the changes in such fair values are recognized in the statements of operations within “Financial income (expenses), net” for the
period in which they occur. During the reported years, the Group did not have derivatives designated as hedges. The Group reviews its
contracts to identify the existence of embedded derivatives. Identified embedded derivatives are analyzed to determine if they need to be
separated from the host contract and recognized in the statements of financial position as assets or liabilities, applying the same valuation
rules used for other derivative instruments.
j.
Inventories
Inventories are valued using the lower of cost and net realizable value. The cost of inventories is based on the “moving-average” method,
including expenditures incurred in acquiring the inventories and the costs incurred in bringing it to its existing location and condition.
The Group analyzes its inventory balances to determine if, as a result of internal events, such as physical damage, or external events, such
as technological changes or market conditions, certain portions of such balances have become obsolete or impaired. When an impairment
situation arises, the inventory balance is adjusted to its net realizable value, whereas, if an obsolescence situation occurs, the inventory
obsolescence reserve is increased. In both cases, these adjustments are recognized against the results of the period. Net realizable value is
the estimated selling price in the ordinary course of business, less the estimated costs to complete and sell the inventories.
k. Property and equipment
Property and equipment are recognized at their acquisition or construction cost, as applicable, less accumulated depreciation and
accumulated impairment losses. Depreciation of property and equipment is recognized as part of operating expenses, and is calculated
using the straight-line method over the estimated useful lives of the assets. As of December 31, 2019, the average useful lives by category
of property and equipment were as follows:
Office furniture and equipment
Equipment and devices for leasing and for internal use
Computers
Leasehold improvements are amortized over the shorter of the lease term and their useful lives.
Depreciation methods and useful lives are reviewed at the end of each reporting year and adjusted if appropriate.
%
10
15
33
F-15
ITAMAR MEDICAL LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
l.
Intangible assets
The Group capitalizes intangible assets acquired, as well as costs incurred in the development of certain intangible assets for internal use,
when future economic benefits associated are identified and there is evidence of control over such benefits.
Intangible assets are recognized at their acquisition or development cost, as applicable. All of the Group’s intangible assets are definite
life intangible assets, and are amortized on straight-line basis over the useful life of the asset, which on average is approximately three
years.
Expenditure on research activities undertaken with the prospect of gaining new scientific or technical knowledge and understanding, are
recognized in the statements of operations when incurred. Development activities are related to a plan to produce new products or
processes, or to significantly improve existing products or processes. Development expenditure is capitalized only if: (i) the expenditure
can be measured reliably; (ii) the product or process is technically and commercially feasible; and (iii) future economic benefits are
probable, and the Group intends to and has sufficient resources to complete development and to use or sell the asset. The expenditure
capitalized in respect of development activities includes the cost of materials, direct labor and overhead costs that are directly attributable
to preparing the asset for its intended use. Other development expenditure is recognized in the statements of operations as incurred.
In subsequent periods, capitalized development expenditure is measured at cost less accumulated amortization and any accumulated
impairment losses.
Amortization methods and useful lives are reviewed at the end of each reporting year and adjusted if appropriate.
m. Impairment of property and equipment, intangible assets of definite life, right-of use assets and other investments
These assets are tested for impairment upon the occurrence of factors such as the occurrence of a significant adverse event, changes in the
Group’s operating environment or in technology, as well as expectations of lower operating results, in order to determine whether their
carrying amounts may not be recovered. An impairment loss is recorded in the statements of operations for the period within “Other
expenses, net”, for the excess of the asset’s carrying amount over its recoverable amount, corresponding to the higher of the fair value
less costs to sell the asset, and the asset’s value in use, the latter represented by the net present value of estimated cash flows related to the
use and eventual disposal of the asset.
No impairment loss was recorded during the reported years.
n. Leases
The accounting policy applied as from January 1, 2019
As from January 1, 2019, the Group applies the following accounting policies under IFRS 16. See also section g. above as to the effect of
initial application.
Determining if an arrangement contains a lease
At inception of a lease contract, the Group assesses whether the contract is, or contains, a lease, while examining whether the contract
conveys the right to control the use of an identified asset for a period of time in exchange for consideration. In its assessment whether a
contract conveys the right to control the use of an identified asset, the Group assesses whether it has the following two rights throughout
the lease term:
(1) the right to substantially obtain all the economic benefits from using the identified asset; and
(2) the right to direct the use of the identified asset.
F-16
ITAMAR MEDICAL LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For lease contracts that contain non-lease components, such as services or maintenance, that are related to a lease component, the
Group elected to account for the contract as one lease component without separating the components.
Leased assets and lease liabilities
Contracts that convey the Group control over the use of a leased asset for a period of time for consideration, are accounted for as leases.
Upon initial recognition, the Group recognizes a liability at the present value of the balance of future lease payments (these payments do
not include certain variable lease payments), and concurrently recognizes a right-of-use at the same amount of the lease liability, adjusted
for prepaid or accrued lease payments, plus any direct costs incurred in respect of the lease.
Since the interest rate implicit in the Group’s lease cannot be readily determinable, the Group uses the lessee’s incremental borrowing
rate.
Subsequent to initial recognition, the right-of use asset is treated as a right-of-use asset is accounted for using the cost model, and is
depreciated over the term of the lease, or the useful life of the asset, whichever is shorter.
The Group has elected to adopt the practical expedient by which short-term leases of up to one year and/or leases in which the underlying
asset has a low value, are accounted for such that lease payments are recognized in the statement of operations on a straight-line basis,
over the lease term, without recognizing an asset and/or liability in the statement of financial position.
The lease term
The lease term is the non-cancellable period of the lease together with periods covered by an option to extend or cancel the lease if it is
reasonably certain that the lessee will or will not exercise the option, respectively.
Variable lease payments
Variable lease payments that depend on an index or rate, are initially measured using the existing index or rate as of the commencement
date of the lease and are included in the measurement of the lease liability. When there is a change in the cash flow of future lease
payments resulting from the change in the index or rate, the balance of the liability is updated against the right-of-use asset.
Other variable lease payments not included in the measurement of the lease liability are recognized in the statement of operations at the
date the terms for such payments are met.
Depreciation of right-of-use asset
Subsequent to the date of the lease, a right-of-use asset is measured using the cost method, less accumulated depreciation and less
accumulated impairment losses and adjusted for remeasurement of the lease liability.
Depreciation is calculated on a straight-line basis over the useful life or contractual lease term, whichever is shorter, as follows.
Buildings
Motor vehicles
F-17
Years
2.50-10.67
3-4
ITAMAR MEDICAL LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Reassessment of lease liability
Upon the occurrence of a significant event or a significant change in circumstances that is under the control of the Group and had an
effect on the decision whether it is reasonably certain that the Group will exercise an option, which was not included before in the lease
term, or will not exercise an option, which was previously included in the lease term, the Group remeasures the lease liability according
to the revised leased payments using a new discount rate. The change in the carrying amount of the liability is recognized against the
right-of-use asset, or recognized in the statement of operations, if the carrying amount of the right-of-use asset was reduced to zero.
Lease modifications
When a lease modification increases the scope of the lease by adding a right to use one or more underlying assets, and the consideration
for the lease increased by an amount commensurate with the stand-alone price for the increase in scope and any appropriate adjustments
to that stand-alone price to reflect the contract’s circumstances, the Group accounts for the modification as a separate lease.
In all other cases, on the initial date of the lease modification, the Group allocates the consideration in the modified contract to the
contract components, determines the revised lease term and measures the lease liability by discounting the revised lease payments using a
revised discount rate.
For lease modifications that decrease the scope of the lease, the Group recognizes a decrease in the carrying amount of the right-of-use
asset in order to reflect the partial or full cancellation of the lease, and recognizes in the statement of operations a profit (or loss) that
equals the difference between the decrease in the right-of-use asset and remeasurement of the lease liability.
For other lease modifications, the Group remeasures the lease liability against the right-of-use asset.
The accounting policy applied in periods prior to January 1, 2019
Determining whether an arrangement contains a lease
At inception or upon reassessment of an arrangement, the Group determines whether such an arrangement is or contains a lease. An
arrangement is a lease or contains a lease if the following two criteria are met:
(1) the fulfillment of the arrangement is dependent on the use of a specific asset or assets; and
(2) the arrangement contains rights to use the asset.
At inception or upon reassessment of the arrangement, the Group separates payments and other consideration required by such an
arrangement into those for the lease and those for other elements on the basis of their relative fair values.
All the Group’s leases are classified as operating leases, and the leased assets are not recognized in the Group’s statement of financial
position.
Lease payments
Payments made under operating leases are recognized in the statement of operations on a straight-line basis over the term of the lease.
Minimum lease payments made under operating leases are recognized in the statement of operations as incurred.
Minimum lease payments made under finance leases are apportioned between the financing expense and the reduction of the outstanding
liability. The financing expense is allocated to each period during the lease term so as to produce a constant periodic rate of interest on the
remaining balance of the liability. Contingent lease payments are accounted for by revising the minimum lease payments over the
remaining term of the lease when the lease adjustment is confirmed.
F-18
ITAMAR MEDICAL LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
o. Provisions
The Group recognizes provisions when it has a legal or constructive obligation resulting from past events, whose resolution would imply
cash outflows, or the delivery of other resources owned by the Group.
Obligations or losses related to contingencies are recognized as liabilities in the statements of financial position only when present
obligations exist resulting from past events and it is probable to result in an outflow of resources and the amount can be measured
reliably. Otherwise, a qualitative disclosure is included in the notes to the financial statements. The provisions are determined by
discounting the future cash flows at a pre-tax interest rate, reflecting the current market estimates of the time value of the money and the
specific risks of the liability without weighting the Group’s credit risk. The carrying value of the provision is then adjusted in every
period so as to reflect the passage of time and the adjustment amount is credited to financial expenses.
p. Post-employment benefits
The costs of defined contribution plans are recognized in the operating results as they are incurred. Liabilities arising from such plans are
settled through cash transfers to the employees’ retirement accounts with insurance companies or with funds managed by others, without
generating future obligations. The majority of the Israeli employees are under defined contribution plans.
The rest of the Israeli employees are under defined benefit plans. The costs associated with defined benefit plans are recognized as
services are rendered, based on actuarial estimations of the benefits’ present value with the advice of external actuaries.
q. Share-based payment transactions
The grant-date fair value of share-based payment awards granted to employees and directors is recognized as a salary expense, with a
corresponding increase in equity, over the period that the employees and directors become unconditionally entitled to the awards. The
amount recognized as an expense in respect of share-based payment awards that are conditional upon meeting service and non-market
performance conditions, is adjusted to reflect the number of awards that are expected to vest.
For share-based payment awards with non-vesting conditions or with market performance vesting conditions, the grant date fair value of
the share-based payment awards is measured to reflect such conditions, and therefore the Group recognizes an expense in respect of the
awards whether or not the conditions have been met.
The fair value at the time of grant of share-based payment awards to consultants and service providers are recognized over the
consultants’ and the service providers’ period of service against an increase in equity. The fair value of the services is calculated on the
basis of the fair value of the awards and not on the basis of the fair value of the services, since it is not possible to reliably estimate the
fair value of the services rendered.
The Group elected to record the increase in equity against salary expense directly to accumulated deficit.
r. Revenue recognition
The accounting policy applied as from January 1, 2018
As from January 1, 2018, the Group applies the following accounting policies under IFRS 15, Revenues from Contracts with Customers.
The Group recognizes revenues when the customer obtains control over the products or services that have been secured, net of provision
for returns and discounts. The revenue is measured according to the amount of consideration that the Group expects to be entitled to in
return for the transfer of products or services promised to the customer, other than amounts collected in favor of third parties.
F-19
ITAMAR MEDICAL LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The Group recognizes estimated sales discounts as a reduction of sales in the same period revenue is recognized. The Group adjusts
reserves to reflect differences between estimated and actual. The Group estimates its sales returns reserve based on historical return rates
and analysis of specific accounts.
When the Group sells its products through distributors, revenue is being recognized upon delivery of the product to the distributor, as the
distributors does not have the right to return and the control over the products is transferred at this point in time.
Identifying the contract
The Group accounts for a contract with a customer only when the following conditions are met:
(1) 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;
(2) the Group can identify the rights of each party in relation to the products or services that will be transferred;
(3) the Group can identify the payment terms for the products or services that will be transferred;
(4) 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
(5) it is probable that the consideration, to which the Group is entitled to in exchange for the products or services transferred to the
customer, will be collected.
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: (i) the Group has no remaining obligations to transfer products or
services to the customer and any consideration promised by the customer has been received and cannot be returned; or (ii) the contract
has been terminated and the consideration received from the customer cannot be refunded.
Identifying performance obligations
The Group identifies products or services promised to the customer as being distinct performance obligations when the customer can
benefit from the products or services on their own or in conjunction with other readily available resources and the Group’s promise to
transfer the products or services to the customer is separately identifiable from other promises in the contract. In order to examine
whether a promise to transfer products or services is separately identifiable, the Group examines whether it is providing a significant
service of integrating the products or services with other products or services promised in the contract into one integrated outcome that is
the purpose of the contract.
Products or services that are not considered as being distinct are grouped together as a single performance obligation. The revenue from
each such performance obligation is recognized upon transfer of control over the promised products or services to customer. In general,
the Group allocates the transaction price to the identified performance obligations in the contract, based on the relative stand-alone selling
prices when the products or services are sold separately. In cases where the products or services are not sold separately, for example, in
the case of installations or training, the Group establishes the stand-alone selling price assigned to that performance obligation, based on
estimated costs plus a reasonable margin.
Significant financing component in installment sales is separated in determining the transaction price.
F-20
ITAMAR MEDICAL LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
As applicable to the Group, revenues from sales agreements consisting of multiple products or services, such as devices, consumables,
access to the CloudPAT application, WatchPAT Direct logistic services and support, extended warranty and other service agreements, are
separated into different performance obligations, based on their relative fair values, and revenue is separately recognized for each
performance obligation.
The Group recognizes revenue from renting its products over the rent term, in conformity with the agreement with the customer.
Since 2015, the Group has focused on offering Total Sleep Solution (“TSS”) to the cardiology market through various business models;
however, the Test as a Service (“TaaS”) model, is the primary model the Group utilized to date. In the TaaS model, the medical practice
or physician ordering the TaaS pays a fixed fee per home sleep apnea test (“HSAT”) that includes all the components associated with the
test, including the disposable biosensor, hardware rental fees and access to the Group’s CloudPAT platform. Under the TaaS model, some
rent agreements of the WatchPAT devices are made for a period of one to two years. The rental fees are separated under the relative fair
value approach.
In some cases, the Group handles sale transactions of these devices as a finance lease and recognizes revenue in respect of the products
supplied at the commencement date of the lease. When these transactions include multiple performance obligations, revenue is
recognized based on the relative stand-alone selling prices of each performance obligation in the transaction when they are sold
separately.
Satisfaction of performance obligations
Revenue is recognized when the Group satisfies a performance obligation by transferring control over the promised products or services
to the customer. Sale of devices and disposables are generally recognized upon shipment. Services (including extended warranty) are
recognized ratably over the service period.
Contract assets and liabilities
A contract asset is recognized when the Group has a right to consideration for products or services it transferred to the customer that is
conditional on other than the passing of time, such as future performance of the Group. Contract assets are classified as receivables when
the rights in their respect become unconditional.
A contract liability is recognized when the Group has an obligation to transfer products or services to the customer for which it received
consideration (or the consideration is payable) from the customer.
An asset and liability relating to the same contract are presented on a net basis in the statement of financial position. On the other hand, a
contract asset and contract liability deriving from different contracts are presented on a gross basis in the statement of financial position.
The accounting policy applied in periods prior to January 1, 2018
Revenue is measured at the fair value of the consideration received or receivable, net of returns and discounts. The Group recognizes
revenue from the sale of its products, net of provision for returns, when persuasive evidence exists (usually in the form of an executed
sales agreement) that the significant risks and rewards of ownership of the products have been transferred to the buyer, recovery of the
consideration is probable, the associated costs and possible return of products can be estimated reliably, there is no continuing
management involvement with the products, and the amount of revenue can be measured reliably. Revenue is recognized when title to the
products and risk of loss transfers to customers, provided there are no material remaining performance obligations required of the Group
or any matters requiring customer acceptance. The timing of the transfer of risks and rewards may be upon shipment or upon delivery to
the customer site, based on the contract terms or legal requirements.
The Group recognizes estimated sales discounts as a reduction of sales in the same period revenue is recognized. The Group adjusts
reserves to reflect differences between estimated and actual. The Group estimates its sales returns reserve based on historical return rates
and analysis of specific accounts.
F-21
ITAMAR MEDICAL LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Revenues from sales agreements consisting of multiple elements, such as devices, consumables, access to the CloudPAT application,
WatchPAT Direct logistic services and support and other service agreements, are separated into different components and are separately
recognized for each component. A component constitutes a separate accounting unit if, and only if, it has value, separately, for the
customer. Components not separated, are grouped together. The revenue from each such component is recognized upon fulfillment of the
conditions for recognition of revenue, based on the nature of the component, i.e., as products or as services. In general, the Group
determines the fair value for each element, based on selling prices when the product or service is sold separately. In cases where the
components are not sold separately, for example, in the case of installations or training, the Group establishes the value assigned to this
element, based on estimated costs plus a reasonable margin.
The Group recognizes revenue from leasing its products over the lease term, in conformity with the agreement with the customer. In
some cases, the Group handles sale transactions in these devices as finance lease and recognizes revenues in respect of the products
supplied, based on their relative fair value compared to all the components in the transaction.
When the Group sells its products through distributors, revenue is being recognized upon delivery of the product to the distributor, as the
distributors does not have the right to return and the material risks and rewards inherent to the ownership of the products are transferred
at this time.
s.
Income taxes
The effects reflected in the statements of operations for income taxes include the amounts incurred during the period and the amounts of
deferred income taxes, determined according to the income tax law applicable to each Group company. Consolidated deferred income
taxes represent the addition of the amounts determined in each Group company by applying the enacted statutory income tax rate to the
total temporary differences resulting from comparing the book and taxable values of assets and liabilities, considering tax assets such as
loss carryforwards and other recoverable taxes, to the extent that it is probable that future taxable profits will be available against which
they can be utilized. The measurement of deferred income taxes at the reporting period reflects the tax consequences that follow the
manner in which the Group expects to recover or settle the carrying amount of its assets and liabilities. Deferred income taxes for the
period represent the difference between balances of deferred income taxes at the beginning and the end of the period. Deferred income
tax assets and liabilities relating to different tax jurisdictions are not offset. According to IFRS, all items charged or credited directly in
shareholders’ equity or as part of other comprehensive income or loss for the period are recognized net of their current and deferred
income tax effects. The effect of a change in enacted statutory tax rates is recognized in the period in which the change is officially
enacted.
Deferred tax assets that were not recognized are reevaluated at each reporting date and recognized if it has become probable that future
taxable income will be available against which they can be utilized.
t. Loss per share
The Group presents basic and diluted loss per share data for its ordinary shares. Basic loss per share is calculated by dividing the net loss
attributable to holders of ordinary shares of the Company, by the weighted average number of ordinary shares outstanding during the
period.
Diluted loss per share is determined by adjusting the loss attributable to ordinary shareholders and the weighted average number of
ordinary shares outstanding for the effects of all potentially dilutive ordinary shares, which include convertible notes and options and
warrants issued to shareholders employees, directors and consultants.
u. Transactions with controlling shareholders
Assets and liabilities, which are subject to a transaction with a controlling shareholder, are measured at fair value upon the transaction
date.
As the transaction is on the equity level, the Company recognized the difference between fair value and the consideration from the
transaction in its equity.
F-22
ITAMAR MEDICAL LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - TRADE AND OTHER RECEIVABLES
Trade receivables:
Open accounts
Checks receivable
Less - allowance for doubtful accounts
Presented in the statements of financial position as follows:
Under current assets
Under non-current assets
Other receivables:
Institutions
Advances to suppliers
Employees
Prepaid expenses
Miscellaneous
December 31,
2019
2018
U.S. dollars in thousands
8,996 $
37
9,033
493
8,540 $
8,384 $
156
8,540 $
7,040
22
7,062
270
6,792
6,549
243
6,792
December 31,
2019
2018
U.S. dollars in thousands
591 $
236
114
411
52
1,404 $
181
187
91
556
3
1,018
$
$
$
$
$
$
The Group’s exposure to credit risk, currency risk and impairment loss in respect of trade and other receivables is described in Note 21.
NOTE 4 – INVENTORIES
Raw materials and auxiliary materials
Work in process
Finished products
F-23
December 31,
2019
2018
U.S. dollars in thousands
$
$
1,651 $
531
1,181
3,363 $
1,158
277
800
2,235
ITAMAR MEDICAL LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 – PROPERTY AND EQUIPMENT
Equipment
and devices
for
leasing and
for
Office
furniture
and
internal use
equipment
U.S. dollars in thousands
Leasehold
improvements
Total
Computers
and
equipment
Cost:
Balance as of January 1, 2019
Additions
Balance as of December 31, 2019
Accumulated depreciation:
Balance as of January 1, 2019
Depreciation
Balance as of December 31, 2019
Depreciated balance as of December 31, 2019
Cost:
Balance as of January 1, 2018
Additions
Balance as of December 31, 2018
Accumulated depreciation:
Balance as of January 1, 2018
Depreciation
Balance as of December 31, 2018
$
$
$
2,009 $
137
2,146
1,527 $
574
2,101
1,695
58
1,753
854
381
1,235
476 $
5
481
345
15
360
326 $
-
326
231
3
234
4,338
716
5,054
3,125
457
3,582
393 $
866 $
121 $
92 $
1,472
1,947 $
62
2,009
1,093 $
434
1,527
1,632
63
1,695
649
205
854
467 $
9
476
319
26
345
317 $
9
326
202
29
231
3,824
514
4,338
2,802
323
3,125
Depreciated balance as of December 31, 2018
$
314 $
673 $
131 $
95 $
1,213
The Group has assets that have been fully depreciated and are still in use. As of December 31, 2019 and 2018, the original cost of such
assets is $3,379 thousand and $2,928 thousand, respectively.
F-24
ITAMAR MEDICAL LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 – INTANGIBLE ASSETS
Cost:
Balance as of January 1, 2019
Additions
Balance as of December 31, 2019
Accumulated amortization:
Balance as of January 1, 2019
Amortization for the year
Balance as of December 31, 2019
Amortized balance as of December 31, 2019
Cost:
Balance as of January 1, 2018
Additions
Balance as of December 31, 2018
Accumulated amortization:
Balance as of January 1, 2018
Amortization for the year
Balance as of December 31, 2018
Computer
software
Capitalized
development
cost
Marketing
rights for a
medical
product
U.S. dollars in thousands
Total
$
$
$
769 $
106
875
716
41
757
806 $
150
956
561
118
679
375 $
-
375
375
-
375
1,950
256
2,206
1,652
159
1,811
118 $
277 $
- $
395
746 $
23
769
678
38
716
716 $
90
806
507
54
561
375 $
-
375
375
-
375
1,837
113
1,950
1,560
92
1,652
Amortized balance as of December 31, 2018
$
53 $
245 $
- $
298
The capitalized development costs are in respect of the Group’s CloudPAT, a cloud-based information technology platform designed to
allow customers to transfer the data of the sleep apnea test results of the Group’s products. The amortization expenses are included in cost
of revenues.
NOTE 7 – LEASES
Leases in which the Group is the lessee
The Group applies IFRS 16, Leases, as from January 1, 2019. The Group has lease agreements with respect to buildings of offices,
manufacturing facilities and warehouses and motor vehicles.
a.
Information regarding material lease agreements:
Buildings
The Group’s leases approximately 14,000 square feet of office and manufacturing space in Caesarea, Israel pursuant to a lease that is
currently scheduled to expire in July 2021. In addition, the Group leases approximately 1,900 square feet of storage space in Caesarea,
Israel pursuant to a lease that is scheduled to expire in June 2021.
During the year ended December 31, 2019, the Group entered into a lease agreement for new manufacturing facilities located in
Caesarea, Israel, where it leases approximately 14,000 square feet. This lease is currently scheduled to expire in February 2023 but
provides for two optional extensions until February 2030.
F-25
ITAMAR MEDICAL LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
In addition, the Group leases approximately 10,900 square feet of office space in Atlanta, Georgia, U.S. pursuant to a lease that expires in
March 2022, with an optional extension until March 2025.
Motor vehicles
The Group leases vehicles for three-year periods from several different leasing companies and from time to time changes the number of
leased vehicles according to its current needs. The leased vehicles are identified by means of license numbers and the vehicle's
registration, with the leasing companies not being able to switch vehicles, other than in cases of deficiencies. The leased vehicles are used
by the Group’s headquarter staff, marketing and salespersons and other employees whose employment agreements include an obligation
of the Group to put a vehicle at their disposal. The Group accounted for the arrangement between it and the leasing companies as a lease
arrangement in the scope of IFRS 16 and for the arrangement between it and its employees as an arrangement in the scope of IAS 19. The
agreements with the leasing companies do not contain extension and/or termination options that the Group is reasonably certain to
exercise.
b. Right-of-use assets
Cost:
Balance as of January 1, 2019, date of initial application
Additions in respect of new leases
Balance as of December 31, 2019
Accumulated depreciation:
Depreciation for the year
Balance as of December 31, 2019
Buildings
Motor
Vehicles
U.S. dollars in thousands
Total
$
681 $
1,788
2,469
567
567
468 $
335
803
263
263
1,149
2,123
3,272
830
830
Depreciated balance as of December 31, 2019
$
1,902 $
540 $
2,442
c. Lease liabilities
Maturity analysis of the Group's lease liabilities
Less than one year
One to five years
More than five years
Total lease liabilities
Less - current maturities
Long-term lease liability
December 31,
2019
U.S. dollars
in thousands
$
$
890
1,011
697
2,598
890
1,708
The cash outflow in the year ended December 31, 2019 amounted to $937 thousand.
d. Lease payments prior to the application of IFRS 16
The lease payments prior to the application of IFRS 16, which were included in the statement of operations among operating expenses
amounted to $1,009 and $999 thousand in the years ended December 31, 2018 and 2017, respectively.
F-26
ITAMAR MEDICAL LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 – CREDIT FACILITY WITH A BANK AND CONVERTIBLE NOTES
a. Credit facility with a bank
In March 2017, the Company received a bank credit line in a total amount of up to $10 million. The credit line is comprised of up to $6
million long-term loan and up to $4 million credit facility against trade accounts receivable, based on specific customer invoices.
The long-term loan is repayable in equal quarterly installments over three years from the date of the draw and bears annual interest of the
quarterly dollar LIBOR rate plus 5.5%. The credit facility against trade accounts receivable bears annual interest of the monthly dollar
LIBOR rate plus 4.25%.
On January 30, 2018, the terms of the bank credit line were amended such that the exercise period of the loan and the credit facility
against trade accounts receivable were extended until February 28, 2019 and January 12, 2019, respectively. The framework of the long-
term loan component was changes so that it can be utilized as a long-term loan or as a short-term loan.
In addition, the Company undertook that upon the withdrawal of credit, the balance of the cash in the Company’s account with the bank
will not be less than 40% of the total amount drawn.
As part of the bank credit, the Company issued to the bank warrants exercisable into 798,088 of the Company’s ordinary shares at an
exercise price of NIS 1.36 per share (equivalent to $0.39 per share as of December 31, 2019), which were initially exercisable until
March 28, 2022 (see extensions below). The fair value of the warrants was measured using a Black-Scholes valuation model and the cost
of $137 thousand was accounted for as an integral part of the effective interest rate of the bank credit.
On March 12, 2019, the Company and the bank entered into a new agreement (the” 2019 Agreement”) under which the total credit line to
be available under the credit facility increased from up to $10 million to up to $11 million, comprised of: (i) up to $6 million in long-term
or short-term loan; and (ii) up to $5 million of credit facility against trade accounts receivable. In July 2019, as a result of achievement of
certain revenue targets, the total credit line to be available under the credit facility increased from up to $11 million to up to $15 million,
comprised of: (i) up to $10 million in long-term or short-term loan; and (ii) up to $5 million of credit facility against trade accounts
receivable.
As part of the 2019 Agreement, the Company issued to the bank additional warrants exercisable into 399,044 ordinary shares at an
exercise price of NIS 1.30 per share (equivalent to $0.38 per share as of December 31, 2019), which will be exercisable until March 28,
2023 (see extension below). In addition, the Company extended the exercise period of the original warrants from March 28, 2022 to
March 28, 2023. The fair value of the additional warrants was measured using a Black-Scholes valuation model and the cost of $62
thousand will be accounted for as an integral part of the effective interest rate of the bank credit.
On February 9, 2020, the Company and the bank entered into a new agreement (the “2020 Agreement”) under which the total credit line
to be available under the credit facility increased from up to $15 million to up to $17 million, comprised of: (i) up to $10 million in long-
term or short-term loan; and (ii) up to $7 million of credit facility against trade accounts receivable. The amount of $10 million may
increase in July 2020 to $13 million (and the total amount of the credit line may increase from up to $17 million to up to $20 million), if
the Company will achieve certain revenue targets. The additional $3 million of long-term or short-term loan will bear annual interest of
the quarterly dollar LIBOR rate plus 7.0%. The loans under the credit line may be drawn until October 25, 2020. In addition, the
Company undertook that upon the withdrawal of credit, the balance of the cash in the Company’s account with the lending bank will not
be less than 30% of the total amount drawn for draws of up to $10 million in the aggregate and 40% of the aggregate amount exceeding
$10 million.
As part of the 2020 Agreement, the Company issued to the bank additional warrants exercisable into 359,140 ordinary shares at an
exercise price of NIS 1.044 per share (equivalent to $0.30 per share as of the date of grant), which will be exercisable until November 30,
2023. In addition, the Company extended the exercise period of the previously issued warrants from March 28, 2023 to November 30,
2023.
F-27
ITAMAR MEDICAL LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 2019, the Company withdrew $5.0 million out of the bank credit as follows: $1.6 million as a short-term loan and
$3.4 million as a short-term loan against trade accounts receivable. On February 20, 2020, the Company repaid the above $5.0 million
and withdrew again $5.0 million from the bank credit, as follows: $1.2 million as a short-term loan and $3.8 million as a short-term loan
against trade accounts receivable. The loans are for a period of three months until May 20, 2019. As mentioned above, the Company
undertook that upon the withdrawal of credit, the balance of the cash in the Company’s account with the bank will not be less than 30%
of the amount of the outstanding credit actually provided to the Company, such that an amount of $1.5 million is not currently available
for the Company’s current use.
In order to secure its obligations to the bank, the Company pledged and granted to the bank a first priority floating charge on all of its
assets and a first priority fixed charge on (i) its intellectual property, goodwill, holdings in its subsidiaries and certain other, immaterial,
assets; and (ii) all of the assets of the Company’s U.S. Subsidiary.
b. Convertible notes
In March 2013, the Company issued, NIS 72,256 thousand par value convertible notes listed for trading on the TASE for total net
proceeds of $19.5 million. The notes matured in two principal repayments on February 28, 2017 and on February 28, 2018, and bore
fixed interest at 8.65% per annum, payable semi-annually: on August 28 and on February 28, through February 28, 2018.
The net proceeds from the issuance of the convertible notes were split into two components for measurement purposes: (i) a liability
component without a conversion feature that was measured at amortized cost according to the effective interest method; and (ii) a
conversion option that was an embedded derivative and is measured at fair value at each reporting date.
The effective interest rate as of the date of the issuance was 27.7%. The attributed transaction costs were allocated to the different
components pro-rata to the amounts of their initial recognition before allocation of the said costs.
The notes were convertible, so that each NIS 1.92 par value notes could have been converted into one ordinary share (which, as a result
of a rights offering conducted by the Company in December 2015, was adjusted such that every 1.92 NIS par value of the notes could be
converted to 1.00904 ordinary shares).
On February 28, 2017, the first installment of the notes in a total amount of NIS 38,128 thousand par value (approximately $10,421
thousand) was repaid and on February 28, 2018, the second and last installment of the notes in a total amount of NIS 38,128 thousand par
value (approximately $10,940 thousand) was repaid, other than NIS 6.0 million (approximately $1.700 thousand) owed to three
shareholders who held notes, of which $500 thousand was repaid to one shareholder in June 2018 and the balance owed to the other two
shareholders was invested by them in the 2018 Private Placement described in Note 15c. None of the notes were converted.
NOTE 9 – OTHER ACCOUNTS PAYABLE
Employees
Institutions
Interest payable
Deferred revenues and advances from customers
Miscellaneous
December 31,
2019
2018
U.S. dollars in thousands
$
$
2,685 $
412
10
308
40
3,455 $
1,403
319
11
255
75
2,063
For information about the Group’s exposure to currency and liquidity risks in respect of the payables’ balances, see Note 21.
F-28
ITAMAR MEDICAL LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10– PROVISIONS
Balance as of January 1, 2018
Provisions made during the year
Provisions reversed during the year
Provisions realized during the year
Balance as of December 31, 2018
Provisions made during the year
Provisions reversed during the year
Provisions realized during the year
Balance as of December 31, 2019
NOTE 11 – EMPLOYEE BENEFITS
Warranties
Returns
U.S. dollars in thousands
83 $
81
-
(68)
96
91
-
(62)
125 $
100 $
86
(5)
(62)
119
154
(4)
(121)
148 $
Total
183
167
(5)
(130)
215
245
(4)
(183)
273
$
$
Employee benefits include retirement benefit obligations, short-term benefits and share-based payments. As for retirement benefit obligations,
the Group has defined benefit plans for which it contributes to insurance policies and pension funds.
As for share-based payments, see Note 16 and as for benefits to key executives, see Note 22.
Presented as part of current liabilities:
Short-term employee benefits
Presented as part of non-current liabilities:
Recognized liability for defined benefit plan, net
Retirement benefit plans - defined benefit plan
1) Movement in net liabilities for defined benefit plans:
Balance at beginning of year
Expense recognized in the statements of operations:
Current service costs and interest costs
Recognized gains (losses) including other:
Actuarial gains (losses) carried to other comprehensive income
Other movements:
Benefits paid
Deposits made by the Group
Balance at end of year
F-29
December 31,
2018
2019
U.S. dollars in thousands
$
$
352 $
222
260 $
159
Year Ended December 31,
2019
2018
U.S. dollars in thousands
$
159 $
22
94
(11)
(4)
260 $
$
310
29
(166)
(5)
(9)
159
ITAMAR MEDICAL LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
2) Expenses recognized in the statements of operations:
Current service costs
Interest costs
Transfer of profits to benefits
Total
3) The principal actuarial assumptions as of the report date (based on weighted average):
Discount rate at the end of the year
Future salary growth
NOTE 12 – DERIVATIVE INSTRUMENTS
Composition
Liabilities
Viola Warrants (non-traded)
Warrants (Series 4) (traded) issued in the 2015 rights offering, see below
Year Ended December 31,
2019
2018
U.S. dollars in thousands
$
$
4 $
5
43
52 $
16
7
28
51
2019
%
December 31,
2018
%
2017
%
2.62
3.00
3.82
3.00
2.74
3.27
December 31,
2018
U.S. dollars
in thousands
$
$
371
71
442
The Viola Warrants were issued to the Viola Growth II A.V. LP, Viola Growth II (A) LP and Viola Growth II (B) LP (collectively,
“Viola”) as part of a private placement in August 2015 and January 2016. The Warrants (Series 4) were issued to the public as part of a
rights offering in December 31, 2015. Both warrants expired on May 4, 2019.
The above derivatives had an exercise price that was denominated in NIS, a currency different than the functional currency of the
Company and as a result were accounted for as a derivative financial instrument measured at fair value through profit or loss on each
reporting date and constitute a liability.
The following parameters were used in the calculation of the fair value of the above derivatives, using the binomial model:
The discount rate of the Viola Warrants and Warrants (Series 4) (risk free interest)
Share price (in NIS)
Standard deviation of the share price
F-30
December 31,
2018
0.30%
1.280
54.59%
ITAMAR MEDICAL LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The fair value of the Viola Warrants and the Warrants (Series 4) as of December 31, 2015 and during the nine month period ended
September 30, 2016 was measured at quoted market value of the Warrants (Series 4), due to the fact that the Viola Warrants and the
Warrants (Series 4) are essentially identical in their conditions. Starting with the fourth quarter of 2016 and until the first quarter of 2019,
the Company believed that there was no active market for the traded Warrants (Series 4) primarily due to an ongoing gradual decline in
the frequency and volume of trading in such warrants with significant variance in the transactions prices of the warrants without a
corresponding material change in the share price, and often with a negative correlation between the change in the share price and the
change in the warrants price. Consequently, the Company estimated the fair value of the Viola Warrants and the Warrants (Series 4) as of
December 31, 2016 and for periods thereafter, based on observable market data, directly or indirectly, based on the binomial model and
based on relevant parameters of the terms of the Viola Warrants and the Warrants (Series 4).
NOTE 13 – OTHER LONG-TERM LIABILITIES
Obligation to pay royalties to the Israeli Government’s Innovation Authority (“IIA”)
The Company has received royalty-bearing grants from the IIA in a total amount of $1.06 million (including interest accrued through
December 31, 2019) for the development of EndoPAT 3000 (the development of which was discontinued before its completion with no sales
to date). In 2009, the IIA notified the Company that under the terms of such grant, it must pay royalties on the sale of all of its products
commencing as of 2012. The Company believes that under the terms of the said grant it is not required to repay these grants to the IIA from
the sale of its past and currently marketed products. There is no assurance that the Company will prevail in its efforts opposing the IIA’s
position. The Company anticipates that, in 2021, it will begin selling its newly developed EndoPATX, for which it recently received
authorization to affix a CE mark. The Company developed EndoPATX using some of the know-how developed under the EndoPAT 3000
grant program, and therefore anticipates paying royalties on sales of EndoPATX against the grants received for the development of EndoPAT
3000. The Company accrued for the royalties’ obligation once the grants became repayable.
NOTE 14 – INCOME TAXES
a.
Israeli taxation:
1) Corporate tax rates in Israel
The tax rates relevant to corporates in Israel in the years 2017 – 2019 were as follows: 2017 – 24%; 2018 and 2019 – 23%.
On December 22, 2016, the Knesset (the Israeli parliament) approved the Economic Efficiency Law (Legislative Amendments to
Achieve Budget Targets for the 2017 and 2018 Budget Years), 2016, which stipulates, among other things, the reduction of corporate
tax rates from 25% to 23% in two phases. The first phase is to a rate of 24%, starting on January 2017 and the second phase is to a
rate of 23% starting on January 2018 and thereafter.
2) Measurement of taxable income in U.S. dollars
The Company has elected, starting in the 2016 tax year, to measure its taxable income and file its tax return under the Israeli Income
Tax Regulations (Principles Regarding the Management of Books of Account of Foreign Invested Companies and Certain
Partnerships and the Determination of Their Taxable Income), 1986. Accordingly, results for tax purposes are measured in terms of
earnings in dollars.
F-31
ITAMAR MEDICAL LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
3) Tax benefits under the Law for the Encouragement of Capital Investments, 1959 (the “Investment Law”)
Approved enterprise, benefited enterprise and preferred enterprise
Most of the production facilities of the Company have been granted “Approved Enterprise”, “Benefited Enterprise” and “Preferred
Enterprise” status under Investment Law. The Company is a “Foreign Investors’ Company” as defined by the Investment Law, which
means it is entitled to tax benefits for taxable income arising from its Approved, Benefited or Preferred Enterprise status.
Since its incorporation, the Company incurred significant losses and therefore it did not start benefiting from such status. To be
eligible for these tax benefits, one must continue to meet certain conditions stipulated in the Investment Law and its regulations and
the criteria set out in the specific certificate of approval. The only material condition applicable to the Company is to meet a
minimum threshold (25%) of export sales (i.e., sales outside of Israel). In the event the Company is considered as having failed to
comply with these conditions, in whole or in part, the eligibility for the benefits may be canceled and the Company may be required
to refund the relevant amount, including inflation adjustments and interest. However, since the Company had accumulated
carryforward tax losses of approximately $115 million as of December 31, 2019 (see section d. below), it did not benefit from such
tax benefits and does not expect to benefit from such tax benefits in the foreseeable future. Once the Company utilizes all of its
accumulated tax losses, it expects to derive tax benefits in Israel relating to its Benefited Enterprise and Preferred Enterprise
programs for which it is eligible.
A company having an Approved or Benefited Enterprise, like the Company, that distributes a dividend from income that was tax
exempt, will be required in the tax year of the dividend distribution to pay corporate tax on the amount of the dividend distributed
(including the corporate tax required as a result of the distribution) at the corporate tax rate that would have been applicable to it in
the year the income was generated if it had not been exempt from tax.
4) Tax benefits under the law for the Encouragement of Industry (Taxes), 1969 (the “Encouragement Law”):
The Encouragement Law provides several tax benefits for industrial companies. An industrial company is defined as a company
resident in Israel, that at least 90% of the income of which in a given tax year exclusive of income from specified government loans,
capital gains, interest and dividends, is derived from an industrial enterprise owned by it. An industrial enterprise is defined as an
enterprise whose major activity in a given tax year is industrial production activity.
Management believes that the Company is currently qualified as an “industrial company" under the Encouragement Law and, as
such, is entitled to tax benefits, including: (i) deduction of purchase of know-how and patents and/or right to use a patent over an
eight-year period; (ii) accelerated depreciation rates on equipment and buildings; and (iii) expenses related to a public offering on the
TASE and on recognized stock markets outside of Israel, such as Nasdaq, are deductible in equal amounts over three years.
Eligibility for benefits under the Encouragement Law is not subject to receipt of prior approval from any governmental authority. No
assurance can be given that the Israel Tax Authority will agree that the Company qualifies and will continue to qualify as an
industrial company, or that the benefits described above will be available to the Company in the future.
F-32
ITAMAR MEDICAL LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
b. Taxation of Non-Israeli subsidiaries
Subsidiaries incorporated outside of Israel are assessed for tax under the tax in their countries of residence. The primary tax rates
applicable to the non-Israeli subsidiaries in the Group are:
(1) U.S. – federal corporate tax rate of 35% during 2017 and 21% during 2018 and thereafter. The reduction did not have a material
impact on the tax expenses of the U.S. subsidiary in the years ended December 31, 2018 and 2017.
(2) The Netherlands – corporate tax rate of 20% during 2017 (the year in which the Netherlands subsidiary was formed) and 2018 on the
first Euro 200,000 of taxable income and 25% for taxable income exceeding Euro 200,000; corporate tax rate of 19% during 2019 on
the first Euro 200,000 of taxable income and 25% for taxable income exceeding Euro 200,000; corporate tax rate of 16.5% during
2020 on the first Euro 200,000 of taxable income and 25% for taxable income exceeding Euro 200,000; and corporate tax rate of
15% during 2021 on the first Euro 200,000 of taxable income and 25% for taxable income exceeding Euro 200,000.
(3) Japan – tax rate of 23.4% during 2017, and 23.2% during 2018 and 2019.
c. Tax expenses in the statements of operations mainly refer to operations of the subsidiaries in the U.S., the Netherlands and Japan. The
Company does not pay taxes in Israel, as it has tax losses carryforward to future years. No deferred tax asset was recognized in respect of
those carryforward tax losses, in the absence of expected utilization thereof in the foreseeable future.
The Company did not include a calculation of the theoretical tax due to the fact that the total tax expenses in the statements of operations
are not material.
d. Carryforward tax losses
The Company has carryforward tax losses (including carryforward research and development expenses) as of December 31, 2019,
amounting to $115 million.
e. Tax assessment
The Company has not received final tax assessments since its incorporation. The Company has self-assessments deemed to be final
through the 2013 tax year .
NOTE 15 – EQUITY
a. Ordinary shares of NIS 0.01 par value
Issued and outstanding share capital (ordinary shares):
Outstanding shares at the beginning of the year
Shares issued in private placements during the year
Shares issued in exercise of stock options during the year
Outstanding at the end of the year
2019
Year Ended December 31,
2018
Number of shares in thousands
2017
287,616
46,115
1,554
264,495
22,014
1,107
262,917
-
1,578
335,285
287,616
264,495
Authorized share capital at the end of the year
750,000
750,000
750,000
The rights of the ordinary shares include voting rights at the general meeting of shareholders, the rights to receive dividends and rights to
participate in the distribution of the surplus assets of the Company in the event of liquidation.
F-33
ITAMAR MEDICAL LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
b. 2019 Private Placement
On January 16, 2019 and January 28, 2019, the Company entered into separate securities purchase agreements with several U.S. and
Israeli accredited investors. Under the securities purchase agreements, the Company undertook to issue to the investors, upon and subject
to the closing:, (i) a total of 1,170,707 ADSs, at a price per ADS of $9.55, to the investors (other than the Israeli investor) (the “U.S.
Tranche”); and (ii) a total of 10,944,185 ordinary shares to the Israeli investor, at a price per ordinary share of NIS 1.1693 (equivalent to
$0.32 as of February 3, 2019) (the “Israeli Tranche”), or, in the aggregate, the Company undertook to issue to the investors a total of
46,115,395 ordinary shares (including ordinary shares underlying the ADSs) representing, as of January 28, 2019, approximately 13.8%
of the Company’s issued and outstanding shares on a post-issuance basis, resulting in aggregate proceeds (before expenses) of
approximately $14.7 million. On February 3, 2019, the Company completed the private placement of the Israeli Tranche and issued to the
Israeli investor, 10,994,185 ordinary shares, and on March 6, 2018, the Company completed the private placement of the U.S. Tranche
and issued to the investors under the U.S, Tranche a total of 1,170,707 ADSs. The ordinary shares and ADSs issued to the investors are
subject to resale restrictions under applicable U.S. and Israeli securities laws. None of the investors were granted registration rights under
the securities purchase agreements. The securities purchase agreements contain other customary terms and conditions, including
customary representations and warranties of the parties which survive the completion of the transaction until the date on which the
investors no longer hold any of the ADSs or shares, as applicable.
c.
2018 Private Placement
On March 22, 2018, the Company entered into separate securities purchase agreements with Viola, the Company’s largest shareholder;
Medtronic International Technology, Inc. (“Medtronic”), a then major shareholder of the Company; Dr. Giora Yaron (through a company
wholly owned by him), the Company’s Chairman of the Board of Directors and a major shareholder, and various funds affiliated with
three Israeli institutional investors, Yelin Lapidot Mutual Funds Management Ltd., a major shareholder; Meitav Dash Investments Ltd.,
and The Phoenix Holdings Ltd. On May 27, 2018, following approval by the Company’s shareholders of the private placement
contemplated by these securities purchase agreements, the Company completed the transaction and issued to the investors a total of
22,013,893 ordinary shares (representing as of such date approximately 7.7% of the Company’s issued and outstanding shares on a post-
issuance basis) at a purchase price of NIS 0.947 per share (equivalent to $0.27 as of May 7, 2018 ) (reflecting a 7% discount on the
average share price during the 15 consecutive trading days preceding March 15, 2018 (inclusive), the date of publication of the
Company’s 2017 financial statements), resulting in aggregate proceeds (before expenses) of NIS 20.8 million (equivalent to
approximately $6.0 million). Out of the total NIS 20.8 million investment, Viola, Medtronic and Dr. Giora Yaron, invested NIS 5.2
million, NIS 2.4 million and NIS 2.1 million, respectively. Since then Medtronic transferred the shares issued to it to MS Pace LP, a
limited partnership.
NOTE 16 – SHARE-BASED PAYMENTS
a. Description of share-based payment arrangements and grants:
1) Performance-based options
Unvested performance-based options as of December 31, 2015 were cancelled and replaced on January 21, 2016, with new grants of
options and restricted share units (“RSUs”) that are either contingent upon the continued employment only or are also contingent on
meeting performance criteria, as detailed in (2) below.
F-34
ITAMAR MEDICAL LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
2) Options and RSUs with service conditions and market conditions
On January 21, 2016, the Company’s Board of Directors approved a new share-based plan for options and RSUs for key employees
that will vest on January 21, 2020 (or earlier in case of an acceleration event), if the share price is at least NIS 2.13 (equivalent to
$0.61 as of December 31, 2019) (the “First Trigger Price”), at which time 50% of the RSUs will vest and if the share price is NIS
4.24 (equivalent to $1.23 as of December 31, 2019), 100% will vest. In the range between these two share prices, a relative quantity
will vest. An acceleration event is defined as an event in which all the issued and outstanding share capital of the Company
(including by way of a merger in which the Company’s shareholders prior to the merger will hold less than 10% of the issued and
outstanding share capital and voting rights in the company surviving the merger) is sold for consideration reflecting a price per share
that is not lower than NIS 2.13 (equivalent to $061 as of December 31, 2019). The above vesting is also contingent upon continued
employment.
On March 21, 2017, the Company’s Board of Directors resolved to extend by five years, till January 20, 2026, the exercise period of
a total of 18,890,695 options, consisting of 3,699,208 options with service conditions and 15,191,487 options with service conditions
and market conditions, granted to officers and key employees of the Company and its subsidiaries. There was no change in the other
terms of the options, including the exercise price and the vesting terms. The new exercise period is in line with the Company’s
compensation policy which allows an exercise period of up to ten years. On May 14, 2017 the Company’s shareholders approved
such extension with respect to the portion of such options granted to the Company’s President and Chief Executive Officer (the
“CEO”).
The fair value of the extension of the exercise period of the options was $475 thousand. The assessment of the fair value of change
on the service-based options has been executed using Black-Scholes valuation model. The assessment of the fair value of change on
the options with service conditions and market conditions has been executed using a Monte-Carlo Simulation.
On March 14, 2018, the Company’s Board of Directors approved a change of the First Trigger Price from NIS 2.13 (equivalent to
$0.61 as of December 31, 2016) to NIS 1.70 (equivalent to $0.49 as of December 31, 2019) and a change of the January 21, 2020
vesting date to December 20, 2020. On May 23, 2018 the Company’s shareholders approved such changes with respect to the portion
of such options and RSUs granted to the CEO.
Such change triggered a new measurement of the fair value of the options and the RSUs. The fair value of the above changes was
$239 thousand. The assessment has been executed using a Monte-Carlo Simulation.
3) Options to key employees, employees and directors with only service condition
On January 21, 2016, the Company’s Board of Directors, as part of the share-based plan described in (2) above, also approved a
grant of options that will vest as followed: 25% will vest and become exercisable one year following the date of grant and the
remaining 75% will vest and become exercisable in 12 equal quarterly portions, beginning on the first anniversary of the date of
grant.
Grants to other employees not participating in the key employees share-based plan, usually vest over three years, as follows: 2/3 will
vest and be exercisable two years following the date of grant, and the remaining 1/3 will vest and become exercisable in four equal
quarterly portions, at the end of each calendar quarter commencing on the second anniversary of the date of grant.
F-35
ITAMAR MEDICAL LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Options granted to directors during the years ended December 31, 2016, 2017 and 2019, were usually divided into three tranches,
each equal to 33% of the amount of options granted. The allotment and the vesting period for the first tranche began on the date of
grant; the allotment and the vesting period for the second tranche will begin on first anniversary of the date of grant; and the
allotment and the vesting period for the third tranche will begin on the third anniversary of the date grant. Each tranche vests in four
equal portions annually over four years. Upon the completion of a full term of service of a director (three years for external directors
and one year for other directors) without being reelected; or (ii) upon termination of the service of a director in the middle of the
term due to the consummation of an exit event, all outstanding stock options vested on the date of completion of the term or
termination upon consummation of an exit event shall expire within 180 days thereafter and all outstanding unvested stock options
shall accelerate and be fully vested on such date and shall expire within 180 days thereafter. The exercise price for each tranche is set
on the date of allotment and is based on the average market price of the ordinary share prior to such allotment date plus 10%. The
grants to directors were measured on the grant date for all three tranches using the binomial model. The option data in d. below
include only options already allotted.
4) Grants of options and RSUs under the January 2016 plan
Grants in the reported years
In February 2017, the Company granted 711,000 options to 15 employees.
In May 2017, the Company granted 440,000 options to directors and 100,000 options were granted to a consultant.
In September 2017, the Company granted 2,281,218 options and 362,858 RSUs to 11 employees. In addition, 100,000 options were
granted to a consultant.
In March 2018, the Company granted 1,802,512 options and 229,534 RSUs to 20 employees and officers. In addition, 263,681
options and 49,032 RSUs were granted to a consultant.
In August 2018, the Company granted 530,137 options and 17,160 RSUs to12 employees.
In January 2019, the Company granted 1,968,954 options and 339,495 RSUs to four grantees.
In May 2019, the Company granted 4,712,779 options and 610,829 RSUs to 41 grantees.
On May 20, 2019, the Company’s Board of Directors resolved to allow nine grantees to be granted new 5,076,583 performance
options and 1,039,314 performance RSUs in lieu of 5,076,583 performance options and 1,039,314 performance RSUs granted in the
past that have not yet vested. The new performance options and RSUs will vest in December 2022 if the price of the Company’s
ordinary shares is, at such time, at least NIS 5.32 per share (equivalent to $1.54 as of December 31, 2019), or 50% of such options
will vest if the price of our ordinary shares is, at such time, at least NIS 2.66 per share (equivalent to $0.77 as of December 31,
2019), or if, on the applicable measurement date, the price of the Company’s ordinary shares is between these two vesting-trigger
share prices, the percentage of options that will vest will be determined based on linear interpolation. Out of the new options and
RSUs a grant of 3,019,864 performance shares and 609,232 performance RSUs to the CEO were approved by the Company’s
shareholders on March 18, 2020. All such employee accepted the Company’s proposal and the new options and RSU were granted to
all such employees.
In May 2019, the Company granted 1,210,000 options to seven directors.
In August 2019, the Company granted 4,884,966 options and 31,148 RSUs to 19 grantees.
In November 2019, the Company’s Board of Directors approved a grant of a total of 825,000 options to 13 grantees.
F-36
ITAMAR MEDICAL LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Grants subsequent to December 31, 2019
In January 2020, the Company’s Board of Directors approved a grant of a total of 3,942,284 options and 194,887 RSUs to 12
employees. The grant of 1,332,195 options and 194,887 RSUS was subject to the effectiveness of a Registration Statement on Form
S-8, which became effective on March 4, 2020 and the grant of 1,676,425 options to the CEO was approved by the Company’s
shareholders on March 18, 2020.
b. Measurement of fair value of share-based payments
The fair value of the options with service conditions granted to employees, directors and consultants is measured according to the Black-
Scholes valuation model. The fair value of performance options and performance RSUs granted to officers and key employees where
vesting is made on the basis of the increase in the Company’s share price and is measured by implementing the Monte Carlo Simulation.
The options granted to directors, but which have not yet been allocated, nor set an exercise price, were priced using the binomial model.
Following are the parameters used to measure the fair value on the date of grant of share-based awards during the year ended December
31, 2019:
The number of shares arising from the exercise of the options and from the vesting of
the RSUs (in thousands)
The parameters included when calculating fair value:
The share price (at the grant date) (in NIS)
The exercise price (in NIS)
Expected volatility
Expected lifetime
Risk-free interest rate
Expected dividend rate
Options with
service
conditions
only
Options with
service
conditions and
market
conditions
RSUs
9,509
4,093
981
1.08 – 1.23
1.04 – 1.47
51% – 54%
1.08 – 1.23
1.15 – 1.34
54%
3.5– 7.5 years
6.98 years
0.34% – 1.50%
0%
1.74%
0%
1.08 – 1.23
0.00 – 0.30
54%
N/A
N/A
0%
The expected volatility was determined based on the historical volatility of the share price. The expected lifetime of the options is
determined in accordance with management’s estimation of the duration of the employees’ holdings of such awards, given their position
in the Company and the Company’s past experience with respect to employee attrition. The risk-free interest rate is based on interest rates
of Israeli government bonds denominated in NIS, whose remaining period is equal to the expected lifetime of the options.
F-37
ITAMAR MEDICAL LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
c. Reconciliation of outstanding options and RSU’s
The number of options and RSUs and the range of exercise price for every option:
2019
Range of
exercise
price
(NIS)
Number of
awards
Year Ended December 31,
2018
2017
Range of
exercise
price
(NIS)
Range of
exercise
price
(NIS)
Number of
awards
Number of
awards
Outstanding at beginning of year
Granted during the year
Forfeited and expired during the year
Exercised during the year (2) (3)
32,360,793 0.23 – 2.50 32,649,852 0.23 – 2.50 36,779,259 0.23 – 2.50
3,742,218 1.17 – 1.68
13,601,699 1.04 – 1.47
-
(6,306,575)
-
0.23
(1,565,050)
(2,091,128)
(1,540,400) 0.23 – 0.48
3,016,330 1.02 – 1.29
-
(2,208,589)
(1,096,800) 0.23 – 0.51
Outstanding at end of year (1)
42,330,964
1.02 - 2.50 32,360,793 0.23 - 2.50 32,649,852 0.23 - 2.50
Exercisable at end of year
10,127,684
1.12 - 2.50 10,114,392 0.23 - 2.50
9,716,559 0.23 - 2.50
(1) Including:
Options with service conditions only
Options with service conditions and market
conditions
Total
21,954,791
15,661,344
16,753,449
20,376,173
42,330,964
16,699,449
32,360,793
15,896,403
32,649,852
(2) The weighted average share price upon exercise of the options, for options exercised in the year ended December 31, 2019 and 2018 and 2017 was
$0.36, $0.35 and $0.35, respectively.
(3) The weighted average remaining contractual life of the options and RSUs outstanding as of December 31, 2019, 2018 and 2017 was 5.59 years, 5.74
years and 6.23 years, respectively.
The number of RSUs with service conditions and market conditions and the range of exercise price for every RSU:
2019
Range of
exercise
price
(NIS)
Number of
awards
Year Ended December 31,
2018
2017
Range of
exercise
price
(NIS)
Number of
awards
Range of
exercise
price
(NIS)
Number of
awards
Outstanding at beginning of year
Granted during the year
Forfeited and expired during the year
3,441,420 0.00 – 0.30
0.00
-
981,472
(94,497)
3,242,632 0.00 – 0.30
295,726 0.00 – 0.30
-
(96,938)
3,398,889 0.00 – 0.30
0.00
-
362,858
(519,115)
Outstanding at end of year
4,328,395 0.00 – 0.30
3,441,420 0.00 – 0.30
3,242,632 0.00 – 0.30
As a result of the grant of options and RSUs, the Company recorded for the years ended December 31, 2019, 2018 and 2017, a non-cash
expense of $1,259 thousand, $1,021 thousand and $1,294 thousand, respectively. The balance of expenditure amounting to $1,868
thousand will be recorded by the Company over the remaining vesting period of the options and RSUs.
F-38
ITAMAR MEDICAL LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The total share-based compensation expenses relating to all of the Company’s share-based awards recognized for the years ended
December 31, 2019, 2018 and 2017 were included in items of the consolidated statements of operations, as follows:
Cost of revenues
Selling and marketing expenses
Research and development expenses
General and administrative expense
Financial expenses from notes and loans
NOTE 17 – REVENUES
The Company operates in one business sector.
The following is a breakdown of revenues according to product groups:
WatchPAT and other related services
EndoPAT and other related services
2019
Year Ended December 31,
2018
U.S. dollars in thousands
2017
$
$
10 $
382
171
672
24
1,259 $
10 $
295
104
612
-
1,021 $
9
336
87
740
122
1,294
2019
Year Ended December 31,
2018
U.S. dollars in thousands
2017
$
$
28,988 $
2,270
31,258 $
22,384 $
1,805
24,189 $
18,105
2,596
20,701
The following is a breakdown of revenues on the basis of geographical regions (based on the geographical location of the
customer):
2019
Year Ended December 31,
2018
U.S. dollars in thousands
2017
$
$
22,960 $
3,489
3,383
912
274
240
31,258 $
17,582 $
3,374
1,885
849
281
218
24,189 $
14,764
2,965
1,746
759
260
207
20,701
United States and Canada
Japan
Europe
Asia Pacific (excluding Japan)
Israel
Others
The majority of the Company’s long-lived assets are in Israel.
F-39
ITAMAR MEDICAL LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Revenue from major customers
Customer A
Customer B
Customer C
NOTE 18 – COST OF REVENUES
Raw materials, auxiliary materials, subcontractors (including changes in
inventories)
Payroll and related expenses (including share-based payment)
Shipping
Depreciation and amortization
Other
NOTE 19 – FINANCIAL INCOME AND EXPENSES
Financial income from cash, deposits and investments:
In respect of cash and investments in bank deposits and marketable securities*
Other financial income
Financial expenses from lease, notes, loans and other:
Convertible notes*
Short-term bank loan
Lease liabilities
Short-term shareholders’ loans
Other financial expenses
Exchange rate differences
$
$
$
$
$
$
$
$
Gain on derivative financial instruments:
Gain on revaluation to fair value of the warrants embedded in the convertible notes $
Gain on revaluation to fair value of warrants
$
* Including the effect of changes in the exchange rate of the NIS against the dollar.
F-40
2019
Year Ended December 31,
2018
U.S. dollars in thousands
2017
7,002 $
3,443
2,048
12,493 $
4,571 $
3,229
2,870
10,670 $
3,622
2,621
2,510
8,753
2019
Year Ended December 31,
2018
U.S. dollars in thousands
2017
2,555 $
2,470
815
552
592
6,984 $
2,538 $
1,806
443
255
684
5,726 $
1,767
1,956
500
190
589
5,002
2019
Year Ended December 31,
2018
U.S. dollars in thousands
2017
359 $
95
454 $
- $
364
279
-
432
158
1,233 $
-
442
442 $
93 $
151
244 $
393 $
316
-
85
359
8
1,161 $
96
2,337
2,433 $
1,389
202
1,591
4,427
-
-
-
427
30
4,884
2,141
1,784
3,925
ITAMAR MEDICAL LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 20 – LOSS PER SHARE
a. Basic loss per share
The computation of basic loss per share was based on the net loss attributable to ordinary shares divided by the weighted average number
of ordinary shares outstanding.
Net loss attributed to the ordinary shares
$
(5,268) $
(1,729) $
(5,301)
Weighted average number of ordinary shares
2019
Year Ended December 31,
2018
U.S. dollars in thousands
2017
2019
Year Ended December 31,
2018
Number of shares in thousands
2017
Balance at the beginning of the year
The effect of private placement
The effect of exercise of options into shares
Weighted average number of ordinary shares used in computation of basic loss per
share
287,616
44,726
306
264,495
12,908
262
262,917
-
1,192
332,648
277,665
264,109
b. Diluted loss per share
The computation of diluted loss per share was based on the net loss attributed to the ordinary shares divided by the weighted average
number of ordinary shares outstanding, after adjustment for all potentially dilutive ordinary shares, as follows:
Net loss used in computation of basic earnings per share
Changes in the fair value of the Viola warrants and Warrants (Series 4) (and in the
year ended December 31, 2018 also of the warrants embedded in the convertible
notes), which are classified as a liability
Net loss attributed to the ordinary shares (diluted)
Weighted average number of ordinary shares (diluted)
2019
Year Ended December 31,
2018
U.S. dollars in thousands
2017
$
(5,268) $
(1,729) $
(5,301)
$
(442)
(5,710) $
(2,433)
(4,162) $
(1,784)
(7,085)
2019
Year Ended December 31,
2018
Number of shares in thousands
2017
Weighted average number of ordinary shares used in computation of basic loss per
share
Effect of the exercise of the Viola warrants and Warrants (Series 4) (and in the year
ended December 31, 2018 also of the conversion of the convertible notes)
Weighted average number of ordinary shares used in computation of diluted loss
per share
332,648
277,665
264,109
13,547
43,246
39,877
346,195
320,911
303,986
F-41
ITAMAR MEDICAL LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
In the calculation of the weighted average number of ordinary shares (diluted) for the year ended December 31, 2019, 42,365,681 shares
in respect of options and 4,328,395 shares in respect of RSUs granted to employees, directors and consultants were not included, due to
their anti-dilutive effect.
In the calculation of the weighted average number of ordinary shares (diluted) for the year ended December 31, 2018, 32,412,199 shares
in respect of options and 3,441,420 shares in respect of RSUs granted to employees, directors and consultants were not included, due to
their anti-dilutive effect.
In the calculation of the weighted average number of ordinary shares (diluted) for the year ended December 31, 2017, 23,588,582 shares
in respect of convertible notes, 32,719,056 shares in respect of options and 3,242,632 shares in respect of RSUs granted to employees,
directors and consultants were not included, due to their anti-dilutive effect.
NOTE 21 – FINANCIAL INSTRUMENTS
This note provides qualitative information regarding the exposure to each of the following risks, and the Group’s objectives, policy and
processes relating to measurement of such risks. Quantitative disclosure is provided throughout these consolidated financial statements.
Credit risk
As of December 31, 2019 and 2018, the maximum exposure to credit risk is represented by the balance of financial assets. Management has
developed policies for the authorization of credit to customers. The accounting exposure to credit risk is monitored constantly according to the
behavior of payment of the debtors. Credit is assigned on a customer-by-customer basis and is subject to assessments which consider the
customers’ payment capacity, as well as past behavior regarding due dates, balances past due and delinquent accounts. Approximately 40%,
44% and 42%, respectively, of the Group’s revenues in the years ended December 31, 2019, 2018 and 2017, arise from sales to single
customers. Other than this, there are no other concentrations of credit risk.
The Group’s revenues are primarily derived from sales to customers in the U.S., Japan and Europe. Management regularly monitors trade
receivables and the financial statements include specific provisions for doubtful debt, which properly reflect, in the opinion of management,
the inherent loss in debt whose collection is in doubtful.
The Group limits its exposure to credit risk by investing exclusively in bank deposits.
The maximum exposure to credit risk in respect of cash and cash equivalents, trade receivables, other accounts receivable and other
investments, as of the report date, by geographic locations was as follows:
Israel
United States and Canada
Asia Pacific (including Japan)
Europe
Other
F-42
December 31,
2019
2018
U.S. dollars in thousands
$
$
12,894 $
9,362
409
1,773
5
24,443 $
5,378
6,337
936
998
194
13,843
ITAMAR MEDICAL LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Aging of receivables and impairment and weighted average loss rate:
December 31, 2019
December 31, 2018
Weighted
average
loss
Impairment
rate
% U.S. dollars in thousands U.S. dollars in thousands
Impairment
Gross
amount
Gross
amount
Not in arrears
In arrears up to three months
In arrears up to six months
In arrears up to 12 months
In arrears over 12 months
1.5 $
1.5
1.5
17.5
100.0
$
7,851 $
703
98
20
361
9,033 $
117 $
10
1
4
361
493 $
5,464 $
1,030
221
188
159
7,062 $
64
12
3
32
159
270
Movements in the allowance for impairment of receivables during the year were as follows:
Balance at beginning of year
Recognized impairment loss
Bad debt
Balance at end of year
Liquidity risk
Year Ended December 31,
2019
2018
U.S. dollars in thousands
$
$
270 $
349
(126)
493 $
540
104
(374)
270
The Group’s approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities
when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Group’s reputation.
The Group ensures that it has sufficient cash on hand for payment of expected operating expenses, including any amounts required to fulfill
financial obligations. In addition to cash flows provided by its operating activities, in order to meet the Company’s overall liquidity needs for
operations, servicing debt and funding capital expenditures, the Company relies on cost-cutting and operating improvements to optimize
capacity utilization and minimizing loss, as well as borrowing under credit facilities, proceeds of debt and equity offerings.
F-43
ITAMAR MEDICAL LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Below is an analysis of contractual maturities of financial liabilities, including estimated interest payments, as of December 31, 2019 and
2018:
December 31, 2019
Non-derivative financial liabilities
Short-term bank loans
Trade payables
Other long-term liabilities
Lease liabilities (including current maturities)
Other accounts payable
Total
December 31, 2018
Non-derivative financial liabilities
Convertible notes, including current maturities and
accrued interest
Trade payables
Other long-term liabilities
Other accounts payable
Total
Equity Risk
$
$
$
$
Carrying
Amount
Contractual
Cash flow
Up to 6
months
6-12 months
U.S. dollars in thousands
1-2 years
2-5 years
Over 5
years
5,000
2,028
1,260
2,598
4,361
15,247
$
$
5,056
2,028
1,260
3,424
4,361
16,129
$
$
5,056
2,028
-
553
4,361
11,998
$
$
5,000
1,517
1,052
2,767
10,336
$
$
5,065
1,517
1,052
2,767
10,401
$
$
5,065
1,517
-
2,668
9,250
$
$
-
-
-
528
-
528
$
$
-
-
-
99
99
$
$
-
-
123
804
-
927
$
$
-
-
-
-
-
$
$
-
-
382
613
-
995
$
$
-
-
-
-
-
$
$
-
-
755
926
-
1,681
-
-
1,052
-
1,052
Changes in the fair value of the Viola Warrants and the Warrants (Series 4) that were denominated in a currency other than the Company’s
functional currency affect the statements of operations. However, they did not imply any risk or variability in cash flows, considering that
through their exercise, the Company would have settled the aforementioned derivatives through issuance of its own shares rather than in cash.
Foreign Currency risk
The Group is exposed to foreign currency risk with respect to sales, purchases, payroll and services expenses and loans denominated in non-
dollar currencies (primarily NIS, but also Euro and Japanese yen) used by the companies in the Group. The currencies in which most
expenses are denominated are the dollar, NIS, Euro and Japanese yen.
Most of the Group’s revenues are denominated in its functional currency (the dollar) and some in Euro, whereas the Group’s payroll expenses
in Israel are denominated in NIS. Therefore, the Group is exposed to fluctuations in the dollar/NIS and dollar/Euro exchange rates and strives
to mitigate currency risk by maintaining liquid investments and cash positions in short-term NIS-denominated deposits, in NIS and in Euro.
F-44
ITAMAR MEDICAL LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The Group’s exposure to the Israeli CPI and foreign currency risk is as follows:
Dollars
NIS
Currency different from dollar
Euro
U.S. dollars in thousands
Other
currencies
Non-
monetary
items
Total
$
$
$
December 31, 2019
Assets
Cash and cash equivalents
Trade receivables (including long-term trade receivables)
Other receivable
Inventories
Long-term restricted deposits
Long-term prepaid expenses
Property and equipment and intangible assets
Right-of-use assets
Liabilities
Sort-term bank loan
Trade payables
Other accounts payable (including accrued expenses)
Provisions
Lease liabilities (including current maturities)
Employee benefits
Other long-term accounts payable
Total exposure in the statements of financial position in respect of
financial assets and financial liabilities
December 31, 2018
Assets
Cash and cash equivalents
Trade receivables (including long-term trade receivables)
Other receivable
Inventories
Long-term restricted deposits
Long-term prepaid expenses
Property and equipment and intangible assets
Liabilities
Sort-term bank loan
Trade payables
Other accounts payable (including accrued expenses)
Provisions
Derivative instruments
Employee benefits
Other long-term accounts payable
$
13,178
7,750
338
-
111
-
-
-
21,377
5,000
779
2,940
-
714
-
1,060
10,493
$
1,254
96
62
-
275
-
-
-
1,687
-
1,215
1,366
-
1,884
-
200
4,665
$
587
694
2
-
-
-
-
-
1,283
-
34
54
-
-
-
-
88
$
96
-
-
-
-
-
-
-
96
-
-
-
-
-
-
-
-
$
-
-
1,002
3,363
-
90
1,867
2,442
8,764
-
-
412
273
-
612
-
1,297
10,884
$
(2,978) $
1,195
$
96
$
7,467
$
$
4,088
6,236
247
-
109
-
-
10,680
5,000
714
1,965
-
-
-
947
8,626
$
1,885
229
32
-
190
-
-
2,336
-
798
761
-
442
-
105
2,106
$
426
327
2
-
-
-
-
755
-
5
50
-
-
-
-
55
$
72
-
-
-
-
-
-
72
-
-
-
-
-
-
-
-
$
-
-
737
2,235
-
66
1,511
4,549
-
-
321
215
-
381
-
917
Total exposure in the statements of financial position in respect of
financial assets and financial liabilities
$
2,054
$
230
$
700
$
72
$
3,632
$
15,115
8,540
1,404
3,363
386
90
1,867
2,442
33,207
5,000
2,028
4,772
273
2,598
612
1,260
16,543
16,664
6,471
6,792
1,018
2,235
299
66
1,511
18,392
5,000
1,517
3,097
215
442
381
1,052
11,704
6,688
F-45
ITAMAR MEDICAL LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Sensitivity analysis
A stronger dollar against the following currencies at the end of each reporting period, and an increase in the Israeli CPI would have increased
(decreased) equity and net income/loss by the following amounts (after-tax). The following analysis is based on changes to exchange rates,
which the Group believes to be reasonably possible as of the end of the reported year. This analysis assumes all other variables, especially
interest rates, remain constant.
An increase in the exchange rate of the following currencies against the dollar:
NIS/dollar by 5%
Euro/dollar by 5%
December 31, 2019
Equity
U.S. dollars in thousands
Profit (loss)
$
(149) $
60
(149)
60
The weakening of these currencies against the dollar at a similar rate as of December 31, 2019 had a similar effect, albeit in the opposite
direction, assuming that all other variables remain constant.
An increase in the exchange rate of the following currencies against the dollar:
NIS/dollar by 5%
Euro/dollar by 5%
December 31, 2018
Equity
U.S. dollars in thousands
Profit
$
12 $
35
12
35
The weakening of these currencies against the dollar at a similar rate as of December 31, 2018 had a similar effect, albeit in the opposite
direction, assuming that all other variables remain constant.
Fair value of financial instruments measured at fair value, for disclosure purposes only
The carrying amount of the cash and cash equivalents, trade receivables, other accounts receivable, bank deposits, pledged deposits, trade
payables, and other accounts payable, lease liabilities and derivatives is identical or approximate to their fair values due to the lifetime of
these items.
The fair value of other financial liabilities and their carrying amounts, as presented in the statements of financial position, are as follows:
Liabilities:
Liability in respect of royalties to the IIA and other government
institutions
$
1,260 $
527 $
1,151 $
490
December 31, 2019
December 31, 2018
Carrying
amount
Fair value
Carrying
amount
U.S. dollars in thousands
Fair value
F-46
ITAMAR MEDICAL LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Fair value hierarchy of financial instruments measured at fair value
The following table shows an analysis of the financial instruments measured at fair value using the valuation method.
Financial instruments - derivative instruments
December 31,
2018
Level 3
U.S. dollars
in thousands
$
442
The change from the opening balance to the closing balance of the financial instruments measured at fair value, categorized within Level 3
hierarchy, in the years ended December 31, 2019, 2018 and 2017, respectively, was caused by the revaluation to fair value of the derivatives
in the amount of $442 thousand, $2,433 thousand and $3,925 thousand, as described in Note 19.
NOTE 22 – RELATED PARTIES
a. Compensation
Compensation to key executives includes:
Year Ended December 31,
2019
2018
2017
Number
of persons Amount
Number
of persons Amount
Number
of persons Amount
U.S. dollars
in
thousands
8 $
8
$
2,201
850
3,051
U.S. dollars
in
thousands
1,835
702
2,537
7 $
7
$
U.S.
dollars in
thousands
1,384
1,083
2,467
7 $
7
$
Employee compensation
Share-based payment
Total
Compensation to directors who are not employed by the Company includes:
Year Ended December 31,
2019
2018
2017
Number of
persons
Amount
Number of
persons
Number of
persons
Amount
Director compensation
Share-based payment
Total
U.S. dollars
in
thousands
8 $
8
$
213
88
301
Amount
U.S. dollars
in
thousands
208
76
284
8 $
8
$
U.S.
dollars in
thousands
195
111
306
9 $
9
9 $
December 31,
2019
Year Ended December 31,
2018
Transaction amounts
U.S. dollars in thousands
2017
2019
2018
Carrying amount
U.S. dollars in thousands
341
383 $
2,773 $
Key executives (including directors) of the Company
$
3,352 $
2,821 $
F-47
ITAMAR MEDICAL LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
b. Capital reserve for transactions with shareholders
Any difference between the nominal value, i.e., the cash amount received, of the loans provided by shareholders, acting in the capacity of
shareholders, and their fair value on initial recognition is reflected in equity as a shareholder contribution. Upon an early extinguishment
of such debt, any cost incurred as a result of the early extinguishment is reflected in equity as a shareholder distribution.
c.
Insurance and indemnification of key management personnel
The Company’s directors and officers are covered by a directors’ and officers’ liability insurance policy. In addition, the Company has
undertaken to enter into indemnification agreements with each of its directors and officers undertaking to indemnify them to the fullest
extent permitted by law.
d. Marketing agreement with a former controlling shareholder in the Company
In 2014, the Company entered into a co-marketing agreement with Medtronic, Inc. (“Medtronic”) (which at the time was a controlling
shareholder) that was subsequently amended in 2015. According to the agreement (as amended), Medtronic was granted exclusive rights
to co-market, with the Company, the Company’s WatchPAT products within the Company’s Total Sleep Solution framework to
electrophysiologists (physicians who specialize in cardiology arrhythmias) in the U.S. Pursuant to this agreement, Medtronic markets
WatchPAT as part of a comprehensive solution offered by Medtronic to physicians. The agreement is currently renewable automatically
for 30 day-periods, unless earlier terminated by either party upon 14 days prior notice.
In the years ended on December 31, 2019, 2018 and 2017, the Company recognized revenues from sales to customers (third parties)
under this agreement in the amount of approximately $203 thousand, $207 thousand and $307 thousand, respectively. The total sales
commissions to Medtronic in these years under this agreement totaled approximately $41 thousand, $41 thousand and $61 thousand,
respectively.
NOTE 23 – SUBSEQUENT EVENTS:
a.
2020 Public Offering
See Note 1b.
b. Grant of stock options and RSUs
See Note 16a(4).
c. Amendment of the bank line of credit
See Note 8a.
F-48
ITAMAR MEDICAL LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
d. Effects of the coronavirus outbreak
In December 2019, a novel strain of coronavirus was reported in Wuhan, China. While, initially, the coronavirus outbreak was largely
concentrated in China, it has now spread globally, including to the U.S., Europe, Japan and Israel. Many countries around the world,
including in the U.S., Europe, Japan and Israel, have since implemented significant measures in an attempt to control the spread of the
virus, including temporary limitations on travel, public gatherings, including work place gathering access to various facilities as well as in
healthcare institutes, and other material limitations. These measures have resulted in work stoppages, in many countries as well as in
China where part of the Company’s suppliers are located, which disrupted the Company’s supply chain. As such, there is no assurance
that the Company will not suffer additional supply chain interruptions.
Furthermore, limitations on access to healthcare facilities, including those who typically service the Company’s products, could adversely
impact demand for the Company’s multi-use reusable products. At the same time, in the U.S., the American Academy of Sleep Medicine
(AASM) has recently issued guidance encouraging sleep clinicians to use disposable single use home sleep tests, instead of traditional in-
lab polysomnography (PSG) tests or multi use reusable home sleep test, to reduce risk of infections, especially during the coronavirus
outbreak. While demand for the Company’s multi use reusable home sleep test devices may be adversely impacted by the coronavirus
outbreak, the Company is changing its manufacturing mix to prioritize WatchPAT ONE production and accelerating its efforts to obtain
regulatory approvals for its disposable WatchPAT ONE in Europe and other parts of the world. To that end, the Company is also currently
investing considerable resources to increase its WatchPAT ONE production capacity, while given the rapidly changing market
environment, there is no certainty as to when such investments and regulatory approvals will materialize into additional WatchPAT ONE
sales.
The extent to which the coronavirus impacts the Company’s manufacturing, operations, demand for its products and business results, will
depend on future developments, which are rapid and highly uncertain and cannot be predicted with confidence, including the duration
and severity of the outbreak, and the actions that may be implemented in an attempt to contain the coronavirus or treat its impact. As
such, the continued spread of the coronavirus globally and uncertainty about current global economic conditions, could adversely impact
the Company’s operations and workforce, including its manufacturing and sales and marketing activities, which in turn, could have a
material adverse impact on the Company’s business, financial condition and results of operation.
F-49
Exhibit 2.4/A
February 9, 2020
To:
Mizrahi Tefahot Bank Ltd. (“Holder”)
Dear Holder,
RE: EXTENSION OF PREVIOUS WARRANTS
Itamar Medical Ltd. (hereinafter: the “Company”) currently intends to enter into an amendment to the framework agreement with Holder, under which the
existing framework agreement shall be extended, and certain additional terms shall be amended.
In the framework of the negotiations, and in order to induce the Holder to extend the term of the existing framework agreement and to amend it, Company
has agreed to extend the warrant period for all outstanding warrants granted to Holder, as set forth below.
In light of the above, we hereby confirm that, effective as of the date of this letter:
1. The original Warrant issued to the Holder on May 14, 2017, is hereby extended until November 30, 2023 (clause 3.1 to the Warrant
Agreement will be amended accordingly).
2. The original Warrant issued to the Holder on March 12, 2019, is hereby extended until November 30, 2023 (clause 3.1 to the Warrant
Agreement will be amended accordingly).
All other terms and conditions of the abovementioned Warrants shall remain unchanged, in full force and effect.
Sincerely,
__________________
Itamar Medical Ltd.
By: ______________
Title:_____________
Date: February 9, 2020
Exhibit 2.5
This Warrant Agreement (the “Agreement”), is made as of the 9 day of February, 2020 (the "Effective Date") by and between:
WARRANT AGREEMENT
(1)
Itamar Medical Ltd. (the “Company”), an Israeli public company (Company No. 51-243421-8), whose shares are traded on the Tel-Aviv Stock
Exchange (“TASE”); and
(2) Mizrahi Tefahot Bank Ltd. (the “Bank”), an Israeli Company formed under the laws of the State of Israel.
In connection with the Credit Facility Agreement between the Company and the Bank dated February 9, 2020 (the “Credit Agreement”), the Company
agrees to grant the Bank an additional Warrant (the “Warrant”) to purchase up to 359,140 ordinary shares with a nominal value NIS 0.01 each of the
Company (“Ordinary Shares”).
In consideration of the foregoing and for the purpose of defining the terms and provisions of the Warrant and the respective rights and obligations
thereunder, the Company and the Bank hereby agree as follows:
1.
Issue of Warrant
1.1. General. The Company hereby grants to the Bank an assignable (only to Permitted Transferees (as defined below) Warrant to purchase
359,140 Ordinary Shares (the “Warrant Shares”). The Warrant may only be assigned to a Permitted Transferee in the event that the Bank
makes a corporate decision to sell a portfolio of its holdings in startup companies (comprising of at least two companies), or in the event that
the Bank is required by law (including instructions by the Israeli Banking Supervision authorities) to sell and/or transfer this Warrant and/or
the Warrant Shares.
“Permitted Transferee” shall mean any entity in which the Bank has an equity interest of at least 5% or to any other reputable financial
institution, bank or venture capital fund.
1.2. Registration. The Warrant shall be registered on the books of the Company when issued. Upon issuance of this Warrant, the Company shall
provide the Bank with a confirmation from the Tel Aviv Stock Exchange Ltd. (the "TASE"), that the Warrants Shares will be registered for
trading upon exercise hereof in accordance with its terms and the applicable TASE rules.
1.3. Limited Rights of Warrant-Holder. Nothing contained in this Agreement or in the Warrant shall, prior to an exercise thereof, be construed as
conferring upon the Bank or any Permitted Transferee of the Bank (collectively, the “Warrant-Holder”) any rights as a shareholder of the
Company, including (without limitation) the right to vote, receive dividends, consent or receive notices as a shareholder.
1.4. NEITHER THE SECURITIES REPRESENTED BY THIS WARRANT NOR THE SECURITIES INTO WHICH THIS WARRANT IS
EXERCISABLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES
COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT
OF 1933, AS AMENDED (THE “SECURITIES ACT”), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD, EXCEPT
PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN
AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE
SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS AS EVIDENCED BY A LEGAL
OPINION OF COUNSEL REASONABLY ACCEPTABLE TO THE COMPANY TO SUCH EFFECT, THE SUBSTANCE OF WHICH
SHALL BE REASONABLY ACCEPTABLE TO THE COMPANY.
-2-
2. Exercise; Exercise Price
2.1. The exercise price per each Warrant Share shall be NIS 1.044 (One New Israeli Shekel, and 4.4 Agorot) [average closing price over last 30
trading days prior to November 25, 2019 (Date of Board Resolution)] per Warrant Share (the “Exercise Price”). The Exercise Price shall be
adjusted from time to time pursuant to the terms set forth below.
2.2. Exercise on a Net-Issuance Basis. In lieu of payment to the Company of the Exercise Price per Warrant Share, as set forth in Subsection 2.1
above, a Warrant-Holder may exercise the Warrant (or any portion thereof), into the number of Ordinary Shares calculated pursuant to the
following formula, by delivering the Warrant to the Company, accompanied by a written notice of exercise, specifying the number of shares
for which the Warrant-Holder desires to exercise the Warrant:
X = Y(A - B)
A
Where:
X = the number of Warrant Shares to be issued to the Warrant-Holder;
Y = the number of Warrant Shares with respect to which the Warrant Holder desires to exercise the Warrant;
A = the Fair Market Value (as defined below) of one Warrant Share; and
B = the Exercise Price of a Warrant Share, as adjusted.
“Fair Market Value” of a Warrant Share shall mean:
(i) the closing price of an Ordinary Share, as reported on the principal stock exchange on which the Company's shares are traded at such
time one (1) trading day immediately preceding the delivery of the Purchase Form / exercise notice; or
(ii) If the Fair Market Value for the Warrant Shares cannot be determined in the manner set forth in sub section (i) above, then such Fair
Market Value shall be as determined in good faith by the Company and the Warrant-Holder or, if the Company and the Warrant-Holder fail
to reach an agreement, by any third party mutually agreed to by the Company and the Warrant-Holder who shall bear the cost of such third
party in equal parts.
3. Exercise Period
3.1. The Warrant-Holder may exercise part or all of the Warrant at any time, and from time to time, in accordance with the provisions of this
Agreement, during the period commencing on the Effective Date and terminating on the fourth anniversary thereof (i.e. at 23:59 Israel time
on November 30, 2023) (the “Exercise Period”). The Warrant-Holder shall not exercise part or all of the Warrant on the record date of a
Company Event (as defined hereunder); provided that if the last day of the Exercise Period occurs on such record date of a Company Event,
then the Exercise Period will be automatically extended, without the need for any further approval of the Company, until the 7th day
following such record date. The Company shall inform the Holder of the extension of the Exercise Period as aforesaid.
Notwithstanding the foregoing, if the last day of the Exercise Period occurs during a period that was determined by the Company as a
blackout period due to the existence or potential for the existence of inside information (as defined under the Israeli Securities Law, 1968)
including due to a Company Event (hereinafter the: "Blackout Period"), then the Exercise Period will be automatically extended, without
the need for any further approval of the Company, until the 30th day following the end of the Blackout Period. The Company shall inform
the Holder of the extension of the Exercise Period as aforesaid.
"Company Event" means - (a) publication of a prospectus or shelf offering report in connection with the raising of capital from the public;
(b) signing of a merger agreement; (c) signing of an agreement for the acquisition of the Company's business; (d) distribution of dividend;
(e) distribution of bonus shares; (f) publication of a prospectus or shelf offering report in connection with raising capital from existing
shareholders of the Company; (g) signing an investment agreement or a loan agreement to the Company.
-3-
3.2. Upon the earlier of: (i) the expiry of the Exercise Period; or (ii) the exercise of this Warrant in full; the Warrant shall become null and void
and shall no longer remain outstanding or exercisable.
3.3. Automatic Exercise. If at the time of expiry of the Warrant Period for any portion of the Warrant, a portion of the Warrant has not been
exercised, such portion of the Warrant will be deemed to have been exercised in accordance with the provisions of Section 2.2 at the date of
expiry of the Warrant Period.
4. Warrant Shares
4.1. Reservation of Warrant Shares. The Company represents that it has reserved and shall at all times keep reserved, for so long as any Warrant
remains outstanding, out of its authorized share capital, such number of Ordinary Shares as may be subject to purchase under the
outstanding Warrant.
4.2. Exercise of Warrants; Issue of Warrant Shares.
4.2.1.
The Warrant Holder shall exercise the Warrant (or any portion thereof) by delivering to the Company a duly executed Purchase
Form, a form of which is attached to this Agreement, provided, however, that in each single exercise of a portion of the Warrant
(except for the last portion), the Warrant Holder will exercise such portion in an exercise amount of at least NIS 200,000.
4.2.2. Within three (3) business days following surrender of this Warrant and (unless the Warrant Holder elects to exercise the Warrant on
a net-issuance basis) payment of the Exercise Price as set forth herein, the Company shall issue and cause to be delivered to the
Nominee Company of Mizrachi Tefahot Bank Ltd. (the “Nominee Company”) a certificate or certificates (the “Warrant Share
Certificate”) representing the number of Warrant Shares so purchased upon the exercise of the Warrant in the name of the
Nominee Company. The Warrant Share Certificate shall be credited to the bank account/TASE member account of the Warrant-
Holder, details of which shall be provided by the Warrant-Holder to the Company within the Purchase Form.
Subject to applicable laws, rules and regulations (including stock exchange rules), such Warrant Share Certificate or Certificates
shall be deemed to have been issued and any person so designated to be named therein shall be deemed to have become a holder of
such Warrant Shares as of the date of surrender of the Warrant being exercised and payment of the Exercise Price, to the extent
applicable, notwithstanding that the Warrant Share Certificate or Certificates representing such shares shall not actually have been
delivered or that the shareholders register of the Company has yet to be updated.
Each Warrant shall be exercisable, at the election of the Warrant-Holder, either in full or from time to time in part and, in the event
of a partial exercise of the Warrant at any time prior to the expiry of the Exercise Period, a new certificate evidencing the remaining
amount applicable to the Warrant will be issued to the Warrant Holder by the Company.
4.2.4.
4.2.3.
4.2.5. Notwithstanding anything to the contrary, any or all of the Warrants may not be exercised on the record date with respect to the
distribution of bonus shares, offer by way of rights issue, distribution of dividends, consolidation of share capital, consolidation of
shares, reduction or split in share capital (each hereinafter referred to as a “Corporate Event”). In addition, if the ex-date with
respect to a Corporate Event occurs before the record date relating to such Corporate Event, then the exercise of Warrants shall not
occur on such ex-date.
-4-
5. Adjustment of Exercise Price and Number of Warrant Shares
Subject to applicable laws, rules and regulations (including stock exchange rules), the Exercise Price and/or the number and type of securities
purchasable upon the exercise of the Warrant, as applicable, shall be subject to adjustment from time to time (at any time during the Exercise
Period and prior to the exercise of the Warrant in full) upon the happening of certain events, as follows:
5.1. Bonus Shares. In the event the Company distributes bonus shares, the Warrant-Holder upon exercising the Warrant shall be issued by the
Company (for the exercise price payable upon such exercise, if any), the Ordinary Shares as to which he is exercising the Warrant and, in
addition thereto (at no additional cost), such number of shares of the class or classes in which such bonus shares were distributed, on the
same terms and conditions as offered to the other shareholders, which he would have received if he had been the holder of the Ordinary
Shares as to which he is exercising the Warrant at all times between the date of issuance of the Warrant and the date of its exercise.
In the event that the Warrant Holder will exercise the Warrant on a Net-Issuance Basis (in accordance with Section 2.2 above) immediately
following a distributions of bonus shares, then the Exercise Price per Warrant Share will be reduced by the ratio of the bonus shares
distribution (i.e., the number of bonus shares distributed divided by the total number of Ordinary Shares immediately following the said
distribution of bonus shares), and the number of Warrant Shares to be issued to Warrant Holder on a Net-Issuance Basis shall be calculated
based on the following formula:
Y=
(EP/R))/MP
*(MP-
R*X
Y
X
R
MP
EP
The number of shares issued upon the exercise of the Warrant following the issuance of bonus shares.
Number of Ordinary Shares exercised by the Warrant Holder.
The result of: (i) the total number of Ordinary Shares immediately following the distribution of bonus shares; divided by (ii) the
total number of Ordinary Shares immediately prior to the distribution of bonus shares.
The price of an Ordinary Share on the stock exchange immediately following the distribution of bonus shares.
Exercise Price
For illustration purposes only, in the event the Company granted the Bank a Warrant to 100 Ordinary Shares at an Exercise Price of NIS55
per Warrant Share, and following that the Company distributed bonus shares at a 1:1 ratio while the price of an Ordinary Share on the TASE
prior to the distribution of the bonus shares was NIS 80 and immediately following such distribution of bonus shares was NIS 40, then upon
the cashless exercise of such Warrant immediately following the distribution of bonus shares, the number of Warrant Shares issued to the
Participant would be 62 Ordinary Shares pursuant to the following calculation:
[200 x (40-27.5)/40] = 62.5
The number of Warrant Shares resulting as of the said distribution shall be 62 Ordinary Shares only as no fractional shares will be issued.
-5-
5.2. Rights Offering. In the event of a rights offering conducted by the Company, the number of Warrant Shares issued as a result of the exercise
of the Warrant shall be adjusted to the benefit component (הבטהה ביכרמ) in the rights offering as reflected in the ratio between the closing
price of an Ordinary Share on the stock exchange on the last trading prior to the ex-day and the basis price of an Ordinary Share on the stock
exchange ex-rights. Notwithstanding the above, the Exercise Price shall not be reduced in any event to less than the higher of: (i) nominal
value of an Ordinary Shares; (ii) minimum exercise price according to the stock exchange by laws (if and to the extent that the stock
exchange by laws indeed imposes such a limitation on such an issuance of Warrant Shares).
5.3. Dividend. In the event the Company distributes cash dividends, then the Exercise Price for each Ordinary Share underlying such Warrant,
not exercised prior to such record date, shall be reduced, as of the record date determining the right to receive such dividend, by the gross
dividend amount so distributed per Warrant Share.
However, in any event, the Exercise Price shall not be reduced to less than the higher of: (i) the par value of an Ordinary Share; (ii)
minimum exercise price according to the stock exchange by laws (if and to the extent that the stock exchange by laws indeed imposes such
a limitation on such an issuance of Warrant Shares).
5.4. Adjustment Upon a Consolidation or Merger. In the event that the Company shall consolidate or merge with or into another corporation or
convey all or substantially all of its assets to another corporation or other entity, then, in each such case, the Warrant Holder shall, upon any
exercise of the Warrant, at any time after the consummation of such consolidation, merger, or conveyance, be entitled to receive, in lieu of
the Warrant Shares or other securities and property receivable upon the exercise of the Warrant prior to such consummation, the shares or
other securities or property to which the Warrant-Holder would have been entitled upon the consummation of such consolidation, merger or
conveyance if the Warrant Holder had exercised the Warrant immediately prior thereto, all subject to further adjustment as provided in this
Section; and in each such case, the terms of the Warrant (including exercisability, transfer and adjustment provisions of the Warrant) shall be
applicable to the shares or other securities or property receivable upon the exercise of the Warrant after the consummation of such
consolidation, merger or conveyance.
5.5. Adjustment Upon Reorganization. If the Company shall subdivide or combine its Ordinary Shares, the Exercise Price shall be
proportionately reduced in case of subdivision of shares (and the number of Ordinary Shares purchasable upon the exercise of the Warrant
shall be proportionately increased), as at the effective date of such subdivision, or if the Company shall fix a record date for the purpose of
so subdividing, as at such record date, whichever is earlier, or shall be proportionately increased in the case of combination of shares (and
the number of Ordinary Shares purchasable upon the exercise of the Warrant shall be proportionately reduced), as at the effective date of
such combination, or, if the Company shall fix a record date for the purpose of so combining, as at such record date, whichever is earlier.
5.6. Adjustment Upon spin-off. In the event that the Company shall issue securities of a subsidiary to its shareholders (as a result of a split-off,
spin-off or the like) then the Exercise Price for each Ordinary Share underlying the Warrant (not exercised prior to such record date) shall be
adjusted by multiplying the Exercise Price in the ratio between: (1) the basis price of an Ordinary Share on the stock exchange ex- split-off,
spin-off or the like; and (2) the closing price of an Ordinary Share on the stock exchange on the last trading prior to the ex-day for such a
split-off, spin-off or the like.
Notwithstanding the above, the Exercise Price shall not be reduced in any event to less than the higher of: (i) nominal value of an Ordinary
Shares; (ii) minimum exercise price according to the stock exchange by laws (if and to the extent that the stock exchange by laws indeed
imposes such a limitation on such an issuance of Warrant Shares).
-6-
5.7. No Impairment. The Company will not, through any reorganization, recapitalization, transfer of assets, consolidation, merger, dissolution,
issue or sale of securities, amendment of its memorandum or articles of association or any other organizational document, or any other
voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the
Company, but will at all times in good faith assist in the carrying out of all the provisions of the Warrant and in the taking of all such action
as may be reasonably necessary or appropriate in order to protect the rights of the Warrant-Holder against impairment.
5.8. Notice of Adjustments. Upon the occurrence of each adjustment or readjustment of the Exercise Price pursuant to the provisions contained
herein, the Company, at its expense, shall promptly compute such adjustment or readjustment in accordance with the terms hereof and
prepare and furnish to the Warrant-Holder a certificate setting forth each adjustment or readjustment and showing in detail the facts upon
which such adjustment or readjustment is based.
5.9. Notice of Record Date. In the event of any taking by the Company of a record of the holders of any class of securities for the purpose of
determining the holders thereof who are entitled to receive any dividend (including a cash dividend) or other distribution, any right to
subscribe for, purchase or otherwise acquire any shares of any class or any other securities or property, or to receive any other right, the
Company shall provide to the Warrant-Holder a notice (including through public filings), which shall be sent simultaneously with the notice
sent to other shareholders of the Company, specifying the date on which any such record is to be taken for the purpose of such dividend,
distribution or right, and the amount and character of such dividend, distribution or right.
5.10. No Fractional Shares. No fractional shares shall be issued upon exercise of all or any portion of the Warrant, and the number of Warrant
Shares to be issued shall be rounded to the nearest whole share (with cash being paid by the Company for any unissued fractional shares).
6. Notice of Events
In the event that the Company files an immediate report regarding: (i) issuance of bonus shares (according to Section 5(i) above); or (ii) issuance
of rights (according to Section 5(ii) above); or (iii) distribution of dividend (according to Section 5(iii) above); or (iv) a merger transaction
(according to Section 5(iv) above); or (v) a reorganization (according to Section 5(v) above); or (vi) a spin off (according to Section 5(vi) above);
or (vii) issuance of any securities of the Company other than: (i) issuance of securities under any of the Company's Employee Stock Options Plan;
(ii) securities issued following an exercise of any of the securities mentioned in sub section (i); or (viii) the sale of all or substantially all of the
Company assets to another person; or (ix) a voluntary or involuntary dissolution, liquidation or winding-up of the Company ("Special Event") the
Company shall, on the same day it files such an immediate report, provide a copy of such immediate report to the Warrant-Holder (the “Company
Notice”).
-7-
7. Representations, Warranties and Covenants of the Company
The Company hereby represents and warrants to the Bank that as of the Effective Date:
7.1. This Warrant has been duly authorized and executed by the Company and is a valid and binding obligation of the Company enforceable in
accordance with its terms. The grant of this Warrant and the issuance of the Warrant Shares in accordance herewith shall not entitle any third
party, including any shareholders of the Company, to any pre-emptive rights, anti-dilution rights, or other benefits.
7.2. The Warrant Shares when issued in accordance with the terms hereof shall be duly authorized, will be validly issued, fully paid and non-
assessable, not subject to any preemptive rights, and issued free and clear of all debts, liens, encumbrances, taxes, charges, equities, claims,
any rights of third parties and any other liabilities.
7.3. The execution and delivery of this Warrant are not, and the issuance of the Warrant Shares upon exercise of this Warrant in accordance with
the terms hereof will not, conflict with the Articles of Association of the Company, and do not contravene any law, governmental rule or
regulation, judgment or order applicable to the Company, and do not and will not conflict with or contravene any provision of, or constitute
a default under, any indenture, mortgage, contract or other instrument of which the Company is a party or by which it is bound or require
any waiver or the consent or approval of, the giving of notice to, the registration with or the taking of any action in respect of or by, any
government authority or agency or other person known to the Company other than the need to file an immediate report regarding the
issuance of the Warrant Shares (if and when they are issued).
7.4. Without derogating from the generality of the aforesaid, the Company has fulfilled all requirements of the Articles of Association and any
other agreement and/or document by which the Company is bound in respect of any limitations on: (i) the issuance of this Warrant; or (ii)
the right of the Warrant-Holder to exercise the Warrant and purchase Warrant Shares.
7.5. The Company's: (i) authorized share capital; and (ii) issued and outstanding share capital; and (iii) securities convertible into Company's
shares; are as set in the Company's public report a copy of which is attached in Exhibit 7.5 hereto. Except as set forth in Exhibit 7.5, there
are no outstanding options, warrants and/or convertible instruments.
7.6. The Financial Statements (as defined below), as were provided to the Bank prior to the date hereof, (a) were prepared in accordance with
International Financial Reporting Standards (“IFRS”); (b) fairly present the Company‘s financial condition and the results of its operations
as of the relevant dates thereof and for the periods covered thereby.
"Financial Statement" – the Company's audited consolidated financial statements for the period of 12 month that ended on December 31,
2018 that were published on the Israeli Securities Authority web site on April 11, 2019.
7.7. There has been no claim or proceeding against the Company seeking bankruptcy, reorganization or other relief with respect to it or its debts
under any foreign or domestic, federal, state or local bankruptcy, insolvency or other similar law, or any petition filed against any part of the
property of the Company.
7.8. The Articles of Association of the Company, as in force at the date hereof, is attached hereto as Exhibit 7.8.
7.9. Subject to the Bank representation in Section 8.3 below, the offer and issuance of the Warrant and the Warrant Shares by the Company is not
subject to obtaining an exemption from the Israeli Securities Authority from the requirement to publish a prospectus in Israel. The Warrant
Shares will be listed for trading on the TASE promptly following the exercise of this Warrant.
7.10. Immediately following the exercise of this Warrant, Company shall (i) file an immediate report with the Israeli Securities Authority
regarding such exercise, and (ii) deposit the Warrant Shares (immediately upon an exercise) with the Nominee Company together with
instructions to transfer the Warrant Shares to the TASE Clearing House and deposit the Warrant Shares in MTB's bank account.
-8-
8. Representations and Warranties of the Bank.
The Bank hereby represents and warrants to the Company as follows:
8.1. The Bank has been given access to information regarding the Company and its Subsidiaries, and has had the opportunity to ask such
questions as it has deemed necessary and to receive answers from representatives of the Company regarding the terms of the Warrant and
the business of the Company and its Subsidiaries.
8.2. The Bank is an investor as defined in Section 15A(b)(1) of the Israeli Securities Law, 1967 and is aware of the implications of being
qualified as such an investor, and is acquiring the Warrant for its own account and not with a view to distributing or reselling.
8.3. The Bank is experienced in investing in companies that are similar in nature to the Company, and is capable of evaluating the merits and
risks involved in an investment of the type of the investment in the Company contemplated hereunder and in the purchase of the Warrants.
The Bank is able to bear the economic risk of an investment in the Warrants.
9. Miscellaneous
9.1. Notices. Any notice pursuant to this Agreement by the Company or by a Warrant-Holder shall be in writing and shall be deemed to have
been duly given (i) if given by facsimile transmission or electronic mail on the business day on which such transmission is sent and
confirmed, (ii) if given by air courier, two business days following the date it was sent, or (iii) if mailed by registered mail, return receipt
requested, five business days following the date it was mailed, to the following addresses:
If to the Warrant Holder:
Mizrahi Tefahot Bank Ltd.
Jabotinsky Street.
Ramat Gan, Israel
E-mail: dani_maor@umtb.co.il
Attn: Dani Maor
with a copy to:
Shlomo Farkas, Adv.,
Gross, Kleinhendler, Hodak, Halevy, Greenberg & Shenhav Co., Law Offices
One Azrieli Center, Circular Tower
Tel Aviv 6701101, Israel
Email: shlomo@gkh-law.com
If to the Company:
Itamar Medical Ltd.
9 Halamish Street, Caesarea, Israel
Attn: Chief Financial Officer
Tel: 046177000
Fax: 046275598
Email: bshy@Itamar-Medical.com
Each party may from time to time change the addresses or fax number to which notices to it are to be delivered or mailed hereunder by
notice in accordance herewith to the other party.
9.2. Successors. All the covenants and provisions of this Agreement by or for the benefit of the Company or the Warrant-Holder shall, subject to
applicable law, bind and inure to the benefit of their respective successors and assigns.
9.3. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Israel. The parties hereto
irrevocably submit to the exclusive jurisdiction of the courts of Tel Aviv, Israel in any action connected with this Agreement.
9.4. Benefits of this Agreement. Nothing in this Agreement shall be construed to give to any person or corporation other than the Company and
the Warrant-Holder any legal or equitable right, remedy or claim under this Agreement. This Agreement shall be for the sole and exclusive
benefit of the Company and the Warrant-Holder.
9.5. Form of Warrant. The text of the Warrant Certificate evidencing the Warrant (the “Warrant Certificate”) and of the form of election to
purchase Warrant Shares shall be as set forth in Exhibit 1 attached hereto. The Exercise Price and, accordingly, number of Warrant Shares
issuable upon exercise of the Warrant are subject to adjustment upon the occurrence of certain events, all as herein provided.
-9-
9.6. Warrant Certificate.
9.6.1.
Exchange of Certificate. Any Warrant Certificate may be exchanged for Warrant Certificates entitling a Warrant-Holder, in the
aggregate, to purchase the same number of Warrant Shares as the Warrant Certificate or Certificates surrendered then entitled such
Warrant-Holder to purchase. Any Warrant-Holder desiring to exchange a Warrant Certificate shall make such request in writing
delivered to the Company, and shall surrender the certificate evidencing the Warrant to be so exchanged. Thereupon, the Company
shall execute and deliver to the person entitled thereto a new Warrant Certificate as so requested.
9.6.2. Mutilated or Missing Warrant. In case any Warrant Certificate or Certificates shall be mutilated, lost, stolen or destroyed, the
Company shall, at the request of the affected Warrant-Holder, issue and deliver in exchange and substitution for and upon
cancellation of the mutilated certificate or certificates, or in lieu of and substitution for the certificate or certificates lost, stolen or
destroyed, a new Warrant Certificate or Certificate representing an equivalent right or interest, but only upon receipt of evidence
reasonably satisfactory to the Company of such loss, theft or destruction of such Warrant Certificate.
9.7. Severability. If any term or other provision of this Agreement is invalid, illegal, or incapable of being enforced by any law or public policy,
all other terms or provisions of this Agreement shall nevertheless remain in full force and effect so long as the economic or legal substance
of the transactions contemplated hereby is not affected in any manner materially adverse to any party. Upon such determination that any
term or other provision is invalid, illegal, or incapable of being enforced, the parties hereto shall act in good faith to modify this Agreement
so as to effect the original intent of the parties as closely as possible in an acceptable manner in order that the transactions contemplated
hereby are consummated as originally contemplated to the greatest extent possible.
[Signature Page Follows]
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IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written.
_____________________
Mizrahi Tefahot Bank Ltd.
_____________________
Itamar Medical Ltd.
By:
Name:
Title:
Date:
By:
Name:
Title:
Date:
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EXHIBIT 1
Warrant Certificate No. ________
WARRANT TO PURCHASE ORDINARY SHARES
VOID AFTER 23:59 ISRAEL TIME ON THE LAST DAY OF THE EXERCISE PERIOD (AS DEFINED IN THE WARRANT AGREEMENT).
ITAMAR MEDICAL LTD. (“ITAMAR”)
INCORPORATED UNDER THE LAWS OF THE STATE OF ISRAEL
This certifies that, for value received, Mizrahi Tefahot Bank Ltd. the registered holder hereof or its Permitted Transferee (the “Warrant-Holder”), is
entitled to purchase from Itamar, at any time during the Exercise Period (as defined in the Warrant Agreement entered into by and between the Warrant-
Holder and Itamar on February 9, 2020 (the “Warrant Agreement”; capitalized terms used and not otherwise defined herein shall have the meanings
ascribed to them in the Warrant Agreement)) commencing at 9.00 a.m., Israel Time, on the first day of the Exercise Period and ending at 11.59 p.m., Israel
Time, on the last day of the Exercise Period, 359,140 ordinary shares with a nominal value NIS 0.01 each of the Company (the “Warrant Shares”) at a
purchase price per share equal to the Exercise Price, as such may be from time to time. The number and type of Warrant Shares evidenced hereby and the
Exercise Price shall be subject to adjustment from time to time as set forth in the Warrant Agreement. The terms of this Warrant are subject to the terms and
provisions contained in the Warrant Agreement. The Warrant evidenced hereby may be exercised in whole or in part in accordance with the provisions of
the Warrant Agreement.
Upon any partial exercise of the Warrant evidenced hereby, there shall be signed and issued, to the Warrant-Holder effecting such partial exercise, a new
Warrant Certificate in respect of the balance of the Warrant Shares as to which the Warrant evidenced hereby shall not have been exercised. This Warrant
may be exchanged by delivery to the office of Itamar of this Warrant Certificate properly endorsed for one or more new Warrants of the same aggregate
number of Ordinary Shares as hereby evidenced by the Warrant or Warrants exchanged. No fractional shares will be issued upon the exercise of rights to
purchase hereunder, but Itamar shall pay the cash value of any fraction upon the exercise of any part of this Warrant. This Warrant is assignable only to
Permitted Transferees.
Itamar Medical Ltd.
By: __________________________
Name: _______________________
Title: _______________________
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ITAMAR MEDICAL LTD.
PURCHASE FORM
[Insert Details]
The undersigned hereby irrevocably elects to exercise the right of purchase represented by the Warrant Certificate with respect to ____ Ordinary Shares of
Itamar Medical Ltd. (“Ordinary Shares”), at the Exercise Price per Ordinary Share set forth in the Warrant Agreement [on a net-exercise basis], and
requests that certificates for the Ordinary Shares be issued and registered in Itamar's shareholders register, in the name of:
(name and address must be printed or typewritten)
____________________________
Name and I.D. number
____________________________
Address
____________________________
and, if the number of Ordinary Shares shall be less than the total number of Ordinary Shares that the Warrant-Holder is entitled to purchase pursuant to this
Warrant, a new Warrant Certificate shall be registered for the balance of the Ordinary Shares in the name of the undersigned Warrant-Holder as below
indicated and delivered to the address stated below.
Dated: __________________
Name of Warrant-Holder: __________________________
Address: _____________________________
_____________________________
Signature: ____________________________
Note: The above signature must correspond with the name as written upon the face of this Warrant Certificate in every particular, without alteration or
enlargement or any change whatever, unless this Warrant has been assigned.
Signature Witnessed: __________________________________________
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ASSIGNMENT
(To be signed only upon assignment of Warrants to Permitted Transferees)
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers this Warrant unto
(name and I.D. number and address of assignee must be printed or typewritten)
________________________________
________________________________
________________________________
which is a Permitted Transferee of the Bank under the terms of the Warrant, hereby irrevocably constituting and appointing ______ as Attorney-in-Fact to
transfer said Warrant on the books of Itamar Medical Ltd., with full power of substitution in the premises.
Dated:
Signature of Registered Holder
Note: The signature of this assignment must correspond with the name as it appears upon the face of the Warrant Certificate in every particular, without
alteration or enlargement or any charge whatever.
Signature Witnessed: _____________________________________________
Exhibit 2.6
DESCRIPTION OF THE RIGHTS OF EACH CLASS OF SECURITIES REGISTERED
UNDER SECTION 12 OF THE SECURITIES EXCHANGE ACT OF 1934
As of December 31, 2019, Itamar Medical Ltd. had two classes of securities registered under Section 12 of the Securities Exchange Act of
1934, as amended, or Exchange Act: our ordinary shares and our American Depositary Shares, or ADSs. References herein to “we,” “us,” “our”
and the “Company” refer to Itamar Medical Ltd. and not to any of its subsidiaries.
Description of Share Capital and Memorandum and Articles of Association
Set out below is a description of our share capital and certain provisions of our memorandum of association, or memorandum, and articles of
association and the Companies Law (as currently in effect) related to such provisions. This description is only a summary and does not purport to be
complete and is qualified by reference to the full text of the memorandum and articles of association, which are incorporated by reference as exhibits to the
annual report of which this Exhibit 2.6 is part, or the Annual Report, and to the applicable sections of the Companies Law.
General
We were incorporated under the laws of the State of Israel under the name “Itamar Medical (CM) 1997 Ltd.” on January 15, 1997 as a company
limited by shares. We changed our name to our current name in July 2000. Our registered office is 9 Halamish Street, Caesarea 3088900, Israel. Our
registration number with the Israeli Registrar of Companies is 51-243421-8.
Pursuant to Section 2 of our memorandum and Section 4 of our articles of association, our objectives are to engage in any lawful activity as
determined from time to time by our Board of Directors.
Authorized Share Capital
Our authorized share capital consists of 750,000,000 ordinary shares, par value NIS 0.01 per ordinary share.
Ordinary Shares
The following summarizes the rights of holders of our ordinary shares:
·
·
·
·
·
·
Holders of ordinary shares have one vote for each ordinary share held on all matters submitted to a vote of shareholders. Such voting rights
may be affected by the grant of any special voting rights to the holders of a class of shares with preferential rights that may be authorized in
the future.
Our shareholders have the right to share in our profits distributed as a dividend and any other permitted distribution.
In the event of our liquidation, after satisfaction of liabilities to creditors, our assets will be distributed to the holders of ordinary shares in
proportion to the par value of their holdings. This right may be affected by the grant of preferential dividend or distribution rights to the
holders of a class of shares with preferential rights that may be authorized in the future.
Under our memorandum and articles of association as well as the Companies Law, the liability of our shareholders is limited to the unpaid
amount of the purchase price (i.e., the par value of the shares and the premium thereon, if any) that such shareholder (or its predecessor)
initially undertook to pay for the shares issued thereto.
Our ordinary shares are not redeemable and do not have any preemptive rights.
All of our outstanding ordinary shares are validly issued, fully paid and non assessable.
For more information about our ordinary shares, see below.
Shares and Rights Attaching to Them
Voting Rights
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Holders of ordinary shares have one vote for each ordinary share held on all matters submitted to a vote of shareholders. Such voting rights may
be affected by the grant of any special voting rights to the holders of a class of shares with preferential rights that may be authorized in the future.
ADS holders generally have the right under the deposit agreement to instruct the depositary to exercise the voting rights for the ordinary shares
represented by your ADSs. See “Description of American Depositary Shares” below.
Dividends
Subject to any preferential, deferred or other rights or restrictions attached to any special class of shares with regard to dividends, the profits of the
Company available for dividend and resolved to be distributed by the Board of Directors shall be applied in payment of dividends upon the shares of the
Company in the same manner with respect to all of the shares granting a right to receive dividends on the date that resolution is adopted (or on later date, as
determined by the Board of Directors).
Our Board of Directors may declare dividends in accordance with the provisions of the Companies Law. The Companies Law imposes restrictions
on our ability to declare and pay dividends. According to the Companies Law, a company may distribute dividends only out of its “profits,” as such term is
defined in the Companies Law and provided that there is no reasonable concern that payment of the dividend will prevent such company from satisfying its
existing and foreseeable obligations as they become due. Notwithstanding the foregoing, dividends may be paid with the approval of a court, provided that
there is no reasonable concern that payment of the dividend will prevent us from satisfying our existing and foreseeable obligations as they become due.
“Profits”, for purposes of the Companies Law, means the greater of retained earnings or earnings accumulated during the preceding two years, after
deduction of previous distributions that were not already deducted from the surpluses, as evidenced by the most recent audited or reviewed financial
statements of the company prepared no more than six months prior to the date of distribution. Our articles of association provide that dividends will be
declared and paid at the discretion of, and upon resolution by, our Board of Directors, subject to the provisions of the Companies Law.
Our Board of Directors is entitled to invest or utilize any unclaimed amount of dividend in any manner to our benefit until it is claimed. We are not
obligated to pay interest or linkage on an unclaimed dividend.
Payment of dividends may be subject to Israeli withholding taxes. See in Item 10.C of the Annual Report under “Material Tax Considerations —
Israeli Tax Considerations” for additional information.
Change of Control
Except for requiring a special majority voting in order to amend our articles of association, there are no specific provisions of our memorandum,
articles of association or other constituent documents that would have an effect of delaying, deferring or preventing a change in control of the Company or
that would operate only with respect to a merger, acquisition or corporate restructuring involving us (or any of our subsidiaries). However, as described
below, certain provisions of the Companies Law may have such effect.
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The Companies Law includes provisions that allow a merger transaction and requires that each company that is a party to the merger have the
transaction approved by its board of directors and a vote of the majority of its shares. For purposes of the shareholder vote of each party, unless a court
rules otherwise, the merger will not be deemed approved if shares representing a majority of the voting power present at the shareholders meeting and
which are not held by the other party to the merger (or by any person who holds 25% or more of the voting power or the right to appoint 25% or more of
the directors of the other party) vote against the merger. Upon the request of a creditor of either party to the proposed merger, the court may delay or
prevent the merger if it concludes that there exists a reasonable concern that as a result of the merger the surviving company will be unable to satisfy the
obligations of any of the parties to the merger. In addition, a merger may not be completed unless at least (i) 50 days have passed from the time that the
requisite proposals for approval of the merger were filed with the Israeli Registrar of Companies by each merging company and (ii) 30 days have passed
since the merger was approved by the shareholders of each merging company.
The Companies Law also provides that an acquisition of shares in a public company must be made by means of a “special” tender offer if as a
result of the acquisition (i) the purchaser would become a 25% or greater holder of the voting rights in the company, unless there is already another 25% or
greater holder of voting rights in the company or (ii) the purchaser would become a 45% or greater holder of the voting rights in the company, unless there
is already a 45% or greater holder of the voting rights in the company. These requirements do not apply if, in general, the acquisition (a) was made in a
private placement that received shareholder approval, (b) was from a 25% or greater holder of the voting rights in the company which resulted in the
acquirer becoming a 25% or greater holder of voting rights in the company, or (c) was from a 45% or greater holder of voting rights in the company which
resulted in the acquirer becoming a 45% or greater holder of voting rights in the company. A “special” tender offer must be extended to all shareholders,
but the offeror is not required to purchase more than 5% of the company’s outstanding shares, regardless of how many shares are tendered by shareholders.
In general, the special tender offer may be consummated only if (i) at least 5% of the company’s outstanding shares will be acquired by the offeror and
(ii) the number of shares tendered in the offer exceeds the number of shares whose holders objected to the offer. If a special tender offer is accepted, then
the purchaser or any person or entity controlling it or under common control with the purchaser or such controlling person or entity may not make a
subsequent tender offer for the purchase of shares of the target company and may not enter into a merger with the target company for a period of one year
from the date of the offer, unless the purchaser or such person or entity undertook to effect such an offer or merger in the initial special tender offer. Shares
purchased in contradiction to the special tender offer rules under the Companies Law will have no rights and will become dormant shares.
If, as a result of an acquisition of shares, the acquirer will hold more than 90% of a company’s outstanding shares, the acquisition must be made by
means of a “full” tender offer for all of the outstanding shares. In general, if less than 5% of the outstanding shares are not tendered in the tender offer and
more than half of the offerees who have no personal interest in the offer tendered their shares, all the shares that the acquirer offered to purchase will be
transferred to it. However, a full tender offer will also be accepted if the shareholders who do not accept the offer hold less than 2% of the issued and
outstanding shares of the company. Shareholders may request appraisal rights in connection with a full tender offer for a period of six months following the
consummation of the tender offer, but the acquirer is entitled to stipulate that tendering shareholders will forfeit such appraisal rights. If (i) the shareholders
who did not respond or accept the tender offer hold at least 5% of the issued and outstanding shares of the company or the shareholders who accept the
offer constitute less than a majority of the offerees that do not have a personal interest in the acceptance of the tender offer, or (ii) the shareholders who do
not accept the offer hold 2% or more of the outstanding shares of the company, then the acquirer may not acquire shares that will cause its shareholdings to
exceed 90% of the outstanding shares. Shares purchased in contradiction to the full tender offer rules under the Companies Law will have no rights and will
become dormant shares.
Lastly, Israeli tax law treats some acquisitions, such as stock-for-stock exchanges between an Israeli company and a foreign company, less
favorably than U.S. tax laws. For example, Israeli tax law may, under certain circumstances, subject a shareholder who exchanges his ordinary shares for
shares in another corporation to taxation prior to the sale of the shares received in such stock-for-stock swap.
Distributions on Winding Up
In the event of our liquidation, after satisfaction of liabilities to creditors, our assets will be distributed to the holders of ordinary shares in
proportion to the par value of their holdings. This right may be affected by the grant of preferential dividend or distribution rights to the holders of a class
of shares with preferential rights that may be authorized in the future.
Variation of Rights
The rights attached to any class of shares (unless otherwise provided by the terms of issuance of the shares of that class) may be varied with the
consent in writing of the holders of all the issued shares of that class, or with the sanction of a vote at a meeting of the shareholders passed at a separate
meeting of the holders of the shares of the class by a majority of the voting rights of such class represented at the meeting in person or by proxy and voting
thereon.
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Under our articles of association, unless otherwise provided by the conditions of issuance, the enlargement of an existing class of shares, or the
issuance of additional shares thereof, shall not be deemed to modify or abrogate the rights attached to the previously issued shares of such class or of any
other class.
Alteration to Share Capital
Changes in our capital, such as increase of authorized share capital or creation of another class of shares, are subject to the approval of the
shareholders by a special majority of 75% or more of the voting power represented at the meeting in person or by proxy and voting thereon.
Preemption Rights
Holders of our ordinary shares are not entitled to preemptive rights.
Transfer of Shares
Our fully paid ordinary shares are issued in registered form and may be freely transferred under our articles of association, unless the transfer is
restricted or prohibited by another instrument, applicable law or the rules of a stock exchange on which the shares are listed for trade. The ownership or
voting of our ordinary shares by non-residents of Israel is not restricted in any way by our articles of association or the laws of the State of Israel, except for
ownership by nationals of some countries that are, or have been, in a state of war with Israel.
Shareholder Meetings
The Board of Directors must convene an annual meeting of shareholders at least once every calendar year, within fifteen months of the last annual
meeting. A special meeting of shareholders may be convened by the Board of Directors, as it decides.
The Companies Law provides that the board of directors must, in general, convene a special meeting of shareholders upon the written demand of:
(i) two of the directors or such number of directors equal to one fourth of the nominated directors, (ii) one or more shareholders having, in the aggregate,
(a) at least 5% of the outstanding share capital and at least 1% of the voting power in the company, or (b) at least 5% of the voting power in the company.
The Companies Law further provides that one or more shareholders holding 1% or more of the outstanding voting power in the company may ask the board
of directors to add an item to the agenda of the shareholders’ meeting. Our articles of association contain procedural guidelines and disclosure items with
respect to the submission of shareholder proposals for shareholders meetings.
In accordance with our articles of association, shareholders meetings require notice in the manner prescribed by the Companies Law. Under the
Companies Law, shareholders meetings generally require prior notice of not less than 21 days or, with respect to certain matters, such as election of
directors and affiliated party transactions, not less than 35 days. Subject to the provisions of the Companies Law and the regulations promulgated
thereunder, shareholders entitled to participate and vote at general meetings are the shareholders of record on a date to be decided by the board of directors,
which may be between four days and 40 days prior to the date of the meeting.
The quorum required at any meeting of shareholders consists of at least two shareholders present in person or represented by proxy, within half an
hour from the time appointed for holding the meeting, who hold or represent, in the aggregate, at least 33 1/3% of the total voting rights in the Company. A
meeting adjourned for lack of a quorum generally is adjourned to the same day in the following week at the same time and place or any time and place as
the directors designate in a notice to the shareholders. If, at such adjourned meeting, a quorum is not present within half an hour from the time appointed
for holding the meeting, any two shareholders present in person or by proxy who hold or represent, in the aggregate, at least 10% of the outstanding share
capital of the Company, shall constitute a quorum.
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Under our articles of association, all shareholder resolutions require approval of no less than a majority of the voting rights represented at the
meeting in person or by proxy and voting thereon, except that (i) amendments to our articles of association (including any change to provisions relating to
the composition of our Board of Directors) and (ii) removal of directors (who are not external directors or “independent directors” as such term is defined
by the Companies Law) by our shareholders, require a special majority of 75% or more of the voting power represented at the meeting in person or by
proxy and voting thereon.
Pursuant to our articles of association, our directors (except external directors) are elected at our annual general meeting of shareholders by a vote
of the holders of a majority of the voting power represented and voting at such meeting.
Access to Corporate Records
Under the Companies Law, shareholders generally have the right to review minutes of our general meetings, our shareholders register and
principal shareholders register, our articles of association, our annual audited financial statements and any document that we are required by law to file
publicly with the Israeli Registrar of Companies or the Israel Securities Authority. In addition, shareholders may request to be provided with any document
related to an action or transaction requiring shareholder approval under the related party transaction provisions of the Companies Law. We may deny this
request if we believe it has not been made in good faith or if such denial is necessary to protect our interests or protect a trade secret or patent.
Board of Directors
Introduction
According to the Companies Law and our articles of association, the management of our business is vested in our Board of Directors. Pursuant to
the Companies Law and our articles of association, our board of directors may exercise all powers and take all actions that are not required under law or
under our articles of association to be exercised or taken by our shareholders, including the power to borrow money for company purposes. As such, the
Board of Directors is primarily responsible for outlining our policies and supervising our chief executive officer.
Under our articles of association, retirement of directors from office is not subject to any age limitation and our directors are not required to own
shares in our Company in order to qualify to serve as directors.
Number of Directors
Under our articles of association, our Board of Directors must consist of not less than five and not more than nine members, including two external
directors as required by the Companies Law.
Election of Directors
Pursuant to our articles of association, other than the external directors, for whom special election and removal requirements apply under the
Companies Law (as further described below), the vote required to elect a director is a simple majority vote of holders of our ordinary shares participating
and voting at the relevant shareholders meeting. Our articles of association provide that, unless otherwise provided by law, our directors (other than
external directors and “independent directors” as such term is defined by the Companies Law) may be elected solely at our shareholders annual general
meetings, which are required to be held at least once during every calendar year and not more than fifteen months after the last preceding annual general
meeting. However, our articles of association allow our Board of Directors to appoint directors to fill vacancies on our Board of Directors, which occur for
any reason, or as additional directors, provided that the number of board members shall not exceed the maximum number of directors, as mentioned above.
The appointment of a director by the Board of Directors shall remain in effect until the annual general meeting of our shareholders following the
appointment or until the end of his tenure, in accordance with our articles of association.
Except for our external directors (as further described below), our directors hold office until the next annual meeting of shareholders following the
annual meeting at which they were appointed.
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Under our articles of association and the Companies Law, (i) directors (other than external directors and “independent directors” as such term is
defined by the Companies Law) may be removed by our shareholders before the expiration of their term by a special majority vote of at least 75% of the
votes of shareholders present and voting at the meeting, not taking into account abstentions; (ii) external directors may be removed by our shareholders
before the expiration of their term only in limited circumstances as described under the section titled “External Directors” below; and (iii) “independent
directors” (as such term is defined by the Companies Law) may be removed before the expiration of their term only by a simple majority of the
shareholders, or by a court, and then only if the independent directors cease to meet the statutory qualifications with respect to their appointment or if they
violate their duty of loyalty to the Company. In addition, under the Companies Law, directors may be removed upon the occurrence of disqualifying events,
such as bankruptcy or conviction of the director in certain criminal offenses. Under the Companies Law, our Board of Directors is required to determine the
minimum number of directors who must have “accounting and financial expertise” (as such term is defined in regulations promulgated under the
Companies Law). Our Board of Directors determined that the Board of Directors should consist of at least two directors who have “accounting and
financial expertise”.
Meetings of the Board of Directors are generally held at least once each quarter, with additional special meetings scheduled when required.
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. See in Item 6.C of the Annual Report under “Board Practices — Alternate Directors” for
additional information.
External Directors
The Companies Law requires Israeli companies with shares that have been offered to the public, such as the Company, to appoint at least two
external directors. See in Item 6.C of the Annual Report under “Board Practices — External Directors” for additional information.
Independent Directors
See in Item 6.C of the Annual Report under “Board Practices — Independent Directors” for additional information.
Directors’ Interests
Under the provisions of the Companies Law and our articles of association, a director generally cannot participate in a meeting of the board of
directors nor vote on a proposal, arrangement or contract in which he or she is personally interested, unless the transaction is not an “extraordinary
transaction” or a majority of the other directors have a personal interest in such matter.
In addition, our directors generally cannot vote on proposals related to their own compensation. See also under “Approval of Office Holder
Compensation” below.
Fees and Remuneration
Each of the directors (i) is entitled to remuneration for their service as directors and other services undertaken for the Company, subject to, in
general, approval of our Compensation Committee, Board of Directors and our shareholders at a general meeting and (ii) may be paid his expenses in
connection with the exercise of powers and the discharge of responsibilities in relation to the Company. See also under “Approval of Office Holder
Compensation” below.
Exculpation, Indemnification and Insurance of Directors and Officers
See in Item 6.C of the Annual Report under “Board Practices — Exculpation, Indemnification and Insurance of Directors and Officers” for
additional information.
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Other Israeli Law Considerations
Approval of Related Party Transactions under Israeli Law
General
Under the Companies Law, a company may approve an action by an office holder from which the office holder would otherwise have to refrain, as
described above, if:
·
·
the office holder acts in good faith and the act or its approval does not cause harm to the company; and
the office holder disclosed the nature of his or her interest in the transaction (including any significant fact or document) to the company at a
reasonable time before the company’s approval of such matter.
Disclosure of Personal Interests of an Office Holder
The Companies Law requires that an office holder disclose to the company, promptly, and, in any event, not later than the board meeting at which
the transaction is first discussed, any direct or indirect personal interest that he or she may have and all related material information known to him or her
relating to any existing or proposed transaction by the company. If the transaction is an extraordinary transaction, the office holder must also disclose any
personal interest held by:
·
·
·
·
·
the office holder’s relatives. Relatives are defined to include the spouse, siblings, parents, grandparents, descendants, spouse’s descendants and the
spouses of any of these people; or
any corporation in which the office holder or his or her relatives holds 5% or more of the shares or voting rights, serves as a director or general
manager or has the right to appoint at least one director or the general manager.
Under the Companies Law, an extraordinary transaction is a transaction:
not in the ordinary course of business;
not on market terms; or
that is likely to have a material impact on the company’s profitability, assets or liabilities.
The Companies Law does not specify to whom within the company nor the manner in which required disclosures are to be made. We require our
office holders to make such disclosures to our Board of Directors. Under the Companies Law, once an office holder complies with the above disclosure
requirement, the Board of Directors may approve a transaction between the company and an office holder, or a third party in which an office holder has a
personal interest, unless the articles of association provide otherwise and provided that the transaction is not detrimental to the company’s interest. If the
transaction is an extraordinary transaction, first the audit committee and then the board of directors of the company, in that order, must approve the
transaction. Under specific circumstances, shareholder approval may also be required. A director who has a personal interest in an extraordinary
transaction, which is considered at a meeting of the board of directors or the audit committee, may not be present at this meeting or vote on this matter,
unless a majority of the board of directors or the audit committee, as the case may be, has a personal interest. If a majority of the board of directors or the
audit committee has a personal interest, then shareholder approval is generally also required.
Approval of Office Holder Compensation
Pursuant to the Companies Law, every Israeli public company, such as the Company, must adopt a compensation policy, recommended by the
compensation committee, and approved by the Board of Directors and the shareholders, in that order. The shareholder approval must be by a simple
majority of all votes cast, provided that (i) such majority includes a simple majority of the votes cast by non-controlling shareholders having no personal
interest in the matter or (ii) the total number of votes of shareholders mentioned in clause (i) above who voted against the approval of the policy does not
exceed 2% of the total voting rights in the company. Even if the shareholders do not approve the compensation policy, the board of directors may resolve to
approve the compensation policy, subject to certain conditions. In general, all office holders’ terms of compensation — including fixed remuneration,
bonuses, equity compensation, retirement or termination payments, indemnification, liability insurance and the grant of an exemption from liability — must
comply with the company’s compensation policy. The compensation policy must take into account certain factors, including advancement of the company’s
objectives, the company’s business plan and its long-term strategy, and creation of appropriate incentives. It must also consider, among other things, the
company’s risk management, size and the nature of its operations. The compensation policy must include certain principles, such as: a link between
variable compensation and long-term performance and measurable criteria; the relationship between variable and fixed compensation; and the minimum
holding or vesting period for variable, equity-based compensation.
-8-
In addition, the compensation terms of directors, the chief executive officer, and any employee or service provider who is considered a controlling
shareholder, must be approved separately by the compensation committee, the board of directors and, subject to certain exceptions, the shareholders of the
company (by the same majority noted above), in that order. The compensation terms of other officers require the approval of the compensation committee
and the board of directors.
Duties of Shareholders
Disclosure by Controlling Shareholders
Under the Companies Law, the disclosure requirements that apply to an office holder also apply to a controlling shareholder of a public company.
A controlling shareholder is a shareholder who has the ability to direct the activities of a company, including a shareholder that owns 25% or more of the
voting rights if no other shareholder owns more than 50% of the voting rights, but excluding a shareholder whose power derives solely from his or her
position on the board of directors or any other position with the company. Two or more shareholders with a personal interest in the approval of the same
transaction are deemed to be holding the shares together.
Approval of Certain Transactions
Extraordinary transactions with a controlling shareholder or (i) in which a controlling shareholder has a personal interest (including a private
placement in which a controlling shareholder has a personal interest); (ii) transactions for the provision of services, whether directly or indirectly, by a
controlling shareholder or his or her relative, or a company such controlling shareholder controls; and (iii) the engagement of a controlling shareholder or
his or her relative as an office holder or employee (including compensation therefor), generally require the approval of the audit committee (or
compensation committee with respect to engagement as an office holder or employee), the Board of Directors and the shareholders, in that order. The
shareholder approval must include at least a majority of the shares of non-interested shareholders voted on the matter. However, the transaction can be
approved by shareholders without this special approval if the total shares of non-interested shareholders that voted against the transaction do not represent
more than 2% of the voting rights in the company. In addition, any such extraordinary transaction whose term is longer than three years may require further
shareholder approval every three years, unless, where permissible under the Companies Law, the audit committee approves that a longer term is reasonable
under the circumstances. Pursuant to regulations promulgated under the Companies Law, certain transactions with a controlling shareholder or his or her
relative, or with directors or other office holders, that would otherwise require approval of a company’s shareholders may be exempt from shareholder
approval under certain conditions.
Duties of Shareholders
Under the Companies Law, each shareholder has a duty to act in good faith toward the company and other shareholders and to refrain from
abusing his or her power in the company, such as in shareholder votes. In addition, specified shareholders have a duty of fairness toward the company.
These shareholders include any controlling shareholder, any shareholder who knows that it possesses the power to determine the outcome of a shareholder
vote and any shareholder who, pursuant to the provisions of the articles of association, has the power to appoint or prevent the appointment of an office
holder or any other power with respect to the company. However, the Companies Law does not define the substance of this duty of fairness.
Private Placements
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Under the Companies Law, if (i) as a result of a private placement a person would become a controlling shareholder (as defined under the
Companies Law) or (ii) a private placement will entitle investors to receive 20% or more of the voting rights of a company as calculated before the private
placement, and all or part of the private placement consideration is not in cash or in public traded securities or is not in market terms and if as a result of the
private placement the holdings of a substantial shareholder shall increase or as a result of it a person shall become a substantial shareholder, then in either
case, the private placement must be approved by the board of directors and by the shareholders of the company. A “substantial shareholder” is defined as a
shareholder who holds five percent or more of the company’s outstanding share capital or voting power, assuming the exercise of all of the securities
convertible into shares held by that person. In order for the private placement to be considered on “market terms,” the board of directors has to determine,
on the base of detailed explanation, that the private placement is on market terms, unless proven otherwise.
Exchange Controls
Israeli law and regulations do not impose any material foreign exchange restrictions on non-Israeli holders of our ordinary shares. There are
currently no Israeli currency control restrictions on payments of dividends or other distributions with respect to our ordinary shares or the proceeds from
the sale of the shares, except for the obligation of Israeli residents to file reports with the Bank of Israel regarding certain transactions. However, legislation
remains in effect pursuant to which currency controls can be imposed by administrative action at any time.
The ownership or voting of our ordinary shares by non-residents of Israel, except with respect to citizens of countries which are in a state of war
with Israel, is not restricted in any way by our memorandum or articles of association or by the laws of the State of Israel.
American Depositary Shares
Description of American Depositary Shares
The Bank of New York Mellon, as depositary, will register and deliver American Depositary Shares, also referred to as ADSs. Each ADS will
represent 30 shares (or a right to receive 30 shares) deposited with either of Bank Leumi or Bank Hapoalim, as custodian for the depositary in Israel. Each
ADS will also represent any other securities, cash or other property that may be held by the depositary. The deposited shares together with any other
securities, cash or other property held by the depositary are referred to as the deposited securities. The depositary’s office at which the ADSs will be
administered and its principal executive office are located at 240 Greenwich Street, New York, New York 10286.
You may hold ADSs either (A) directly (i) by having an American Depositary Receipt, also referred to as an ADR, which is a certificate
evidencing a specific number of ADSs, registered in your name, or (ii) by having uncertificated ADSs registered in your name, or (B) indirectly by holding
a security entitlement in ADSs through your broker or other financial institution that is a direct or indirect participant in The Depository Trust Company,
also called DTC. If you hold ADSs directly, you are a registered ADS holder, also referred to as an ADS holder. This description assumes you are an ADS
holder. If you hold the ADSs indirectly, you must rely on the procedures of your broker or other financial institution to assert the rights of ADS holders
described in this section. You should consult with your broker or financial institution to find out what those procedures are.
Registered holders of uncertificated ADSs will receive statements from the depositary confirming their holdings.
As an ADS holder, we will not treat you as one of our shareholders and you will not have shareholder rights. Israeli law governs shareholder
rights. The depositary will be the holder of the shares underlying your ADSs. As a registered holder of ADSs, you will have ADS holder rights. A deposit
agreement among us, the depositary, ADS holders and all other persons indirectly or beneficially holding ADSs sets out ADS holder rights as well as the
rights and obligations of the depositary. New York law governs the deposit agreement and the ADSs.
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The following is a summary of the material provisions of the deposit agreement. This description is only a summary and does not purport to be
complete and is qualified by reference to the full text of the deposit agreement and the form of ADR, which are incorporated by reference as exhibits to the
Annual Report.
Dividends and Other Distributions
How will you receive dividends and other distributions on the shares?
The depositary has agreed to pay or distribute to ADS holders the cash dividends or other distributions it or the custodian receives on shares or other
deposited securities, upon payment or deduction of its fees and expenses. You will receive these distributions in proportion to the number of shares your
ADSs represent.
Cash. The depositary will convert any cash dividend or other cash distribution we pay on the shares into U.S. dollars, if it can do so on a reasonable basis
and can transfer the U.S. dollars to the United States. If that is not possible or if any government approval is needed and cannot be obtained, the deposit
agreement allows the depositary to distribute the foreign currency only to those ADS holders to whom it is possible to do so. It will hold the foreign
currency it cannot convert for the account of the ADS holders who have not been paid. It will not invest the foreign currency and it will not be liable for
any interest.
Before making a distribution, any withholding taxes, or other governmental charges that must be paid will be deducted. See Item 10.C of the Annual Report
under “Material Tax Considerations” for additional information. The depositary will distribute only whole U.S. dollars and cents and will round fractional
cents to the nearest whole cent. If the exchange rates fluctuate during a time when the depositary cannot convert the foreign currency, you may lose some of
the value of the distribution.
Shares. The depositary may distribute additional ADSs representing any shares we distribute as a dividend or free distribution. The depositary will only
distribute whole ADSs. It will sell shares which would require it to deliver a fraction of an ADS (or ADSs representing those shares) and distribute the net
proceeds in the same way as it does with cash. If the depositary does not distribute additional ADSs, the outstanding ADSs will also represent the new
shares. The depositary may sell a portion of the distributed shares (or ADSs representing those shares) sufficient to pay its fees and expenses in connection
with that distribution.
Rights to purchase additional shares. If we offer holders of our securities any rights to subscribe for additional shares or any other rights, the depositary
may (i) exercise those rights on behalf of ADS holders, (ii) distribute those rights to ADS holders or (iii) sell those rights and distribute the net proceeds to
ADS holders, in each case after deduction or upon payment of its fees and expenses. To the extent the depositary does not do any of those things, it will
allow the rights to lapse. In that case, you will receive no value for them. The depositary will exercise or distribute rights only if we ask it to and provide
satisfactory assurances to the depositary that it is legal to do so. If the depositary will exercise rights, it will purchase the securities to which the rights relate
and distribute those securities or, in the case of shares, new ADSs representing the new shares, to subscribing ADS holders, but only if ADS holders have
paid the exercise price to the depositary. United States securities laws may restrict the ability of the depositary to distribute rights or ADSs or other
securities issued on exercise of rights to all or certain ADS holders, and the securities distributed may be subject to restrictions on transfer.
Other Distributions. The depositary will send to ADS holders anything else we distribute on deposited securities by any means it thinks is legal, fair and
practical. If it cannot make the distribution in that way, the depositary has a choice. It may decide to sell what we distributed and distribute the net
proceeds, in the same way as it does with cash. Or, it may decide to hold what we distributed, in which case ADSs will also represent the newly distributed
property. However, the depositary is not required to distribute any securities (other than ADSs) to ADS holders unless it receives satisfactory evidence from
us that it is legal to make that distribution. The depositary may sell a portion of the distributed securities or property sufficient to pay its fees and expenses
in connection with that distribution. United States securities laws may restrict the ability of the depositary to distribute securities to all or certain ADS
holders, and the securities distributed may be subject to restrictions on transfer.
The depositary is not responsible if it decides that it is unlawful or impractical to make a distribution available to any ADS holders. We have no obligation
to register ADSs, shares, rights or other securities under the Securities Act. We also have no obligation to take any other action to permit the distribution of
ADSs, shares, rights or anything else to ADS holders. This means that you may not receive the distributions we make on our shares or any value for them if
it is illegal or impractical for us to make them available to you.
Deposit, Withdrawal and Cancellation
How are ADSs issued?
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The depositary will deliver ADSs if you or your broker deposits shares or evidence of rights to receive shares with the custodian. Upon payment of its fees
and expenses and of any taxes or charges, such as stamp taxes or stock transfer taxes or fees, the depositary will register the appropriate number of ADSs in
the names you request and will deliver the ADSs to or upon the order of the person or persons that made the deposit.
How can ADS holders withdraw the deposited securities?
You may surrender your ADSs to the depositary for the purpose of withdrawal. Upon payment of its fees and expenses and of any taxes or charges, such as
stamp taxes or stock transfer taxes or fees, the depositary will deliver the shares and any other deposited securities underlying the ADSs to the ADS holder
or a person the ADS holder designates at the office of the custodian. Or, at your request, risk and expense, the depositary will deliver the deposited
securities at its office, if feasible. However, the depositary is not required to accept surrender of ADSs to the extent it would require delivery of a fraction of
a deposited share or other security. The depositary may charge you a fee and its expenses for instructing the custodian regarding delivery of deposited
securities.
How do ADS holders interchange between certificated ADSs and uncertificated ADSs?
You may surrender your ADR to the depositary for the purpose of exchanging your ADR for uncertificated ADSs. The depositary will cancel that ADR and
will send to the ADS holder a statement confirming that the ADS holder is the registered holder of uncertificated ADSs. Upon receipt by the depositary of a
proper instruction from a registered holder of uncertificated ADSs requesting the exchange of uncertificated ADSs for certificated ADSs, the depositary
will execute and deliver to the ADS holder an ADR evidencing those ADSs.
Voting Rights
How do you vote?
ADS holders may instruct the depositary how to vote the number of deposited shares their ADSs represent. If we request the depositary to solicit your
voting instructions (and we are not required to do so), the depositary will notify you of a shareholders’ meeting and send or make voting materials available
to you. Those materials will describe the matters to be voted on and explain how ADS holders may instruct the depositary how to vote. For instructions to
be valid, they must reach the depositary by a date set by the depositary. The depositary will try, as far as practical, subject to the laws of the State of Israel
and the provisions of our articles of association or similar documents, to vote or to have its agents vote the shares or other deposited securities as instructed
by ADS holders. If we do not request the depositary to solicit your voting instructions, you can still send voting instructions, and, in that case, the
depositary may try to vote as you instruct, but it is not required to do so.
Except by instructing the depositary as described above, you won’t be able to exercise voting rights unless you surrender your ADSs and withdraw the
shares. However, you may not know about the meeting enough in advance to withdraw the shares. In any event, the depositary will not exercise any
discretion in voting deposited securities and it will only vote or attempt to vote as instructed or as described in the following sentence. If (i) we asked the
depositary to solicit your instructions at least 30 days before the meeting date, (ii) the depositary does not receive voting instructions from you by the
specified date and (iii) we confirm to the depositary that:
·
·
·
we wish to receive a proxy to vote uninstructed shares;
we reasonably do not know of any substantial shareholder opposition to a particular question; and
the particular question is not materially adverse to the interests of shareholders.
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the depositary will consider you to have authorized and directed it to give, and it will give, a discretionary proxy to a person designated by us to vote the
number of deposited securities represented by your ADSs as to that question.
We cannot assure you that you will receive the voting materials in time to ensure that you can instruct the depositary to vote your shares. In addition, the
depositary and its agents are not responsible for failing to carry out voting instructions or for the manner of carrying out voting instructions. This means
that you may not be able to exercise voting rights and there may be nothing you can do if your shares are not voted as you requested.
In order to give you a reasonable opportunity to instruct the depositary as to the exercise of voting rights relating to Deposited Securities, if we request the
Depositary to act, we agree to give the depositary notice of any such meeting and details concerning the matters to be voted upon at least 30 days in
advance of the meeting date.
Fees and Expenses
See in Item 12.D of the Annual Report under “American Depositary Shares — Fees and Expenses” for additional information.
Payment of Taxes
See in Item 12.D of the Annual Report under “American Depositary Shares — Payment of Taxes” for additional information.
Tender and Exchange Offers; Redemption, Replacement or Cancellation of Deposited Securities
The depositary will not tender deposited securities in any voluntary tender or exchange offer unless instructed to do so by an ADS holder surrendering
ADSs and subject to any conditions or procedures the depositary may establish.
If deposited securities are redeemed for cash in a transaction that is mandatory for the depositary as a holder of deposited securities, the depositary will call
for surrender of a corresponding number of ADSs and distribute the net redemption money to the holders of called ADSs upon surrender of those ADSs.
If there is any change in the deposited securities such as a sub-division, combination or other reclassification, or any merger, consolidation, recapitalization
or reorganization affecting the issuer of deposited securities in which the depositary receives new securities in exchange for or in lieu of the old deposited
securities, the depositary will hold those replacement securities as deposited securities under the deposit agreement. However, if the depositary decides it
would not be lawful or practical to hold the replacement securities because those securities could not be distributed to ADS holders or for any other reason,
the depositary may instead sell the replacement securities and distribute the net proceeds upon surrender of the ADSs.
If there is a replacement of the deposited securities and the depositary will continue to hold the replacement securities, the depositary may distribute new
ADSs representing the new deposited securities or ask you to surrender your outstanding ADRs in exchange for new ADRs identifying the new deposited
securities.
If there are no deposited securities underlying ADSs, including if the deposited securities are cancelled, or if the deposited securities underlying ADSs have
become apparently worthless, the depositary may call for surrender of those ADSs or cancel those ADSs upon notice to the ADS holders.
Amendment and Termination
How may the deposit agreement be amended?
We may agree with the depositary to amend the deposit agreement and the ADRs without your consent for any reason. If an amendment adds or increases
fees or charges, except for taxes and other governmental charges or expenses of the depositary for registration fees, facsimile costs, delivery charges or
similar items, or prejudices a substantial right of ADS holders, it will not become effective for outstanding ADSs until 30 days after the depositary notifies
ADS holders of the amendment. At the time an amendment becomes effective, you are considered, by continuing to hold your ADSs, to agree to the
amendment and to be bound by the ADRs and the deposit agreement as amended.
How may the deposit agreement be terminated?
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The depositary will initiate termination of the deposit agreement if we instruct it to do so. The depositary may initiate termination of the deposit agreement
if:
·
·
·
·
·
·
90 days have passed since the depositary told us it wants to resign but a successor depositary has not been appointed and accepted its appointment;
we delist the ADSs from an exchange on which they were listed and do not list the ADSs on another exchange;
we appear to be insolvent or enter insolvency proceedings;
all or substantially all the value of the deposited securities has been distributed either in cash or in the form of securities;
there are no deposited securities underlying the ADSs or the underlying deposited securities have become apparently worthless; or
there has been a replacement of deposited securities.
If the deposit agreement will terminate, the depositary will notify ADS holders at least 90 days before the termination date. At any time after the
termination date, the depositary may sell the deposited securities. After that, the depositary will hold the money it received on the sale, as well as any other
cash it is holding under the deposit agreement, unsegregated and without liability for interest, for the pro rata benefit of the ADS holders that have not
surrendered their ADSs. Normally, the depositary will sell as soon as practicable after the termination date.
After the termination date and before the depositary sells, ADS holders can still surrender their ADSs and receive delivery of deposited securities, except
that the depositary may refuse to accept a surrender for the purpose of withdrawing deposited securities or reverse previously accepted surrenders of that
kind that have not settled if it would interfere with the selling process. The depositary may refuse to accept a surrender for the purpose of withdrawing sale
proceeds until all the deposited securities have been sold. The depositary will continue to collect distributions on deposited securities, but, after the
termination date, the depositary is not required to register any transfer of ADSs or distribute any dividends or other distributions on deposited securities to
the ADSs holder (until they surrender their ADSs) or give any notices or perform any other duties under the deposit agreement except as described in this
paragraph.
Limitations on Obligations and Liability
Limits on our Obligations and the Obligations of the Depositary; Limits on Liability to Holders of ADSs
The deposit agreement expressly limits our obligations and the obligations of the depositary. It also limits our liability and the liability of the depositary. We
and the depositary:
·
·
·
are only obligated to take the actions specifically set forth in the deposit agreement without negligence or bad faith, and the depositary will not be
a fiduciary or have any fiduciary duty to holders of ADSs;
are not liable if we are or it is prevented or delayed by law or by events or circumstances beyond our or its ability to prevent or counteract with
reasonable care or effort from performing our or its obligations under the deposit agreement;
are not liable if we or it exercises discretion permitted under the deposit agreement;
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·
·
are not liable for the inability of any holder of ADSs to benefit from any distribution on deposited securities that is not made available to holders
of ADSs under the terms of the deposit agreement, or for any special, consequential or punitive damages for any breach of the terms of the deposit
agreement;
have no obligation to become involved in a lawsuit or other proceeding related to the ADSs or the deposit agreement on your behalf or on behalf
of any other person;
· may rely upon any documents we believe or it believes in good faith to be genuine and to have been signed or presented by the proper person;
·
·
are not liable for the acts or omissions of any securities depository, clearing agency or settlement system; and
the depositary has no duty to make any determination or provide any information as to our tax status, or any liability for any tax consequences that
may be incurred by ADS holders as a result of owning or holding ADSs or be liable for the inability or failure of an ADS holder to obtain the
benefit of a foreign tax credit, reduced rate of withholding or refund of amounts withheld in respect of tax or any other tax benefit.
In the deposit agreement, we and the depositary agree to indemnify each other under certain circumstances.
Requirements for Depositary Actions
Before the depositary will deliver or register a transfer of ADSs, make a distribution on ADSs, or permit withdrawal of shares, the depositary may require:
·
·
·
payment of stock transfer or other taxes or other governmental charges and transfer or registration fees charged by third parties for the transfer of
any shares or other deposited securities;
satisfactory proof of the identity and genuineness of any signature or other information it deems necessary; and
compliance with regulations it may establish, from time to time, consistent with the deposit agreement, including presentation of transfer
documents.
The depositary may refuse to deliver ADSs or register transfers of ADSs when the transfer books of the depositary or our transfer books are closed or at
any time if the depositary or we think it advisable to do so.
Your Right to Receive the Shares Underlying your ADSs
ADS holders have the right to cancel their ADSs and withdraw the underlying shares at any time except:
·
·
·
when temporary delays arise because: (i) the depositary has closed its transfer books or we have closed our transfer books; (ii) the transfer of
shares is blocked to permit voting at a shareholders’ meeting; or (iii) we are paying a dividend on our shares;
when you owe money to pay fees, taxes and similar charges; or
when it is necessary to prohibit withdrawals in order to comply with any laws or governmental regulations that apply to ADSs or to the withdrawal
of shares or other deposited securities.
This right of withdrawal may not be limited by any other provision of the deposit agreement.
Direct Registration System
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In the deposit agreement, all parties to the deposit agreement acknowledge that the Direct Registration System, also referred to as DRS, and Profile
Modification System, also referred to as Profile, will apply to the ADSs. DRS is a system administered by DTC that facilitates interchange between
registered holding of uncertificated ADSs and holding of security entitlements in ADSs through DTC and a DTC participant. Profile is a feature of DRS
that allows a DTC participant, claiming to act on behalf of a registered holder of uncertificated ADSs, to direct the depositary to register a transfer of those
ADSs to DTC or its nominee and to deliver those ADSs to the DTC account of that DTC participant without receipt by the depositary of prior authorization
from the ADS holder to register that transfer.
In connection with and in accordance with the arrangements and procedures relating to DRS/Profile, the parties to the deposit agreement understand that
the depositary will not determine whether the DTC participant that is claiming to be acting on behalf of an ADS holder in requesting registration of transfer
and delivery as described in the paragraph above has the actual authority to act on behalf of the ADS holder (notwithstanding any requirements under the
Uniform Commercial Code). In the deposit agreement, the parties agree that the depositary’s reliance on and compliance with instructions received by the
depositary through the DRS/Profile system and in accordance with the deposit agreement will not constitute negligence or bad faith on the part of the
depositary.
Shareholder communications; inspection of register of holders of ADSs
The depositary will make available for your inspection at its office all communications that it receives from us as a holder of deposited securities that we
make generally available to holders of deposited securities. The depositary will send you copies of those communications or otherwise make those
communications available to you if we ask it to. You have a right to inspect the register of holders of ADSs, but not for the purpose of contacting those
holders about a matter unrelated to our business or the ADSs.
Jury Trial Waiver
The deposit agreement provides that, to the extent permitted by law, ADS holders waive the right to a jury trial of any claim they may have against us or
the depositary arising out of or relating to our shares, the ADSs or the deposit agreement, including any claim under the United States federal securities
laws. If we or the depositary opposed a jury trial demand based on the waiver, the court would determine whether the waiver was enforceable in the facts
and circumstances of that case in accordance with applicable case law.
You will not, by agreeing to the terms of the deposit agreement, be deemed to have waived our or the depositary’s compliance with United States federal
securities laws or the rules and regulations promulgated thereunder.
Exhibit 4.12
[INFORMAL ENGLISH TRANSLATION]
Date: February 9, 2020
Name of the customer: Itamar Medical Ltd. (hereinafter: the “Borrower” or the “Company” or the “Customer”)
Company No. 512434218
Address: 9 Halamish Street, Caesarea 3088900
Account number: 250888 in the Orot Mall Branch (hereinafter: the “Account”)
To: Mizrahi Tefahot Bank Ltd. (hereinafter: the “Bank”)
To Whom It May Concern:
Re: Credit Agreement
We are setting forth in writing the agreements reached between us in connection with the Credit Line and the loans made available to the Company, from
time to time, in reliance on this Agreement and in reliance of a specific credit agreement and/or specific loan agreement that will be submitted to you in the
future, from time to time, in reliance on this Credit Agreement. In addition to the provisions of this Agreement, the terms of the Line of Credit and all of the
loans that will be provided to the Company, under any of the credit frameworks (hereinafter: the “Credit”), shall be in accordance with and subject to the
“Account Opening Application” and/or “Account Changes” and “Account Management Packet” and “Credit Packet for a Business Customer,” and all of
the appendices and amendments in which we have engaged with the Bank, as well as subject to any specific credit / loan agreement or otherwise, between
the Company and the Bank (hereinafter: the “Credit Documents”), and all of the provisions of the Credit Documents and all of the terms thereof shall
apply and be binding with respect to the credit that will be provided to the Company by you. This Credit Agreement hereby replaces the line of credit
agreements dated March 29, 2017 (including its amendments) and March 12, 2019 (hereinafter: the "Former Agreement"). It is hereby clarified that the
provisions of this Agreement shall apply to credit lines which were provided under the credit frameworks pursuant to the Former Agreement, mutatis
mutandis.
1.
Types of credit:
The amount of the credit that will be provided pursuant to this Agreement: a sum of USD 17,000,000, and subject to the provisions of section
4.1.1. hereunder, the amount of the credit shall be USD 20,000,000 (hereinafter: the “Credit Amount”).
The Line of Credit and the Credit will be provided and may be utilized by the Company as of the date on which all of the preconditions and
general terms as set forth in Section 5 below are satisfied (hereinafter: the “Preconditions”) and subject to the Bank’s signature on this
Agreement.
All of the Credit Amounts that were provided and/or will be provided to the Company shall be repaid in full pursuant to the agreements set forth in
the documents signed and/or that will be signed by the Company in connection with the provision of the same Credit, and subject to the terms of
this Agreement.
2.
3.
The Lender - Mizrahi Tefahot Bank Ltd. (hereinafter: the “Bank”)
The Borrower - Itamar Medical Ltd., Company No. 512434218 (hereinafter: the “Borrower” or the “Company”)
4.
Types of credit:
4.1.
Long-term loans framework -
4.1.1.
The Bank shall provide a long-term loans framework (hereinafter: "Loans framework") in a cumulative amount of USD
10,000,000. It is hereby agreed that upon the fulfillment of the following terms, the Loans Framework shall be increased to the
sum of USD 13,000,000 (the “Increase”):
A. There has been no adverse change in the borrower's state.
B. The borrowers' revenues in the months January – June 2020, were no less than USD 15,000,000.
The Borrower shall provide the bank with documents evidencing the foregoing, to the bank's satisfaction.
The Loans Framework shall be valid and may be taken, until 25.10.2020. It is hereby agreed that the sum of the loan shall be no
less than USD 2,000,000. It is hereby agreed that the Borrower may also elect to utilize the Long-term Loans Framework in
order to obtain short term loans.
The Borrower’s notice of its intent to withdraw any loan as stated above will be provided to the Bank in writing no later than
two (2) business days prior to the date of the execution of the loan and will include the date requested for the provision thereof
as well as the amount of the loan. The Bank will prepare the relevant loan agreement for the Borrower’s signatures, including all
of the details of the Loan and the relevant interest, as well as the other documents customary at the Bank.
4.1.2
4.1.3.
The annual interest rate for each long-term loan or short-term loan that will be drawn from the Line of Credit - Quarterly Libor
Rate + 5.5%, however, if the Line of Credit is increased as noted above, then loans made from the Line of Credit after the
Increase will bear annual interest at the Quarterly Libor Rate + 7%.
Repayment –
The principal of the long-term loan and the interest for the same will be repaid in 12 consecutive quarterly payments, as of the
end of three months from the date on which each long-term loan was provided, all as shall be set forth in the amortization table
which shall be provide to the Borrower upon the provision of the Loan. The method of repayment of the short-term loans shall
be agreed by the parties in writing prior to the provision of the short-term loans.
4.1.4.
The execution fee provision of each loan - shall be payable on the date of the provision of each loan, with a 50% discount
compared to the Bank’s fee schedule at the time.
For avoidance of doubt, it is hereby clarified that all of the foregoing loans are part of the Credit, as defined in this Agreement
and all the provisions of this Credit Agreement with respect to the Credit shall apply to said loans.
4.2.
Credit limit to finance customer debt -
4.2.1
The Loans Framework for financing customer debt in the amount of up to USD 7,000,000 (hereinafter: the “Line of Credit for
Financing Customer Debt” or the “Loan for Financing Customer Debt”) will be in force and may be utilized subject to the
provisions of Section 1 above, by 25.10.2020 (hereinafter: the “Expiration of the Line of Credit”). Any loan from the aforesaid
framework will be calculated and provided pursuant to the following aggregate rules and conditions:
1)
2)
Invoices for payment that are not yet paid, which are issued by the Borrower and/or the US Subsidiary Itamar Medical Inc.
(hereinafter: the “US Subsidiary”) and/or I.M.E. 2016 B.V. (hereinafter: the “Dutch Subsidiary”) to their customers, will
be financed at a rate between 80% and 85% of the amount of the same invoices (for each invoice), subject to the bank's sole
discretion.
Invoices will be financed that are payable no later than 90 days from the Reporting Date, as set forth in Section 4.2.3 below,
and in any case no later than the Expiration of the Line of Credit. Invoices in arrears shall not be financed, excluding
invoices that are in arrears of up to 60 days on the date of the provision of the loan (hereinafter: “Invoices in Arrears”), and
provided that the rate of the Invoices in Arrears does not exceed 10% of the total Loans for Financing Customer Debt. It is
clarified that in transactions in installments, the payment date is the payment date of each payment. Additionally, deferred
income as well as doubtful debts will be offset from the balance of the invoices.
Notwithstanding the foregoing, it is hereby agreed that the bank shall provide the Borrower financing against invoices
which were issued as set forth above, for transactions which were paid by means of credit card and their repayment date
exceeds 90 days, subject to the following terms;
A. Transaction whose final repayment date does not exceed 12 months of the date of their execution, shall be
financed.
B. The total credit out of the Line of Credit for Financing Customer Debt, to be provided against such invoices shall
not exceed USD 1,050,000.
3) The exposure vis-a-vis each individual customer (as calculated pursuant to this section) will not exceed 20% of the total
Credit Limit for Financing Customer Debt.
Notwithstanding the foregoing, the exposure vis-à-vis the following customers shall not exceed 305 of the of the total Credit
Limit for Financing Customer Debt. –
Kaiser Foundation Health Plan, Inc. and its affiliates
Department of Veterans Affairs and its affiliates
Phillips Respironics GK, Japan
The amount of the loan calculated in accordance with the rules above will be hereinafter: the “Derived Amount.”
4.2.2
4.2.3
Payment date of the Loans for Financing Customer Debt - the payment date of each Loan for Financing Customer Debt will not
exceed 3 months from the date on which it is provided, with the final and absolute payment date of the loans provided being the
expiration of the framework.
Reporting - The Borrower will provide the Bank, no later than 12 days from the end of each calendar month, with a report
including the details of the invoices as of the last day of the previous calendar month, which is not yet paid by the reporting date,
as well as the calculation of the Derived Amount. The reporting will be made in the form customary at the Bank as agreed upon
by the parties in writing (hereinafter: the “Monthly Invoices Report”).
Additionally, together with the transfer of the unpaid invoices report, the Borrower will also provide a collection report
regarding all of the invoices that were financed, which details the amounts collected in the previous month and the invoices that
were paid.
The reports will be signed by the CEO of the Company or its CFO.
It is agreed that the Bank may, at its sole discretion, demand the presentation of the invoices set forth in the Report, in whole or
in part.
The Bank may examine the calculation of the Derived Amount as well as disqualify any of the customers and/or invoices set
forth in the report.
4.2.4
The adjustment of the balance amount of the Loans for Financing Customer Debt to the Derived Amount will be made within
five days from the date of the provision of the report. The adjustment of the balance of the Loans for Financing Customer Debt
will take place by the provision of Loans for Financing Customer Debt or the early repayment thereof. It is clarified that the
Bank will not be required to provide Loans for Financing Customer Debt from the Line of Credit unless it has approved the
debtor customers and the calculation of the Derived Amount, at its discretion.
4.2.5
The Borrower shall sign all of the documents required by the Bank for the execution of the provisions of this section.
4.2.6
The interest rate for the Loans for Financing Customer Debt - for each Loan for Financing Customer Debt, the Borrower will
pay the Bank variable annual interest at a rate of monthly Libor + 4.25%. The interest for the Loan for Financing Customer
Debt will be repaid on a monthly basis (or based on the term of the Loan for Financing Customer Debt, as the case may be).
4.3
Fees
4.3.1.
For the Credit Limit for Financing Customer Debt and the Line of Credit, the account will be charged a credit allocation fee at a
rate of 0.75% per year, for the entire Credit Amount, as defined above, as of the signing date of this Agreement. The credit
allocation fee shall be calculated daily and collected on a quarterly basis, at the beginning of each calendar quarter, for the
preceding quarter.
For the same part of the framework that was actually utilized by the Borrower, the Borrower will receive a full reduction from
the credit allocation fee set forth above. The calculation will take place regarding any credit provided, as of the date on which it
is actually provided, for the unused balance.
The credit allocation fee as set forth above does not constitute a substitute for the ordinary fees customary at the Bank.
4.4
All of the additional conditions in connection with the credit that will be provided to the Borrower, insofar as they are not provided in this
Agreement, including interest rates, payment dates, fees and other payments, will be as agreed upon and/or will be agreed upon in writing
by the Bank and the Borrower.
5.
Preliminary and general terms:
Any provision of any credit and/or its continued provision will be subject to the fulfillment of all of the following conditions:
5.1
The Borrower has opened account number 250888 at the Orot Mall branch (438) of the Bank (hereinafter: the “Account”).
The Borrower above has executed the customary Credit Documents at the Bank as well as the relevant documents required for the
requested activity and/or credit and provided all of the minutes and attorney verifications as customary at the Bank.
5.2
The Borrower has provided the Bank with all of the following sureties, signed a bond or pledge deed for the same in the form customary
in the Bank, and provided all of the documents, minutes, and attorney verifications as customary at the Bank:
5.2.1
A first-ranked floating charge, unlimited in amount, on all of the property, funds, rights and assets of any type or kind of the
Borrower, and a first-ranked fixed charge, unlimited in amount, on the intellectual property of the Borrower, on the goodwill,
documents and negotiable papers, on its bank account, and its holdings in the US Subsidiary and the Dutch Subsidiary, all as set
forth in the bond, dated 28.5.17, which was registered on 13.6.17 as Lien No. 13 with the Registrar of Companies.
A first-ranked fixed pledge, unlimited in amount, on all of the rights to receive funds from customers of the Borrower, as set
forth in the list that will be attached to the bond.
5.2.2
A first-ranked pledge for the benefit of the Bank, unlimited in amount, on all of the assets and property of the US Subsidiary
(including its customers debts). The Borrower will provide the Bank, at the time of the execution of this agreement, with a
consent of the US Subsidiary’s attorney that the charge on the assets of the US Subsidiary and its shares which was registered
with the UCC on 12.3.19 also secures the credit made available under this agreement. The Borrower and the US Subsidiary will
make efforts to update the registered charge, such that it will remain in force until the absolute and final clearance of the debts
and liabilities of the Borrower to the Bank.
5.2.3
The Dutch Subsidiary has signed on May 29, 2017, a “negative charge” document in the form agreed upon by the parties.
5.2.4
The lists of intellectual property and customers of the Borrower and the US Subsidiary as set forth above include the intellectual
property of the companies as well as the lists of their customers on the signing date of the charge documents above. The
companies undertake to update the lists on a biannual basis, to provide the updated lists to the Bank, and, to the extent required
by the bank in writing, to update the pledge documents accordingly.
The Borrower shall provide to the bank upon the execution of this Agreement, updated lists of equipment, intellectual property
rights and customers' debts, and shall further sign an amending warrant agreement, in the form attached hereto as exhibit 5.2.4.
5.3
5.4
5.5
5.6
The Borrower and the US Subsidiary will sign and provide the Bank with any document required by the competent authorities for the
fulfillment of their undertakings in accordance with the provisions of this section.
The Borrower will deposit in the Account, funds as set forth in Section 8 below.
The Borrower signed on 07.09.2017 an undertaking with respect to various changes in the Borrower, including in its equity.
The borrower granted the bank on 05.14.2017 and March 12, 2019, warrant agreements (as amended from time to time). The Borrower
signed at the time of the execution of this agreement a document for the extension of the expiration dates of the existing warrants until
November 30, 2023.
Additionally, the Borrower signed a warrant agreement for an additional 359,140 warrants with the bank, attached hereto as exhibit 5.6 of
the agreement. The listing of the securities underlying the said warrant agreement an options agreement for trading on the Tel Aviv
Securities Exchange ("TASE") is subject to the TASE approval. The company shall take action as soon as practicable in order to obtain
such approval.
6.
7.
8.
The Borrower and the US Subsidiary hereby assign to the Bank all of their rights, existing and future, for the receipt of funds from their
customers, existing and future. Additionally, the Borrower undertakes to act in order for all of the direct payments of its customers, as well as all
of the payments owed thereto from the subsidiaries, will be made solely to the bank account set forth in Section 5.1 above, and the same Account
will be listed in all of the accounts for payment provided thereby.
The subsidiaries undertake to transfer funds to the Borrower’s Account, at the first request of the Bank, to cover the credit provided in the Credit
Limit for Financing Customer Debt.
The Borrower hereby undertakes to employ its means of control over such subsidiaries in order for the funds to be transferred to its account as
aforementioned.
The Borrower undertakes that as of the date of the withdrawal of the credit, in whole or in part (whether a withdrawal of a loan from the Credit
Limit for Financing Customer Debt or a withdrawal from the loans framework), the balance of the cash in the Bank’s Account will not be less at
any time than the following:
Amount of Utilized Credit in USD
Up to 10,000,000
Above 10,000,000
Total Cash in Account
30% of the utilized credit
40% of the utilized credit
(hereinafter: the “Required Deposited Amount”).
It is agreed that a temporary reduction in the amount, at a rate of up to 10% of the Required Deposited Amount, , will not constitute grounds to
call the credit due for repayment, subject to the fulfillment of the following terms: (1) the temporary reductions was coordinated with the Bank in
advance and in writing; and (2) the Borrower has deposited, within 30 days, in its Account, the amount required such that the Borrower’s cash
balance in the Account is at least the required Deposited Amount.
9.
10.
11.
The Borrower undertakes to ensure that no charges are created on the assets of the subsidiaries (other than as set forth in this Agreement), unless
agreed to in advance and in writing by the Bank, and the Borrower further undertakes that it will not change the pricing of the transactions
between it and the subsidiaries, as it may be, on the signing date of this Agreement without obtaining the Bank’s prior written consent, unless such
a pricing change is required under applicable law.
Without derogating from the undertaking of the Borrower to provide information and documents, as agreed upon by the Bank and the Borrower,
the Borrower undertakes to provide the Bank, on a quarterly basis, with its consolidated financial statements and those of its subsidiaries, audited
(regarding the annual financial statements) and reviewed (regarding the quarterly financial statements) by an accountant, as the case may be, as
well as any business and financial information, at the request of the Bank. It is emphasized that the reporting on MAGNA and/or on EDGAR (in
the event that the securities of the company are listed for trading in the U.S.A) of the annual or quarterly financial statements shall be considered
to be the delivery of the information to the Bank. In the event that the company's securities are listed for trading I the U.S.A, an Earnings Release
shall be deemed a quarterly financial statement.
It is hereby explicitly clarified that the actual provision of the loans and/or credit, pursuant to this Agreement, is contingent on the fulfillment of all
of the conditions set forth in this Agreement above, and that the loans and/or credit will be provided based on the agreements set forth in the terms
of the Credit Documents, subject to the provisions of this Agreement. The provision of the credit is also contingent on there being no legal
impediment for the same, and that the same does not conflict with the provisions of the law and/or the instructions of the Supervisor of Banks
(including the provisions of Proper Banking Procedure No. 311 “Minimum Capital Ratio” and Procedure no. 313 - “Restrictions on Companies of
a Borrower and Group of Borrowers” and/or any other provisions that shall replace them) and provided that the granting of the credit does not
cause a deviation from the liability restrictions of a borrower / group of borrowers. As of the date of the execution of this Agreement, the Bank is
not aware of any such impediment or limitation.
12.
13.
14.
15.
A breach of any of the undertakings set forth in this document shall be deemed grounds to call for immediate repayment of the credit in its entirety
and will not permit the provision of loans from the Credit Limit for Financing Customer Debt and/or the provision of the long-term loan, as the
case may be. For the avoidance of doubt, the above shall be in addition to the grounds for calling the credit for immediate repayment, as set forth
in the other documents signed and/or that will be signed by the Borrower.
The Bank may, at any time and from time to time, in any case in which the Bank may perceive an inability to collect the credit and/or if an adverse
change occurs to the Borrower’s solvency and/or a materially adverse change to the financial or business state thereof and/or if there are grounds
to call the credit for immediate repayment and/or in the event that any of the other conditions occur as a result of changes of the law, or its
interpretation which require a reduction and/or cancellation and/or delay of the Line of Credit immediately, while providing notice to the Borrower
to reduce and/or cancel the Lines of Credit that are not utilized and/or postpone the provision of any loan, in whole or in part, and/or to delay it.
For the avoidance of doubt, the above was not intended to grant rights to any third party, and the same will not constitute a representation on
which any third party may rely.
All of the appendices to this Agreement constitute integral parts hereof and all of the provisions of the appendices will supplement and be in
addition to the provisions of this Agreement. In any case of a conflict between the provisions of this Agreement and the provisions of the Credit
Documents or the appendices, the provisions of this Agreement shall prevail, unless expressly agreed otherwise in any of the appendices or Credit
Documents. In any other case, the provisions of this Agreement and the provisions of the Credit Documents and the appendices thereto shall be
deemed supplementary to each other.
16.
The Borrower will pay the Bank, upon the signing of this Agreement, a sum of USD 14,000, for the drafting of the documents. This fee is in
addition to the fees customary in the Account.
Respectfully,
Itamar Medical Ltd.
By: Gilad Glick; Shy Basson
Date: 2/9/2020
To Bank Mizrahi Tefahot Ltd.
Dear Sir, madam
We confirm that we have read the foregoing document and we agree to its contents and undertake to act accordingly.
Itamar Medical Inc.
I.M.E. 2016 B.V.
We confirm the above
Mizrahi Tefahot Bank Ltd.
[INFORMAL ENGLISH TRANSLATION]
Mizrahi Tefahot Bank Ltd.
Deed of Pledge Legal Amendment
Company Number
512434218
Pledge number 13
Name of the Company/borrower – Itamar Medical Ltd.
Amendment Code: 40
Replacement of Appendix A, A2 and B of the attached appendixes to the amending Deed.
List of codes:
01 Assignment of rights to another
02 Change in the loan agreement
03 Decrease of the secured amount
04 Change in special terms
05 Change in the degree of the pledge
11 Addition of collateral
12 Changes in collateral
13 Release of a collateral
14 Addition of identification for a collateral (include vehicle license number)
21 Partial repayment
40 Other Changes
February 9, 2020
Date
signature of the Borrower
Signature of the Bank
Date: February 9, 2020
Amendment to Deed of Debenture dated 28.5.2017
Whereas:
on 28.5.17 Itamar Medical Ltd. company number 512434218 (hereinafter, the "Company") signed a debenture in favor of Mizrahi
Tefahot Bank Ltd. (hereinafter, the "Bank"), pursuant to which it pledged by floating charge of a first degree its manufacturing facility
and all the reminder of assets and rights of any kind what so ever, in its possession now or in the future and by fixed pledge of a first
degree its reputation, its fixed assets as detailed in Appendix A of the debenture, the intellectual property as detailed in Appendixes A1
and A2, of the debenture, the Company's rights to receive funds as detailed in Appendix B of the debenture, all the Company's holdings
in Itamar Medical Inc, and I.M.E B.V (2016), its bills of lading and certificates, securities, documents and deeds as well as the
Company's account with the Bank, all as detailed in the debenture; the said debenture was registered by the Companies Registrar on
13.6.17 as certificate number 13;
Whereas:
the company and the Bank agreed that the debenture shall be amended as detailed in this amending deed and that the reminder of the
provisions of the debenture shall remain unchanged, all as detailed hereunder;
Now therefore it is hereby agreed by the parties as follows;
1.
-
-
-
It is hereby agreed that:
Appendix A (list of the fixed assets) shall be replaced with Appendix A attached to this amending deed.
Appendix A2 (list of intellectual property rights) shall be replaced with Appendix A2 attached to this amending deed.
Appendix B (list of customers) shall be replaced with Appendix B attached to this amending deed.
2. The reminder of the provisions of the debenture shall remain unchanged.
3. The respectable registrar is hereby requested to register in his records the amendment of the debenture as set forth above.
In witness thereof the parties have thereunto signed today February 9, 2020
signature of the Borrower
Signature of the Bank
[Omitted. The registrant agrees to furnish supplementally a copy of such omitted appendix to the U.S. Securities and Exchange Commission upon request.]
Appendix A
to the Secured Debenture
[Omitted. The registrant agrees to furnish supplementally a copy of such omitted appendix to the U.S. Securities and Exchange Commission upon request.]
Appendix A1
to the Secured Debenture
[Omitted. The registrant agrees to furnish supplementally a copy of such omitted appendix to the U.S. Securities and Exchange Commission upon request.]
Appendix A2
to the Secured Debenture
[Omitted. The registrant agrees to furnish supplementally a copy of such omitted appendix to the U.S. Securities and Exchange Commission upon request.]
Appendix B
to the Secured Debenture
Name of Customer: Itamar Medical, Inc.
Address: c/o Itamar Medical Ltd. Halamish 9, Caesarea, Israel
I.D./Company No: 3213646
MIZRAHI TEFAHOT BANK LTD
Kenyon Orot Branch
CONTINUING GUARANTEE IN AN UNLIMITED AMOUNT TO SECURE ALL DEBTS
PREAMBLE
WHEREAS Mizrahi Tefahot Bank Ltd (hereinafter referred to as the “Bank”) has granted or from time to time shall grant
to Itamar Medical Ltd. (hereinafter referred to as the “Customer”) credit under such terms as from time to time were
and/or shall be agreed upon between the Bank and the Customer in respect of each credit;
AND WHEREAS we, the undersigned, are willing to guarantee to the Bank the repayment of debts of any kind owing
now and / or hereafter from the Customer to the Bank;
NOW THEREFORE WE CONFIRM, GUARANTEE AND UNDERTAKE AS FOLLOWS:-
DEFINITIONS
1.
In this Guarantee:-
(a)
“Credit”, whether in Israeli currency or in any foreign currency, includes every revolving credit, single
credit, loan, discount, purchase and or brokerage of bills, overdraft, granting of guarantee and/or letter of
indemnity, opening of documentary credit, grant of extension of time, and of various banking facilities,
handling of bills of lading transactions in securities services, or any other payments granted or to be
granted now or hereafter by the Bank to the Customer or to his order, whether in Israel or abroad, as well
as every and any other transaction or other action whereby or as a result of which debts or obligations are
or may be incurred or undertaken by the Customer towards the Bank, whether as debtor, guarantor or
endorser and/or in any other manner whether the said debts be owing from the Customer jointly or
severally, whether owing presently or hereafter, whether maturing prior to the execution hereof or
hereafter, whether certain or contingent, whether owing directly or indirectly, whether express or implied.
Words importing the singular shall include the plural and vice versa.
Words importing the masculine gender shall include the feminine gender and vice versa.
“Bank” means Mizrahi Tefahot Bank Ltd and includes all branches and/or offices and/or subsidiaries
and/or affiliates of the Bank existing on the date of this Guarantee, whether in Israel or abroad, and/or any
such branch and/or office and/or subsidiary and/or affiliate of the Bank that shall at any future date be
established in any place whether in Israel or abroad, its assigns and any person or legal entity duly
authorized to act on behalf of the Bank and its duly appointed representatives.
The “Customer” includes the heirs, estates, successors, executors and administrators of their wills and
estates and their appointees and substitutes, guardians, liquidators, directors, partners, shareholders,
trustees and assigns of the Customer or power of attorney acting in the Customer's stead.
“Bills” include promissory notes, cheques, bills of exchange, commitments, guarantees, bills of securities,
drafts, bills of lading and any other negotiable and any other negotiable instruments.
“Consumer Price Index” means the price index known as “the Consumer Price Index" (cost of living index)
including fruits and vegetables, published by the Central Bureau of Statistics of the State of Israel, and
including such index if published by another official body or institute, and also any official index replacing
it, irrespective of whether based on the same data.
The expression “Representative Rate of the US Dollar” or “Representative Rate” means the representative
of the US dollar determined by the Bank of Israel. In the event that the Bank of Israel ceases to determine
the Representative Rate either temporarily or permanently, the Representative Rate shall be determined by
the Bank.
The expression “Dollar” means the US dollar.
“Exchange Rate” means the selling price for cheques and transfers and/or bank notes of any denomination
whatsoever in foreign currency, all as shall be determined by the Bank. In the event that at any such time
two or more exchange rates as aforesaid are prevailing at the Bank, the Exchange Rate shall be the highest
such rate then prevailing. In the event that at the time of such conversion of foreign currency additional
payments, including commissions, levies, taxes, fees and other costs, etc. shall apply, the Exchange Rate
shall be deemed to include any such additional payments.
The preamble to this Guarantee shall constitute an integral part hereof.
(b)
(c)
(d)
(e)
(f)
(g)
(h)
(i)
(j)
(k)
1
GUARANTEE
2.
We hereby irrevocably guarantee to the Bank and its assigns absolutely, unequivocally and unconditionally the full
and prompt repayment of any sums owing now and/or hereafter from the Customer to the Bank, inter alia, in
connection with the granting of the Credit by the Bank to the Customer, whether the said debts be owing from the
Customer singly or jointly with another or others, whether incurred by the Customer in the past or are to be
incurred by the Customer in the future, whether owing from the Customer as debtor, guarantor or endorser,
whether owing now or hereafter, whether certain or contingent, whether owing directly or indirectly, with the
addition of interest, commissions, damages, linkage differentials, exchange rate differentials and any other
reasonable and actual charges and costs (all the aforesaid sums hereby guaranteed by us shall hereinafter be
referred to as the “Said Sums”). For the avoidance of any doubt, it is hereby agreed and confirmed that we hereby
guarantee all linkage differentials and/or exchange rate differentials of any kind whatsoever owing now and/or
hereafter by the Customer to the Bank in respect of linked principal and/or linked interest constituting part of the
Said Sums. Accordingly, the expression the “Said Sums” shall also be deemed to include the aforesaid linkage
differentials and exchange rate differentials.
OBLIGATION
AMOUNT.
3.
The aggregate amount which we shall be obliged to pay the Bank under the present Guarantee (hereinafter referred
to as the “Guaranteed Amount”) shall be an unlimited amount.
PAYMENTS DATES
4.
We undertake to pay the Bank any amount it may demand from us from time to time, within 7 (seven) days of the
date of the dispatch of its first demand notice on account of the Guaranteed Amount as the Customer shall owe the
Bank, up to the full actual repayment thereof.
WAIVER OF PRIOR
DEMAND NOTICE FOR
REPAYMENT TO
CUSTOMER
5.
FOREIGN CURRENCY
TRANSACTION
6.
LIABILITY IN EVENT OF
ARRANGMENT,
LIQUIDATION OR
BANKRUPTCY
7.
Except for the notices required pursuant to this Guarantee and as required by applicable law, the undersigned
waives notice of acceptance of this Guaranty and notice of any liability to which it may apply, and waives
presentment, demand of payment, protest, notice of dishonor or nonpayment of any such liabilities, suit or taking
other action by the Bank against, and any other notice to, any party liable thereon (including the undersigned).
Notwithstanding the foregoing, the Bank shall provide notice of default to the Customer concurrently with
providing a demand for payment to us. We shall pay the Bank all such sums as the Bank may demand from us as
aforesaid, without imposing upon the Bank any duty to provide us with any accounts or proof whatsoever of the
non-performance by the Customer of his obligations, and we hereby waive any requirement that the Bank make
prior demand for payment of any such sums from the Customer. The Bank shall be entitled to demand from us the
performance of this Guarantee, without the Bank being obliged to institute any proceedings for the collection of
any such sums from the Customer, or from any liquidator or trustee thereof or from other guarantors or to realize
other collateral. The institution of any proceedings by the Bank in order to collect any such sums shall not derogate
from our obligations to pay any such sums immediately and we shall not be entitled to delay the payment of any
such sums until the finalization of any other proceedings instituted by the Bank.
In every instance that Credit is granted or is to be granted to the Customer in any foreign currency (hereinafter
referred to as a “Foreign Currency Transaction”), we hereby undertake to pay to the Bank or to its order in that
same foreign currency all the Said Sums which are due and which shall become due from the Customer with
respect to that Foreign Currency Transaction, including principal, interest and linkage differentials, if they occur,
as well as commissions and reasonable and actual expenses resulting from the linkage of the principal and the
interest or any one of them, to the Exchange Rate.
In the event that the Bank shall be compelled to take legal action against us (on the basis of this Guarantee) in
order to recover Said Sums in respect of a Foreign Currency Transaction and the court and/or the execution office
shall order us to pay any sums in respect of the Foreign Exchange Transaction, in Israeli currency or in
consideration of Israeli currency, we hereby undertake to pay the Bank the amount, in New Israeli Shekel, or the
proceeds thereof, which shall be sufficient for the conversion into foreign currency of the said amount in
accordance with the Exchange Rate prevailing on the date of actual payment.
In the event of any arrangement made with respect to the debts of the Customer, (including an arrangement by the
court) or the liquidation or bankruptcy thereof, such arrangement shall not derogate from our obligations pursuant
to this Guarantee and the Bank shall be entitled to demand from us the Guaranteed Amount in full in accordance
with the amount of the Said Sums as would have been due from the Customer to the Bank if it were not for such
arrangement, liquidation or bankruptcy. The Bank shall be entitled to consent to any compromise settlement, and
such compromise shall not to derogate from our guarantee for the entire Guaranteed Amount. We undertake not to
submit evidence of a debt to a receiver, trustee, etc., without the prior written approval of the Bank which shall not
be unreasonably withheld. Notwithstanding the foregoing, we may submit to the receiver, trustee, etc., proof of a
debt (or claims of a debt or claims of a similar nature), only if it is emphasized that such claims are subordinate
and junior to the rights of the Bank at the time of the receivership or dissolution.
2
UNCONDITIONAL
GUARANTEE
8.
The Bank is not bound to accept any additional collateral or guarantee from Customer in respect of the payment of
the Said Sums. If it was known to us at the time of or prior to our signing this Guarantee that the Bank was about
to obtain other collateral from the Customer or further guarantees, including any instance in which names of
additional guarantors were to be supplemented to this Guarantee and the Bank shall not have received such
additional collateral and/or the additional guarantors shall not have signed any other guarantee, the validity of this
Guarantee shall not thereby be derogated from and we shall perform all our obligations hereunder.
PRESERVATION OF
GUARANTEE
9.
WAIVER OF DEFENCE
CLAIMS
10.
The Bank may from time to time, whether with or without our consent and with or without any notice to us:-
(a)
(b)
Discontinue, vary, decrease, increase, or renew any Credit to the Customer;
extend the time for payment or grant other similar accommodations to the Customer and/or to any
other person and/or to the Guarantor or to any one of us;
exchange, renew, modify, release, terminate, enforce or refrain from enforcing any collaterals or guarantees
held or which shall be held by the Bank, whether obtained from the Customer and/or from other persons
and/or from the Guarantors and/or from any one or more of us;
compromise, waive, release or make any other arrangement with the Customer and/or with any other
person and/or with the Guarantors and/or with any one of us, of his obligations;
procure the non-discharge of any indebtedness incurred by the Customer in respect of the granting of the
Credit, or procure the release of any collateral given in connection with the granting of the Credit;
refrain from notifying us of the non-performance of any obligations whatsoever by the Customer and/or
postpone or suspend the submission of demands against us hereunder, without the same being deemed to
constitute a precedent, waiver, limitation of action or negligence on the part of the Bank.
(c)
(d)
(e)
(f)
Upon the occurrence of any of the aforesaid events, even if as a consequence thereof a loss shall be incurred by the
Bank, this Guarantee shall remain fully valid and effective and shall not be affected or altered or reduced as to the
amount thereof and all our obligations shall remain unaffected and shall not be reduced. In order to avoid all
doubt, it is hereby stipulated that if the Bank perform any of the aforesaid acts, we shall not be entitled to any right
of option, right of cancellation or any other right stipulated in the Guarantee Law, 5727-1967, in respect of the said
acts and we hereby expressly waive all our said rights thereunder.
This Guarantee shall not be derogated from, reduced or altered and shall remain valid and effective:-
(a)
in the event that the Customer’s indebtedness to the Bank is impaired or invalid for any reason whatsoever
including, inter alia, by reason of the capacity or representation of the Customer;
in the event that the Bank’s right to claim the payment of the Guaranteed Amount from the Customer has
terminated due to prescription;
in the event that the Customer denies his liability towards the Bank or in the event that the Customer has or
raises any claims against the Bank.
In the event that the Customer is a corporation that has passed a resolution to merge with another
corporation, whether as an absorbing company or as a target company, as defined in the Companies Law,
5759-1999.
(b)
(c)
(d)
In each of the aforesaid instances, the abovementioned indebtedness shall, for the purposes of this Guarantee, be
deemed to be valid, unimpaired, fully effective, non-appealable and unable to be responded to for the purposes of
this Guarantee and we hereby declare that we shall not raise any claim against the Bank and that all our obligations
pursuant to this Guarantee shall remain fully effective and we hereby waive, in advance, any rights or claims that
the Guarantee Law, 5727-1967, confers or allows in such circumstances.
PRESERVATION
OF OBLIGATIONS
11.
In the event that we or any one of us or the Customer is a legal entity, whether incorporated or unincorporated, or a
trustee, executor or administrator, or joint account holder at the Bank, or any type of organization or entity
constituting an affiliation of entities, our obligations hereunder shall not be derogated from by reason of any
change in our name, constitution or composition or in that of the Customer.
CONSIDERATION
12. Without deeming consideration to be a precondition to the validity of this Guarantee in whole or in part, we hereby
confirm that the Bank’s consent to advance Credit from time to time to the Customer or any party constituting the
Customer shall be deemed to be full consideration for our obligations hereunder, in whole or in part.
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COLLATERAL
13.
All present and future collateral and guarantees for our obligations held or to be held by the Bank including those
stipulated hereunder, shall constitute collateral for the performance of all our obligations hereunder: The bills of
our customers or other parties, or securities or other negotiable instruments as shall be held by the Bank from time
to time. Such bills, securities or other negotiable instruments shall be deemed to be pledged and charged to the
Bank from the moment of their delivery to the Bank as collateral. We hereby exempt the Bank from all obligations
as holder of a bill, such as, presentation for acceptance or for payment, protest and notice of dishonor and the
signatures, endorsements and guarantees on bills and any other negotiable instruments shall remain valid until their
discharge, without any formal requirements whatsoever having to be met and we hereby waive the right to raise
the defense of prescription.
BANKER’S LIEN PLEDGE
AND SET-OFF
14. Without prejudice to any other right of the Bank, the Bank shall have a right of pledge, charge, possession,
bankers’ lien and set-off on all amounts that are or shall be held by the Bank at any time to our credit in a current
or any other account whatsoever, whether held jointly or severally, whether with another or others and/or with
respect to any and all assets (including, without derogation from the generality thereof, diamonds, gold, securities,
bills, coins, banknote, goods, documents relating to goods, insurance policies, assignments of debts, any negotiable
instruments, deposits, collateral, mortgages and other rights) that are and/or shall be held and/or credited to or on
our behalf at the Bank, in any form or manner whatsoever, including those that have been or shall be delivered to
the Bank for collection and/or as security and/or for custody and/or in any other manner whatsoever and on the
proceeds thereof. The Bank shall be entitled at any time and from time to time to utilize any asset to which the said
lien, pledge, charge or set-off shall apply, in any way or manner, including by realization, collection and sale, at
any price and in accordance with any terms as the Bank shall deem proper, and from time to time, to utilize the
proceeds (in part or fully) that shall be received as a result of or in relation to such realization and/or collection or
sale for the partial and/or full repayment of the Said Sums. At any time that we shall owe, or might owe, or only
conditionally owe the Bank any monies pursuant to this Guarantee, the Bank shall be entitled to utilize its rights to
fully realize the said pledge, charge, possession, lien and set-off or any of them, in order to discharge the amounts
that are or shall be owed by us to the Bank or as security for their repayment. We do not have and shall not have
any claim or plea of any type whatsoever against the Bank for taking any action stipulated in this Clause. In order
to effect any of the said actions, the Bank shall be entitled to take all legal and other proceedings as it shall deem
necessary.
All costs related to the realization and/or sale and/or taking any legal proceedings both against Customer and us,
shall be borne by us, and the Bank shall be entitled to debit our account accordingly. In every instance of the
collection of bills, the Bank shall be entitled to negotiate and discount the bills to other persons in a reasonable
amount, take all legal and other proceedings for the collection of the bills, debit our account with the collection
charges, compromise with the makers, endorsers or guarantors thereof or grant any reasonable concessions
whatsoever, accept partial payment and from time to time, apply the proceeds of the bills in full or partial payment
of the Said Sums.
DEBITING AND
CREDITING OF
PAYMENTS
15.
The Bank may at any time at its reasonable discretion:-
(a)
Debit any account in our name with any amount owing now or hereafter to the Bank pursuant to this
Guarantee.
Credit any amount paid by us or on our account in any manner and form to such account as the Bank shall
deem proper.
Transfer any amount standing to our credit in any account in our name to any other account maintained in
our name.
Credit any amount received from the Customer or on his behalf or on account thereof or upon the
realization of any collateral held by the Bank to such account as the Bank shall deem proper.
(b)
(c)
(d)
CONTINUING
GUARANTEE
16.
This Guarantee shall be continuing and revolving security and shall continue to be effective notwithstanding any
settlement of accounts with the Customer and shall bind us and our assigns (which expression shall be interpreted
as including guardians, custodians, heirs, administrators and executors of wills, trustees, receivers, liquidators and
successors and any party acting in their stead) until the expiration of thirty (30) days from the day on which the
Bank, through the branch at which we executed the present Guarantee, receives written notice from us of the
termination of the Guarantee. The said notice shall not derogate from our Guarantee and our liability for the debts,
transactions and obligations that the Customer has effected or undertook to effect prior to the termination of the
said period of 30 (Thirty) days, even though their maturity dates may occur after the expiration of the said period.
SUBORDINATIOM OF
INDEBTEDNESS OF
CUSTOMER
17. We hereby agree that any indebtedness of the Customer, now or in the future owed to us and outstanding at the
time of enforcement of, or collection under, this Guarantee, is hereby subordinated to the Said Sums. If the Bank
so request, any such indebtedness shall be collected, enforced and received by the Guarantor as trustee for the
Bank, and shall be paid over to the Bank in kind on account of the Said Sums, provided that the Bank is then
entitled to collect an amount equal to, or greater than, such indebtedness from the Customer pursuant to any
agreement and/or Credit provided by Bank to Customer.
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SUBROGATION
18. We hereby agree that, until the payment and satisfaction in full of all of the Said Sums, we shall not exercise any
right, remedy, power or privilege, such as any right of subrogation, contribution or indemnity or related remedy,
power or privilege, arising to us (whether by contract or operation of law) against the Customer in respect of all or
any part of the Said Sums or any collateral for all or any part of the Said Sums by reason of any payment or other
performance pursuant to the provisions of this Guarantee and, if any amount shall be paid to us on account of such
rights, remedies, powers or privileges, we shall hold such amount in trust for the benefit of, and pay the same over
to, the Bank, on account of the Said Sums. We understand that the exercise by the Bank of any right, remedy,
power or privilege that it may have under any agreement with Customer and/or with us relative to all or any part of
the Said Sums may affect or eliminate our right of subrogation or similar recovery against the Customer, any other
guarantors or any collateral, and that we may therefore incur partially or totally non-reimbursable liability under
this Guarantee. Nevertheless, we hereby authorize and empower the Bank to exercise, in its sole discretion, any
combination of such rights, remedies, powers and privileges, provided however, that such exercise of rights is in
accordance with the terms of its agreements with Customer or with us.
CONDITIONAL RELEASE
19.
In the event that our obligation to the Bank pursuant to this Guarantee is for any reason whatsoever revoked or
terminated or the Bank shall confirm that our obligation as herein stipulated has terminated, we hereby agree that
in any event of the Bank being ordered by any court to repay to any person or body whatsoever any amount
whatsoever paid to the Bank in discharge of the Said Sums or on account thereof (whether such amount was paid
to the Bank by mistake or in fraudulent preference or for any other reason whatsoever) we hereby undertake to
compensate and indemnify the Bank in respect of any sum which the Bank is ordered to pay and/or incurs in
relation thereto, with the addition of all the expenses and payments incurred with respect thereto and with the
addition of interest accrued on such sums, charged at the highest rate of interest then prevailing, until we fully
repay all the amounts stipulated in this paragraph to the Bank.
AUTONOMOUS NATURE
OF COLLATERAL
20.
This Guarantee shall be deemed to be autonomous of any other collateral or guarantees and shall not be prejudiced
or affected by any such other collateral or by reason of the Bank receiving impaired or invalid collateral or
guarantees.
INDEMNITY
21.
BANK ENTRIES
22.
We hereby waive any right to receive by way of transfer to us or to participate in any other collateral which the
Bank holds in respect of the repayment of the Said Sums and we shall not perform any act with the purpose of
obtaining any rights in the said collateral, notwithstanding payment by us of the full Guaranteed Amount.
In addition to our guarantee provided herein, the present document shall constitute an undertaking of indemnity
and we hereby undertake to indemnify the Bank, within the limits of the Guaranteed Amount, for any damages,
costs and losses caused to the Bank in any action or legal proceeding brought by third parties, with the exclusion of
lost-profit damages only, as result of granting credit to the Customer, subject to the relevant conditions stipulated
herein.
All entries recorded in the books of the Bank shall be deemed to be accurate and shall serve as sufficient evidence
against us with respect to all their details, regarding all the accounts of the Customer unless disputed by Customer
within thirty (30) days of entry being provided to Customer. Copies of such entries and/or, at the discretion of the
Bank, every item in such entry or such page or in separate document or any part of such entry or the last page of
the said entry or any part thereof that shall be approved by an officer of the Bank, shall serve as sufficient evidence
as to the existence of such entry and as to the accuracy of the details appearing thereon.
The term “the books of the Bank” shall be deemed to also include any book, ledger, statement, copy of statement,
loan agreement, deed of undertaking, bill signed by the Customer, index card, page, roll or any other means or by
electronic data storage and computerization and other means of data storage.
The term “entry” shall be deemed to also include any entry or copy of an entry whether written or copied by hand
or typewriter or whether recorded by printing, stenciling, duplicating, photostating (including microfilming) or any
other mechanical, electrical or electronic means or by electronic computer recording means or any other means of
recording or presenting words or presenting words or number or any other symbols whatsoever which exist and/or
are utilized at the Bank.
For avoidance of doubt, in no event shall the Bank provide us with any books and records with respect to
Customer if doing so is prohibited by any applicable law or regulation.
TAX GROSS UP AND
SETOFF
23. We shall make all payments to be made by us under this Guarantee without any deduction or withholding for or on
account of any tax (together, a ”Tax Witholding") unless a Tax Withholding is required by law. We shall promptly
upon becoming aware that we must make a Tax Withholding (or that there is any change in the rate or the basis of
a Tax Withholding) notify the Bank accordingly. If a Tax Withholding is required by law to be made by us, the
amount of the payment due from us shall be increased to an amount which (after making any Tax Withholding)
leaves an amount equal to the payment which would have been due if no Tax Withholding had been required. If we
are required to make a Tax Withholding, we shall make that Tax Withholding and any payment required in
connection with that Tax Withholding within the time allowed and in the minimum amount required by law.
Within 30 days of making either a Tax Withholding or any payment required in connection with that Tax
Withholding, we shall deliver to the Bank evidence satisfactory to the Bank that the Tax Withholding has been
made or (as applicable) any appropriate payment has been paid to the relevant taxing authority. All payments made
by us to the Bank under this Guarantee shall (save insofar as required by law to the contrary) be paid in full
without set-off or counterclaim.
5
TECHNICAL CHANGES
24.
For the avoidance of any doubt and for the purposes of clarification, it is hereby stated that: in the event that for
any bureaucratic, administrative or technical reasons, a change shall occur in the number of any account (as such
account is included in the definition of “Credit” in this document) or the account is transferred to another branch of
the Bank, all the provisions of this Guarantee shall be deemed to relate to the said account pursuant to the new
number so given or at the other branch to which the account has been transferred, even in the event that it shall be
stated in this document that our Guarantee relates to Credit which the Customer has received in a particular
account or at a particular branch.
ASSIGNMENT OF RIGHTS 25.
This Guarantee may be assigned by the Bank without the need to obtain our prior consent.
MUTUALLY DEPENDENT,
JOINT AND SEVERAL
LIABILITY
26.
In the event that the Customer shall have a number of Guarantors, the liability hereunder shall be mutually
dependent, jointly and severally, and the Bank shall at its sole discretion, be entitled to collect from any one or
more of the Guarantors, the full Guaranteed Amount or any part thereof. The liability of each one of the
Guarantors shall not be affected by reason of any of the other Guarantors not having the capacity to be bound as
Guarantors, or as a consequence of the Bank releasing them from their liability or returning to them the collateral
that they delivered to the Bank.
STATUTE OF
LIMITATIONS
RATIFICATION
27. We hereby waive all our rights to plead prescription under any law in force at such time in all matters relating to
this Guarantee and we hereby agree that the fact that the Bank does not immediately exercise its rights hereunder
or in connection herewith in any given event shall not be deemed a waiver of such rights, nor a consent or
acknowledgment by the Bank, nor shall it be deemed to create any precedent and the Bank shall be entitled to
exercise the rights deriving from this document and/or in connection herewith and/or the law at such time as it may
deem fit.
28. We hereby undertake to sign all such documents and forms as the Bank may require, if and insofar as under any or
some of the laws of the State of Israel, our signing of any such document or form is or shall be deemed to be
required, at the Bank's sole discretion, in order to make the present document fully valid and effective. In
compliance with the provisions of this Clause, we hereby appoint the Bank as our principal attorney, either itself or
through such person to whom the Bank may delegate its powers, to sign all such documents and forms as may be
requested by the Bank, and the Bank or any party acting on its behalf shall in no way be liable to us in respect of
any act or omission whatsoever made thereby under or by virtue of this Clause. The said appointment shall be
irrevocable as the rights of the Bank are dependent thereon and full consideration has been given by the Bank
therefor by the Bank advancing the Credit to the Customer.
NOTICES
29.
Any notice, demand, request, consent, approval, declaration, or other communication hereunder shall be deemed to
have been duly given or served on the date on which personally delivered, or - if mailed to us by the Bank through
the post by registered or ordinary mail to the addresses set out below or to such other address in Israel of which we
shall notify the Bank in writing shall be deemed to have been duly received by the addressee five (5) business days
after the date of delivery of the letter for dispatch. A written statement by the Bank shall constitute sufficient proof
of the time and posting of the notice.
STAMPING AND
EXPENSES
30.
Stamp duty payable in respect of this Guarantee and all such other expenses as relate to the enforcement hereof or
the realization of any collateral delivered in connection herewith, including the Bank’s advocate’s fees, shall be
borne by us and secured by this Guarantee.
WAIVER OF PRIOR
NOTICE
31. We hereby waive the need for dispatching any notarial or other warnings in all matters in connection with this
Guarantee.
GOVERNING LAW AND
JURISDICTION
32.
The laws of the State of Israel shall govern this Guarantee and we hereby agree that the city of Tel Aviv-Jaffa,
State of Israel, shall be the place of jurisdiction for the purposes of this Guarantee, provided that the Bank shall be
entitled to institute proceedings against us in any such other competent court as it may deem fit.
MARGINAL NOTES
33.
The marginal notes in this Guarantee have been inserted for ease of reference only and shall not be utilized as a
means of interpreting the intentions of the parties or the interpretation of this Guarantee.
6
ADDENDA
34.
SPECIAL CONDITIONS:
IN WITNESS WHEREOF THE PARTIES HERETO HAVE HEREUNTO EXECUTED THIS GUARANTEE ON THIS
12 DAY OF March 2019
NAME OF GUARANTORS
Date
Ma March 12,
2019
Name of Guarantor
Itamar Medical, Inc.
Address (in Israel
only)
c/o Itamar Medical Ltd. Halamish
9, Caesarea, Israel
Company/Id.
No.
3213646
Signature
VERIFICATION OF GUARANTORS SIGNATURES
I, the undersigned, hereby verify that the Guarantor/s whose names appear hereunder, have signed before me on the dates stipulated above next to their
names/signatures on this Guarantee and have been identified by me in accordance with an identification document and I have explained to them the
contents and significance of this Guarantee after they have confirmed to me that they have read it.
Name of Guarantor*
Bank Officer’s
Full Name
Position
Bank Officer’s Signature
Date of Bank
Officer of
Signature
03.12.2019
*
First and Surname/Corporate Name (In case of corporate Guarantor – in addition, the name of the authorized signatory signing on behalf of the
Corporation must be completed
7
UNLIMITED SECURITY AGREEMENT
Execution Copy
THIS SECURITY AGREEMENT ("Security Agreement") is made and entered into as of the 12th day of March, 2019 (the "Execution Date") by
and between Itamar Medical Inc., a Delaware Corporation, c/o Itamar Medical Ltd., 9 Halamish St., Caesarea, Israel USA ("Guarantor"), and Mizrahi
Tefahot Bank Ltd., Israel (the "Bank").
WHEREAS Itamar Medical Ltd., the parent company of Guarantor (“Affiliated Company”) has, or may have, obtained in the past, pursuant to previous
agreements and transactions with the Bank, and intends to obtain – in the future - additional credit lines, loans, banking facilities, credit and other
miscellaneous banking services from the Bank (hereinafter jointly and severally referred to as the “Banking Service(s)”) on such terms as have been and/or
are in future from time to time agreed in respect of each Banking Service; and
WHEREAS in order to induce the Bank to provide the Banking Services to the Affiliated Company, and in consideration of the Bank’s agreement to
extend such Banking Services to the Affiliated Company, it has been agreed between the Guarantor and the Bank that the Guarantor will guarantee all of
the Affiliated Company’s debts and liabilities to the Bank of any kind whatsoever related to the Banking Services, whether in Israeli currency, in United
States Dollars, or in any other currency whatsoever, all as set forth in the Guarantee Agreement entered into between the parties hereto, dated March 12,
2019 (the "Guarantee Agreement"), and will secure all of its undertakings and obligations, all as set out in this Security Agreement below;
NOW, THEREFORE, in consideration of the premises and of the mutual covenants herein contained and for other good and valuable consideration, the
receipt of which is hereby acknowledged, the parties hereto agree as follows:
1. Defined Terms. The following terms shall have the following meanings (such meanings being equally applicable to both the singular and plural forms of
the terms defined):
"Accounts" shall mean any "account," as such term is defined in section 9-102(a)(2) of the UCC, now owned or hereafter acquired by the Guarantor
and, in any event, shall include, without limitation, all accounts receivable, book debts, and other forms of obligations now owned or hereafter received or
acquired by or belonging or owing to the Guarantor (including, without limitation, under any trade names, styles, or divisions thereof) whether arising out
of goods sold or services rendered by the Guarantor or from any other transaction, whether or not the same involves the sale of goods or services by the
Guarantor (including, without limitation, any such obligation that might be characterized as an account or contract right under the UCC) and all of the
Guarantor's rights in, to, and under all purchase orders or receipts now owned or hereafter acquired by it for goods or services, and all of the Guarantor's
rights to any goods represented by any of the foregoing (including, without limitation, unpaid seller's rights of rescission, replevin, reclamation, and
stoppage in transit, and rights to returned, reclaimed, or repossessed goods), and all moneys due or to become due to the Guarantor under all contracts for
the sale of goods or the performance of services or both by the Guarantor (whether or not yet earned by performance on the part of the Guarantor or in
connection with any other transaction), now in existence or hereafter occurring, including, without limitation, the right to receive the proceeds of such
purchase orders and contracts, and all collateral security and guaranties of any kind given by any person or entity with respect to any of the foregoing.
"Chattel Paper" shall mean any "chattel paper," as such term is defined in section 9-102(a)(11) of the UCC, now owned or hereafter acquired by the
Guarantor.
"Collateral" shall have the meaning assigned to such term in Section 5 of this Security Agreement.
"Contracts" shall mean all contracts, undertakings, or other agreements (other than rights evidenced by Chattel Paper, Documents, or Instruments)
under which the Guarantor may now or hereafter have any right, title or interest, including, without limitation, with respect to an Account, any agreement
relating to the terms of payment or the terms of performance thereof.
"Copyrights" shall mean all of the following now or hereafter acquired by the Guarantor: (i) all copyrights, registrations, and applications therefor; (ii)
all renewals and extensions thereof; (iii) all income, royalties, damages, and payments now and hereafter due or payable or both with respect thereto,
including, without limitation, damages and payments for past or future infringements or misappropriations thereof; (iv) all rights to sue for past, present,
and future infringements or misappropriations thereof; and (v) all other rights corresponding thereto throughout the world.
“Deposit Accounts” shall mean any “deposit account” as such term is defined in section 9-102(a)(29) of the UCC, now owned or hereafter acquired by
the Guarantor.
"Documents" shall mean any "documents," as such term is defined in section 9-102(a)(30) of the UCC, now owned or hereafter acquired by the
Guarantor.
"Equipment" shall mean any "equipment," as such term is defined in section 9-102(a)(33) of the UCC, now owned or hereafter acquired by the
Guarantor and, in any event, shall include, without limitation, all machinery, equipment, furnishings, fixtures, vehicles, computers, and other electronic
data-processing and other office equipment now owned or hereafter acquired by the Guarantor and any and all additions, substitutions, and replacements of
any of the foregoing, wherever located, together with all attachments, components, parts, equipment, and accessories installed thereon or affixed thereto.
"Event of Default" shall mean any Event of Default as defined in Section 10 herein.
"General Intangibles" shall mean any "general intangibles," as such term is defined in section 9-102(a)(42) of the UCC, now owned or hereafter
acquired by the Guarantor and, in any event, shall include, without limitation, all right, title, and interest that the Guarantor may now or hereafter have in or
under any Contract, all customer lists, Copyrights, Trademarks, Patents, rights in intellectual property, Licenses, permits, Trade Secrets, proprietary or
confidential information, inventions (whether patented or patentable or not), technical information, procedures, designs, knowledge, know-how, software,
data bases, data, skill, expertise, experience, processes, models, drawings, materials, and records now owned or hereafter acquired by the Guarantor,
goodwill, and rights of indemnification.
2
"Hereby," "herein," "hereof," "hereunder" and words of similar import refer to this Security Agreement as a whole (including, without limitation, any
schedules hereto) and not merely to the specific section, paragraph, or clause in which the respective word appears.
"Instruments" shall mean any "instrument," as such term is defined in section 9-102(a)(47) of the UCC, now owned or hereafter acquired by the
Guarantor, other than instruments that constitute, or are a part of a group of writings that constitute, Chattel Paper.
"Intellectual Property" shall mean all of the Copyrights, Licenses, Patents, Trademarks, and Trade Secrets of Guarantor.
"Inventory" shall mean all "inventory," as such term is defined in section 9-102(a)(48) of the UCC, now owned or hereafter acquired by the Guarantor
and, in any event, shall include, without limitation, all inventory, merchandise, goods, and other personal property now owned or hereafter acquired by the
Guarantor which are held for sale or lease or are furnished or are to be furnished under a contract of service or which constitute raw materials, work in
process, or materials used or consumed or to be used or consumed in the Guarantor's business, or the processing, packaging, delivery, or shipping of the
same, and all finished goods.
"Investment Property" means (i) a security, whether certificated or uncertificated, (ii) a security entitlement, (iii) a securities account, (iv) a
commodities contract, or (v) a commodities account, all as defined in Article 9 of the UCC.
"License" shall mean any Patent License, Trademark License, or other license as to which the Bank has been granted a security interest hereunder.
"Liens" shall mean, with respect to any asset, (a) any mortgage, deed of trust, lien, pledge, hypothecation, encumbrance, charge or security interest in,
on or of such asset, (b) the interest of a vendor or a lessor under any conditional sale agreement, capital lease or title retention agreement (or any financing
lease having substantially the same economic effect as any of the foregoing) relating to such asset and (c) in the case of securities, any purchase option, call
or similar right of a third party with respect to such securities.
"Patent License" shall mean any written agreement granting any right to practice any invention on which a Patent is in existence, now owned or
hereafter acquired by the Guarantor.
"Patents" shall mean all of the following now or hereafter acquired by the Guarantor: (i) all patents and patent applications throughout the world,
whether arising under U.S. federal law, state law, common law or the law of any other jurisdiction; (ii) all inventions and improvements described and
claimed therein; (iii) all reissues, divisions, continuations, renewals, extensions, and continuations-in-part thereof; (iv) all income, royalties, damages and
payments now and hereafter due and/or payable to the Guarantor with respect thereto, including, without limitation, damages and payments for past,
present or future infringements or misappropriations thereof; (v) all rights to sue for past, present, and future infringements or misappropriations thereof;
and (vi) all other rights corresponding thereto throughout the world.
3
"Proceeds" shall mean "proceeds," as such term is defined in section 9-102(a)(64) of the UCC and, in any event, shall include, without limitation, (i)
any and all proceeds of any insurance, indemnity, warranty or guaranty payable to the Guarantor from time to time with respect to any of the Collateral; (ii)
any and all payments (in any form whatsoever) made or due and payable to the Guarantor from time to time in connection with any requisition,
confiscation, condemnation, seizure, or forfeiture of all or any part of the Collateral by any governmental body, authority, bureau, or agency (or any person
acting under color of governmental authority); and (iii) any and all other amounts from time to time paid or payable under or in connection with any of the
Collateral.
"Secured Sums" shall have the meaning defined in Section 2 herein.
"Security Agreement" shall mean this Security Agreement, as the same may from time to time be amended, modified, or supplemented pursuant to
Section 19 of this Security Agreement, and shall refer to this Security Agreement as in effect on the date such reference becomes operative.
"Trade Secrets" shall mean trade secrets, along with any and all (i) income, royalties, damages, and payments now and hereafter due and/or payable to
the Guarantor with respect thereto, including, without limitation, damages and payments for past or future infringements or misappropriations thereof; (ii)
rights to sue for past, present, and future infringements or misappropriations thereof; and (iii) all other rights corresponding thereto throughout the world.
"Trademark License" shall mean any written agreement granting any right to use any Trademark or Trademark registration, now owned or hereafter
acquired by the Guarantor.
"Trademarks" shall mean all of the following now owned or hereafter acquired by the Guarantor: (i) all trademarks (including service marks and trade
names, whether registered or at common law), registrations and applications therefor, and the entire product lines and goodwill of the Guarantor's business
connected therewith and symbolized thereby; (ii) all renewals thereof; (iii) all income, royalties, damages, and payments now and hereafter due or payable
or both with respect thereto, including, without limitation, damages and payments for past, present, or future infringements or misappropriations thereof;
(iv) all rights to sue for past, present, and future infringements or misappropriations thereof; and (v) all other rights corresponding thereto throughout the
world.
"UCC" shall mean the Uniform Commercial Code as the same may, from time to time, be in effect in the State of Delaware; provided, however, in the
event that, by reason of mandatory provisions of law, any or all of the attachment, perfection or priority of security interest in any Collateral is governed by
the Uniform Commercial Code as in effect in a jurisdiction other than the State of Delaware the term "UCC" shall mean the Uniform Commercial Code as
in effect in such other jurisdiction for purposes of the provisions hereof relating to such attachment, perfection, or priority and for purposes of definitions
related to such provisions.
4
2. Secured Obligations. This Unlimited Security Agreement has been executed to secure the full and punctual payment of all the amounts, whether in New
Israeli Shekels, in United States Dollars or in any foreign currency, now and in future due to the Bank from the Guarantor and/or from the Affiliated
Company, in any manner or way and for any reason, whether or not the amounts are due from the Affiliated Company in connection with the provision of
the Banking Services, whether due from the Affiliated Company alone or together with others, whether the Affiliated Company has already become liable
for them or becomes liable for them in the future, as debtor and/or guarantor and/or otherwise (including the Affiliated Company’s liability in accordance
with bills that have been or are in the future delivered to the Bank either by the Affiliated Company or by third parties for discounting or as security and/or
pursuant to any other liability of the Affiliated Company to the Bank), that are now and/or in future due, payable prior to or after realization of the
collateral hereby given, absolutely or contingently due, pursuant to the Affiliated Company’s original obligation or formulated in a court judgment or
otherwise, in an unlimited amount, plus any and all accrued interest, commissions and all expenses whatsoever, including the costs of realization,
advocates' professional fees, insurance fees and other payments pursuant to this Security Agreement, with the addition of any sums of any type now or in
the future due from the Affiliated Company to the Bank in any way in respect or as a result of linkage to any index or rate of exchange, including, without
limitation, any such linked principal and linked interest (all the foregoing amounts being hereinafter referred to as the "Secured Sums").
3. Realization of Collateral. Upon the following, the Bank shall be entitled to exercise all rights and remedies of a secured party under the UCC, and may
collect, receive, appropriate, and realize upon the Collateral, or any part thereof, and/or may forthwith sell, lease, assign, give an option or options to
purchase, or sell or otherwise dispose of and deliver such Collateral (or contract to do so), or any part thereof, and all such proceeds shall be used to pay the
Bank all of the Secured Sums:
(a) on the due date of the Secured Sums (or any part thereof), if it has been agreed between the Bank and the Affiliated Company that the particular
amount is payable on a particular date (giving effect to any grace periods as agreed between the Bank and the Affiliated Company or the Guarantor in
writing), and the Affiliated Company has not paid such Secured Sums;
(b) at the end of ten (10) days from the date of receipt by Guarantor of the Bank’s first written demand to the Guarantor, if a due date has not been
agreed as provided in paragraph (a) above, if such Secured Sums have not been paid by Affiliated Company;
(c) the occurrence of an Event of Default.
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4. Interest.
(a) The Bank shall compute interest on the Secured Sums at such rate as has been or is in future from time to time agreed between it and the Affiliated
Company. In cases in which the interest rate has not been agreed, the Bank may fix the interest rate for any part of the Secured Sums for which the
Affiliated Company and Bank have not agreed on an interest rate, and give notice thereof to the Affiliated Company in accordance with interest rates
customary at the Bank at such time. The Affiliated Company and/or Guarantor shall be charged such interest rates as aforesaid and the Bank may add them
to principal at the end of each quarter or at the end of any other period, as determined by it.
(b) In an event of default in payment of all or any of the Secured Sums, they shall bear default interest at the rate agreed upon in the agreement for the
provision of the Banking Services. In the absence of a provision with regard to default interest in those agreements, the Secured Sums shall bear interest at
the maximum rate prevailing at the Bank in respect of unauthorized withdrawals and defaults on an approved overdraft account, but not less than 2% (two
percent) more than the interest rate fixed in the agreement for the provision of any Banking Service.
(c) In the event that the Bank becomes entitled to realize the Collateral under this Security Agreement it may increase the interest rates of the Secured
Sums, commencing at such time when the Bank becomes entitled to realize the Collateral to the maximum rate prevailing at the Bank in respect of
unauthorized withdrawals and defaults on an approved overdraft account.
5. Grant of Security Interest.
(a)
As collateral security for the punctual and full payment and performance when due (whether at stated maturity, by acceleration, or otherwise)
of all the Secured Sums, and to induce the Bank to provide the Banking Services to the Affiliated Company, the Guarantor hereby grants to the
Bank, a first priority lien on, and security interest in, to, and under the following property, now owned or hereafter acquired by the Guarantor
(all of which being hereinafter collectively called the "Collateral"):
(i)
(ii)
all Accounts, including, without limitation, all accounts receivable set forth in Schedule A attached hereto;
all Chattel Paper;
(iii)
all Contracts;
(iv)
all Copyrights;
(v)
all Deposit Accounts other than the Deposit Accounts identified on Schedule I attached hereto;
(vi)
all Documents;
(vii)
all Equipment;
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(viii)
all General Intangibles;
(ix)
all Instruments;
(x)
all Inventory;
(xi)
all Investment Property;
(xii)
all Patents;
(xiii)
all Patent Licenses;
(xiv)
all Trademarks;
(xv)
all Trade Secrets;
(xvi)
all Trademark Licenses;
(xvii)
the Company’s goodwill, as currently and at any time in future existing;
(xviii)
all other goods and personal property of the Guarantor whether tangible or intangible or whether now owned or hereafter acquired by
the Guarantor and wherever located; and
(xix)
(xx)
to the extent not otherwise included, all Proceeds of each of the foregoing and all accessions to, substitutions, and replacements for,
and rents, profits and linkage thereon, and products of each of the foregoing.
any and all Intellectual Property owned or that shall be owned by the Guarantor, or to which it is or shall be entitled or that it
possesses or shall possess any proprietary or other rights thereto, by virtue of any law, agreement or any other source whatsoever,
including without limitation all Intellectual Property listed in Schedule B, including but not limited to all information or materials in
any shape or form, relating to research, development, specifications, formulas, algorithms, prototypes, computer programs, records,
data, designs, concepts, ideas, methods, techniques, processes, samples, trade secrets, analyses, materials, patents, pending patent
applications, registered trademarks, pending trademark applications, and applications for registration, other data and information, as
well as any improvements and derivatives thereof; and any and all Proceeds of the foregoing and all accessions to, substitutions, and
replacements for, and rents, profits, and products of the foregoing.
The Guarantor hereby confirms that the list attached hereto as Schedule B, constitutes all of the Guarantor's Intellectual Property,
including all patents, pending patent applications, registered trademarks, pending trademark applications, and applications for
registration, to this date.
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(b)
(c)
(d)
(e)
(f)
(g)
(h)
The Guarantor agrees to deliver promptly or cause to be delivered to the Bank all Pledged Shares, and any and all certificates or other
instruments or documents representing any of the Collateral (together with any necessary endorsement). All Pledged Shares delivered to the
Bank shall be accompanied by undated stock powers duly executed in blank (in form as attached in Schedule C) or other instruments of
transfer satisfactory to the Bank and by such other instruments and documents as the Bank may reasonably request. Such stock powers and
other documents and instruments shall be held by the Bank in escrow and may be executed by the Bank - at its sole and absolute discretion -
only upon the occurrence of an Event of Default.
Upon signing this Agreement, and each time Schedule A is updated, Guarantor shall execute and deliver to bank, in a form as attached hereto
in Schedule D, a specific assignment of such accounts of borrower listed in Schedule A.
The security interest that has been given to the Bank pursuant to this Security Agreement is of perpetual character notwithstanding settlement
of all or any of the Affiliated Company's accounts and it shall remain in force until this Security Agreement is terminated pursuant to the
provisions of Section 14 below.
Should the Bank have or in future be given collateral or guarantees for payment of the Secured Sums, all the collateral and guarantees shall be
independent of each other.
Should the Bank compromise with or grant forbearance or a concession to the Affiliated Company, or should the Bank alter the Affiliated
Company’s obligations in connection with the Secured Sums or release or waive other collateral or guarantees, the same shall not alter the
nature of the collateral created pursuant to this Security Agreement and all the collateral and obligations of the Guarantor pursuant to this
Security Agreement shall remain in full force and effect in accordance with the terms of the Security Agreement.
The Bank shall have rights of possession, lien and set-off over all the amounts, assets and rights, including securities, currency, gold, bank
notes and documents for goods, insurance policies, bills, checks, obligations, deposits, collateral and the proceeds thereof, that are at the Bank
at any time to or for the credit of the Guarantor, including those given for collection, security, safe keeping or otherwise. The Bank may
withhold the said assets until full discharge of the Secured Sums or sell them and apply all of the proceeds of sale to the discharge of the
Secured Sums, in accordance with the terms of this Security Agreement.
The Bank may at any time charge any of Guarantor's accounts held with it with any outstanding amount now or in future due to it from the
Guarantor and apply the entire amount that it receives from or for the Guarantor to the credit of such amount as it deems fit, and transfer any
amount standing to the Guarantor's credit in any account with it to any other account with it as the Bank deems fit.
6. Rights of the Bank; Limitations on the Bank's Obligations.
(a) The Bank shall have no obligation or liability under any contract by reason of or arising out of this Security Agreement or the granting to the Bank
of a security interest therein or the receipt by the Bank of any payment relating to any contract pursuant hereto, nor shall the Bank be required or obligated
in any manner to perform or fulfill any of the obligations of the Guarantor under or pursuant to any contract, or to make any payment, or to make any
inquiry as to the nature or the sufficiency of any payment received by it or the sufficiency of any performance by any party under any contract, or to present
or file any claim, or to take any action to collect or enforce any performance or the payment of any amounts which may have been assigned to it or to
which it may be entitled at any time or times.
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(b) So long as no Event of Default shall have occurred, the Guarantor shall be entitled to exercise all voting rights pertaining to the Pledged Shares and
to give consents, waivers and ratifications in respect thereof, provided however that the Guarantor shall not vote or give any consent, waiver, or ratification
if the effect thereof would in the reasonable judgment of the Bank impair the stock secured or pledged hereby or be inconsistent with or result in any
violation of the provisions of this Security Agreement, and Guarantor shall notify the Bank regarding any shareholder action that may impair the Bank’s
rights under this Security Agreement and the Bank shall have the exclusive right to vote any and all of the Pledged Shares and to give consents, waivers
and ratifications in respect thereof, and the Guarantor shall deliver to the Bank such proxies or other documents and instruments as the Bank may request to
further effectuate the foregoing. After the occurrence and during the continuance of an Event of Default, the Bank shall have the exclusive right to vote any
and all of the Pledged Shares and to give consents, waivers and ratifications in respect thereof, and the Guarantor shall deliver to the Bank such proxies or
other documents and instruments as the Bank may request to further effectuate the foregoing. For these purposes, the Guarantor designates and appoints the
Bank as the Guarantor’s agent and attorney-in-fact for purposes of executing such documents and instruments as the Bank may consider necessary or
appropriate for purposes of implementing this Agreement. The foregoing designation and appointment is irrevocable and coupled with an interest.
(c) The Bank shall not be liable for failure to collect or realize upon the Collateral, or for any delay in so doing, nor shall it be under any obligation to
take any action whatsoever with regard thereto. If an Event of Default has occurred and had not been cured during the applicable cure period, the Bank may
thereafter, without notice, exercise all rights, privileges or options pertaining to any Pledged Shares and/ or to the Collateral as if it were the absolute owner
thereof, upon such terms and conditions as it may determine, all without liability except to account for property actually received by it, but the Bank shall
have no duty to exercise any of the aforesaid rights, privileges or options and shall not be responsible for any failure to do so or delay in so doing.
7. Representations and Warranties. The Guarantor hereby represents and warrants that:
(a) Except for the security interest granted to the Bank pursuant to this Security Agreement, the Guarantor is the sole owner of each item of the
Collateral in which it purports to grant any interest hereunder, having good and marketable title and unlimited rights thereto, free and clear of any and all
Liens, assignments, restrictions, and any current or future rights whatsoever.
(b) No effective security agreement, financing statement, equivalent security or lien instrument, or continuation statement covering all or any part of the
Collateral is on file or of record in any public office, except such as may have been filed by the Guarantor in favor of the Bank pursuant to this Security
Agreement.
9
(c) The Affiliated Company is an Israeli Company. The Affiliated Company’s registered office is at 9 Halamish Street, P.O. Box 3579, Caesarea
3088900, Israel. Guarantor is a fully-held subsidiary of the Affiliated Company, on a fully diluted and as-converted basis.
(d) Guarantor's exact legal name is as set forth in the preamble to this Agreement and Guarantor is not generally known by or using any fictitious or
other name or trade name or style. Guarantor’s address is at 3290 Cumberland Club Drive, Suite 100, Atlanta, GA 30339, USA. Guarantor's address in
Israel, to which any and all documents could legally be delivered, is at 9 Halamish Street, P.O. Box 3579, Israel.
(e) There is no legal, contractual or other restraint or condition prohibiting the transfer, charge or pledge of the Collateral, or of any part thereof.
(f) Guarantor is entitled to pledge or charge the Collateral pursuant to this Security Agreement.
(g) No assignment of right or other transaction has been made that derogates from the value of the Collateral as in effect on the date of this Security
Agreement.
(h) Guarantor has received the necessary consents and/or waivers (if any) from its directors and stockholders pursuant to the certificate of incorporation
and by-laws of Guarantor or the various investment agreements. A copy of the resolutions of the Guarantor's board of directors and shareholders' meetings
approving the execution of this agreement and the grant of a security interest under the terms and conditions herein are attached hereto as Schedule E. No
additional consents or waivers are necessary.
(i) Upon the appropriate UCC Financing Statements having been filed in the State of Delaware, this Security Agreement is effective to create and
perfect a valid and continuing first priority charge on, and first priority perfected security interest in, the Collateral, with respect to which a security interest
may be perfected by filing pursuant to the UCC, in favor of the Bank, prior to all other Liens, and is enforceable as such against creditors.
(j) Upon the appropriate filings and/or statements having been filed with the United States Patent and Trademark Office ("USPTO") if and to the extent
applicable, and upon the filings of the UCC Financing Statement in the state of [Delaware], this Security Agreement is effective to create and perfect a
valid and continuing first priority security interest in, and/or floating charge on, the respective Intellectual Property that is pledged in favor of the Bank, if
any, prior to all other Liens, and is enforceable as such against creditors. As of the date of Execution of this Agreement, the Guarantor hereby represents
and warrants that it is not the owner of any Patents or Trademarks.
10
(k) Upon entering into the Account Control Agreement, attached hereto as Schedule F, and upon the filings of the UCC Financing Statement in the
state of Delaware, this Security Agreement is effective to create and perfect a valid and continuing , first priority security interest in, and/or floating charge
on the Deposit Accounts in favor of the Bank, prior to all other Liens, and is enforceable as such against creditors, all subject to applicable bankruptcy,
insolvency, reorganization or other similar laws generally affecting the enforcement of the rights of creditors and equitable principles (regardless of whether
enforcement is sought in equity or at law).
(l) Except for the filing of Financing Statements under the UCC and the filing of this Agreement with the USPTO, if and to the extent applicable, and
entering into the attached Account Control Agreement no authorization, approval or other action by, and no notice to or filing with, any governmental or
regulatory authority, agency or office is required for the grant by the Guarantor or the effectiveness of the first priority security interest granted hereby or
for the execution, delivery and performance of this Agreement by the Guarantor.
(m) The Guarantor is the owner and/or holds the rights of use under license or agreement, of all the intellectual property currently used for the purpose
of its business; and
(n) The Guarantor is not currently in breach and there are no proceedings against it in connection with any breach of any intellectual property rights of
any third party
8. Covenants. The Guarantor covenants and agrees with the Bank that from and after the date of this Security Agreement and until this Security Agreement
is terminated pursuant to Section 14 below, unless compliance is waived by the Bank in writing:
(a) Guarantor shall properly preserve the Collateral. On the date hereof and as of the date of any future delivery of Collateral to the Bank and at all
times until the security interests granted by this Agreement are terminated pursuant to Section 14 hereof: (A) the Guarantor shall maintain ownership of
such Collateral, unless conveyed during the ordinary course of business, subject to no adverse claim (including any lien, encumbrance or claim of legal or
beneficial ownership), except the lien and security interest in favor of the Bank; (B) the Guarantor shall provide that at all times it will have full power,
authority and legal right to pledge the Collateral to the Bank hereunder, and no consent, approval or other authorization of any person or governmental
authority is required (except those which have been obtained) in connection therewith; and (C) the lien of this Agreement constitutes and will constitute a
first priority perfected security interest in the Collateral in favor of the Bank.
(b) Guarantor shall notify the Bank forthwith of the imposition of an attachment over the Collateral and/or any of it, and forthwith notify the attacher of
the charge in favor of the Bank and at the Guarantor's expense forthwith and without delay take all steps in order to remove the attachment. If the Guarantor
does not take such steps as aforesaid the Bank may (but need not) take all steps to remove the attachment, and the Guarantor shall be liable immediately to
pay the Bank all actual and reasonable expenses involved therein (including the professional fees of the Bank’s advocates);
(c) Guarantor shall not create any other lien or charge over the Collateral or any of it, and shall not assign and/or license (other than a limited license or
similar type of commercial agreement entered into in the ordinary course of business) any right that the Guarantor has in the Collateral without obtaining
the Bank’s prior written consent which shall not be unreasonably withheld;
11
(d) The Guarantor shall not issue shares in aggregate constituting more than 10% of the issued share capital to any other shareholder, without the Bank's
prior written consent; provided, however, that any shares issued under such threshold shall not be superior to the Shares issued to the Affiliated Company,
and shall only be of the classes of stock currently existing at the time of this Agreement.
(e) None of the tangible components of the Collateral shall be maintained at locations other than in the address as stated above or otherwise leased by
Guarantor and/or by Affiliated Company. In the event that Guarantor, after the date hereof, intends to store or otherwise deliver any portion of the
Collateral to a bailee, then Guarantor will first receive the written consent of the Bank, and such bailee must acknowledge in writing that the bailee is
holding such Collateral for the benefit of the Bank. All inventory is in all material respects of good and marketable quality, free from material defects.
(f) Guarantor shall be responsible for the genuineness and accuracy of all signatures, endorsements and particulars on bills, documents and securities
that have been and/or are in future given to the Bank by Guarantor as collateral;
(g) Guarantor shall pay on due date all the taxes, municipal rates, levies and other mandatory payments legally imposed over the Collateral and shall
furnish the Bank, on demand, with all the receipts for such payments, and if the Guarantor does not duly make such payments, the Bank may make them at
the Guarantor’s expense and charge it the payments, plus expenses and interest at the then maximum rate prevailing at the Bank in respect of unauthorized
withdrawals and defaults on an approved overdraft account. Those payments are secured by this Security Agreement;
(h) Guarantor shall keep books of account and permit the Bank or its representative at any time, upon a reasonable prior notification to Guarantor,
during normal business hours and subject to customary non-disclosure restrictions, to examine the Guarantor's books.
(i) Guarantor undertakes to assist the Bank or its representatives and to give them on demand balance sheets, documents and any information
reasonably required by the Bank, including explanations in connection with the financial and operational state of the Guarantor, its subsidiaries, and/or its
business;
(j) There shall be no material change to the business of the Guarantor or its subsidiaries (if any) without the Bank’s prior written consent.
12
(k) At the sole expense of the Guarantor, the Guarantor will promptly, but no later than 15 days after the Execution Date to file a UCC-1 Financing
Statement in substantially the form of Schedule G (the “UCC Financing Statement”) and any additional necessary and required financing statements
under the UCC with respect to the Liens and security interests granted hereby. Guarantor will also promptly, following the request of the Bank, duly
execute and deliver any and all such further instruments and documents and take such further action as the Bank may reasonably deem desirable to obtain
the full benefits of this Security Agreement and of the rights and powers herein granted. The Guarantor shall file all necessary continuation statements from
time to time under the applicable provisions of Article 9 of the UCC in order to maintain the perfection of the Collateral. The Guarantor also hereby
authorizes the Bank to file any such financing statement or continuation statement (including a notice that any disposition of the Collateral, by either the
Debtor or any other Person, shall be deemed to violate the rights of Lenders under the Code) without the signature of the Guarantor to the extent permitted
by applicable law.
(l) At the sole expense of the Guarantor, the Guarantor will promptly, but no later than 30 days after the Execution Date, record a security interest with
the USPTO, if and to the extent applicable, including, inter alia, file this Agreement and any additional necessary and required filings and/or statements
with respect to the Liens and security interests granted hereby, with the USPTO. Guarantor will also promptly, following the request of the Bank, duly
execute and deliver any and all such further instruments and documents and take such further action as the Bank may reasonably deem desirable to obtain
the full benefits of this Security Agreement and of the rights and powers herein granted. The Guarantor also hereby authorizes the Bank to file any such
documents without the signature of the Guarantor to the extent permitted by applicable law;
(m) The Guarantor will promptly, but no later than 3 business days from the Execution Date, enter into the attached Account Control Agreement;
(n) Guarantor undertakes not to enter into any account control agreement with respect to any of its existing or future Deposit Accounts, without the
Bank's prior written consent.
(o) In any suit, proceeding, or action brought against the Bank by a third party, relating to any part of the Collateral, the Guarantor will save, indemnify,
and keep the Bank harmless from and against all expense, loss, or damage suffered by reason of any defense, setoff, counterclaim, recoupment, or reduction
of liability whatsoever of the obligor thereunder, arising out of a breach by the Guarantor of any obligation thereunder or arising out of any other
agreement, indebtedness, or liability at any time owing to, or in favor of, such obligor or its successors from the Guarantor, and all such obligations of the
Guarantor shall be and remain enforceable against and only against the Guarantor and shall not be enforceable against the Bank;
(p) Guarantor will not create, permit, or suffer to exist, any Lien on the Collateral, will defend the Collateral against, and take such other action as is
necessary to remove any unauthorized Lien on the Collateral, and will defend the right, title, and interest of the Bank in and to any of the Guarantor's rights
under the Collateral;
(q) Guarantor hereby agrees that if the Guarantor changes its name, its type of organization or its state of organization, the Guarantor will promptly
thereafter notify the Bank in writing of the additions or changes. Guarantor will not change its state of incorporation or its name, identity, or corporate
structure in any manner that might make any financing or continuation statement filed in connection herewith seriously misleading within the meaning of
section 9-503 of the UCC (or any other then applicable provision of the UCC) unless the Guarantor shall have given the Bank at least thirty (30) days' prior
written notice thereof and shall have taken all action (or made arrangements to take such action substantially simultaneously with such change if it is
impossible to take such action in advance) necessary or reasonably requested by the Bank to amend such financing statement or continuation statement so
that it is not seriously misleading;
13
(r) Throughout the subsistence of this Security Agreement, Guarantor undertakes: (i) not to pay its stockholders any loan or funds that the stockholders
have lent or do in future lend to the Guarantor or any funds that they have invested and/or do in future invest in the Guarantor without the Bank’s prior
written consent; (ii) not to declare, pay or set aside dividends on shares of capital stock of itself without the Bank’s prior written consent; (iii) not to enter
into any related party transactions with Affiliated Company; and (iv) not to enter into any related party transactions with any of Guarantor's and/or
Affiliated Company's office holders and/or directors (other than standard and arm's-length employment agreements and service agreements with
Guarantor's office holders); provided, however, that limitations (i), (ii) and (iii) shall not apply in the event that (and as long as) Affiliated Company
remains the sole shareholder of Guarantor.
(s) Upon the execution of this Security Agreement by all parties hereto, the Guarantor shall provide the Bank with a written legal opinion of
Guarantor’s Counsel in the form attached hereto as Schedule H.
(t) No later than 45 days after the Execution Date, Guarantor shall provide the Bank with copies of the UCC Financing Statement certifying the filing of
the first priority security interest granted herein;
(u) No later than 45 days after the registration of any Patents or Trademarks with the USPTO, Guarantor shall provide the Bank with an official
document evidencing the filing of a copy of this Agreement with the USPTO, if and to the extent applicable, and certifying the filing of the first priority
security interest in the Intellectual Property, granted herein;
(v) Guarantor shall file annual franchise tax report and pay annual franchise tax which it is required to file under the laws of the State of Delaware on a
timely basis;
(w) Guarantor shall update the Bank of its accounts receivable every six months. Upon such notification, Guarantor shall update Schedule A
accordingly, and have the updated schedule re-submitted and re-filed; and
(y) In each instance from time to time on a recurring basis in which the collective account balances of the bank accounts denoted with an asterisk on
Schedule I attached hereto exceed $200,000 in the aggregate, the Guarantor shall no later than seven (7) days thereafter either reduce such collective
balances below $50,000 or proceed to enter into a deposit account control agreement with such depository institution and the Bank on substantially similar
terms to this Agreement.
14
(z) The account balance of the "Payroll Account" set forth on Schedule I attached hereto shall not exceed $500,000 in the aggregate, for a period of
more than seven (7) consecutive days, and shall only be used for payroll purposes.
(aa) The account balance in the Certificate of Deposit account set forth on Schedule I attached hereto shall not exceed $110,000 + accruing interest, in
the aggregate, and shall only be used to secure payments to the Atlanta offices landlord.
9. Exchange Rate. Having regard to the fact that the amounts that are now and in future due to the Bank from the Guarantor on account of the Secured
Sums can be both in Israeli currency and in foreign currency, it is hereby agreed and declared that the Bank, may convert Israeli currency in their
possession to foreign currency as necessary for the full or partial discharge of the Secured Sums that are due to the Bank in foreign currency and convert
foreign currency in their possession to Israeli currency, at the rates of exchange existing at the time when any such conversions are actually made by either
of them.
The expression “rate of exchange” means:
(a) in respect of the time when there is a restraint by Israeli law in respect of the free use of foreign currency in Israel - the highest amount of Israeli
currency that an Israeli resident is required to pay for a unit of the currency of such debt to an entity duly licensed to trade in Israel in foreign currency,
together with the bank commission for such transaction;
(b) in respect of the time when there is no such restraint - the highest price for the purchase of a unit of the currency of such debt existing at the Bank of
Israel in respect of bank telegraphic withdrawals on a city for the time being known as one of the financial centers of the state in which the currency of the
debt is legal tender or in New York, at the option of the Bank, together with the bank commission for such transaction.
10. Events of Default. Without prejudice to the generality of the provisions of this Security Agreement or any other written agreement between the parties
with respect to the Bank’s right to call for immediate payment of all or any of the Secured Sums, the Bank may in any of the under-mentioned cases
("Events of Default") call for the immediate payment by the Guarantor of all or any of the Secured Sums, without prior notice to the Guarantor and/or the
Affiliated Company, unless otherwise stated below:
(a) if Affiliated Company and/or Guarantor fails to pay any payment pursuant to any agreement (including the principal amount, interest, linkage,
expenses and/or related fees) to the Bank, when due.
(b) if a voluntary winding-up resolution is passed by the Guarantor and/or the Affiliated Company or if a winding-up order or a suspension of
proceedings order is issued against either of the Guarantor and/or the Affiliated Company by the court or if the court calls a creditors meeting for the
purpose of finding an arrangement with them or if the Guarantor's and/or the Affiliated Company’s name has been removed or is about to be removed from
any register operated by law;
15
(c) if a provisional or permanent receiver, receiver and manager or liquidator is appointed over Guarantor's and/or over any of its subsidiaries' and/or
over Affiliated Company's material assets or any of them; or if a petition for the appointment of any of the above has been filed by any party against any
asset of either of Guarantor and/or Affiliated Company.
(d) if an attachment (temporary or permanent) covering any obligation is imposed over all or any of the Guarantor’s and/or Affiliated Company's assets
or over any of the Collateral given by the Guarantor to the Bank or if any act of execution in respect of any obligation is taken against either of them;
provided however that in the case of an attachment that was only registered (and which did not remove any assets), then only to the extent that the
registered attachment has not been revoked or reversed within 60 days thereafter; Such 60 day period may be shortened by the Bank, if Bank is convinced,
upon exercising reasonable judgment, that such delay may impair the Bank’s rights, or its ability to collect any amounts owed thereto.
(e) if Guarantor and/or the Affiliated Company stops paying its debts to third parties for a period longer than two months;
(f) if the Affiliated Company's business or a substantial part of it is stopped for three or more weeks, or if Affiliated Company's business or a substantial
part of it is shut down; Such time period may be shortened by the Bank, if Bank is convinced, upon exercising reasonable judgment, that such delay may
impair the Bank’s rights, or its ability to collect any amounts owed thereto.
(g) if Affiliated Company has been declared as a "Limited Customer" or as a "Severe Limited Customer", as such terms are defined in the Israeli
Checks Without Cover (bad checks) Law, 1981.
(h) if all or a significant portion of the Affiliated Company's current assets (inventory) are burned, lost or otherwise damaged, and not replaced with
insurance proceeds; or if all or a significant portion of the Affiliated Company's fixed assets (including, for avoidance of doubt, manufacturing lines) are
burned, lost or otherwise damaged, and the Affiliated Company does not have sufficient inventory to enable continuous sales (at least at the same volume
as existing prior to such event);
(i) if more than $50,000 of the Collateral value is burned, lost or otherwise damaged and not replaced with insurance proceeds;
(j) if there has been a change in the identity of the security holders and/or of the security - holdings of the Guarantor (except in the event of an initial
public offering of the Guarantor) without the Bank’s prior written approval, or if there has been a change of control in the Affiliated Company (“control”
shall have the meaning ascribed to it in the Israeli Securities Law, 1968);
(k) if the Bank, at its reasonable discretion, takes the view that a material change in the Guarantor's financial situation has occurred, that may materially
impair Guarantor’s ability to dispose of its payment obligation relating to the Secured Sums;
16
(l) if, at the Bank's reasonable commercial opinion, there is a material deterioration in the value of the Collateral (excluding deterioration due to foreign
currency exchange rates);
(m) if Guarantor and/or the Affiliated Company is required to accelerate the discharge of debts that it owes to other creditors;
(n) if Guarantor materially breaches or does not perform any of the covenants set forth in this Security Agreement and/or any of the material obligations
that are contained in this Security Agreement and/or any agreement and/or instrument and/or contract made in the past and/or future between the Guarantor
and the Bank and which breach or non-performance is not cured within thirty (30) days of receiving notice, except that Guarantor shall have an additional
sixty (60) days if Guarantor has commenced performance and such performance will require more than thirty (30) days for compliance; provided, however,
that such period may be shortened by the Bank, if Bank is convinced, upon exercising reasonable judgment, that such delay may impair the Bank’s rights,
or its ability to collect any amounts owed thereto.
(o) if it transpires that any warranty of the Guarantor in this Security Agreement and/or any contract made in the past and/or future between Guarantor
and the Bank is incorrect in a material respect and/or inaccurate or incomplete in any material respect;
(p) if Guarantor and/or the Affiliated Company alter any of their charter documents in such manner as to have a material adverse effect on the ability of
Affiliated Company to comply with any of its obligations under the loan agreements, and /or on the ability of Guarantor to comply with any of its
obligations under this Security Agreement;
(q) if Guarantor and/or the Affiliated Company pass a resolution to merge with another company, whether as absorbing or target company (including,
for avoidance of doubt, any action as a result of which Guarantor and/or Affiliated Company purchase assets and/or obligation of another party, or transfers
assets in consideration for securities of another party), without the Bank’s prior consent which shall not be unreasonably withheld;
(r) if any license, consent, approval or registration of any of the Intellectual Property or the intellectual property rights of the Guarantor and/or the
Affiliated Company is denied, becomes void, suspended or is materially prejudiced, and has a material effect on such company.
(s) if Guarantor does not file the appropriate UCC Financing Statements in the State of Delaware; or if Guarantor does not file the necessary
continuation statements from time to time under the applicable provisions of Article 9 of the UCC in order to maintain the perfection of the Collateral, or if
any other security interest is perfected in the Collateral, having a higher priority over the Bank.
(t) if Guarantor does not file the appropriate filings with the USPTO in order to perfect the Guarantor's security interest in the Guarantor's future
Intellectual Property; or if Guarantor does not file the necessary continuation filings, if such are required in order to maintain the perfection of the
Intellectual Property Collateral, or if any other security interest is perfected relating to the Intellectual Property having a higher priority over the Bank. For
avoidance of doubt, it is hereby explicitly stipulated, that as of the date hereof, Guarantor has no registered Patents, and thus no such filings are currently
required.
17
(u) If the Guarantor shall issue any shares to any other shareholder, without the Bank's prior written consent.
(v) If the Guarantor shall not file annual franchise tax report and pay annual franchise tax which it is required to file under the laws of the State of
Delaware on a timely basis.
(w) If an event of default shall be declared by the Bank pursuant to any agreement with either the Affiliated Company or the Guarantor.
11. The Bank's Appointment as Attorney-in-Fact.
(a) Upon any of the events set forth in section 3 above, the Bank may take all the steps it deems fit in order to collect all the Secured Sums, realize the
Collateral in any way that the law permits and exercise all its rights pursuant to this Security Agreement, in whole or in part, and apply the proceeds thereof
in discharge of the Secured Sums, without the Bank having to enforce or realize any other guarantees or collateral that it might have (whether against
Guarantor or against any third party). Upon the giving of such notice (if any) as may be required by law, the Bank may, at its discretion, as the Guarantor’s
attorney, for which purpose the Guarantor irrevocably appoints the Bank as its attorney, sell the Collateral or any part of it by auction, public sale, private
sale or otherwise, itself or through others and on conditions at the Bank’s absolute discretion, and the Bank may itself or by the court or execution office
realize the Collateral granted to it pursuant to this Security Agreement or otherwise by the appointment of a receiver or receiver and manager on behalf of
the Bank (and the Guarantor agrees in advance to any person or legal entity that the Bank appoints or proposes as receiver and manager as aforesaid) at
Guarantor’s expense and amongst his other powers, he may:
(i) ask, demand, collect, receive, and give acquittances and receipts for any and all moneys due and to become due under any Collateral and, in the
name of the Guarantor or its own name or otherwise, to take possession of and endorse and collect any checks, drafts, notes, acceptances, or other
instruments for the payment of moneys due under any Collateral and to file any claim or to take any other action or proceeding in any court of law or equity
or otherwise deemed appropriate by the Bank for the purpose of collecting any and all such moneys due under any Collateral whenever payable and to file
any claim or to take any other action or proceeding in any court of law or equity or otherwise deemed reasonably appropriate by the Bank for the purpose
of collecting any and all such moneys due under any Collateral whenever payable;
(ii) pay or discharge taxes, Liens, security interests, or other encumbrances levied or placed on or threatened against the Collateral, to effect any
repairs or any insurance called for by the terms of this Security Agreement and to pay all or any part of the premiums therefor and the costs thereof; and
18
(iii) (A) direct any party liable for any payment under any of the Collateral to make payment of any and all moneys due, and to become due
thereunder, directly to the Bank or as the Bank shall direct; (B) receive payment of and receipt for any and all moneys, claims and other amounts due, and
to become due at any time, in respect of or arising out of any Collateral; (C) sign and endorse any invoices, freight or express bills, bills of lading, storage
or warehouse receipts, drafts against debtors, assignments, verifications, and notices in connection with accounts and other documents constituting or
relating to the Collateral; (D) commence and prosecute any suits, actions, or proceedings at law or in equity in any court of competent jurisdiction to collect
the Collateral or any part thereof and to enforce any other right in respect of any Collateral; (E) defend any suit, action, or proceeding brought against the
Guarantor with respect to any Collateral; and (F) settle, compromise, or adjust any suit, action, or proceeding described above and, in connection therewith,
to give such discharges or releases as the Bank may deem appropriate.
(iv) (i) place a “hold” on any account maintained with Guarantor and/or (ii) deliver a notice of exclusive control, any entitlement order, or other
directions or instructions pursuant to any Control Agreement or similar agreements providing control of any Collateral (including, without limitation, an
Account Control Agreement);
(b) The Bank agrees that, except upon the occurrence and during the continuation of an Event of Default, it will forbear from exercising the power of
attorney or any rights granted to the Bank pursuant to this Section 11. The Guarantor hereby ratifies, to the extent permitted by law, all that said attorneys
shall lawfully do or cause to be done by virtue hereof. The power of attorney granted pursuant to this Section 11 is a power coupled with an interest and
shall be irrevocable until this Security Agreement is terminated pursuant to Section 14 below.
(c) The powers conferred on the Bank hereunder are solely to protect the Bank's interests in the Collateral and shall not impose any duty upon it to
exercise any such powers. The Bank shall be accountable only for amounts that it actually receives as a result of the exercise of such powers and neither it
nor any of its representatives or agents shall be responsible to the Guarantor for any act or failure to act, except for its own gross negligence, bad faith,
misrepresentation, fraud or willful misconduct.
(d) The Guarantor also authorizes the Bank, at any time and from time to time upon the occurrence and during the continuation of any Event of Default,
to execute, in connection with the sale provided for in Section 13 hereof, any endorsements, assignments, or other instruments of conveyance or transfer
with respect to the Collateral.
12. Performance by the Bank of Guarantor's Obligations. If the Guarantor materially fails to perform or comply with any of its material agreements
contained herein and the Bank, as provided for by the terms of this Security Agreement, shall itself perform or comply, or otherwise cause performance or
compliance, with such agreement, the reasonable expenses of the Bank incurred in connection with such performance or compliance, together with interest
thereon, shall be payable by the Guarantor to the Bank on demand and shall constitute Secured Sums secured hereby.
19
13. Remedies, Rights Upon Default.
(a) Upon the occurrence of any of the events set forth in Section 3 above, and provided that the Secured Sums had not been fully paid, the Bank will be
entitled to exercise in addition to all other rights and remedies granted to it in this Security Agreement and in any other instrument or agreement securing,
evidencing, or relating to the Secured Sums, all rights and remedies of a secured party under the UCC. Without limiting the generality of the foregoing, the
Guarantor expressly agrees that upon the occurrence of any such Event of Default (and provided that such Event of Default had not been cured during the
applicable cure period), the Bank, without demand of performance or other demand, advertisement, or notice of any kind (except the notice specified below
of time and place of public or private sale) or upon the Guarantor or any other person (all and each of which demands, advertisements, and/or notices are
hereby expressly waived to the maximum extent permitted by the UCC and other applicable law), may forthwith collect, receive, appropriate, and realize
upon the Collateral, or any part thereof, and/or may forthwith sell, lease, assign, give an option or options to purchase, or sell or otherwise dispose of and
deliver such Collateral (or contract to do so), or any part thereof, in one or more parcels at public or private sale or sales, at any exchange or broker's board
or at any of the Bank's offices or elsewhere at such prices on such terms as the Bank may deem commercially best, for cash or on credit or for future
delivery without assumption of any credit risk. The Bank shall have the right upon any such public sale or sales, and, to the extent permitted by law, upon
any such private sale or sales, to purchase the whole or any part of such Collateral so sold. The Guarantor further agrees, at the Bank's request, to assemble
the Collateral and make it available to the Bank at places that the Bank shall reasonably select, whether at the Guarantor's premises or elsewhere. The Bank
shall apply the net proceeds of any such collection, recovery, receipt, appropriation, realization, or sale, as provided in Section 13(d) hereof, the Guarantor
remaining liable for any deficiency remaining unpaid after such application, and only after so paying over such net proceeds and after the payment by the
Bank of any other amount required by any provision of law, including section 9-610 of the UCC, need the Bank account for the surplus, if any, to the
Guarantor. To the maximum extent permitted by applicable law, the Guarantor waives all claims, damages, and demands against the Bank arising out of the
repossession, retention, or sale of the Collateral except such as arise out of the gross negligence, fraud, misrepresentation, bad faith or willful misconduct of
the Bank. The Guarantor agrees that the Bank need not give more than sixty (60) days' prior notice (which notification shall be deemed given when mailed
or delivered on an overnight basis, postage prepaid, addressed to the Guarantor at its address referred to in Section 17 hereof with confirmation of receipt)
of the time and place of any public sale or of the time after which a private sale may take place and that such notice is reasonable notification of such
matters. The Guarantor shall remain liable for any deficiency if the proceeds of any sale or disposition of the Collateral are insufficient to pay all of the
Secured Sums.
(b) The Guarantor also agrees to pay all costs of the Bank, including, without limitation, reasonable attorneys' fees, incurred in connection with the
enforcement of any of its rights and remedies hereunder.
(c) Except as otherwise set forth in this Security Agreement, the Guarantor hereby waives presentment, demand, protest, or any notice (to the maximum
extent permitted by applicable law) of any kind in connection with this Security Agreement or any Collateral.
20
(d) The Proceeds of any sale, disposition, or other realization upon all or any part of the Collateral shall be distributed by the Bank in the following
order:
(a)
(b)
(c)
(d)
first, in discharge of all expenses incurred in connection with collecting the Secured Sums, including the expenses and remuneration of
any receiver and/or manager at such rate as reasonably fixed by the Bank;
second, in discharge of the further amounts that are due to the Bank in consequence of the linkage conditions, the interest, damages,
commission and expenses now and in future due to the Bank pursuant to this Security Agreement;
third, in discharge of the principal of the Secured Sums; and
fourth, to pay to the Guarantor, or its representatives or as a court of competent jurisdiction may direct, any surplus then remaining from
such Proceeds.
(e) The Bank shall not be required to resort to or pursue any of its rights or remedies under or with respect to any other agreement or any other collateral
or charge before pursuing any of its rights or remedies under this Security Agreement. The Bank may pursue its rights and remedies in such order as it
determines, and the exercise by the Bank of any right or remedy will not preclude the Bank from exercising any other right or remedy.
(f) Until such time as any of the events set forth in Section 3 above have occurred, the Bank shall not exercise the rights set forth in subsection (a)
above, including without limitation giving a Notice of Exclusive Control under the Deposit Account Control Agreement by and among the Bank, the
Guarantor and Bank Leumi USA dated as of July 19th, 2017 (as such term is defined therein) or the giving of any similar notice under any other deposit
account control agreement granting a security interest in any deposit account entered into pursuant to this Agreement or as a result of the Banking Services.
14. Termination. The Bank shall terminate this Security Agreement upon the Guarantor’s request provided that there has been the full repayment of all
outstanding Secured Sums, all credit lines of the Affiliated Company are cancelled, and there remain no obligations towards the Bank or any outstanding
credit facilities either of Guarantor or of Affiliated Company. Upon termination of this Security Agreement the Bank will release the security interest
hereunder and will provide the Guarantor with any required approval or executed documents to the Secretary of State of the State of Delaware to remove
the security interest in favor of the Bank under this Security Agreement.
21
15. Appointment of the Bank; Limitation on the Bank's Duty in Respect of Collateral. The Bank shall be obligated and shall have the right hereunder to
make demands, to give notices, to exercise or refrain from exercising any rights, and to take or refrain from taking action (including, without limitation, the
release or substitution of Collateral) solely in accordance with this Security Agreement, and the Bank shall be bound thereby. So long as the Bank complies
with reasonable banking practices, the Bank shall not have any duty as to any Collateral in its possession or control or in the possession or control of any
agent or nominee of it or any income thereon or as to the preservation of rights against prior parties or any other rights pertaining thereto, except that the
Bank shall use reasonable care with respect to the Collateral in its possession or under its control. Furthermore, neither the Bank nor any of its officers,
directors, agents, or employees shall be liable for any action taken or omitted by any of them hereunder or in connection herewith or therewith, unless
caused by it or their gross negligence, fraud, misrepresentation, bad faith or willful misconduct. Upon request of the Guarantor, the Bank shall account for
any monies received by it in respect of any foreclosure on or disposition of the Collateral.
16. Reinstatement. Subject to the provisions of Section 14 above, this Security Agreement shall remain in full force and effect and continue to be effective
should any petition be filed by or against the Guarantor for liquidation or reorganization, should the Guarantor become insolvent or make an assignment for
the benefit of creditors, or should a receiver or trustee be appointed for all or any significant part of the Guarantor's assets, and shall continue to be effective
or be reinstated, as the case may be, if at any time payment and performance of the Secured Sums, or any part thereof, is, pursuant to applicable law,
rescinded or reduced in amount, or must otherwise be restored or returned by any obligee of the Secured Sums, whether as a "voidable preference",
"fraudulent conveyance", or otherwise, all as though such payment or performance had not been made. In the event that any payment, or any part thereof, is
rescinded, reduced, restored, or returned, the Secured Sums shall be reinstated and deemed reduced only by such amount paid and not so rescinded,
reduced, restored, or returned.
17. Notices. Except as otherwise provided herein, whenever it is provided herein that any notice, demand, request, consent, approval, declaration, or other
communication shall or may be given to or served upon any of the parties by any other party, or whenever any of the parties desires to give or serve upon
any other communication with respect to this Security Agreement, each such notice, demand, request, consent, approval, declaration, or other
communication shall be in writing and either shall be delivered in person with receipt acknowledged or sent by registered or certified mail, return receipt
requested, postage prepaid, or by facsimile, and confirmed by answerback addressed as follows:
(a)
If to the Bank:
with a copy to:
Mizrahi Tefahot Bank Ltd.
7 Jabotinsky Street
Ramat Gan, Israel
Email: Dani_maor@umtb.co.il
Attention: Dani Maor
E. Landau Law Offices
7 Jabotinsky Street.
Ramat Gan, Israel
Facsimile: 972-2-561-8212
Attention: Shlomo Farkas, Adv.
22
(b)
If to the Guarantor:
Itamar Medical Inc.
c/o Itamar Medical Ltd.
9 Halamish Street, P.O. Box 3579
Caesarea 3088900, Israel
Attn: Shy Basson, CFO
with a copy to:
Itamar Medical Inc.
3290 Cumberland Club Drive
Suite 100, Atlanta, GA 30339
Attn: Shy Basson, CFO
Itamar Medical Ltd.
9 Halamish Street, P.O. Box 3579
Caesarea 3088900, Israel
Attn: Gil Ashkenazi, Legal Counsel
or at such other address in Israel, as may be substituted by notice given as herein provided. The giving of any notice required hereunder may be waived in
writing by the party entitled to receive such notice. Every notice, demand, request, consent, approval, declaration, or other communication hereunder shall
be deemed to have been duly given or served on the date on which personally delivered, with receipt acknowledged, telecopied, and confirmed by telecopy
answerback, or five (5) Business Days after the same shall have been deposited in the local postal service in Israel or in the U.S. To the extent permitted
under applicable law, failure or delay in delivering copies of any notice, demand, request, consent, approval, declaration, or other communication to the
persons designated above to receive copies shall in no way adversely affect the effectiveness of such notice, demand, request, consent, approval,
declaration, or other communication, unless the recipient thereof has been materially prejudiced by such failure or delay.
Guarantor hereby irrevocably designates, appoints and empowers Mr. Shy Basson, 9 Halamish Street, P.O. Box 3579, Caesarea 3088900, Israel to receive
for and on behalf of the Guarantor, any and all notices and/or correspondence relating to this Agreement and/or to Guarantor‘s relations with the Bank,
including without limitation, service of process issued out of the courts of the State of Israel or by or on behalf of the Bank or in any other manner in any
legal action or proceedings arising out of or in connection with this Agreement. Any service of process to the above mentioned agent shall be deemed as
service of process to the Guarantor itself. Guarantor hereby irrevocably agrees that if its agent ceases to have an address in Israel or ceases to act as its
agent it shall appoint a new agent in Israel and will deliver to the Bank within 7 days a copy of a written acceptance of appointment by its agent. If at any
time Guarantor appoints a new agent it shall give notice to the Bank of such appointment and until such time service on the agent last known to the other
party shall be deemed to be effective service.
18. Severability. Any provision of this Security Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction.
23
19. No Waiver; Cumulative Remedies. Neither party shall, by any act, delay, omission, or otherwise, be deemed to have waived any of its rights or
remedies hereunder, and no waiver shall be valid unless in writing, signed by the waiving party, and then only to the extent therein set forth. A waiver by
either party of any right or remedy hereunder on any one occasion shall not be construed as a bar to any right or remedy which such party would otherwise
have had on any future occasion. No failure to exercise, nor any delay in exercising on the part of a party hereunder, any right, power, or privilege
hereunder, shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power or privilege hereunder preclude any other or future
exercise thereof or the exercise of any other right, power, or privilege. The rights and remedies hereunder provided are cumulative and may be exercised
singly or concurrently, and are not exclusive of any rights and remedies provided by law. None of the terms or provisions of this Security Agreement may
be waived, altered, modified, or amended except by an instrument in writing, duly executed by the Bank and the Guarantor.
20. Successors and Assigns; Governing Law.
(a) This Security Agreement and all obligations of the Guarantor hereunder shall be binding upon the successors and assigns of the Guarantor, and shall,
together with the rights and remedies of the Bank hereunder, inure to the benefit of the Bank and its successors and assigns. No sales of participations, other
sales, assignments, transfers, or other dispositions of any agreement governing or instrument evidencing the Secured Sums or any portion thereof or interest
therein shall in any manner affect the security interest granted to the Bank, hereunder.
(b) This Security Agreement shall be governed by, and be construed and interpreted in accordance with, the laws of the State of Delaware.
(c) All parties to this Security Agreement hereby irrevocably consent to the jurisdiction of the courts in Tel Aviv, Israel, with respect to all matters
related to and /or arising of this Agreement. The competent court in Tel Aviv is hereby vested with jurisdiction for the purpose of this Security Agreement,
but the Bank may also take legal proceedings in any other competent court and/or jurisdiction. Subject to the provisions set forth in this section, all parties
waive any objection to venue and any objection based on a more convenient forum in any action instituted under this Security Agreement.
21. Further Indemnification. The Guarantor agrees to pay, and to save the Bank harmless from, any and all liabilities with respect to, or resulting from any
delay in paying, any and all excise, sales, or other similar taxes that may be payable or determined to be payable with respect to any of the Collateral or in
connection with any of the transactions contemplated by this Security Agreement, except for losses caused by the Bank’s gross negligence, fraud,
misrepresentation, bad faith or willful misconduct.
24
22. Books of Account. Guarantor confirms that the Bank’s books and accounts are acceptable to it, shall be deemed correct and shall serve as prima facie
evidence against it of all their particulars, including as regards the computation of the Secured Sums, the details of the bills and guarantees and the other
collateral and every other matter relating to this Security Agreement.
23. Waiver of Jury Trial. Each of the parties to this Security Agreement waives all right to trial by jury in any action or proceeding to enforce or defend any
rights or remedies hereunder. The parties acknowledge that the foregoing waiver is knowing and voluntary.
24. Section Titles. The section titles contained in this Security Agreement are and shall be without substantive meaning or content of any kind whatsoever
and are not a part of the agreement between the parties hereto.
25. Counterparts. This Security Agreement may be executed in any number of counterparts, which shall, collectively and separately, constitute one
agreement.
26. Transfer of Rights. The Bank may at any time, at its discretion, without needing the Guarantor’s consent, transfer to a corporation under its control or to
another banking institution or to any venture capital or secondary fund with whom the Bank has transferred warrants or security agreements relating to at
least two (2) operating high-technology companies, this Security Agreement and the rights pursuant hereto, including the Collateral, in whole or parts, and
any such transferee may transfer the said rights without requiring further consent from Guarantor to a corporation under its control or to another banking
institution or to any venture capital or secondary fund. The transfer may be made by endorsement of the Security Agreement or in such other manner as the
Bank deems fit.
Notwithstanding the above, in the event that the Bank declares an Event of Default under section 10 above, the Bank may freely transfer this Security
Agreement and the rights pursuant hereto, including the Collateral, in whole or parts, to any third party it deems fit, and any such transferee may transfer
the said rights without requiring any further consent.
[Signature page Follows]
25
[Security Agreement dated March 12th, 2019 - Signature Page]
authorized officer on the date first set forth above.
IN WITNESS WHEREOF, each of the parties hereto has caused this Security Agreement to be executed and delivered by its duly
Mizrahi Tefahot Bank Ltd.
By:
Guarantor
By:
Schedule A:
List of Accounts
Schedule B:
List of IP.
None.
Schedule C:
Pledged Shares' Certificates + Undated stock powers duly executed in blank or other instruments of transfer satisfactory to the Bank and by such other
instruments and documents as the Bank may reasonably request.
None.
Schedule D:
ASSIGNMENT OF FUNDS
In consideration of One Dollar cash in hand, the receipt and sufficiency of which are hereby acknowledged, Itamar Medical, Inc., a Delaware corporation
(“Guarantor”), hereby irrevocably assigns to Mizrahi Tefahot Bank (“Bank”) all accounts receivable due to it from all customers listed in Schedule A, and
does hereby authorize and instruct them to pay to the Bank all amounts now due or which later become due to Guarantor, and authorizes the Bank to
endorse any checks received in the name of Guarantor.
Itamar Medical, Inc.
By:
Guarantor
By:
Schedule E:
A copy of the resolutions of the Guarantor's board of directors or to be done by unanimous consent of shareholders approving the execution of this
agreement and the grant of a security interest under the terms and conditions herein.
[Omitted. The registrant agrees to furnish supplementally a copy of such omitted schedule to the U.S. Securities and Exchange Commission upon request.]
[Omitted. The registrant agrees to furnish supplementally a copy of such omitted schedule to the U.S. Securities and Exchange Commission upon request.]
Schedule F:
Deposit Account Control Agreement
Schedule G:
UCC Financing Statement
To be provided.
Schedule H:
Legal opinion of Guarantor’s Counsel
To be provided.
[Omitted. The registrant agrees to furnish supplementally a copy of such omitted schedule to the U.S. Securities and Exchange Commission upon request.]
Schedule I
I, Gilad Glick, certify that:
1.
I have reviewed this annual report on Form 20-F of Itamar Medical Ltd.;
CERTIFICATION
Exhibit 12.1
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the company as of, and for, the periods presented in this report;
4. The company’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-
15(f)) for the company and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the company, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the company’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the company’s internal control over financial reporting that occurred during the period covered by
the annual report that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial
reporting; and
5. The company’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to
the company’s auditors and the audit committee of the company’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the company’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the company’s internal
control over financial reporting.
Date: April 3, 2020
/s/ Gilad Glick
Gilad Glick
President and Chief Executive Officer
(Principal Executive Officer)
I, Shy Basson, certify that:
1.
I have reviewed this annual report on Form 20-F of Itamar Medical Ltd.;
CERTIFICATION
Exhibit 12.2
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the company as of, and for, the periods presented in this report;
4. The company’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-
15(f)) for the company and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the company, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the company’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the company’s internal control over financial reporting that occurred during the period covered by
the annual report that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial
reporting; and
5. The company’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to
the company’s auditors and the audit committee of the company’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the company’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the company’s internal
control over financial reporting.
Date: April 3, 2020
/s/ Shy Basson
Shy Basson
Chief Financial Officer
(Principal Financial Officer)
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 13.1
In connection with the Annual Report on Form 20-F for the fiscal year ended December 31, 2019 of Itamar Medical Ltd. (the “Company”) as filed with the
U.S. Securities and Exchange Commission on the date hereof (the “Report”) and pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002, I, Gilad Glick, certify that, to the best of my knowledge:
•
•
the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the
Company.
Date: April 3, 2020
/s/ Gilad Glick
Gilad Glick
President and Chief Executive Officer
(Principal Executive Officer)
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 13.2
In connection with the Annual Report on Form 20-F for the fiscal year ended December 31, 2019 of Itamar Medical Ltd. (the “Company”) as filed with the
U.S. Securities and Exchange Commission on the date hereof (the “Report”) and pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002, I, Shy Basson, certify that, to the best of my knowledge:
•
•
the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the
Company.
Date: April 3, 2020
/s/ Shy Basson
Shy Basson
Chief Financial Officer
(Principal Financial Officer)
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Exhibit 15.1
The Board of Directors
Itamar Medical Ltd.
We consent to the incorporation by reference in the registration statements (Nos. 333-230799 and 333-236883) on Form S-8 of Itamar Medical Ltd. of our
report dated March 30, 2020, with respect to the consolidated statements of financial position of Itamar Medical Ltd. as of December 31, 2019 and 2018,
the related consolidated statements of operations, comprehensive income (loss), changes in equity, and cash flows for each of the years in the three-year
period ended December 31, 2019, and the related notes, which report appears in the December 31, 2019 annual report on Form 20-F of Itamar Medical Ltd.
Our report refers to a change in method of accounting for leases.
/s/ Somekh Chaikin
Certified Public Accountants (Israel)
A member firm of KPMG International
Tel Aviv, Israel
April 3, 2020