f20f2017_medigusltd.htm
Edgar Agents LLC
Form Type: 20-F
Medigus Ltd.
Page 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
☐ REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2017
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
☐ SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number: 001-37381
Medigus Ltd.
(Exact name of Registrant as specified in its charter)
Israel
(Jurisdiction of incorporation or organization)
Omer Industrial Park No. 7A, P.O. Box 3030, 8496500, Israel
(Address of principal executive offices)
Oded Yatzkan
7A Industrial Park, P.O. Box 3030
Omer, 8496500, Israel
Tel: +972 72 260-2211
Fax: +972 72 260-2231
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Title of class
American Depositary Shares, each representing fifty (50)
Ordinary Shares(1)
Ordinary shares, par value NIS 0.10 per share(2)
Name of each exchange on which registered
Nasdaq Capital Market
Nasdaq Capital Market
(1) Evidenced by American Depositary Receipts.
(2) Not for trading, but only in connection with the registration of the American Depositary Shares.
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Form Type: 20-F
Medigus Ltd.
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Securities registered or to be registered pursuant to Section 12(g) of the Act: None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of December 31, 2017: 191,785,784
ordinary shares, par value NIS 0.10 per share
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act:
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 ☒
Yes ☐ No ☒
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or
for such shorter period that the registrant was required to submit and post such files).
Yes ☒ No ☐
Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth
company. See definition of “accelerated filer and large accelerated filer” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated filer
☐
Accelerated filer
☐
Non-accelerated filer
Emerging growth company
☐
☒
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the
registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided
pursuant to Section 13(a) of the Exchange Act. ☐
† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its
Accounting Standards Codification after April 5, 2012.
Indicate by check mark the basis of accounting the registrant has used to prepare the financial statements included in this filing:
☐ U.S. GAAP
☒ International Financial Reporting Standards as issued by the International Accounting Standards Board
☐ Other
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has
elected to follow.
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):
Item 17 ☐ Item 18 ☐
Yes ☐ No ☒
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Edgar Agents LLC
Form Type: 20-F
Medigus Ltd.
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TABLE OF CONTENTS
Part I
Item 1.
Item 2.
Item 3.
Item 4.
Item 4a.
Item 5.
Item 6.
Item 7.
Item 8.
Item 9.
Item 10.
Item 11.
Item 12.
Identity of Directors, Senior Management and Advisors
Offer statistics and Expected Timetable
Key Information
Information on the Company
Unresolved staff Comments
Operating and Financial Review and Prospects
Directors, Senior Management and Employees
Major Shareholders and Related Party Transactions
Financial Information
The Offer and Listing
Additional Information
Quantitative and Qualitative Disclosures About Market Risk
Description of Securities Other Than Equity Securities
Part II
Defaults, Dividend Arrearages and Delinquencies
Item 13.
Material Modifications to the Rights of Security Holders and Use of proceeds
Item 14.
Controls and Procedures
Item 15.
Audit Committee Financial Expert
Item 16A.
Code of Ethics
Item 16B.
Principal Accountant Fees and Services
Item 16C.
Exemptions from the Listing Standards for Audit Committees
Item 16D.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
Item 16E.
Item 16F.
Change in Registrant’s Certifying Accountant
Corporate Governance
Item 16G.
Item 16H. Mine Safety Disclosure
Item 17.
Item 18.
Item 19.
Signatures.
Financial Statements
Financial Statements
Exhibits
Part III
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1
1
1
28
50
50
63
81
84
85
87
105
106
113
113
113
114
114
114
114
114
115
115
116
116
117
118
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Certain Definitions
In this annual report, unless the context otherwise requires:
INTRODUCTION
● references to “Medigus,” the “Company,” “us,” “we” and “our” refer to Medigus Ltd. (the “Registrant”), an Israeli company, and its
consolidated subsidiary.
● references to “ordinary shares,” “our shares” and similar expressions refer to the Registrant’s Ordinary Shares, NIS 0.10 nominal (par)
value per share.
● references to “ADS” refer to American Depositary Shares.
● references to “dollars,” “U.S. dollars”, “USD” and “$” refer to United States Dollars.
● references to “NIS” refer to New Israeli Shekels, the Israeli currency.
● references to the “Companies Law” refer to Israel’s Companies Law, 5759-1999, as amended.
● references to the “SEC” refer to the United States Securities and Exchange Commission.
● references to MUSE™ refer to the trade name of an endoscopy system developed by the Company which is intended as a minimally
invasive treatment for Gastroesophageal Reflux Disease, or GERD. It should be noted that this term may refer to both versions of the
system, according to the applicable context. MUSE™ II is second version of the MUSE™ system. The system was previously called
“SRS”.
● references to “endoscopy” refer to a medical procedure which is used to diagnose or treat various diseases using an endoscope (a
flexible tube which contains lighting features, imaging features and a system used to direct the endoscope within bodily systems).
All share data information in this annual report on Form 20-F reflects a 1-for-10 reverse share split of our ordinary shares effected on
November 6, 2015, and a change in the ratio of ordinary shares per ADS from five ordinary shares per ADS to 50 ordinary shares per ADS effected
on March 15, 2017. The change in the ordinary shares ratio for the ADSs had the same effect as a 1-for-10 reverse stock split of the ADSs.
ii
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain information included or incorporated by reference in this annual report on Form 20-F may be deemed to be “forward-looking
statements”. Forward-looking statements are often characterized by the use of forward-looking terminology such as “may,” “will,” “expect,”
“anticipate,” “estimate,” “continue,” “believe,” “should,” “intend,” “project” or other similar words, but are not the only way these statements are
identified.
These forward-looking statements may include, but are not limited to, statements relating to our objectives, plans and strategies, statements
that contain projections of results of operations or of financial condition, statements relating to the research, development and use of our
products, and all statements (other than statements of historical facts) that address activities, events or developments that we intend, expect, project,
believe or anticipate will or may occur in the future.
Forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties. We have based these
forward-looking statements on assumptions and assessments made by our management in light of their experience and their perception of historical
trends, current conditions, expected future developments and other factors they believe to be appropriate.
Important factors that could cause actual results, developments and business decisions to differ materially from those anticipated in these
forward-looking statements include, among other things:
● our ability to continue as a going concern;
● projected capital expenditures and liquidity;
● the overall global economic environment;
● insufficient coverage or reimbursement from medical insurers;
● the impact of competition and new technologies;
● general market, political, reimbursement and economic conditions in the countries in which we operate;
● changes in our strategy;
● government regulations and approvals;
● changes in customers’ budgeting priorities;
● litigation and regulatory proceedings; and
● those factors referred to in “Item 3. Key Information – D. Risk Factors,” “Item 4. Information on the Company,” and “Item 5. Operating
and Financial Review and Prospects”, as well as in this annual report on Form 20-F generally.
Readers are urged to carefully review and consider the various disclosures made throughout this annual report on Form 20-F, which are
designed to advise interested parties of the risks and factors that may affect our business, financial condition, results of operations and prospects.
In addition, the section of this annual report on Form 20-F entitled “Item 4. Information on the Company” contains information obtained
from independent industry and other sources that we have not independently verified. You should not put undue reliance on any forward-looking
statements. Any forward-looking statements in this annual report are made as of the date hereof, and we undertake no obligation to publicly update or
revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.
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Edgar Agents LLC
Table of Contents
Form Type: 20-F
Medigus Ltd.
PART I
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS
Not applicable.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not applicable.
ITEM 3. KEY INFORMATION
A.
Selected Financial Data
The following consolidated statement of operations data for the years ended December 31, 2017, 2016, and 2015, and the consolidated
balance sheet data as of December 31, 2017 and 2016, is derived from our audited consolidated financial statements included elsewhere in this annual
report on Form 20-F. These audited financial statements have been prepared in accordance with International Financial Reporting Standards, or
IFRS, as set forth by the International Accounting Standard Board. The consolidated statement of operations data for the years ended December 31,
2014 and 2013 and the consolidated balance sheet data as of December 31, 2015, 2014, and 2013 is derived from other consolidated financial
statements not included in this Form 20-F. The selected consolidated financial data set forth below should be read in conjunction with and are
qualified by reference to “Item 5. Operating and Financial Review and Prospects” and the consolidated financial statements and notes thereto and
other financial information included elsewhere in this annual report on Form 20-F.
Until December 31, 2015, our consolidated financial statements were recorded in NIS, which was the Company’s functional and
presentation currency as of such date. Effective January 1, 2016, the Company changed its functional currency to U.S. Dollar. The December 31,
2015, 2014, and 2013, financial data presented in this annual report on Form 20-F was translated from NIS to USD as follows: (1) all assets and
liabilities of the Company were translated using the dollar exchange rate as of December 31 of each year, as applicable; (2) equity items were
translated using historical exchange rates at the relevant transaction dates; (3) the statement of comprehensive loss items has been translated at the
average exchange rates for the respective year; and (4) the resulting translation differences have been reported as “currency translation differences”
within other comprehensive loss.
Consolidated Statements of Operations Data
Revenues
Cost of revenues:
Products and services
Inventory impairment
Gross Profit (Loss)
Research and development expenses, net
Sales and marketing expenses
General and administrative expenses
Other income, net
Operating loss
Profit from changes in fair value of warrants issued to
investors
Finance income (expenses), net
Loss before taxes on income
Taxes benefit (Taxes on income)
Loss for the year
Other comprehensive income (loss) for the year, net of tax
Total comprehensive loss for the year
Basic loss per ordinary share(1)
Diluted loss per ordinary share(1)
Weighted average number of ordinary shares outstanding
used to compute (in thousands)(1):
Basic loss per share
Diluted loss per share
2017
467
219
297
(49)
2,208
846
3,005
-
(6,108)
3,502
54
(2,552)
7
(2,545)
-
(2,545)
(0.02)
(0.02)
2016
Year ended December 31,
2015
U.S. Dollars, in thousands, except per share and
weighted average shares data
549
2014
624
744
176
-
373
3,655
2,125
3,684
-
(9,091)
25
87
(8,979)
(28)
(9,007)
-
(9,007)
(0.26)
(0.26)
277
-
347
4,384
2,680
2,842
3
(9,556)
106
(14)
(9,464)
(68)
(9,532)
(211)
(9,743)
USD
(0.34)
(0.34)
351
-
393
4,025
2,341
2,280
269
(7,984)
980
650
(6,354)
(4)
(6,358)
(1,573)
(7,931)
(0.33)
(0.33)
2013
691
311
-
380
2,275
900
1,908
181
(4,522)
3,228
(111)
(1,405)
(23)
(1,428)
408
(1,020)
(0.11)
(0.11)
125,685
129,690
34,397
34,397
28,415
28,415
19,500
19,500
13,020
13,020
(1) Adjusted to reflect 10:1 reverse share split such that every 10 ordinary shares were converted into one ordinary share effected on November 6,
2015, and a change in the ratio of ordinary shares per ADS from five ordinary shares per ADS to 50 ordinary shares per ADS effected on March
15, 2017. The change in the ordinary shares ratio for the ADSs had the same effect as a 1-for-10 reverse stock split of the ADSs. For more
information see “Item 4. Information on the Company A. History and Development of the Company.”
1
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Balance Sheet Data:
Cash and cash equivalents
Short-term deposits
Financial assets at fair value through profit or loss
Total assets
Total non-current liabilities
Accumulated deficit
Total shareholders’ equity
2017
2016
As of December 31,
2015
U.S. Dollars (in thousands)
2014
2013
2,828
3,498
-
7,210
742
(55,881)
5,511
3,001
-
-
4,724
463
(53,336)
2,927
10,312
-
-
12,141
107
(44,329)
10,181
10,817
-
2,105
14,291
208
(34,797)
13,050
6,893
2,326
2,293
13,022
884
(28,412)
11,163
The following table sets forth information regarding the exchange rates of U.S. dollars per NIS for the periods indicated. Average rates are
calculated by using the daily representative rates as reported by the Bank of Israel on the last day of each month during the periods presented.
Year
2017
2016
2015
2014
2013
NIS per U.S. dollars
High
Low
Average
Period End
3.860
3.983
4.053
3.994
3.728
3.467
3.746
3.761
3.402
3.471
3.599
3.832
3.884
3.577
3.601
3.467
3.845
3.902
3.889
3.471
The following table sets forth the high and low daily representative rates for the NIS as reported by the Bank of Israel for each of the prior
NIS per U.S. dollars
High
Low
Average
Period End
3.469
3.535
3.460
3.550
3.544
3.542
3.584
3.431
3.427
3.388
3.467
3.499
3.491
3.504
3.450
3.494
3.423
3.503
3.517
3.512
3.537
3.434
3.485
3.405
3.467
3.499
3.521
3.529
six months.
Month
March 2018 (1)
February 2018
January 2018
December 2017
November 2017
October 2017
September 2017
(1)
Through March 15, 2018.
B.
Capitalization and Indebtedness
Not applicable.
C.
Reasons for the Offer and Use of Proceeds
Not applicable.
D.
Risk Factors
You should carefully consider the risks described below, together with all of the other information in this annual report on Form 20-F. The
risks described below are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be
immaterial may also materially and adversely affect our business operations. If any of these risks actually occurs, our business and financial
condition could suffer and the price of our shares could decline.
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Risks Related to Our Business
Our auditors have expressed substantial doubt about our ability to continue as a going concern, which may hinder our ability to obtain further
financing.
Our audited consolidated financial statements for the year ended December 31, 2017, were prepared under the assumption that we would
continue our operations as a going concern. Our independent registered public accounting firm has included a “going concern” explanatory paragraph
in its report on our consolidated financial statements for the year ended December 31, 2017, indicating that we have suffered recurring losses from
operations and have a net capital deficiency that raises substantial doubt about our ability to continue as a going concern. Uncertainty concerning our
ability to continue as a going concern may hinder our ability to obtain future financing. Continued operations and our ability to continue as a going
concern are dependent on our ability to obtain additional funding in the near future and thereafter, and there are no assurances that such funding will
be available to us at all or will be available in sufficient amounts or on reasonable terms. Our consolidated financial statements do not include any
adjustments that may result from the outcome of this uncertainty. Without additional funds from private or public offerings of debt or equity
securities, sales of assets, sales or out-licenses of intellectual property or technologies, or other transactions, we will exhaust our resources and will be
unable to continue operations. If we cannot continue as a viable entity, our shareholders would likely lose most or all of their investment in us.
We will need additional funding. If we are unable to raise capital, we will be forced to reduce or eliminate our operations.
As of December 31, 2017, and March 15, 2018, we had a total cash and deposits balance of approximately $6.3 million and $5.2 million,
respectively. Based on our projected cash flows and our cash balances as of the date of this annual report on Form 20-F, our management is of the
opinion that without further fund raising we will not have sufficient resources to enable us to continue advancing our activities and as a result, there is
substantial doubt about our ability to continue as a going concern. At our current burn rate, and without taking into account additional fund raising,
our current cash balance will be sufficient until approximately December 2018, taking into account shut down costs. If we are unable to obtain
additional sufficient financing, we will be forced to reduce the scope of, or eliminate our operations. We will also have to reduce marketing, customer
service or other resources devoted to our products. Any of these factors will materially harm our business and results of operations.
Our management’s plans include the continued commercialization of our products, taking cost reduction steps and securing sufficient
financing through the sale of additional equity securities, debt or capital inflows from strategic partnerships. There are no assurances however, that
we will be successful in obtaining the level of financing needed for our operations.
Even if we are able to continue to finance our business, the sale of additional equity or debt securities could result in dilution to our current
shareholders and could require us to grant a security interest in our assets. If we raise additional funds through the issuance of debt securities, these
securities may have rights senior to those of our ordinary shares and could contain covenants that could restrict our operations. In addition, we may
require additional capital beyond our currently forecasted amounts to achieve profitability. Any such required additional capital may not be available
on reasonable terms, or at all.
Since the third quarter of 2016 we have been implementing a cost reduction program which may be unsuccessful in its execution, and, even if
successful, may lead to undesirable outcomes.
Since the third quarter of 2016 we have been implementing a cost reduction program that has affected the structure and operation of our
business. Such plan reflects assumptions and analyses based on our experience and perception of historical trends, current market conditions and
expected future developments as well as other factors that we consider appropriate under the circumstances. Whether our cost reduction program will
prove successful depends on a number of factors, including but not limited to (i) our ability to substantially raise additional funding and to obtain
adequate liquidity; (ii) our ability to maintain suppliers’, hospitals’, medical facilities’ and practitioners’ confidence; (iii) our ability to efficiently
reduce our operational expenditures, while retaining key employees; and (iv) the overall success of our business. In addition, as long as these cost
reduction measurements last, and for a substantial time afterwards, our employees may face considerable distraction and uncertainty and we may
experience increased levels of employee attrition. A loss of key personnel could have a material adverse effect on our ability to meet operational and
financial expectations. The pursuit of additional funding and the application of the cost reduction program has occupied and will continue to occupy a
substantial portion of the time and attention of our management and will impact how our business is conducted.
We have a history of operating losses and expect to incur additional losses in the future.
We have sustained losses in recent years, which as of December 31, 2017, accumulated to $55.9 million, including an operating net loss of
$6.1 million and $9.1 million for the year ended December 31, 2017 and 2016, respectively. We anticipate that we are likely to continue to incur
significant net losses for at least the next several years as we continue the development of the MUSE™ system and potentially other products, expand
our sales and marketing capabilities in the endoscopy-based products market, continue our commercialization of our MUSE™ system, expand our
adoption and clinical implementation, and continue to develop the corporate infrastructure required to sell and market our products. Our losses have
had, and will continue to have, an adverse effect on our shareholders’ equity and working capital. Any failure to achieve and maintain profitability
would continue to have an adverse effect on our shareholders’ equity and working capital and could result in a decline in our share price or cause us
to cease operations.
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The future success of our business depends on our ability to continue to develop and obtain regulatory clearances or approvals for
innovative and commercially successful products in our field, which we may be unable to do in a timely manner, or at all. Our success and ability to
generate revenue or be profitable also depends on our ability to establish our sales and marketing force, generate product sales and control costs, all
of which we may be unable to do.
The commercial success of the MUSE™ system or any future product, if approved, depends upon the degree of market acceptance by physicians,
patients, third-party payors, and others in the medical community.
The commercial success of the MUSE™ system and any future product, if approved, depends in part on the medical community, patients,
and third-party payors accepting our products as medically useful, cost-effective, and safe. Any product that we bring to the market may or may not
gain market acceptance by physicians, patients, third-party payors, and others in the medical community. In addition, since the MUSETM system is a
therapeutic device being used for a quality of life, benign disease, market penetration may be more difficult. To date, we have experienced slower
than expected market penetration. If the MUSE™ system or any future product, if approved, does not achieve an adequate level of acceptance, we
may not generate significant product revenue and may not become profitable. The degree of market acceptance of these products, if approved for
commercial sale, will depend on a number of factors, including:
● the cost, safety, efficacy, and convenience of the MUSE™ system and any future product in relation to alternative treatments and
products;
● the ability of third parties to enter into relationships with us without violating their existing agreements;
● the effectiveness of our sales and marketing efforts;
● the prevalence and severity of any side effects resulting from the procedure;
● the willingness of the target patient population to try new procedures and of physicians to perform new procedures;
● the strength of marketing and distribution support for, and timing of market introduction of, competing products;
● publicity concerning our products or competing products and treatments; and
● sufficient third-party insurance coverage or reimbursement.
Even if the MUSE™ system and any future product, if approved, displays a favorable safety and efficacy profile in clinical trials, market
acceptance of the product will not be known until after it is launched. Our efforts to educate the medical community and third-party payors on the
benefits of the products may require significant resources and may never be successful. Such efforts to educate the marketplace may require more
resources than are required by conventional technologies.
Insufficient coverage or reimbursement from medical insurers to users of our products could harm our ability to market and commercialize our
current and future products.
Our ability to successfully commercialize our products, mainly the MUSE™ system, depends significantly on the availability of coverage
and reimbursement for endoscopic procedures from third-party insurers, including governmental programs, as well as private insurance and private
health plans. Reimbursement is a significant factor considered by hospitals, medical facilities and practitioners in determining whether to acquire and
utilize new capital equipment or to implement new procedures such as our technology.
In January 2018, the American Medical Association’s, or the AMA’s Current Procedural Terminology, or CPT, published an updated
payment for the Category I CPT Code for transoral esophagogastric fundoplasty procedures, which describes procedures conducted with the
MUSE™ system. In the U.S., the CPT Editorial Panel assigns specific billing codes for physician services and outpatient hospital procedures, which
are used by providers, who are our customers, to bill for procedures. Once a CPT code is established, the Centers for Medicare and Medicaid
Services, or CMS, in turn establishes payment levels and coverage rules under Medicare, and private payors establish rates and coverage rules.
Notwithstanding the issuance of a CPT to report the MUSE procedure and the establishment of payment rates for the code, we cannot guarantee that
the MUSE™ system is or will be covered and, if covered, that reimbursement will be sufficient, and furthermore, we cannot guarantee that the
MUSE™ system or any future product will be approved for coverage or reimbursement by Medicare, Medicaid or any third-party payor.
Reimbursement decisions in the European Union and in other jurisdictions outside of the United States vary by country and region and there can be
no assurance that we will be successful in obtaining adequate reimbursement.
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We depend on the success of a limited portfolio of products for our revenue, which could impair our ability to achieve profitability.
Though we have plans for the development of additional natural orifice surgical products based on our technology, including miniature
cameras, flexible stapling and ultrasound, and although we currently derive most of our revenue from the sale of miniature cameras and related
imaging equipment, we plan to derive most of our future revenue from product sales of our imaging equipment and our flagship MUSE™ system and
its future applications, as well as recurring sales of associated products required to use the MUSE™ system. Our future growth and success is
dependent on the successful commercialization of the MUSE™ system. If we are unable to achieve increased commercial acceptance of the MUSE™
system, obtain regulatory clearances or approvals for future products, or experience a decrease in the utilization of our product line or procedure
volume, our revenue would be adversely affected.
We may encounter manufacturing issues during the assembly process of our flagship product.
Due to the characteristics of the technologies on which the main parts of the MUSE™ system are manufactured, which include plastic and
metal injection, sheet metals, laser welding and rubber vulcanization, using production tools such as molds, templates and jigs, in the event that parts
are found which are inaccurate and/or which have been rendered defective and/or which have failed preliminary tests, we will be forced to repair the
manufacturing tools and re-manufacture and/or re-order the parts, a process which will delay the production timetable. Furthermore, in the event that
certain parts are not suitable, due to a situation whereby the manufacturing tools have not produced the part in the appropriate manner, it may be
necessary to redesign and re-manufacture the manufacturing tool and to manufacture the parts rapidly and at additional cost.
Furthermore, if we are unable to satisfy commercial demand for our MUSE™ system due to our inability to assemble, test and deliver the
system in compliance with applicable regulations, our business and financial results, including our ability to generate revenue, would be impaired,
market acceptance of our products could be materially, and adversely affected and customers may instead purchase or use competing products.
We may encounter failure in the operation of our products, which may adversely harm patients operated by using our products.
Users of our products may encounter failures in mechanical components, which could result in difficulties in operation or opening or
releasing the products, leading to the need for surgical procedures to correct the mechanical failure, in which case, a patients’ medical condition may
worsen.
Additionally, in the event that users of our products do not follow the instructions for use or the available product training instructions
(which appear on the screen during the performance of the procedure) the foregoing may cause injury and in certain cases, could even cause death. A
result of this kind could reduce the rate of progress of, or even prevent, the marketing for the MUSE™ product and our other products.
Furthermore, users of our products may encounter failure in electronic components of our products used in the system software, which could
lead to incorrect interpretation by the users or to failure in the operation of the endoscope and to injury to the patient’s critical internal organs.
We have only limited clinical data to support the value of the MUSE™ system, as well as our other products, which may make patients,
physicians and hospitals reluctant to accept or purchase our products.
Physicians, hospitals and patients will only accept or purchase our products if they believe them to be safe and effective, with advantages
over competing products or procedures. To date, we have collected only limited clinical data with which to assess our products’ (mainly the MUSE™
system) clinical and economic value. The collection of clinical and economic data and the process of generating peer review publications in support
of our products and procedures is an ongoing focus for us.
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If future publications of clinical studies indicate that medical procedures using the MUSE™ system are less safe or less effective than
competing products or procedures, the patients may choose not to undergo our procedure, and physicians or hospitals may choose not to purchase or
use our system. Furthermore, unsatisfactory patient outcomes or patient injury could cause negative publicity for our products, particularly in the
early phases of product introduction.
Current Hospital economic conditions could delay or prevent our customers from obtaining budgetary approval to purchase a MUSE™ system or
other products, which would adversely affect our business, financial condition and results of operations.
As a result of hospital economic concerns relating to business or financial situations or related to ongoing healthcare reimbursement
changes, customers and distributors may be delayed in obtaining, or may not be able to obtain, budgetary approval or financing for their purchases or
leases of medical equipment including our products. These delays may in some instances lead to our customers or distributors postponing the
shipment and use of previously ordered systems and products, cancelling their orders, or cancelling their agreements with us. An increase in delays
and order cancellations of this nature could adversely affect our products sales and revenues and, therefore, harm our business and results of
operations.
In addition, worldwide economic conditions or market instability may make it increasingly 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 carrying costs and result in obsolete inventory. Alternatively, this forecasting difficulty could cause a shortage of products, or materials
used in our products, that could result in an inability to satisfy demand for our products and a material loss of potential revenue.
Our reliance on third-party suppliers for most of the components of our products could harm our ability to meet demand for our products in a
timely and cost effective manner.
Though we attempt to ensure the availability of more than one supplier for each important component in our products, the number of
suppliers engaged in the provision of miniature video sensors which are suitable for our CMOS technology products is very limited, and therefore in
some cases we engage with a single supplier, which may result in dependency on such supplier. This is the case regarding sensors for the CMOS type
technology that is produced by a single supplier in the United States. As we do not have a contract in place with this supplier, there is no contractual
commitment on the part of such supplier for any set quantity of such sensors. The loss of our sole supplier in providing us with miniature sensors for
our CMOS technology products, and our inability or delay in finding a suitable replacement supplier, could significantly affect our business, financial
condition, results of operations and reputation.
Modifications to our current regulator-cleared products or the introduction of new products may require new regulatory clearances or approvals
or require us to recall or cease marketing our current products until clearances or approvals are obtained.
Our MUSE™ system has received marketing clearance from the U.S. Food and Drug Administration, or FDA, based on several 510(k)
applications, bears the CE Mark (a mark assigned to a product certifying its fulfillment of the Medical Devices Directive of the European Union), as
required in order to market the system in European Union countries and has obtained the necessary license to market the product in Canada, Turkey
and Israel.
Ongoing modifications to our products may require new regulatory approvals, as with prior 510k clearances, or require us to recall or cease
marketing the modified products until these clearances or approvals are obtained. Any modification to one of our cleared products that would
constitute a major change in its intended use, or any change that could significantly affect the safety or effectiveness of the product would require us
to obtain a new 510(k) marketing clearance and may even, in some circumstances, require the submission of a premarket approval, or PMA, track
application if the change raises complex or novel scientific issues or the product has a new intended use. The FDA requires every manufacturer to
make the determination regarding the need for a new 510(k) submission in the first instance, but the FDA may review any manufacturer’s decision.
We may make modifications in the future to the MUSE™ system without seeking additional clearances or approvals if we believe such clearances or
approvals are not necessary. However, it is possible that the FDA could change existing policy and practices regarding the assessment of whether a
new 510(k) clearance is required for changes or modifications to existing devices. Under these changed circumstances, the FDA may disagree with
our past or future decisions not to seek a new 510(k) for changes or modifications to existing devices and require new clearances or approvals. In that
case, we may be required to recall and stop marketing our products as modified, which could require us to redesign our products, conduct clinical
trials to support any modifications, and pay significant regulatory fines or penalties. In addition, the FDA may not approve or clear our products for
the indications that are necessary or desirable for successful commercialization or could require additional clinical trials to support any modifications.
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Significant changes that could be reasonably expected to affect the safety or effectiveness of one of our devices may require us to obtain a
license amendment or possibly a new license from Health Canada, Turkey, or Israel. In addition, we have started the process for receiving a
regulatory clearance in China by the China Food and Drug Administration, or CFDA, which could be significantly affected by such changes.
Substantial changes to the quality system or changes to the CE marked device which could affect compliance with the essential requirements of the
device or its intended use must be reported to the Notified Body (an independent and neutral institution appointed to conduct conformity assessment).
This may result in a decision that an existing certificate is in valid, an addendum to the certificate is needed or a new certificate must be obtained.
Any failure to maintain our existing clearances or approvals, or delay or failure in obtaining required clearances or approvals would adversely affect
our ability to introduce new or enhanced products in a timely manner, which in turn would harm our future growth. Any of these actions would harm
our operating results. Further, we may also be required to seek regulatory clearance in additional countries as we expand our marketing efforts.
Moreover, clearances and approvals by the applicable regulator are subject to continual review, and the later discovery of previously
unknown problems can result in product labeling restrictions or withdrawal of the product from the market. The loss of previously received approvals
or clearances, or the failure to comply with existing or future regulatory requirements could reduce our sales, profitability and future growth
prospects.
We are currently required by the FDA to refrain from using certain terms to label and market our products, which could harm our ability to
market and commercialize our current or future products.
The FDA’s 510(k) clearances include a specification of a product’s indication for use, and also authorize specific labeling and marketing
claims and language in promotional materials for the U.S. market. Failure to conform with the specific cleared labeling of our products or corporate
promotional material would be considered mislabeling or off-label promotion which might lead to:
● untitled letters, warning letters, fines, injunctions, consent decrees and civil penalties;
● customer notifications, refunds, detention or seizure of our products;
● refusing or delaying requests for 510(k) marketing clearance or PMA approvals of new products or modified products;
● withdrawing 510(k) marketing clearances or PMA approvals that have already been granted;
● refusing to provide Certificates for Foreign Government;
● refusing to grant export approval for our products; or
● pursuing criminal prosecution.
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Any of these sanctions could impair our ability to produce our products in a cost-effective and timely manner in order to meet our
customers’ demands. We may also be required to bear other costs or take other actions that may have a negative impact on our future sales and
financial condition.
If we or our third-party manufacturers or suppliers fail to comply with the FDA’s Quality System Regulation or other regulatory authorities, our
manufacturing operations could be interrupted and our product sales and operating results could suffer.
We and some of our third-party manufacturers and suppliers are required to comply with the FDA’s Quality System Regulation, or QSR,
which covers the methods and documentation of the design, testing, production, control, quality assurance, labeling, packaging, sterilization, storage
and shipping of our products. We and our manufacturers and suppliers are also subject to the regulations of foreign jurisdictions regarding the
manufacturing process if we or our distributors market our products abroad. We monitor our quality management in order to improve our overall
level of compliance. Our facilities are subject to periodic and unannounced inspection by U.S. and foreign regulatory agencies, including notified
bodies, to audit compliance with the QSR and comparable foreign regulations. If our facilities or those of our third-party manufacturers or suppliers
are found to be in violation of applicable laws and regulations, or if we or our manufacturers or suppliers fail to take satisfactory corrective action in
response to an adverse inspection, the regulatory authority could take enforcement action, including any of the following sanctions:
● untitled letters, warning letters, fines, injunctions, consent decrees and civil penalties;
● customer notifications or repair, replacement, refunds, 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) marketing clearances that have already been granted, or PMA approvals that we may receive in the future;
● refusing to provide Certificates for foreign government;
● refusing to grant export approval for our products; or
● pursuing criminal prosecution.
Any of these sanctions could impair our ability to produce our products in a cost-effective and timely manner in order to meet our
customers’ demands, and could have a material adverse effect on our reputation, business, results of operations and financial condition. We may also
be required to bear other costs or take other actions that may have a negative impact on our future sales and our ability to generate profits.
We face possible competition from the pharmaceutical sector, which could harm our ability to market and commercialize our current and future
products.
The development of more powerful drug treatments to assist in the suppression of GERD or other medical problems which compete with
our products, may reduce the size of our target markets and may reduce the need for the use of our systems and products, either available now, or
which will be developed in the future, thus adversely affecting our ability to market and commercialize our current and future products. While we are
unaware of any current pharmaceutical product that could directly compete with the MUSE™ system at this time, there may be new pharmaceutical
entrants in the future.
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There can be no assurance that we will be able to compete successfully against current or future competitors or that competition will not
have a material adverse effect on our future revenues and, consequently, on our business, operating results and financial condition.
We face competition from medical device companies that develop and market similar related products and systems, or may launch products in the
future, as well as new techniques and devices for treatments performed by our products.
Several medical device companies have commercial products which compete with the MUSE™ system for the treatment of GERD using an
endoscopic method. While we believe that the MUSE™ system has several advantages over competing devices, such as the requirement of one
operator, inclusion of visualization and ultrasound apparatuses, use of standard titanium staples, and reduced risk of harm to adjacent organs, there
can be no assurance that we will be able to compete successfully against current or future competitors or that competition will not have a material
adverse effect on our future revenues and, consequently, on our business, operating results and financial condition.
Reporting requirements on payments to physicians in the United States may deter doctors from providing advice to the Company.
The implementation of the reporting and disclosure obligations of the Physician Payment Sunshine Act, which is part of the Affordable Care
Act of 2010, or the Sunshine Act, could adversely affect our business.
The Sunshine Act has imposed new reporting and disclosure requirements for drug and device manufacturers with regard to payments or
other transfers of value made to certain practitioners (including physicians, dentists and teaching hospitals), and for such manufacturers and for group
purchasing organizations with regard to certain ownership interests held by physicians in the reporting entity. On February 1, 2013, the
CMS, released the final rule to implement the Sunshine Act. Under this rule, data collection activities began on August 1, 2013, and first disclosure
reports were due by March 31, 2014, for the period August 1, 2013, through December 31, 2013. As required under the Sunshine Act, CMS
publishes information from these reports on a publicly available website, including amounts transferred and physician, dentist and teaching hospital
identities.
The final rule implementing the Sunshine Act is complex, ambiguous, and broad in scope. Accordingly, we are required to collect and report
detailed information regarding certain financial relationships we have with U.S. licensed physicians, dentists (if any) and teaching hospitals in the
United States. It is difficult to predict how the new requirements may impact existing relationships among manufacturers, distributors, physicians,
dentists and teaching hospitals. The Sunshine Act preempts similar state reporting laws, although we, or our subsidiaries, may be required to continue
to report under certain of such state laws. While we expect to have substantially compliant programs and controls in place to comply with the
Sunshine Act requirements, and we have completed our initial registration with CMS and our 2015 report with respect to Sunshine Act reporting, our
continued compliance with the Sunshine Act imposes continuing additional costs on us.
Medical device development is costly and involves continual technological change which may render our current or future products obsolete.
Innovation is rapid and continuous in the medical device industry, and our competitors in the medical device industry make significant
investments in research and development. If new products or technologies emerge that provide the same or superior benefits as our products at equal
or lower cost, they could render our products obsolete or unmarketable. We must anticipate changes in the marketplace and the direction of
technological innovation and customer demands. In addition, we face increasing competition from well-financed medical device companies to
develop new technologies and may face competition should we attempt to acquire new technologies, products and businesses. As a result, we cannot
be certain that our products will be competitive with current or future products and technologies.
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We may be subject to product liability claims, product actions, including product recalls, and other field or regulatory actions that could be
expensive, divert management’s attention and harm our business.
Our business exposes us to potential liability risks, product actions and other field or regulatory actions that are inherent in the
manufacturing, marketing and sale of medical device products. We may be held liable if our products cause injury or death or is found otherwise
unsuitable or defective during usage. The MUSE™ system incorporates mechanical and electrical parts, complex computer software and other
sophisticated components, any of which can contain errors or failures. Complex computer software is particularly vulnerable to errors and failures,
especially when first introduced. In addition, new products or enhancements to our existing products may contain undetected errors or performance
problems that, despite testing, are discovered only after installation.
If any of our products are defective, whether due to design or manufacturing defects, improper use of the product, or other reasons, we may
voluntarily or involuntarily undertake an action to remove, repair, or replace the product at our expense. In some circumstances we will be required to
notify regulatory authorities of an action pursuant to a product failure.
The medical device industry has historically been subject to extensive litigation over product liability claims. We anticipate that as part of
our ordinary course of business we will be subject to product liability claims alleging defects in the design, manufacture or labeling of our products.
A product liability claim, regardless of its merit or eventual outcome, could result in significant legal defense costs and high punitive damage
payments. Although we maintain product liability insurance, the coverage may not be adequate to cover future claims. Additionally, we may be
unable to maintain our existing product liability insurance in the future at satisfactory rates or adequate amounts.
Broad-based domestic and international government initiatives to reduce spending, particularly those related to healthcare costs, may reduce
reimbursement rates for endoscopic procedures, which will reduce the cost-effectiveness of our products.
Healthcare reforms, changes in healthcare policies and changes to third-party coverage and reimbursements, including legislation enacted
reforming the U.S. healthcare system, and any future changes to such legislation, may affect demand for our products and may have a material
adverse effect on our financial condition and results of operations. There can be no assurance that current levels of reimbursement will not be
decreased in the future, or that future legislation, regulation, or reimbursement policies of third-parties will not adversely affect the demand for our
products or our ability to sell products on a profitable basis. The adoption of significant changes to the healthcare system in the United States, Europe
or other jurisdictions in which we may market our products, could limit the prices we are able to charge for our products or the amounts of
reimbursement available for our products, could limit the acceptance and availability of our products, reduce medical procedure volumes and
increase operational and other costs. For example, U.S. President Donald Trump has recently publicly indicated an intent to lower healthcare costs
through various potential initiatives. In addition, President Trump and other U.S. lawmakers have made statements about potentially repealing or
replacing the Affordable Care Act, although specific legislation for such a repeal or replacement is still in its early stages. While we are unable to
predict what changes may ultimately be enacted, to the extent that future changes affect how our products are paid for and reimbursed by government
and private payers our business could be adversely impacted.
We cannot predict whether future healthcare initiatives will be implemented at the federal or state level or internationally, or the effect that
any future legislation or regulation will have on us. The expansion of government’s role in any country’s healthcare industry may result in decreased
profits to us, lower reimbursements by third-parties for procedures in which our products are used, and reduced medical procedure volumes, all of
which may adversely affect our business, financial condition and results of operations.
We depend on key employees, and if we fail to attract and retain employees with the expertise required for our business and provide for the
succession of senior management, we cannot grow or achieve profitability.
We are dependent on the continued service and performance of members of our senior management and other key personnel, for example
our Chief Executive Officer, Chris Rowland. We do not maintain key-man life insurance. Our future success will depend in part on our ability to
retain our management and scientific teams, to identify, hire and retain additional qualified personnel with expertise in research and development and
sales and marketing, and to effectively provide for the succession of senior management. Competition for qualified personnel in the medical device
industry is intense. We may be unable to replace key persons if they leave or to fill new positions requiring key persons with appropriate experience.
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The loss of key employees, the failure of any key 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 key employees could harm our business.
If we or our contractors or service providers fail to comply with regulatory laws and regulations, we or they could be subject to regulatory actions,
which could affect our ability to develop, market and sell our products and any other or future products that we may develop and may harm our
reputation.
If we or our manufacturers or other third-party contractors fail to comply with applicable federal, state or foreign laws or regulations,
including with respect to healthcare and data privacy, we could be subject to regulatory actions, which could affect our ability to develop, market and
sell our current products or any future products which we may develop in the future and could harm our reputation and lead to reduced demand for or
non-acceptance of our proposed products by the market.
If our employees commit fraud or other misconduct, including noncompliance with regulatory standards and requirements and insider trading,
our business may experience serious adverse consequences.
We are exposed to the risk of employee fraud or other misconduct. Misconduct by employees could include intentional failures to comply
with FDA regulations, to provide accurate information to the FDA, to comply with manufacturing standards we have established, to comply with
federal and state health-care fraud and abuse laws and regulations, to report financial information or data accurately or to disclose unauthorized
activities to us. In particular, sales, marketing and business arrangements in the healthcare industry are subject to extensive laws and regulations
intended 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, sales commission, customer incentive programs and other business arrangements. Employee
misconduct could also involve the improper use of information obtained in the course of clinical trials, which could result in regulatory sanctions and
serious harm to our reputation.
Our board of directors adopted a Code of Ethics in March 2016. However, it is not always possible to identify and deter employee
misconduct, and the precautions we take to detect and prevent this activity 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 be in compliance with such laws or
regulations. If any such actions are instituted against us, and we are not successful in defending ourselves or asserting our rights, those actions could
have a significant impact on our business, including the imposition of significant fines or other sanctions.
In addition, during the course of our operations, our directors, executives and employees may have access to material, nonpublic information
regarding our business, our results of operations or potential transactions we are considering. If a director, executive or employee was to be
investigated, or an action was to be brought against a director, executive or employee for insider trading, it could have a negative impact on our
reputation and the market price of our securities. Such a claim, with or without merit, could also result in substantial expenditures of time and money,
and divert attention of our management team from other tasks important to the success of our business.
If we fail to withhold our position against the Israeli tax authorities in connection with tax withholding, we may be required to pay additional
taxes.
Following a tax deduction assessment conducted by the Israeli Tax Authorities, or the ITA, in October 2016, as of March 15, 2018, we are
deemed to be in debt of approximately $0.8 million of additional withholding taxes, including penalties and interest. It is our management’s opinion,
based on the assessment of our legal counsel, that the chances of the claims of the ITA being dismissed are more likely than not. Therefore, no
allowance regarding this assessment was recorded in our financial statements. However, if our position is not accepted in the event this case is
litigated, our business can be materially adversely affected.
Disruptions to our information technology systems due to cyber-attacks or our failure to upgrade and adjust our information technology systems,
may materially impair our operations, hinder our growth and materially and adversely affect our business and results of operations.
We believe that an appropriate information technology, or IT, infrastructure is important in order to support our daily operations and the
growth of our business. If we experience difficulties in implementing new or upgraded information systems or experience significant system failures,
or if we are unable to successfully modify our management information systems or respond to changes in our business needs, we may not be able to
effectively manage our business, and we may fail to meet our reporting obligations. Additionally, if our current back-up storage arrangements and
our disaster recovery plan are not operated as planned, we may not be able to effectively recover our information system in the event of a crisis,
which may materially and adversely affect our business and results of operations.
In the current environment, there are numerous and evolving risks to cybersecurity and privacy, including criminal hackers, hacktivists,
state-sponsored intrusions, industrial espionage, employee malfeasance and human or technological error. High-profile security breaches at other
companies and in government agencies have increased in recent years, and security industry experts and government officials have warned about the
risks of hackers and cyber-attacks targeting businesses such as ours. Computer hackers and others routinely attempt to breach the security of
technology products, services and systems, and to fraudulently induce employees, customers, or others to disclose information or unwittingly provide
access to systems or data. We can provide no assurance that our current IT system or any updates or upgrades thereto and the current or future IT
systems of our distributors use or may use in the future, are fully protected against third-party intrusions, viruses, hacker attacks, information or data
theft or other similar threats. Legislative or regulatory action in these areas is also evolving, and we may be unable to adapt our IT systems or to
manage the IT systems of third parties to accommodate these changes. We have experienced and expect to continue to experience actual or attempted
cyber-attacks of our IT networks. Although none of these actual or attempted cyber-attacks has had a material adverse impact on our operations or
financial condition, we cannot guarantee that any such incidents will not have such an impact in the future.
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Risks Related to Our Intellectual Property
If we are unable to secure and maintain patent or other intellectual property protection for the intellectual property used in our products, our
ability to compete will be harmed.
Our commercial success depends, in part, on obtaining and maintaining patent and other intellectual property protection for the technologies
used in our products. The patent positions of medical device companies, including ours, can be highly uncertain and involve complex and evolving
legal and factual questions. Furthermore, we might in the future opt to license intellectual property from other parties. If we, or the other parties from
whom we may license intellectual property, fail to obtain and maintain adequate patent or other intellectual property protection for intellectual
property used in our products, or if any protection is reduced or eliminated, others could use the intellectual property used in our products, resulting
in harm to our competitive business position. In addition, patent and other intellectual property protection may not provide us with a competitive
advantage against competitors that devise ways of making competitive products without infringing any patents that we own or have rights to.
U.S. patents and patent applications may be subject to interference proceedings, and U.S. patents may be subject to re-examination
proceedings in the U.S. Patent and Trademark Office. Foreign patents may be subject to opposition or comparable proceedings in the corresponding
foreign patent offices. Any of these proceedings could result in loss of the patent or denial of the patent application, or loss or reduction in the scope
of one or more of the claims of the patent or patent application. Changes in either patent laws or in interpretations of patent laws may also diminish
the value of our intellectual property or narrow the scope of our protection. Interference, re-examination and opposition proceedings may be costly
and time consuming, and we, or the other parties from whom we might potentially license intellectual property, may be unsuccessful in defending
against such proceedings. Thus, any patents that we own or might license may provide limited or no protection against competitors. In addition, our
pending patent applications and those we may file in the future may have claims narrowed during prosecution or may not result in patents being
issued. Even if any of our pending or future applications are issued, they may not provide us with adequate protection or any competitive advantages.
Our ability to develop additional patentable technology is also uncertain.
Non-payment or delay in payment of patent fees or annuities, whether intentional or unintentional, may also result in the loss of patents or
patent rights important to our business. Many countries, including certain countries in Europe, have compulsory licensing laws under which a patent
owner may be compelled to grant licenses to other parties. In addition, many countries limit the enforceability of patents against other parties,
including government agencies or government contractors. In these countries, the patent owner may have limited remedies, which could materially
diminish the value of the patent. In addition, the laws of some foreign countries do not protect intellectual property rights to the same extent as do the
laws of the United States, particularly in the field of medical products and procedures.
If we are unable to prevent unauthorized use or disclosure of our proprietary trade secrets and unpatented know-how, our ability to compete will
be harmed.
Proprietary trade secrets, copyrights, trademarks and unpatented know-how are also very important to our business. We rely on a
combination of trade secrets, copyrights, trademarks, confidentiality agreements and other contractual provisions and technical security measures to
protect certain aspects of our technology, especially where we do not believe that patent protection is appropriate or obtainable. We require our office
holders, employees, consultants and distributers of our products and most third parties (such as contractors or clinical collaborators) to execute
confidentiality agreements in connection with their relationships with us. However, these measures may not be adequate to safeguard our proprietary
intellectual property and conflicts may, nonetheless, arise regarding ownership of inventions. Such conflicts may lead to the loss or impairment of our
intellectual property or to expensive litigation to defend our rights against competitors who may be better funded and have superior resources. Our
office holders, employees, consultants and other advisors may unintentionally or willfully disclose our confidential information to competitors. In
addition, confidentiality agreements may be unenforceable or may not provide an adequate remedy in the event of unauthorized disclosure. Enforcing
a claim that a third party illegally obtained and is using our trade secrets is expensive and time consuming, and the outcome is unpredictable.
Moreover, our competitors may independently develop equivalent knowledge, methods and know-how. Unauthorized parties may also attempt to
copy or reverse engineer certain aspects of our products that we consider proprietary. As a result, other parties may be able to use our proprietary
technology or information, and our ability to compete in the market would be harmed.
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We could become subject to patent and other intellectual property litigation that could be costly, result in the diversion of management’s
attention, require us to pay damages and force us to discontinue selling our products.
Our industry is characterized by competing intellectual property and a substantial amount of litigation over patent and other intellectual
property rights. Determining whether a product infringes a patent involves complex legal and factual issues, and the outcome of a patent litigation
action is often uncertain. No assurance can be given that patents containing claims covering our products, parts of our products, technology or
methods do not exist, have not been filed or could not be filed or issued. Furthermore, our competitors or other parties may assert that our products
and the methods we employ in the use of our products are covered by U.S. or foreign patents held by them. In addition, because patent applications
can take many years to issue and because publication schedules for pending applications vary by jurisdiction, there may be applications now pending
of which we are unaware and which may result in issued patents which our current or future products infringe. Also, because the claims of published
patent applications can change between publication and patent grant, there may be published patent applications with claims that we infringe. There
could also be existing patents that one or more of our products or parts may infringe and of which we are unaware. As the number of competitors in
the endoscopic procedure market grows, and as the number of patents issued in this area grows, the possibility of patent infringement claims against
us increases.
Infringement actions and other intellectual property claims and proceedings brought against or by us, whether with or without merit, may
cause us to incur substantial costs and could place a significant strain on our financial resources, divert the attention of management from our
business and harm our reputation. Some of our competitors may be able to sustain the costs of complex patent or intellectual property litigation more
effectively than we can because they have substantially greater resources.
We cannot be certain that we will successfully defend against allegations of infringement of patents and intellectual property rights of
others. In the event that we become subject to a patent infringement or other intellectual property lawsuit and if the other party’s patents or other
intellectual property were upheld as valid and enforceable and we were found to infringe the other party’s patents or violate the terms of a license to
which we are a party, we could be required to pay damages. We could also be prevented from selling our products unless we could obtain a license to
use technology or processes covered by such patents or will be able to redesign the product to avoid infringement. A license may not be available at
all or on commercially reasonable terms or we may not be able to redesign our products to avoid infringement. Modification of our products or
development of new products could require us to conduct clinical trials and to revise our filings with the applicable regulatory bodies, which would
be time consuming and expensive. In these circumstances, we may be unable to sell our products at competitive prices or at all, our business and
operating results could be harmed.
We may be subject to claims that our employees, consultants, or independent contractors have wrongfully used or disclosed confidential
information of third parties or, that our employees have wrongfully used or disclosed alleged trade secrets of their former employers.
Certain of our employees and personnel were previously employed at universities, medical institutions, or other biotechnology or
pharmaceutical companies. Although we try to ensure that our employees, consultants, and independent contractors do not use the proprietary
information or know-how of others in their work for us, we may be subject to claims that we or our employees, consultants, or independent
contractors have inadvertently or otherwise used or disclosed intellectual property, including trade secrets or other proprietary information, of any of
our employee’s former employer or other third parties. Litigation may be necessary to defend against these claims. If we fail in defending any such
claims, in addition to paying monetary damages, we may lose valuable intellectual property rights or personnel. Even if we are successful in
defending against such claims, litigation could result in substantial costs and be a distraction to management and other employees. Furthermore,
universities or medical institutions who employ some of our key employees and personnel in parallel to their engagement by us may claim that
intellectual property developed by such person is owned by the respective academic or medical institution under the respective institution intellectual
property policy or applicable law.
We may be subject to claims challenging the inventorship or ownership of our patents and other intellectual property.
We may be subject to claims that former employees, collaborators, or other third parties have an ownership interest in our patents or other
intellectual property. Ownership disputes may arise in the future, for example, from conflicting obligations of consultants or others who are involved
in developing our product candidates. Litigation may be necessary to defend against these and other claims challenging inventorship or ownership. If
we fail in defending any such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights, such as exclusive
ownership of, or right to use, valuable intellectual property. Such an outcome could have a material adverse effect on our business. Even if we are
successful in defending against such claims, litigation could result in substantial costs and be a distraction to management and other employees.
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Risks Related to Regulatory Compliance
If we fail to comply with the extensive government regulations relating to our business, we may be subject to fines, injunctions and other
penalties that could harm our business.
Our medical device products and operations are subject to extensive regulation by the FDA, pursuant to the Federal Food, Drug, and
Cosmetic Act, or FDCA, and various other federal, state and foreign governmental authorities. Government regulations and requirements specific to
medical devices are wide ranging and govern, among other things:
● design, development and manufacturing;
● testing, labeling and storage;
● clinical trials;
● product safety;
● marketing, sales and distribution;
● premarket clearance or approval;
● record keeping procedures;
● advertising and promotions; and
● product recalls and field corrective actions.
For the purpose of receiving FDA clearance through the 510(k) track, the applicant must prove, inter alia, that the device subject to the
application is substantially equivalent to one or more products which have already been approved by the FDA (predicate device). Additionally, the
applicant is required to provide a detailed description of the device, including specifications and technical information, labeling, instructions for use,
and the relevant indications for use of the device which is the subject of the application.
Clinical trials are usually not required under the 510(k) track, unless the FDA suspects the device subject to application contains new
technical characteristics requiring clinical results regarding safety and efficacy. Clinical trials whose results are attached to the application for
marketing approval are subject to advance approval by the FDA regarding the protocol of the trial of the Investigative Device Exemption (IDE) type.
Approval for marketing of medical devices in the United States can be submitted through a PMA, which is required when the device subject
to approval is not substantially equivalent to a previously approved device, particularly high risk life-saving devices.
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Though the PMA track consists of more stringent requirements than the 510(k) track and can be expensive and lengthy and entail significant
fees, unless exempt. The FDA’s 510(k) marketing clearance process usually takes from three to 12 months, but it can last longer. The process of
obtaining PMA approval is more expensive and uncertain than the 510(k) marketing clearance process. It generally takes from one to three years, or
even longer, from the time the PMA application is submitted to the FDA, until an approval is obtained. There is no assurance that we will be able to
obtain FDA clearance or approval for any new products on a timely basis, or at all.
In addition, we are subject to annual regulatory audits in order to maintain our quality system certifications, CE mark permissions, FDA
Clearance and Canadian medical device license. We do not know whether we will be able to continue to affix the CE mark for new or modified
products or that we will continue to meet the quality and safety standards required to maintain the permissions and license we have already received.
If we are unable to maintain our quality system certifications and permission to affix the CE mark to our products, we will no longer be able to sell
our products in member countries of the European Union or other areas of the world that require CE’s or FDA’s approval of medical devices. If we
are unable to maintain our quality system certifications and Canadian medical device license, we will not be able to sell our products in Canada.
Our medical device products and operations are also subject to regulation by the Medical Devices and Accessories Division in the Israeli
Ministry of Health, or AMAR, which is responsible for the registration of medical devices in Israel, issuance of import licenses and monitoring
marketing of medical equipment. We have received an AMAR approval in Israel.
Failure to obtain regulatory approval in additional foreign jurisdictions will prevent us from expanding the commercialization of our products.
To be able to market and sell our products in most other countries, we must obtain regulatory approvals and comply with the regulations of
those countries. These regulations, including the requirements for approvals and the time required for regulatory review, vary from country to
country. Obtaining and maintaining foreign regulatory approvals are expensive and time consuming, and we cannot be certain that we will receive
regulatory approvals in the various countries in which we plan to market our products. Failure to obtain or maintain regulatory approval in such
countries could have an adverse effect on our financial condition and results of operations.
Our products may be subject to product actions in the future that could harm our reputation, business operations and financial results.
The FDA and similar foreign health or governmental authorities have the authority to require an involuntary recall of commercialized
products in the event of material deficiencies or defects in design, or manufacturing or labeling. In the case of the FDA, the authority to require a
recall must be based on an FDA finding. In addition, foreign governmental bodies have the authority to require a recall of our products in the event of
material deficiencies or defects in design or manufacture. Product actions involving any of our products would divert managerial and financial
resources and have an adverse effect on our financial condition and results of operations.
If our products, or malfunction of our products, cause or contribute to adverse medical events such as death or a serious injury, we are required
to report to the FDA, and if we fail to do so, we would be subject to sanctions that would materially harm our business.
Our marketed products are subject to Medical Device Reporting, or MDR, obligations, which require that we report to the FDA any incident
in which our products may have caused or contributed to a death or serious injury, or in which our products malfunctioned and, if the malfunction
were to recur, it could likely cause or contribute to a death or serious injury. The timing of our obligation to report under the MDR regulations 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, especially if
it is not reported to us as an adverse event or if it is an adverse event that is unexpected. In addition, all manufacturers placing medical devices in the
European Union, Israel and Canada markets are legally bound to report any serious or potentially serious incidents involving devices they produce or
sell to the relevant authority in whose jurisdiction the incident occurred.
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If we fail to comply with our reporting obligations, the FDA or other agencies in whose jurisdiction the incident occurred, 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 of future products. Any corrective action, whether voluntary or involuntary, as well
as defending ourselves in a lawsuit, will require the dedication of our time and capital, distract management from operating our business, and may
materially harm our reputation and financial results.
We may be subject to fines, penalties or injunctions if we promote the use of our products for unapproved uses, resulting in damage to our
reputation and business.
Our promotional materials and training methods must comply with FDA and other applicable laws and regulations, including the prohibition
of the promotion of a medical device for a use that has not been cleared or approved by FDA. Use of a device outside its cleared or approved
indications is known as “off-label” use. We are not allowed to promote the MUSETM system for off label use. If the FDA determines that we promote
an off-label use, it could request that we modify our promotional materials or subject us to regulatory or enforcement actions, which could have an
adverse impact on our reputation and financial results. Similarly, a CE mark and an AMAR approval is invalidated if any part of the device is
modified or used in a manner that is outside of its intended use.
Regulatory reforms may adversely affect our ability to sell our products profitably.
From time to time, legislation is drafted and introduced in the United States, European Union or other countries in which we operate, that
could significantly change the statutory provisions governing the clearance or approval, manufacture and marketing of medical devices. In addition,
regulations and guidance may often be revised or reinterpreted by the regulatory authorities in ways that may significantly affect our business and our
products. It is impossible to predict whether legislative changes will be enacted or interpretations changed, and what the impact of such changes, if
any, may be.
On September 24, 2013, the FDA published a final rule establishing a unique device identification system, or the UDI Rule. The UDI Rule
mandates new labeling requirements that will impact our medical products. We will be required to meet compliance dates as early as September 24,
2015 for implantable devices (such as staples and cartridges), and additional compliance dates of September 24, 2016 and September 24, 2018 for all
other Class II (such as staplers) and reusable components (such as consoles), respectively. Compliance may involve increases costs and require new
equipment, quality systems and manufacturing processes. As of the date of this annual report on Form 20-F, we are on schedule with the UDI Rule
compliance.
If we fail to comply with federal or state fraud and abuse laws, we could be subject to criminal and civil penalties, loss of licenses and exclusion
from Medicare, Medicaid and other federal and state healthcare programs which could have a material adverse effect on our business, financial
condition and results of operations.
There are numerous United States federal and state laws pertaining to healthcare fraud and abuse, including anti-kickback laws, false claims,
and physician transparency laws. Section 1128B(b) of the Social Security Act, or the SSA, commonly referred to as the “Anti-Kickback Statute”,
prohibits the offer, payment, solicitation or receipt of any form of remuneration in return for referring, ordering, leasing, purchasing or arranging for
or recommending the ordering, purchasing or leasing of items or services payable by the Medicare and Medicaid programs or any other federally
funded healthcare program. The Anti-Kickback Statute is very broad in scope, and many of its provisions have not been uniformly or definitively
interpreted by courts or regulations. We have consulting or fee for services arrangements with physicians, hospitals and other entities, which may be
subject to scrutiny. To the extent we are found to not be in compliance, we could face potentially significant fines and penalties in addition to other
more significant sanctions and we may be required to restructure our operations.
Another development affecting the healthcare industry is the increased use of the federal Civil False Claims Act and, in particular, actions
brought pursuant to the False Claims Act’s “whistleblower” or “qui tam” provisions. The False Claims Act imposes liability on any person or entity
that, among other things, knowingly presents, or causes to be presented, a false or fraudulent claim for payment by a federal healthcare program. 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. In addition, various states have enacted false claim laws analogous to the Civil
False Claims Act.
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The federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, as amended, created two new federal crimes:
healthcare fraud and false statements relating to healthcare matters. Violations can result in criminal and civil liabilities.
Compliance with complex foreign and U.S. laws and regulations that apply to our international operations increases our cost of doing
business in international jurisdictions and could expose us or our employees to fines and penalties in the U.S. and abroad. These numerous and
sometimes conflicting laws and regulations include the Foreign Corrupt Practices Act. Many foreign countries have enacted similar laws addressing
fraud and abuse in the healthcare sector. The shifting commercial compliance environment and the need to build and maintain robust and expandable
systems to comply with different compliance requirements in multiple jurisdictions increases the possibility that a healthcare company may run afoul
of one or more of the requirements.
Violations of any fraud and abuse may result in significant fines, imprisonment and exclusion from the Medicare, Medicaid and other
federal or state healthcare programs which could have a material adverse effect on our business, financial condition and results of operations. 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, exclusion from federal healthcare programs, such as Medicare and Medicaid,
and the curtailment or restructuring of our operations. Dealing with investigations can be time and resource consuming and can divert management’s
attention from the business. In addition, settlements with law enforcement agencies have forced healthcare providers to agree to additional onerous
compliance and reporting requirements as part of a consent decree or corporate integrity agreement. Any violations of these laws, or any action
against us for violation of these laws, even if we successfully defend against it, could have a material adverse effect on our reputation, business and
financial condition. See “Item 4. Information on the Company - B. Business Overview - Health Care Laws and Regulations - Fraud and Abuse
Laws”.
The new disclosure rules regarding the use of conflict minerals may affect our relationships with suppliers and customers.
The Securities and Exchange Commission adopted disclosure rules in August 2012 for companies that use conflict minerals in their
products, with substantial supply chain verification requirements in the event that the materials come from, or could have come from, the Democratic
Republic of the Congo or adjoining countries. These new rules and verification requirements may impose additional costs on us and on our suppliers,
and limit the sources or increase the prices of materials used in our products. Among other things, this new rule could affect sourcing at competitive
prices and availability in sufficient quantities of certain minerals used in the manufacture of components that are incorporated into our products. In
addition, the number of suppliers who provide conflict-free minerals may be limited, and there may be material costs associated with complying with
the disclosure requirements, such as costs related to the process of determining the source of certain minerals used in our products, as well as costs of
possible changes to products, processes, or sources of supply as a consequence of such verification activities. We may not be able to sufficiently
verify the origins of the relevant minerals used in components manufactured by third parties through the procedures that we implement, and we may
encounter challenges to satisfy those customers who require that all of the components of our products be certified as conflict-free, which could place
us at a competitive disadvantage if we are unable to do so. If we are unable to certify that our products are conflict free, we may face challenges with
our customers, which could place us at a competitive disadvantage, and our reputation may be harmed.
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Risks Related to Our Operations in Israel
Our headquarters, manufacturing facilities, and most of our administrative offices are located in Israel and, therefore, our results may be
adversely affected by military instability in Israel.
Our offices are located in Israel. In addition, the majority of our officers and directors are residents of Israel. Accordingly, geopolitical or
military conditions in Israel and its region may directly or indirectly affect our business. Since the establishment of the State of Israel in 1948, a
number of armed conflicts have taken place between Israel and its neighboring countries. Any hostilities involving Israel or the interruption or
curtailment of trade between Israel and its trading partners could adversely affect our operations and results of operations. During July and August
2014, Hamas and Israel were engaged in a military conflict that caused damage and disrupted economic activities in Israel. During November 2012,
Hamas and Israel were engaged in an armed conflict and during the summer of 2006, Israel was engaged in an armed conflict with Hezbollah, a
Lebanese Islamist Shiite militia group and political party. These conflicts involved missile strikes against civilian targets in various parts of Israel,
including areas in which our employees and consultants are located, and negatively affected business conditions in Israel. Any armed conflicts,
terrorist activities or political instability in the region could adversely affect business conditions and could harm our results of operations and could
make it more difficult for us to raise capital. The conflict situation in Israel could cause situations where medical product certifying or auditing bodies
could not be able to visit our manufacturing facilities in order to review our certifications or clearances, thus possibly leading to temporary
suspensions or even cancellations of our clearances or manufacturing certifications. The conflict situation in Israel could also result in parties
with whom we have agreements involving performance in Israel claiming that they are not obligated to perform their commitments under those
agreements pursuant to force majeure provisions in such agreements. Furthermore, several countries, principally in the Middle East, restrict doing
business with Israel and Israeli companies, and additional countries may impose restrictions on doing business with Israel and Israeli companies if
hostilities in the region continue or intensify. Such restrictions may seriously limit our ability to sell our products to customers in those countries.
Although the Israeli government is currently committed to covering the reinstatement value of direct damages that are caused by terrorist
attacks or acts of war, we cannot assure that this government coverage will be maintained, or if maintained, will be sufficient to compensate us fully
for damages incurred. Any losses or damages incurred by us could have a material adverse effect on our business. Any armed conflicts would likely
negatively affect business conditions generally and could harm our results of operations.
Our operations may be disrupted as a result of the obligation of management or key personnel to perform military service.
Many of our male employees in Israel are obligated to perform one month, and in some cases more, of annual military reserve duty until
they reach the age of 40 (or older, for officers or reservists with certain occupations) and, in the event of a military conflict, may be called to active
duty. In response to increases in terrorist activity, there have been periods of significant call-ups of military reservists, and recently some of our
employees have been called up in connection with armed conflicts. It is possible that there will be military reserve duty call-ups in the future. Our
operations could be disrupted by the absence of a significant number of our employees or of one or more of our key employees. Such disruption
could materially adversely affect our business, financial condition and results of operations.
Exchange rate fluctuations between foreign currencies and the U.S. Dollar may negatively affect our earnings.
Our reporting and functional currency is the U.S. dollar. Our revenues are currently primarily payable in U.S. dollars and Euros and we
expect our future revenues to be denominated primarily in U.S. dollars and Euros. However, certain amount of our expenses are in NIS and as a
result, we are exposed to the currency fluctuation risks relating to the recording of our expenses in U.S. dollars. We may, in the future, decide to enter
into currency hedging transactions. These measures, however, may not adequately protect us from material adverse effects.
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The government tax benefits that we currently are entitled to receive require us to meet several conditions and may be terminated or reduced in
the future.
Some of our operations in Israel may entitle us to certain tax benefits under the Law for the Encouragement of Capital Investments, 5719-
1959, or the Investments Law, once we begin to produce revenues. From time to time, the government of Israel has considered reducing or
eliminating the tax benefits available to Benefitted Enterprise programs such as ours. If we do not meet the requirements for maintaining these
benefits, they may be reduced or cancelled and the relevant operations would be subject to Israeli corporate tax at the standard rate, which was set at
24% for 2017 (to be reduced to 23% in 2018 and thereafter). In addition to being subject to the standard corporate tax rate, we could be required to
refund any tax benefits that we have already received, plus interest and penalties thereon. Even if we continue to meet the relevant requirements, the
tax benefits that our current “Benefitted Enterprise” is entitled to may not be continued in the future at their current levels, or at all. If these tax
benefits were reduced or eliminated, the amount of taxes that we would have to pay if we produce revenues would likely increase, as all of our
operations would consequently be subject to corporate tax at the standard rate, which could adversely affect our results of operations. Additionally, if
we increase our activities outside of Israel, for example, by way of acquisitions, our increased activities may not be eligible for inclusion in Israeli tax
benefits programs. See “Item 10. Additional Information - E. Taxation.”
In the past, we received Israeli government grants for certain of our research and development activities. The terms of those grants may require
us, in addition to payment of royalties, to satisfy specified conditions in order to manufacture products and transfer technologies outside of Israel,
including increase of the amount of our liabilities in connection with such grants. If we fail to comply with the requirements of the Innovation
Law (as defined below), we may be required to pay penalties in addition to repayment of the grants, and may impair our ability to sell our
technology outside of Israel.
Some of our research and development efforts were financed in part through royalty-bearing grants, in an amount of $0.2 million that we
received from the Israeli Innovation Authority of the Israeli Ministry of Economy and Industry, or IIA. When know-how is developed using IIA
grants, the Encouragement of Research, Development and Technological Innovation in the Industry Law 5744-1984 (formerly known as the Law for
the Encouragement of Research and Development in Industry 5744-1984), or the Innovation Law and the regulations thereunder, restricts our ability
to manufacture products and transfer technology and know-how, developed as a result of IIA funding, outside of Israel.
Under the Innovation Law and the regulations thereunder, a recipient of IIA grants is required to return the grants by the payment of
royalties of 3% to 6% on the revenues generated from the sale of products (and related services) developed (in whole or in part) under IIA program
up to the total amount of the grants received from IIA, linked to the U.S. dollar and bearing interest at an annual rate of LIBOR applicable to U.S.
dollar deposits, as published on the first business day of each calendar year.
Transfer of IIA funded know-how and related intellectual property rights outside of Israel, including by way of license for research and
development purpose requires pre-approval by IIA and imposes certain conditions, including, requirement of payment of a redemption fee calculated
according to the formula provided in the Innovation Law which takes into account, among others, the consideration for such know-how paid to us in
the transaction in which the technology is transferred, research and development expenses, the amount of IIA support, the time of completion of IIA
supported research project and other factors, while the redemption fee will not exceed 600% of the grants amount plus interest. No assurance can be
given that approval to any such transfer, if requested, will be granted and what will be the amount of the redemption fee payable.
Transfer of IIA funded know-how and related intellectual property rights to an Israeli company requires a pre-approval by IIA and may be
granted if the recipient undertakes to fulfil all the liabilities to IIA and undertakes to abide by the provisions of Innovation Law, including the
restrictions on the transfer of know-how and the manufacturing rights outside of Israel and the obligation to pay royalties (note that there will be an
obligation to pay royalties to IIA from the income received by us in connection with such transfer transaction as part of the royalty payment
obligation). No assurance can be given that approval to any such transfer, if requested, will be granted.
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In addition, the products may be manufactured outside Israel by us or by another entity only if prior approval is received from IIA (such
approval is not required for the transfer outside of Israel of less than 10% of the manufacturing capacity in the aggregate, and in such event only a
notice to IIA is required). As a condition for obtaining approval to manufacture outside Israel, we would be required to pay increased royalties, which
usually amount to 1% in addition to the standard royalties rate, and also the total amount of our liability to IIA will be increased to between 120%
and 300% of the grants we received from IIA, depending on the manufacturing volume that is performed outside Israel (less royalties already paid to
IIA). This restriction may impair our ability to outsource manufacturing rights abroad, however, does not restrict export of our products that
incorporate IIA funded know-how.
A company also has the option of declaring in its IIA grant application its intention to exercise a portion of the manufacturing capacity
abroad, thus avoiding the need to obtain additional approval. Such declaration may affect the increased royalties cap.
The restrictions under the Innovation Law (such as with respect to transfer of manufacturing rights abroad or the transfer of IIA funded
know-how and related intellectual property rights abroad) will continue to apply even our liabilities to IIA in full and will cease to exist only upon
payment of the redemption fee described above.
Furthermore, in the event that we undertake a transaction involving the transfer to a non-Israeli entity of technology developed with IIA
funding pursuant to a merger or similar transaction, the consideration available to our shareholders may be reduced by the amounts we are required to
pay to IIA. Any approval, if given, will generally be subject to additional financial obligations. Failure to comply with the requirements under the
Innovation Law may subject us to mandatory repayment of grants received by us (together with interest and penalties), as well as expose us to
criminal proceedings.
In May 2017 IIA issued new rules for licensing know how developed with IIA funding outside of Israel, or the Licensing Rules, allowing us
to enter into licensing arrangements or grant other rights in know-how developed under IIA programs outside of Israel, subject to the prior consent of
IIA and payment of license fees to IIA, calculated in accordance with the Licensing Rules. The payment of the license fees will not discharge us from
the obligations to pay royalties or other payments to IIA.
We were members of an IIA-related consortium, in which certain of our technologies were developed. We are required to provide licenses to the
other members of the consortium to use such technologies for no consideration, which could reduce our profitability.
Certain of our miniaturized imaging equipment may be based on technological models developed as part of the Bio Medical Photonic
Consortium in the framework of Magnet program of the IIA. The property rights in and to “new information” (as such term is defined therein) which
has been developed by a member of the Consortium, in the framework of a research and development program conducted as part of the Consortium,
belongs solely to the Consortium member that developed it. The developing member is obligated to provide the other members in the Consortium a
non-sublicensable license to use of the “new information” developed by such member, without consideration, provided that the other members do not
transfer such “new information” to any entity which is not a member of the Consortium, without the consent of such member. No royalties from this
funding are payable to the Israeli government, however, the provisions of the Innovation Law and related regulations regarding, inter alia, the
restrictions on the transfer of know-how outside of Israel do apply, mutatis mutandis.
Provisions of Israeli law and our articles of association may delay, prevent or otherwise impede a merger with, or an acquisition of, our company,
which could prevent a change of control, even when the terms of such a transaction are favorable to us and our shareholders.
Israeli corporate law regulates mergers, requires tender offers for acquisitions of shares above specified thresholds, requires special
approvals for transactions involving directors, officers or significant shareholders and regulates other matters that may be relevant to such types of
transactions. For example, a merger may not be consummated unless at least 50 days have passed from the date on which a merger proposal is filed
by each merging company with the Israel Registrar of Companies and at least 30 days have passed from the date on which the shareholders of both
merging companies have approved the merger. In addition, a majority of each class of securities of the target company must approve a merger.
Moreover, a tender offer for all of a company’s issued and outstanding shares can only be completed if the acquirer receives positive responses from
the holders of at least 95% of the issued share capital. Completion of the tender offer also requires approval of a majority of the offerees that do not
have a personal interest in the tender offer, unless, following consummation of the tender offer, the acquirer would hold at least 98% of the
Company’s outstanding shares. Furthermore, the shareholders, including those who indicated their acceptance of the tender offer, may, at any time
within six months following the completion of the tender offer, claim that the consideration for the acquisition of the shares does not reflect their fair
market value, and petition an Israeli court to alter the consideration for the acquisition accordingly, unless the acquirer stipulated in its tender offer
that a shareholder that accepts the offer may not seek such appraisal rights, and the acquirer or the company published all required information with
respect to the tender offer prior to the tender offer’s response date.
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Furthermore, Israeli tax considerations may make potential transactions unappealing to us or to our shareholders whose country of residence
does not have a tax treaty with Israel exempting such shareholders from Israeli tax.
These and other similar provisions could delay, prevent or impede an acquisition of us or our merger with another company, even if such an
acquisition or merger would be beneficial to us or to our shareholders.
It may be difficult to enforce a judgment of a U.S. court against us and our officers and directors and the Israeli experts named in this annual
report on Form 20-F in Israel or the U.S., to assert United States securities laws claims in Israel or to serve process on our officers and directors
and these experts.
We are incorporated in Israel. Certain of our executive officers and directors reside in Israel and most of our assets and most of the assets of
these persons are located outside of the United States. Therefore, a judgment obtained against us, or any of these persons in the United States,
including one based on the civil liability provisions of the U.S. federal securities laws, may not be collectible in the United States and may not
necessarily be enforced by an Israeli court. It may also be difficult to affect service of process on these persons in the United States or to assert
United States securities law claims in original actions instituted in Israel.
Even if an Israeli court agrees to hear such claim, it may determine that Israeli law, and not U.S. law is applicable to the claim. Under Israeli
law, if U.S. law is found to be applicable to such claim, the content of applicable U.S. law must be proven as a fact by expert witnesses, which can be
a time consuming and costly process, and certain matters of procedure would also be governed by Israeli law. There is little binding case law in Israel
that addresses the matters.
The rights and responsibilities of a shareholder will be governed by Israeli law which differs in some material respects from the rights and
responsibilities of shareholders of U.S. companies.
The rights and responsibilities of the holders of our ordinary shares are governed by our articles of association and by Israeli law. These
rights and responsibilities differ in some material respects from the rights and responsibilities of shareholders in typical U.S.-registered corporations.
In particular, a shareholder of an Israeli company has certain duties to act in good faith and fairness towards the company and other shareholders, and
to refrain from abusing its power in the company. There is limited case law available to assist us in understanding the nature of this duty or the
implications of these provisions. These provisions may be interpreted to impose additional obligations and liabilities on holders of our ordinary
shares that are not typically imposed on shareholders of U.S. corporations.
The ability of any Israeli company to pay dividends is subject to Israeli law and the amount of cash dividends payable may be subject to
devaluation in the Israeli currency.
The ability of an Israeli company to pay dividends is governed by Israeli law, which provides that cash dividends may be paid only out of
retained earnings or earnings derived over the two most recent fiscal years, whichever is higher, as determined for statutory purposes in Israeli
currency, provided that there is no reasonable concern that payment of a dividend will prevent a company from satisfying its existing and foreseeable
obligations as they become due. In the event of a devaluation of the Israeli currency against the U.S. dollar, the amount in U.S. dollars available for
payment of cash dividends out of prior years’ earnings will decrease.
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The termination or reduction of tax and other incentives that the Israeli Government provides to domestic companies may increase the costs
involved in operating a company in Israel.
The Israeli government currently provides major tax and capital investment incentives to domestic companies, as well as grant and loan
programs relating to research and development and marketing and export activities. In recent years, the Israeli Government has reduced the benefits
available under these programs and the Israeli Governmental authorities have indicated that the government may in the future further reduce or
eliminate the benefits of those programs. We currently take advantage of these programs. There is no assurance that such benefits and programs
would continue to be available in the future to us. If such benefits and programs were terminated or further reduced, it could have an adverse effect
on our business, operating results and financial condition.
We may become subject to claims for remuneration or royalties for assigned service invention rights by our employees, which could result in
litigation and adversely affect our business.
A significant portion of our intellectual property has been developed by our employees in the course of their employment for us. Under the
Israeli Patent Law, 5727-1967, or the Patent Law, inventions conceived by an employee in the course and as a result of or arising from his or her
employment with a company are regarded as “service inventions,” which belong to the employer, absent a specific agreement between the employee
and employer giving the employee service invention rights. The Patent Law also provides that if there is no such agreement between an employer and
an employee, the Israeli Compensation and Royalties Committee, or the Committee, a body constituted under the Patent Law, shall determine
whether the employee is entitled to remuneration for his inventions. Recent case law clarifies that the right to receive consideration for “service
inventions” can be waived by the employee and that in certain circumstances, such waiver does not necessarily have to be explicit. The Committee
will examine, on a case-by-case basis, the general contractual framework between the parties, using interpretation rules of the general Israeli contract
laws. Further, the Committee has not yet determined one specific formula for calculating this remuneration (but rather uses the criteria specified in
the Patent Law). Although we generally enter into assignment-of-invention agreements with our employees pursuant to which such individuals assign
to us all rights to any inventions created in the scope of their employment or engagement with us, we may face claims demanding remuneration in
consideration for assigned inventions. As a consequence of such claims, we could be required to pay additional remuneration or royalties to our
current and/or former employees, or be forced to litigate such claims, which could negatively affect our business.
Risks Related to an Investment in the Securities
We may be a passive foreign investment company, or PFIC, for U.S. federal income tax purposes in 2017 or in any subsequent year. This may
result in adverse U.S. federal income tax consequences for U.S. taxpayers that are holders of our securities.
We will be treated as a PFIC for U.S. federal income tax purposes in any taxable year in which either (1) at least 75% of our gross income is
“passive income” or (2) on average at least 50% of our assets by value produce passive income or are held for the production of passive income.
Passive income for this purpose generally includes, among other things, certain dividends, interest, royalties, rents and gains from commodities and
securities transactions and from the sale or exchange of property that gives rise to passive income. Passive income also includes amounts derived by
reason of the temporary investment of funds, including those raised in a public offering. In determining whether a non-U.S. corporation is a PFIC, a
proportionate share of the income and assets of each corporation in which it owns, directly or indirectly, at least a 25% interest (by value) is taken
into account. We do not believe we were a PFIC for 2017 or 2016 but there can be no assurance that we were not a PFIC in those years and will not
be a PFIC in subsequent years, as our operating results for any such years may cause us to be a PFIC. If we are a PFIC in 2017, or any subsequent
year, and a U.S. shareholder does not make an election to treat us as a “qualified electing fund,” or QEF, or make a “mark-to-market” election, then
“excess distributions” to a U.S. shareholder, and any gain realized on the sale or other disposition of our securities will be subject to special rules.
Under these rules: (1) the excess distribution or gain would be allocated ratably over the U.S. shareholder’s holding period for the securities; (2) the
amount allocated to the current taxable year and any period prior to the first day of the first taxable year in which we were a PFIC would be taxed as
ordinary income; and (3) the amount allocated to each of the other taxable years would be subject to tax at the highest rate of tax in effect for the
applicable class of taxpayer for that year, and an interest charge for the deemed deferral benefit would be imposed with respect to the resulting tax
attributable to each such other taxable year. In addition, if the U.S. Internal Revenue Service, or the IRS, determines that we are a PFIC for a year
with respect to which we have determined that we were not a PFIC, it may be too late for a U.S. shareholder to make a timely QEF or mark-to-
market election. U.S. shareholders who hold or have held our securities during a period when we were or are a PFIC will be subject to the foregoing
rules, even if we cease to be a PFIC in subsequent years, subject to exceptions for U.S. shareholders who made a timely QEF or mark-to-market
election. A U.S. shareholder can make a QEF election by completing the relevant portions of and filing IRS Form 8621 in accordance with the
instructions thereto. If applicable, upon request, we will annually furnish U.S. shareholders with information needed in order to complete IRS Form
8621 (which form would be required to be filed with the IRS on an annual basis by the U.S. shareholder) and to make and maintain a valid QEF
election for any year in which we or any of our subsidiaries are a PFIC.
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The market prices of our securities are subject to fluctuation, which could result in substantial losses by our investors.
The stock market in general and the market prices of our ordinary shares on Tel Aviv Stock Exchange Ltd., or the TASE, and the ADSs on
the NASDAQ, in particular, are or will be subject to fluctuation, and changes in these prices may be unrelated to our operating performance. We
anticipate that the market prices of our securities will continue to be subject to wide fluctuations. The market price of our securities are, and will be,
subject to a number of factors, including:
● announcements of technological innovations or new products by us or others;
● announcements by us of significant acquisitions, strategic partnerships, in-licensing, out-licensing, joint ventures or capital
commitments;
● expiration or terminations of licenses, research contracts or other collaboration agreements;
● public concern as to the safety of our equipment we sell;
● general market conditions;
● the volatility of market prices for shares of medical devices companies generally;
● developments concerning intellectual property rights or regulatory approvals;
● developments concerning standard-of-care in endoscopic procedures;
● variations in our and our competitors’ results of operations;
● changes in revenues, gross profits and earnings announced by the company;
● changes in estimates or recommendations by securities analysts, if our ordinary shares or the ADSs are covered by analysts;
● changes in government regulations or patent decisions; and
● general market conditions and other factors, including factors unrelated to our operating performance.
These factors may materially and adversely affect the market price of our securities s and result in substantial losses by our investors.
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Raising additional capital by issuing securities may cause dilution to existing shareholders.
We may seek additional capital through a combination of private and public equity offerings, debt financings and collaborations and
strategic and licensing arrangements. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the
ownership interest will be diluted, and the terms of any such offerings may include liquidation or other preferences that may adversely affect the then
existing shareholders rights. Debt financing, if available, would result in increased fixed payment obligations and may involve agreements that
include covenants limiting or restricting our ability to take specific actions such as incurring debt or making capital expenditures. If we raise
additional funds through collaboration, strategic alliance or licensing arrangements with third parties, we may have to relinquish valuable rights to
our technologies, future revenue streams or product candidates, or grant licenses on terms that are not favorable to us.
We do not know whether a market for the ADSs and ordinary shares will be sustained or what the trading price of the ADSs and ordinary shares
will be and as a result it may be difficult for you to sell your ADSs or ordinary shares.
Although our ADSs trade on NASDAQ and our ordinary shares trade on TASE, an active trading market for the ADSs or ordinary shares
may not be sustained. It may be difficult for you to sell your ADSs or ordinary shares without depressing the market price for the ADSs or ordinary
shares. As a result of these and other factors, you may not be able to sell your ADSs or ordinary shares. Further, an inactive market may also impair
our ability to raise capital by selling ADSs and ordinary Shares and may impair our ability to enter into strategic partnerships or acquire companies or
products by using our ordinary shares as consideration.
Future sales of our securities could reduce their market price.
Substantial sales of our securities, either on the TASE or on NASDAQ, may cause the market price of our securities to decline. All of our
outstanding ordinary shares are registered and available for sale in Israel. Sales by us or our security holders of substantial amounts of our securities,
or the perception that these sales may occur in the future, could cause a reduction in the market price of our securities.
The issuance of any additional ordinary shares, ADSs, warrants or any securities that are exercisable for or convertible into our ordinary
shares or ADSs, may have an adverse effect on the market price of our securities and will have a dilutive effect on our existing shareholders and
holders of ADSs.
Holders of ADSs may not receive the same distributions or dividends as those we make to the holders of our ordinary shares, and, in some limited
circumstances, you may not receive dividends or other distributions on our ordinary shares and you may not receive any value for them, if it is
illegal or impractical to make them available to you.
The depositary for the ADSs has agreed to pay to you the cash dividends or other distributions it or the custodian receives on ordinary shares
or other deposited securities underlying the ADSs, after deducting its fees and expenses. You will receive these distributions in proportion to the
number of ordinary shares your ADSs represent. However, the depositary is not responsible if it decides that it is unlawful or impractical to make a
distribution available to any holders of ADSs. For example, it would be unlawful to make a distribution to a holder of ADSs if it consists of securities
that require registration under the Securities Act of 1933, as amended, or the Securities Act, but that are not properly registered or distributed under
an applicable exemption from registration. In addition, conversion into U.S. dollars from foreign currency that was part of a dividend made in respect
of deposited ordinary shares may require the approval or license of, or a filing with, any government or agency thereof, which may be unobtainable.
In these cases, the depositary may determine not to distribute such property and hold it as “deposited securities” or may seek to effect a substitute
dividend or distribution, including net cash proceeds from the sale of the dividends that the depositary deems an equitable and practicable substitute.
We have no obligation to register under U.S. securities laws any ADSs, ordinary shares, rights or other securities received through such distributions.
We also have no obligation to take any other action to permit the distribution of ADSs, ordinary shares, rights or anything else to holders of ADSs. In
addition, the depositary may withhold from such dividends or distributions its fees and an amount on account of taxes or other governmental charges
to the extent the depositary believes it is required to make such withholding. This means that you may not receive the same distributions or dividends
as those we make to the holders of our ordinary shares, and, in some limited circumstances, you may not receive any value for such distributions or
dividends if it is illegal or impractical for us to make them available to you. These restrictions may cause a material decline in the value of the ADSs.
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Holders of ADSs must act through the depositary to exercise their rights as shareholders of our company.
Holders of our ADSs do not have the same rights of our shareholders and may only exercise the voting rights with respect to the underlying
ordinary shares in accordance with the provisions of the Deposit Agreement. Under Israeli law and our articles of association, the minimum notice
period required to convene a shareholders meeting is no less than 21 or 35 calendar days, depending on the proposals on the agenda for the
shareholders meeting. When a shareholder meeting is convened, holders of ADSs may not receive sufficient notice of a shareholders’ meeting to
permit them to withdraw their ordinary shares to allow them to cast their vote with respect to any specific matter. In addition, the Depositary and its
agents may not be able to send voting instructions to holders of ADSs or carry out their voting instructions in a timely manner. We will make all
reasonable efforts to cause the Depositary to extend voting rights to holders of the ADSs in a timely manner, but we cannot assure holders that they
will receive the voting materials in time to ensure that they can instruct the Depositary to vote their ordinary shares underlying the ADSs.
Furthermore, the Depositary and its agents will not be responsible for any failure to carry out any instructions to vote, for the manner in which any
vote is cast or for the effect of any such vote. As a result, holders of ADSs may not be able to exercise their right to vote and they may lack recourse
if their ordinary shares underlying the ADSs are not voted as they requested. In addition, in the capacity as a holder of ADSs, they will not be able to
call a shareholders’ meeting.
We do not intend to pay any cash dividends on our ordinary shares in the foreseeable future and, therefore, any return on your investment in
our securities must come from increases in the value and trading price of our securities.
We have never declared or paid cash dividends on our securities and do not anticipate that we will pay any cash dividends on our securities
in the foreseeable future, therefore, any return on your investment in our securities must come from increases in the value and trading price of our
securities.
We intend to retain our earnings to finance the development and expenses of our business. Any future determination relating to our dividend
policy will be at the discretion of our board of directors and will depend on a number of factors, including future earnings, our financial condition,
operating results, contractual restrictions, capital requirements, business prospects, applicable Israeli law and other factors our board of directors may
deem relevant.
We are an “emerging growth company,” and the reduced disclosure requirements applicable to emerging growth companies may make our
securities less attractive to investors.
We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, and may remain
an emerging growth company for up to five years. For so long as we remain an emerging growth company, we are permitted and intend to rely on
exemptions from certain disclosure requirements that are applicable to other public companies that are not emerging growth companies. These
exemptions include 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. We cannot predict
whether investors will find our securities less attractive if we rely on these exemptions. If some investors find our securities less attractive as a result,
there may be a less active trading market for our securities and the price of our securities may be more volatile.
In addition, the JOBS Act provides that an emerging growth company can take advantage of an extended transition period for complying
with new or revised accounting standards. This allows an emerging growth company to delay the adoption of certain accounting standards until those
standards would otherwise apply to private companies. We are choosing to “opt out” of this provision and, as a result, we will comply with new or
revised accounting standards as required when they are adopted. This decision to opt out of the extended transition period is irrevocable.
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If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, our share price and
trading volume could decline.
The trading market for our securities will depend on the research and reports that securities or industry analysts publish about us or our
business. We do not have any control over these analysts. There can be no assurance that analysts will cover us, or provide favorable coverage. If one
or more analysts downgrade our share or change their opinion of our securities, the price of our securities would likely decline. In addition, if one or
more analysts cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which could
cause our share price or trading volume to decline.
Our securities are traded on different markets and this may result in price variations.
Our ordinary shares have been traded on the TASE since February 2006 and our ADSs have been traded on the NASDAQ since August 5,
2015. Trading in our securities on these markets takes place in different currencies (U.S. dollars on the NASDAQ 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). The trading
prices of these securities on these two markets may differ due to these and other factors. Any decrease in the price of our securities on one of these
markets could cause a decrease in the trading price of our securities on the other market.
We incur additional increased costs as a result of the listing of the ADSs for trading on the NASDAQ, and our management is required to devote
substantial time to new compliance initiatives and reporting requirements.
As a public company in the United States, we incur significant accounting, legal and other expenses as a result of the listing of the ADSs on
the NASDAQ. These include costs associated with corporate governance requirements of the SEC and the Marketplace Rules of the NASDAQ, as
well as requirements under Section 404 and other provisions of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act. These rules and
regulations increase our legal and financial compliance costs, introduce costs such as investor relations, stock exchange listing fees and shareholder
reporting, and make some activities more time consuming and costly. Any future changes in the laws and regulations affecting public companies in
the United States and Israel, including Section 404 and other provisions of the Sarbanes-Oxley Act, the rules and regulations adopted by the SEC and
the rules of the NASDAQ Stock Market, as well as compliance with the applicable full Israeli reporting requirements which currently apply to us as a
company listed on the TASE (for so long as they apply to us, pending shareholder approval by special majority of a change to our TASE reporting
requirements to allow us to report to the TASE in the same manner in which we report to the SEC), may result in increased costs to us as we respond
to such changes. These laws, rules and regulations could make it more difficult or more costly for us to obtain certain types of insurance, including
director and officer liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to
obtain the same or similar coverage. The impact of these requirements could also make it more difficult for us to attract and retain qualified persons
to serve on our board of directors, our board committees or as executive officers.
As a foreign private issuer, we are permitted to follow certain home country corporate governance practices instead of applicable SEC and
NASDAQ requirements, which may result in less protection than is accorded to investors under rules applicable to domestic issuers.
As a foreign private issuer, we are permitted to follow certain home country corporate governance practices instead of those otherwise
required under the rules of the NASDAQ for domestic issuers. Following our home country governance practices as opposed to the requirements that
would otherwise apply to a U.S. company listed on the NASDAQ, may provide less protection than is accorded to investors under the rules of the
NASDAQ applicable to domestic issuers. For more information, see “Item 16G. Corporate Governance - Nasdaq Stock Market Listing Rules and
Home Country Practices.”
In addition, as a foreign private issuer, we are exempt from the rules and regulations under the Securities Exchange Act of 1934, as
amended, or the Exchange Act, related to the furnishing and content of proxy statements, and our officers, directors and principal shareholders are
exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the Exchange Act. In addition, we are not required
under the Exchange Act to file annual, quarterly and current reports and financial statements with the SEC as frequently or as promptly as domestic
companies whose securities are registered under the Exchange Act.
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We may lose our foreign private issuer status in the future, which could result in significant additional costs and expenses.
We are a foreign private issuer, as such term is defined in Rule 405 under the Securities Act, and therefore, we are not required to comply
with all the periodic disclosure and current reporting requirements of the Exchange Act and related rules and regulations. Under Rule 405, the
determination of foreign private issuer status is made annually on the last business day of an issuer’s most recently completed second fiscal quarter
and, accordingly, the next determination will be made with respect to us on June 30, 2018.
In the future, we would lose our foreign private issuer status if a majority of our shareholders, directors or management are U.S. citizens or
residents and we fail to meet additional requirements necessary to avoid loss of foreign private issuer status. Although we have elected to comply
with certain U.S. regulatory provisions, our loss of foreign private issuer status would make such provisions mandatory. The regulatory and
compliance costs to us under U.S. securities laws as a U.S. domestic issuer may be significantly higher. If we are not a foreign private issuer, we will
be required to file periodic reports and registration statements on U.S. domestic issuer forms with the U.S. Securities and Exchange Commission, or
the SEC, which are more detailed and extensive than the forms available to a foreign private issuer. For example, the annual report on Form 10-K
requires domestic issuers to disclose executive compensation information on an individual basis with specific disclosure regarding the domestic
compensation philosophy, objectives, annual total compensation (base salary, bonus, equity compensation) and potential payments in connection
with change in control, retirement, death or disability, while the SEC forms applicable to foreign private issuers permit them to disclose
compensation information on an aggregate basis if executive compensation disclosure on an individual basis is not required or otherwise has not been
provided in the issuer’s home jurisdiction. We disclose individual compensation information, but this disclosure is not as comprehensive as that
required of U.S. domestic issuers since we are not required to disclose more detailed information in Israel. We intend to continue this practice as long
as it is permitted under the SEC’s rules and Israel’s rules do not require more detailed disclosure. We will also have to mandatorily comply with U.S.
federal proxy requirements, and our officers, directors and principal shareholders will become subject to the short-swing profit disclosure and
recovery provisions of Section 16 of the Exchange Act. We may also be required to modify certain of our policies to comply with good governance
practices associated with U.S. domestic issuers. Such conversion and modifications will involve additional costs. In addition, we may lose our ability
to rely upon exemptions from certain corporate governance requirements on U.S. stock exchanges that are available to foreign private issuers.
If we are unable to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act of 2002 as they apply to a foreign private issuer that is
listing on a U.S. exchange for the first time, or our internal control over financial reporting is not effective, the reliability of our financial
statements may be questioned and our securities price may suffer.
Section 404 of the Sarbanes-Oxley Act requires a company subject to the reporting requirements of the U.S. securities laws to do a
comprehensive evaluation of its and its subsidiaries’ internal control over financial reporting. As such, we are required to document and test our
internal control procedures and our management is required to assess and issue a report concerning our internal control over financial reporting. In
addition, when applicable to comply with this statute, our independent registered public accounting firm may be required to issue an opinion on the
effectiveness of our internal control over financial reporting at a later date.
The continuous process of strengthening our internal controls and complying with Section 404 is complicated and time-consuming.
Furthermore, as our business continues to grow both domestically and internationally, our internal controls will become more complex and will
require significantly more resources and attention to ensure our internal controls remain effective overall. During the course of its testing, our
management may identify weaknesses or deficiencies, which may not be remedied in a timely manner. If our management cannot favorably assess
the effectiveness of our internal controls over financial reporting, or if our independent registered public accounting firm identifies material
weaknesses in our internal control, investor confidence in our financial results may weaken, and the market price of our securities may suffer.
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The right of the investors of our December 2016 offering to participate in future financings of our securities could impair our ability to raise
capital.
Pursuant to the terms of the securities purchase agreements relating to an offering of our ADSs and warrants which closed on December 6,
2016, we granted the purchasers in such offering an eighteen month contractual preemptive right to participate in future financings, subject to certain
exceptions, in an amount equal to up to 50% of the amount raised in such future financings. The existence of such preemptive rights, or the exercise
of such rights, may deter potential investors from providing us needed financing, or may deter investment banks from working with us. This may
have a material adverse effect on our ability to finance our company which, in turn, could lead to our inability to continue our business.
We may not satisfy NASDAQ’s requirements for continued listing. If we cannot satisfy these requirements, NASDAQ could delist our securities.
Our ADSs are listed on the NASDAQ under the symbol “MDGS”. To continue to be listed on NASDAQ, we are required to satisfy a
number of conditions, including a minimum bid price of at least $1.00 per share, a market value of our publicly held shares of at least $1 million and
shareholders’ equity of at least $2.5 million.
If we are delisted from NASDAQ, trading in our securities may be conducted, if available, on the OTC Markets or, if available, via another
market. In the event of such delisting, our shareholders would likely find it significantly more difficult to dispose of, or to obtain accurate quotations
as to the value of our securities, and our ability to raise future capital through the sale of our securities could be severely limited. In addition, if our
securities were delisted from NASDAQ, our ADSs could be considered a “penny stock” under the U.S. federal securities laws. Additional regulatory
requirements apply to trading by broker-dealers of penny stocks that could result in the loss of an effective trading market for our securities.
Moreover, if our securities were delisted from NASDAQ, we will no longer be exempt from certain provision of the Israeli Securities Law, and
therefore will have increased disclosure requirements.
ITEM 4.
INFORMATION ON THE COMPANY
A.
History and Development of the Company
Our legal and commercial name is Medigus Ltd. We were incorporated in the State of Israel on December 9, 1999, as a private company
pursuant to the Israeli Companies Ordinance (New Version), 1983. In February 2006, we completed our initial public offering in Israel, and our
ordinary shares have since traded on the TASE, under the symbol “MDGS”. In May 2015, we listed the ADSs on NASDAQ, and since August 2015
the ADSs have been traded on the NASDAQ under the symbol “MDGS”. Each ADS represents 50 ordinary shares.
We are a public limited liability company and operate under the provisions of the Companies Law. Our registered office and principal place
of business are located at Omer Industrial Park, No. 7A, P.O. Box 3030, Omer 8496500, Israel and our telephone number in Israel is + 972 (72) 260
2200. Our website address is http://www.medigus.com. The information contained on our website or available through our website is not
incorporated by reference into and should not be considered a part of this Annual Report on Form 20-F.
On July 22, 2007, we formed a wholly owned subsidiary in the State of Delaware under the name Medigus USA LLC, or the U.S.
Subsidiary. Our U.S. Subsidiary currently employs only our Chief Executive Officer, and on October 1, 2013, a service agreement was executed
between the Company and the U.S. Subsidiary whereby the U.S. Subsidiary would render services to the Company against reimbursement of its
direct expenses as well as a premium at a reasonable rate.
On November 6, 2015, we effected a 10:1 reverse share split such that every 10 ordinary shares par value NIS 0.01 were converted into one
ordinary share par value NIS 0.10, without changing the rights attached to each share. In connection with the reverse share split, our share option
plans and outstanding options and warrants to purchase our ordinary shares were also adjusted to reflect the reverse share split and the ratio of the
ADSs was adjusted to five ordinary shares per ADS.
On March 15, 2017, we effected a change in the ratio of ordinary shares per ADS from five ordinary shares per ADS to 50 ordinary shares
per ADS. The change in the ordinary shares ratio for the ADSs had the same effect as a 1-for-10 reverse stock split of the ADSs.
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Based on the projected cash flows, cash and cash equivalents and short-term deposit balances as of December 31, 2017, which totaled to
USD 2.8 million and USD 3.5 million, respectively, our management is of the opinion that without further fund raising it will not have sufficient
resources to enable it to continue its operating activities including the development, manufacturing and marketing of its products for a period of at
least 12 months from the date of approval of the financial statements. As a result, there is substantial doubt about our ability to continue as a going
concern. For more information see “Item 5. Operating and Financial Review and Prospects―Operating Capital and Capital Expenditure
Requirements and Note 1b to our financial statements.
To date, substantially all of our revenues have derived from our miniaturized imaging equipment for use within the medical and
industrial fields. However, we are currently focused on the marketing and continued development of our MUSE™ product as described below.
We engage in the development, production and marketing of innovative medical devices, including flexible surgical staplers with direct
vision systems for minimally invasive medical procedures. Our expertise is in the development, production and marketing of innovative endoscopic
surgical devices for the treatment of Gastroesophageal Reflux Disease, or GERD, a common ailment which is predominantly treated by medical
therapy (e.g., proton pump inhibitors) or in more chronic cases, conventional open or laparoscopic surgery. Our FDA-cleared and CE-marked
product, known as the MUSE™ System, enables a trans-orifice procedure, or scar less procedure through a natural opening in the body, that requires
no incision for the treatment of GERD by reconstruction of the esophageal valve where the stomach and the esophagus meet. We believe this
procedure offers a safe, effective and economical alternative to the current surgical methods of GERD treatment. In addition, this trans-orifice
approach has the ability to provide results which are equivalent to those of standard surgical procedures while reducing pain and trauma, minimizing
hospital stays, and delivering economic value to hospitals and payors.
The key elements of the MUSE™ system include a single-use, flexible stapler (also called an Endostapler) containing several sophisticated
innovative technologies such as a surgical stapler, miniature camera and ultrasound sensor, as well as a control console, offering a video image
transmitted from the tip of the Endostapler.
In addition to the MUSE™ system for the treatment of GERD, we are engaged in the development of other minimally invasive endosurgical
tools, as well as miniaturized imaging equipment for use in medical procedures as well as various industrial applications.
Principal Capital Expenditures
We had capital expenditures of approximately $9,000, $38,000 and $96,000 in the year ended on December 31, 2017, 2016 and 2015, respectively.
Our capital expenditures consisted mainly of purchase of machinery, equipment and computers. We have financed our capital expenditures from our
available cash and short-term investments. We expect to maintain our capital expenditures in 2018 with a consistent volume of products and to meet
our pre-approved budget.
There are no significant capital expenditures or divestitures currently in progress by the Company.
B.
Business Overview
Overview
We are a medical device company dedicated to the development, manufacturing and marketing of surgical endostaplers and direct vision
systems for minimally invasive medical procedures or other commercial use. Our expertise is in the development, production and marketing of
innovative surgical devices with direct visualization capabilities for the treatment of Gastroesophageal Reflux Disease, or GERD, a common ailment,
which is predominantly treated by medical therapy (e.g. proton pump inhibitors) or in chronic cases, conventional open or laparoscopic surgery. Our
FDA-cleared and CE-marked endosurgical system, known as the Medigus Ultrasonic Surgical Endostapler, or MUSE™ (Medigus Ultrasonic
Surgical Endostapler) system, enables minimally-invasive and incisionless procedures for the treatment of GERD by reconstruction of the esophageal
valve via the mouth and esophagus, eliminating the need for surgery in eligible patients. We believe that this procedure offers a safe, effective and
economical alternative to the current modes of GERD treatment for certain GERD patients, and has the ability to provide results which are equivalent
to those of standard surgical procedures while reducing pain and trauma, minimizing hospital stays, and delivering economic value to hospitals and
payors.
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The key elements of the MUSE™ system include a single-use endostapler containing several sophisticated innovative technologies such as
flexible stapling technology, a miniature camera and ultrasound sensor, as well as a control console offering a video image transmitted from the tip of
the endostapler.
In addition to the MUSE™ system for the treatment of GERD, we have developed miniaturized video cameras for use in various
medical procedures as well as specialized industrial applications.
Prevalence of GERD
GERD, is a worldwide disorder, with evidence suggesting an increase in GERD disease prevalence since 1995. The sample size weighted
mean for the GERD population in the United States and Europe is 19.8% and 15.2% respectively. In the United States alone, over 49 million adults
are affected by GERD, with over 29 million adults suffering daily from GERD symptoms. Proton pump inhibitors, or PPIs, are a class of effective
and generally safe medication to treat GERD, but not everyone who experiences heartburn needs a PPI. Several PPIs have been widely advertised to
consumers and heavily promoted by physicians. This has led to an overuse of the drug. PPIs are the third highest selling class of drugs in the U.S. and
Nexium has the second highest retail sales among all drugs at $4.8 billion in 2008. This figure does not include sales of other brands of PPIs.
After being swallowed, food descends through the esophagus to the stomach, which contains acids and enzymes intended to digest and
break down food. GERD is caused by the defective operation of the lower esophageal sphincter, or LES, a valve which controls the flow of ingested
food from the esophagus into the stomach. While eating and between eating periods, a properly operating LES prevents stomach contents from
entering the esophagus. Among GERD sufferers, the valve opens spontaneously or is unable to close properly. This results in acidic stomach contents
rising into the esophagus, causing irritation, acid reflux and heartburn, as well as other potentially dangerous conditions.
Beyond painful symptoms, GERD may also increase sufferers’ susceptibility to cancer. Whereas the stomach is lined by the “gastric
mucosal barrier” which allows acidic material to be contained harmlessly, the surface of the esophagus consists of flat, thin cells
called squamous cells, which are not resistant to acid. Repeated episodes of acid reflux can cause inflammation of the esophagus, a condition called
esophagitis. The flat cells lining the esophagus can also undergo genetic changes due to exposure to acid, causing these cells to resemble those found
in the stomach lining, a condition known as Barrett’s Esophagus.
Barrett’s Esophagus is a complication of GERD and predisposes patients to esophageal adenocarcinoma, a tumor that has increased in
incidence more than seven-fold over the past several decades. Studies have shown that people exhibiting Barrett’s Esophagus have a higher risk of
developing cancer of the esophagus. Studies have also shown, that compared to patients not exhibiting GERD symptoms, patients exhibiting weekly
symptoms of GERD have a five times higher probability for developing esophageal cancer while patients exhibiting daily symptoms of GERD have a
seven times higher probability for developing esophageal cancer. The most common risk factors for cancer in Barrett’s Esophagus patients include
chronic GERD, hiatal hernia, advanced age, male sex, white race, cigarette smoking and obesity.
Treatment of GERD
Treatment of GERD involves a stepwise approach. The goals are to control symptoms, to heal esophagitis and to prevent recurrent
esophagitis. The treatment is based on lifestyle modification and control of gastric acid through medical treatment (antacids, PPI’s, H2 blockers or
other reflux inhibitors) or antireflux surgery. Mild GERD may be defined as intermittent reflux symptoms that can be managed with lifestyle changes
or over-the-counter medications. Moderate to severe GERD represents more chronic symptoms that may require stronger drugs, long term
medication or surgical intervention.
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For moderate to severe GERD, physicians usually prescribe PPIs. This class of drugs reduces acid production by the stomach, and thereby
relieves the patients of their symptoms. Drugs of this class are among the most commonly prescribed medications in the world. There are several
brands on the market, best known are Prilosec (omeprazole), Prevacid (lansoprazole) and Nexium (esomeprazole). Certain PPI drugs are available
over the counter in the United States and in other countries, but the over the counter dosage may be inadequate to control GERD symptoms, except in
mild cases.
While PPI drugs effectively reduce the severity and frequency of GERD symptoms, they have a number of drawbacks:
a) In approximately 30% of patients, symptom control is incomplete;
b) The drugs do not treat the disease, they only control its manifestations and therefore they must be taken for life at a dosage which requires
prescription. Accumulated costs may be substantial; and
c) Long term use is associated with a number of serious adverse effects. In particular, they increase the risk of osteoporosis and fractures of
the hip, wrist and spine. The FDA has issued a warning on this effect as well as warnings against other untoward effects on absorption of other
essential minerals, which may lead to chronic kidney disease, irregular heartbeat, diarrhea and increased flatulence.
Interventional treatment
The most common operation for GERD is called a surgical fundoplication, a procedure that prevents reflux by wrapping or attaching the
upper part of the stomach around the lower esophagus and securing it with sutures. Due to the presence of the wrap or attachment, increasing
pressure in the stomach compresses the portion of the esophagus which is wrapped or attached by the stomach, and prevents acidic gastric content
from flowing up into the esophagus. Today, the operation is usually performed laparoscopically: instead of a single large incision into the chest or
abdomen, four or five smaller incisions are made in the abdomen, and the operator uses a number of specially designed tools to operate under video
control.
The operation does not completely eliminate the use of PPIs, and up to approximately 60% of the patients who undergo this surgery still use
some in long term follow up. Nevertheless, the dose is usually lower – in the over the counter range – and the response rate is excellent. Since the
majority of patients referred to surgeons are incomplete responders, or require a high dose of PPI, the patients are generally satisfied with the
operation, and the overall costs of treatment are lower in the long run.
In spite of clinical outcome of surgery, relatively few patients undergo surgery. We estimate that large numbers of patients who are
candidates for operative treatment are either not referred by their treating physician or decline it. We believe that many patients decline to undergo
operations to avoid even minute scars or violation of the abdominal cavity.
Given the current environment in which the vast majority of GERD sufferers in North America and Europe must choose between long-term
pharmaceutical therapy and surgery, leading to what is known in our industry as the “treatment gap”, we believe there is a demand for a minimally-
invasive, incision-less procedure which treats the root cause of the disease. We believe that the MUSETM system is positioned to fill this need.
Our system achieves the general physiological result of surgical fundoplication, by inserting the MUSETM endostapler through the mouth
and the esophagus, and stapling the top of the stomach to the side of the esophagus. The endostapler contains a video camera and stapling system.
Staples have long been used in surgical procedures in place of sutures, and we believe that they are at least as reliable and potentially more durable.
Our endostapler uses standard surgical staples.
First line therapy for GERD includes a combination of lifestyle modifications and medical therapy or PPIs. Unfortunately, 25% to 42% of
patients with GERD do not respond to an initial 4-8-week treatment of PPI. In those who do respond to therapy, the effectiveness of PPI treatment
decreases over time. Anti-reflux surgery controls acid reflux and treats an incompetent lower esophageal sphincter, while also improving patient
quality of life in the long term. Thus, PPI therapy and lifestyle modifications are frequently eliminated.
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Despite the effectiveness of surgery, it is invasive, requires hospitalization, and carries the risk of short and long-term complications,
including dysphagia, diarrhea, and gas bloat syndrome. Thus, endoscopic therapies that mimic the mechanism through which surgery works and can
reduce surgical morbidity have gained popularity for the treatment of GERD.
The market for medical devices, including the market for endoscopic therapies, is very broad, with an increasing demand for new less
invasive alternatives to the existing surgical procedures for the treatment of various diseases. This increasing need for minimally-invasive and
incision-less treatments, such as endoscopy-based procedures, are also augmented by the increase in the average age of global population. In 2000,
the worldwide population of persons aged more than 65 years was an estimated 420 million. During 2000-2030, the worldwide population aged more
than 65 years is projected to increase by approximately 550 million to 973 million. This increase in age will potentially lead to increased healthcare
costs and may have dramatic consequences for public health and the healthcare financing and delivery systems.
Endoscopy is a minimally invasive method of performing investigative, diagnostic and therapeutic medical procedures, employing an
endoscope, which allows real-time visual observation of the patient’s internal organs during the procedure. Endoscopic procedures are most
commonly performed through natural orifices, including the mouth, to avoid incisions. Because of the accessibility of the digestive tract through the
mouth, the endoscopy field is largely focused on disorders of the gastrointestinal tract such as disorders of the colon, esophagus, stomach and
duodenum.
Endoscopes are commonly composed of a flexible tube with a camera installed at its tip. Endoscopes often include “working channels”
through which catheters or other endoscopic tools or devices may be inserted directly into the patient’s digestive system. The primary advantage of
endoscopy is the elimination of incisions to the patient’s body during a medical procedure. We believe that this is safer, prevents most post-operative
pain and facilitates faster recuperation. Patient perception or preference is important as well. The perception of endoscopy procedures as being safer,
and less painful than, corresponding surgical procedures may have the effect of minimizing patient fears.
Endoscopic procedures generally involve less recovery time and patient discomfort than conventional open or laparoscopic surgery. These
procedures are also typically performed in the outpatient hospital setting as opposed to an inpatient setting. Typically, outpatient procedures cost the
hospital or the insurer less money since there is no overnight stay in the hospital.
Our Solution
The MUSE™ system
Our primary product, the MUSE™ system for transoral fundoplication, is a single use innovative device for the incisionless treatment of
GERD. The MUSETM technology is based on our proprietary platform technology, experience and know-how. While at present substantially all of
our revenue is derived from the miniature video camera and related equipment, our strategy is focused on the development and promotion of the
MUSETM system, which we therefore refer to as our ‘primary product’.
Transoral means the procedure is performed through the mouth, rather than through incisions in the abdomen. The MUSE™ system for
transoral fundoplication was previously known as the SRS™ Endoscopic Stapling System. We rebranded to the MUSETM system following the
launch of the most recent generation product. The MUSETM system is used to perform a procedure as an alternative to a surgical fundoplication. The
MUSETM system offers an endoscopic, incisionless alternative to surgery. A single surgeon or gastroenterologist can perform the MUSETM procedure
in a transoral way, unlike in a laparoscopic fundoplication which requires incisions.
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The system consists of the MUSE™ console controller, the MUSETM endostapler and several accessories, including an overtube, irrigation
bottle, tubing supplies and staple cartridges. The MUSETM endostapler incorporates a video camera, a flexible surgical stapler and an ultrasonic
guidance system that is used to measure the distance between the anvil and the cartridge of the stapler, to ensure their proper alignment and tissue
thickness. The device also contains an alignment pin, which is used for initial positioning of the anvil against the cartridge, two anvil screws, which
are used to reduce the thickness of the tissue that needs to be stapled and to fix the position of the anvil and the MUSETM endostapler during stapling.
The system allows the operator to staple the fundus of the stomach to the esophagus, in two or more locations, typically around the circumference,
thereby creating a fundoplication, without any incisions.
The clearance by the FDA, or ‘Indications for Use’, of the MUSETM system is “for endoscopic placement of surgical staples in the soft
tissue of the esophagus and stomach in order to create anterior partial fundoplication for treatment of symptomatic chronic Gastro-Esophageal Reflux
Disease in patients who require and respond to pharmacological therapy”. As such, the FDA clearance covers the use by an operator of the MUSE™
endostapler as described in the above paragraph. In addition, in the pivotal study that was presented to the FDA in order to gain clearance, only
patients who were currently taking GERD medications (i.e. pharmacological therapy) were allowed in the study. In addition, all patients had to have
a significant decrease in their symptoms when they were taking medication compared to when they were off the medication. As such, the FDA
clearance included the indication that MUSETM system is intended for patients who require and respond to pharmacological therapy. The MUSETM
system indication does not restrict its use with respect to GERD severity from a regulatory point of view. However, clinicians typically only consider
interventional treatment options for moderate to severe GERD. Therefore, it is reasonable to expect the MUSETM System would be primarily used to
treat moderate and severe GERD in practice. The system has received 510(k) marketing clearance from the FDA in the United States, as well as a CE
mark in Europe and a license from Health Canada. It is also cleared for use in Turkey and in Israel.
Clinical Studies
The original FDA submission for the MUSETM system included short term (six month) results from a multi-center clinical trial. The trial
was conducted in support of the 510(k) marketing clearance submission for the system and pursuant to an FDA-issued Investigational Device
Exemption (IDE).
Enrollment was completed in November 2010. A total of 72 patients were enrolled and 69 were treated with the MUSETM system during the
study. A manuscript detailing the results of this study was published in Surgical Endoscopy and is currently available online. Publication in the
hardcopy of the journal was in the January 2015 issue.
The primary objective of the study was to assess the safety and efficacy of the system in the treatment of subjects with GERD. The primary
efficacy endpoint was at least a 50% improvement in the GERD Health Related Quality of Life, or HRQL, scores in 53% of the subjects. GERD-
HRQL is the standard assessment of how an individual’s well-being may be affected over time by a disease. Secondary efficacy assessments included
PPI intake, esophageal acid exposure during a 24-hour period and anatomical changes. The follow-up period was set at six months following each
procedure.
The primary endpoint was met in that 73% of subjects exhibited at least a 50% reduction in GERD-HRQL at six months. In addition, 85%
of subjects reduced their PPI intake by at least 50%, with 65% of subjects eliminating PPI use completely at six months.
FDA marketing clearance for our system was granted in May 2012 following the original FDA submission. Subsequent improvements to the
system included improvements to the camera, illumination and alignment mechanisms, the addition of an electronic stapling motor, and condensing
two control consoles into a single unit. FDA clearance for the modified system was obtained in June 2015. The modified system has also obtained a
CE mark in Europe, a license from Health Canada and was approved in Turkey and Israel.
In May 2013, we received five years of follow-up results for a precursor IRB (Institutional Review Board) approved pilot study of the
system conducted in 2007 at Deenanath Mangeshkar Hospital and Research Center in the city of Pune, India. The results of this follow-up study were
published in the peer review journal Surgical Endoscopy in March 2015. As noted in the journal article, the five-year results are similar to the results
obtained from subjects who received-laparoscopic procedures for GERD in the same period. Each year, eleven of the thirteen patients were reached
(although not always the same eleven). All thirteen patients had at least a four year follow-up. Throughout the follow up period, GERD-HRQL scores
were normal in all but one patient. All patients indicated that they would agree to do the procedure again. Out of the initial thirteen patients, seven
(54%) had eliminated their PPI intake and another three (23%) reduced PPI use by 50% or more. It should be emphasized that for this trial patients
were selected with GERD severity at a higher than average level (moderate to severe), a fact which may indicate an even greater outcome of the
effect of the system in an average GERD level patient population.
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In November 2015, a follow-up study conducted in the United States looked at evaluating the long-term clinical outcome of 37 patients who
received GERD treatment with the MUSETM system in the multi-center study mentioned above was concluded. Efficacy and safety data were
analyzed up to four years post-procedure. No new complications have been reported in such long-term analysis. The proportions of patients who
remained off daily PPI were 83.8% (31/37) at six months, and 69.4% (25/36) at 4 years post-procedure. GERD-HRQL scores off PPI were
significantly decreased following six months and four years post-procedure. The authors concluded that the MUSETM system appeared to be safe and
effective in improving symptom scores as well as reducing PPI use in patients with GERD. These results appeared to be equal to or better than those
of the other devices for endoluminal GERD therapy.
In February 2017, we received an approval to start a multi-center MUSE™ system clinical study in China after the China Food and Drug
Administration, or the CFDA, reviewed the complete submission package. In addition, each study location received approval from their ethics
committees and agreements were put in place. Under Principal Investigator, Yunsheng Yang, Director of Gastroenterology Department Clinical
center at 301 Hospital and Chairman of Chinese Society of Gastroenterology, The General Hospital of People’s Liberation Army in Beijing, the
clinical study will include approximately 62 patients, will take place at 5 centers across China: The General Hospital of People’s Liberation Army,
Renji Hospital of Shanghai, Shanghai General Hospital, Peking University Third Hospital and Navy General Hospital.
Procedures started in March 2017 and are expected to carry on through 2018. We expect the results to be reported back to the CFDA in 2019
as part of the final CFDA submission for clearance to sell the MUSE™ system in China.
Miniature Video Cameras
By definition all endoscopes must include vision apparatus to facilitate the operator’s view of the internal organs of the patient. In the past,
fiber optics were utilized for this purpose, and have been gradually replaced with electronic video systems offering higher resolution and higher-
quality images. We have developed several models of miniaturized digital video cameras and video processing equipment, for use in medical
endoscopy products as well as industrial uses. Our cameras range between 3.45mm to 0.99 mm in diameter, and are based on single-use
Complementary Metal Oxide Semiconductor, or CMOS, image sensors. In some cases, our cameras are relatively inexpensive, allowing them to be
used in single-use devices.
Our miniature cameras are intended for use in medical applications in which it has not yet been feasible to use miniature video cameras, and
may be integrated into devices developed by the company, or by third parties who source the camera from us. We expect that the growing demand
for single-use medical devices will increase demand for the CMOS cameras in particular, in fields such as gastroenterology, orthopedics, gynecology,
ears nose throat, urology, cardio-vascular, and other fields in which diagnostic and surgical procedures may be performed endoscopically. Small-
diameter video cameras permit not only smaller camera-based endoscopes which are able to penetrate previously inaccessible organs or visualize
them in improved image quality, but also allows for the addition of working channels and other features in the valuable space freed by the reduction
in camera size.
Our most advanced camera is a prototype CMOS-based camera measuring only 0.99 mm in diameter transmitting 45,000 pixels in HDMI
format, which we believe to be the smallest video camera ever produced. This camera is based on “through-silicon-via” technology whereby the
electronics pass vertically through the sensor, permitting smaller diameter devices. This prototype camera will not be commercially available in the
foreseeable future.
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Other Products
We have utilized the MUSE™ system technological platform for the development of prototypes for other endoscopy and direct vision
products, including a device aiding colonoscopy, a device used in dental surgery and others. To date, we have not yet applied for regulatory
approvals for these devices, nor have we entered into agreements for the commercialization of these devices.
Our strategy
Our primary goal is to generate recurring revenues by driving sales of our MUSE™ system and establishing it as the standard-of-care
procedure and device for the treatment of moderate to severe GERD. We believe that we can achieve this goal by continuing to accumulate clinical
data and promote reimbursement for the procedure in the principal markets of North America, Europe and Asia. Our strategy includes the following
key elements:
Driving MUSE™ System Sales. We intend to continue to focus on commercializing the MUSETM system in key geographies and markets.
Our distribution network continues to expand for further commercialization. During 2017, we entered into additional European distribution
agreements in Spain, Germany Switzerland and Liechtenstein. In the U.S. we will look for partners to market the MUSE™ at key institutions. In
addition, we have successfully completed the technical testing for CFDA approval in China and have already begun the necessary clinical trial with
anticipated completion of the trial in 2018.
Collaborating and co-developing with established companies. We seek to initiate co-development or licensing collaborations with leading
companies which have existing marketing channels or significant marketing power in critical geographies and sales channels.
Out-licensing our products. We may consider plans to issue a license for various endoscopic systems which are based on owned and patent-
protected technology which has been developed by us. We continue to work to engage in agreements with companies which produce and market
medical devices, to include the production of systems for the foregoing companies which will be integrated by them in the endoscopic systems which
they produce or that we will develop or produce for them.
Developing additional products. Additionally, we intend to develop other products which will be based on the integrated and platform
technology which we have developed to date, including our miniaturized visualization imaging products, combined with our flexible stapling
platform, similar to the MUSE™ system. Additional products could include a fully integrated, endoscopic platform designed for endoscopic surgical
tissue dissection or for endoscopic sleeve gastrectomy.
Substantially all of our revenues in recent years are based on the sale of miniature cameras which we develop and manufacture. The
following data reflects our total revenue arising from the following services:
Sales of Miniature Cameras and related equipment
Sales of the MUSE™ System
Total
35
2017
Revenues
Year Ended December 31,
2016
(Thousands of U.S. dollars)
306
161
467
449
100
549
2015
558
66
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The following data reflects our total revenue broken down by geographic region:
United States
Europe
Asia
Other
Total
Seasonality of Business
2017
Revenues
Year Ended December 31,
2016
(Thousands of U.S. dollars)
115
193
116
43
467
345
53
5
146
549
2015
446
105
51
22
624
During the last few years we have not seen any seasonality in our sales.
Raw Materials and Suppliers
The main raw materials required for the assembly and production of our various products mainly include electronic components, mechanical
components, lighting components, tubes, lenses, sensors and cables, which we purchase from various suppliers and subcontractors in Israel and
around the world.
We generally engage with our suppliers and subcontractors in routine purchase orders for the performance of specific orders of goods, and
not via long-term contracts. We are not required to provide collateral of any kind with respect to our orders, though occasionally we have to pay
some, or all, of the purchase order amount up front. The payment is usually made in various currencies as agreed by the parties.
Though we attempt to ensure the availability of more than one supplier for each important component in our products, the number of
suppliers engaged in the provision of miniature video sensors which are suitable for our CMOS technology products is very limited, and therefore in
some cases we engage with a single supplier, which may result in dependency on such supplier. This is the case regarding sensors for the CMOS type
technology that is produced by a single supplier in the United States. As we do not have a contract in place with this supplier, there is no contractual
commitment on the part of such supplier for any set quantity of such sensors. The loss of our sole supplier in providing us with miniature sensors for
our CMOS technology products, and our inability or delay in finding a suitable replacement supplier, could significantly affect our business, financial
condition, results of operations and reputation.
In general, alternative suppliers can be trained within a short period. However, we do have a small number of suppliers who the replacement
of which could be longer, due to the adjustment of their products to our needs.
Marketing and Distribution
Company Sales and Marketing Efforts
In the United States, Europe and China, our commercial goals in the short term are to initiate highly selective sites for procedural
experience. We will support these physicians and hospitals through a number of activities, including: marketing materials to help drive GERD patient
awareness, hands-on training, animations, procedure simulator, attendance at key physician society meetings and trade shows, training courses,
reimbursement analysis, and procedural assistance.
Engagement in External Distribution Agreements for the MUSE™ System
We currently have distribution agreements with local distributors in Italy, Spain, Switzerland and Liechtenstein, Germany and China for the
distribution of the MUSE™ system, (in China the distribution arrangement is pending achievement of regulatory clearance for the MUSE™ system).
To date, a few commercial procedures have been performed for treatment of GERD using the MUSE™ system, which were provided in accordance
with distribution agreements.
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In general, the distribution agreements with respect to the MUSE™ system are uniform and provide the following:
● The distributor serves as the exclusive distributor in the territory relevant to the agreement;
● The distributor must obtain all local approvals required to import and market the systems in the relevant country;
● A distribution period of one to several years is determined;
● The distributor undertakes to market the systems in accordance with an annual plan coordinated with us, and serves as a service center
for the systems in that country; and
● The distributor undertakes to purchase a minimum quantity of systems throughout the preliminary period of the agreement.
Marketing of Imaging Equipment
With respect to our visualization technology, we sell and market our off-the-shelf and customized products globally and also engage in co-
development efforts when possible. We also maintain a dedicated web-site for our imaging products.
Intellectual Property
Our commercial success depends, in part, on obtaining and maintaining patent and other intellectual property protection, in the United States
and internationally, for the technologies used in our products. We cannot be sure that any of our patents will be commercially useful in protecting our
technology. Our commercial success also depends in part on our non-infringement of the patents or proprietary rights of third parties. The patent
positions of medical device companies, including ours, can be highly uncertain and involve complex and evolving legal and factual questions. For
additional information see “Item 3. Key information—D. Risk Factors—Risks Related to Our Intellectual Property.”
We own 19 U.S. patents and have filed four additional patent applications in the U.S. In addition, we own 69 patents that were granted in
other countries, including nine European patents, which are not valid on their own, unless validated in specific European countries, as indeed were
validated according to our list of chosen European countries. We also have ten pending patent applications outside of U.S. and one patent application
with the Patent Cooperation Treaty. Our patents, and any patents which may be granted under our pending patent applications, expire between the
years 2021 and 2037.
We cannot be sure that any patents will be granted with respect to any of our pending patent applications or with respect to any patent
applications filed by us in the future. There is also a significant risk that any issued patents will have substantially narrower claims than those that are
currently sought.
We also protect our proprietary technology and processes, in part, by confidentiality and invention assignment agreements with our
employees, consultants, scientific advisors and other contractors. These agreements may be breached, and we may not have adequate remedies for
any breach. We also rely on trade secrets to protect our product candidates. However, our trade secrets may otherwise become known or be
independently discovered by competitors. To the extent that our employees, consultants, scientific advisors or other contractors use intellectual
property owned by others in their work for us, disputes may arise as to the rights in related or resulting know-how and inventions.
On October 28, 2016, we settled all litigation and administrative proceedings with EndoChoice, Inc., or EndoChoice, including those actions
pending in the U.S. District Court for the District of Delaware C.A. Nos. 15-505-LPS-CJB and C.A. No. 15-1215-LPS-CJB and the trademark
opposition proceedings in the State of Israel involving Trademark Application Nos. 257172, 260433 and 262423. Under the terms of the confidential
settlement, we were granted a covenant not to sue with respect to EndoChoice FUSE-related trademarks and EndoChoice was granted a non-
exclusive license to our U.S. Patent No. 6,997,871 and related patents. Each party has agreed to bear its own costs and fees associated with the
litigation.
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Competition
The rapidly changing market for the treatment of GERD, which is comprised of pharmaceutical products, surgical procedures, medical
devices and potential other treatments, can be significantly affected by new product introductions and other market activities of industry participants.
We believe that the principal competitive factors in our market include:
● safety, efficacy and clinically effective performance of products;
● product benefits, including the ability to offer users (both physicians and patients) a solution for treatment of GERD using endoscopic-
based methods or other;
● ease of use and comfort for the physician and patient;
● the cost of product offerings and the availability of product coverage and reimbursement from third-party payors, insurance companies
and other parties;
● the strength of acceptance and adoption by physicians and hospitals;
● the ability to deliver new product offerings and enhanced technology to expand or improve upon existing applications through
continued research and development;
● the quality of training, services and clinical support provided to physicians and hospitals;
● effective sales, marketing and distribution;
● the ability to provide proprietary products protected by strong intellectual property rights; and
● the ability to offer products that are intuitive and easy to learn and use.
Competition with the MUSE™ system
We have several competitors in the medical device and pharmaceutical industries. Patients and physicians may opt for more established
existing therapies to treat GERD, including PPI pharmaceutical treatment or laparoscopic fundoplication surgery. PPIs are currently being offered by
several large pharmaceutical manufacturers, most of whom have significantly greater financial, clinical, manufacturing, marketing, distribution and
technical resources and experience than we have.
Over the last few years a number of different medical devices and treatments have been introduced to address the “treatment gap” in GERD
treatments and therapies which is found between long-term pharmaceutical therapy on one hand and surgery on the other. These devices and
treatments seek to treat GERD less invasively than fundoplication and without the need for long-term use of drug therapy, and include the following
options that, to our knowledge, are currently commercialized:
● EsophyXTM Transoral Incisionless Fundoplication (EndoGastric Solutions) — a device to endoscopically replicate a partial
fundoplication.
● LINXTM Reflux Management System (Torax Medical, acquired by a Johnson and Johnson medical device company) — an
implantable magnetic mechanical collar around the LES.
● StrettaTM (Mederi Therapeutics) — a catheter to deliver radiofrequency energy to the lower esophageal sphincter to stimulate collagen
deposition (scarring) in the LES.
● GERDX (G-Surg) – An endoscopic plication device for the LES.
Due to the fact that the market is broad, it is also possible that there are additional companies who are working on the development of
endoscopic devices for the treatment of GERD. However, we do not have any indications concerning any commercial product or product
approaching commercialization, beyond information published publicly, from time to time, in medical journals and databases of the FDA.
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In addition, new companies have been, and are likely to continue to be, formed to pursue opportunities in our market. For example,
EndoStim Inc. is a medical device company focused on the development and commercialization of a neurostimulation system for the treatment of
GERD, via an implant which includes electrodes which stimulates the LES through a permanent electrical current, and is intended for the treatment
of GERD. The Endostim device is implanted in the body by means of a laparoscopic surgery.
There is also a relatively new surgical technology without the use of a dedicated device, called Anti-Reflux Mucosectomy to treat GERD.
Competition with Miniature Video Cameras
The main devices that compete with our miniature cameras are manufactured by Awaiba, Fujikura, MicroCam (Sanovas), Precision Optics,
Opcom, Misumi and FISBA. The miniature cameras of each of these vendors differ in various factors include image quality and resolution, camera
shape and dimensions, sensor technology, optic characteristics, and user flexibility/customization.
Government Regulation
The healthcare industry, and thus our business, is subject to extensive federal, state, local and foreign regulation. Some of the pertinent laws
have not been definitively interpreted by the regulatory authorities or the courts, and their provisions are open to a variety of interpretations. In
addition, these laws and their interpretations are subject to change.
Both federal and state governmental agencies continue to subject the healthcare industry to intense regulatory scrutiny, including heightened
civil and criminal enforcement efforts. As indicated by work plans and reports issued by these agencies, the federal government will continue to
scrutinize, among other things, the billing practices of healthcare providers and the marketing of healthcare products.
We believe that we have structured our business operations and relationships with our customers to comply with all applicable legal
requirements. However, it is possible that governmental entities or other third parties could interpret these laws differently and assert otherwise. In
addition, because there is a risk that our products are used off label, we believe we are subject to increased risk of prosecution under these laws and
by these entities even if we believe we are acting appropriately. We discuss below the statutes and regulations that are most relevant to our business
and most frequently cited in enforcement actions.
U.S. Food and Drug Administration
All of our products sold in the U.S. are subject to regulation as medical devices under the FDA, as implemented and enforced by the FDA.
The FDA governs the following activities that we perform or that are performed on our behalf, to ensure that medical products we manufacture,
promote and distribute domestically or export internationally are safe and effective for their intended uses:
● product design, preclinical and clinical development and manufacture;
● product premarket clearance and approval;
● product safety, testing, labeling and storage;
● record keeping procedures;
● product marketing, sales and distribution; and
● post-marketing surveillance, complaint handling, medical device reporting, reporting of deaths, serious injuries or device malfunctions
and repair or recall of products.
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FDA Premarket Clearance and Approval Requirements
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Unless an exemption applies, each medical device we wish to commercially distribute in the United States will require either premarket
notification, or 510(k) marketing clearance or approval of a premarket approval application, or PMA, from the FDA. The FDA classifies medical
devices into one of three classes. Class I devices, considered to have the lowest risk, are those for which safety and effectiveness can be assured by
adherence to the FDA’s general regulatory controls for medical devices, which include compliance with the applicable portions of the Quality
System Regulation, facility registration and product listing, reporting of adverse medical events, and appropriate, truthful and non-misleading
labeling, advertising, and promotional materials (General Controls). Class II devices are subject to the FDA’s General Controls, and any other special
controls as deemed necessary by the FDA to ensure the safety and effectiveness of the device (Special Controls). Manufacturers of most class II and
some class I devices are required to submit to the FDA a premarket notification under Section 510(k) of the FDCA requesting permission to
commercially distribute the device. This process is generally known as 510(k) marketing clearance. Devices deemed by the FDA to pose the greatest
risks, such as life sustaining, life supporting or some implantable devices, or devices that have a new intended use, or use advanced technology that is
not substantially equivalent to that of a legally marketed device, are placed in class III, requiring approval of a PMA.
510(k) Marketing Clearance Pathway
To obtain 510(k) marketing clearance, we must submit a premarket notification demonstrating that the proposed device is “substantially
equivalent” to a legally marketed “predicate device” that is either in class I or class II, or to a class III device that was in commercial distribution
before May 28, 1976 for which the FDA has not yet called for the submission of a PMA. A Special 510(k) is an abbreviated 510(k) application which
can be used to obtain clearance for certain types of device modification such as modifications that do not affect the intended use of the device or alter
the device’s fundamental scientific technology. A Special 510(k) generally requires less information and data than a complete, or Traditional 510(k).
In addition, a Special 510(k) application often takes a shorter period of time, which could be as short as 30 days, than a Traditional 510(k) marketing
clearance application, which can be used for any type of 510(k) device. The FDA’s 510(k) marketing clearance pathway usually takes from three to
twelve months, but may take significantly longer. The FDA may require additional information, including clinical data, to make a determination
regarding substantial equivalence. There is no guarantee that the FDA will grant 510(k) marketing clearance for our future products and failure to
obtain necessary clearances for our future products would adversely affect our ability to grow our business.
The FDA is currently considering proposals to reform its 510(k) marketing clearance process and such proposals could include increased
requirements for clinical data and a longer review period. In response to industry and healthcare provider concerns regarding the predictability,
consistency and rigor of the 510(k) regulatory pathway, the FDA initiated an evaluation of the 510(k) program, and in January 2011, announced
several proposed actions intended to reform the review process governing the clearance of medical devices. The FDA intends these reform actions to
improve the efficiency and transparency of the clearance process, as well as bolster patient safety. For example, in July 2011, the FDA issued a draft
guidance document entitled “510(k) Device Modifications: Deciding When to Submit a 510(k) for a Change to an Existing Device,” which was
intended to assist manufacturers in deciding whether to submit a new 510(k) for changes or modifications made to the manufacturer’s previously
cleared device. While this draft guidance was subsequently withdrawn, the FDA is expected to replace the 1997 guidance document on the same
topic. As part of FDASIA, Congress reauthorized the Medical Device User Fee Amendments with various FDA performance goal commitments and
enacted several “Medical Device Regulatory Improvements” and miscellaneous reforms which are further intended to clarify and improve medical
device regulation both pre- and post-approval. One of these provisions obligates the FDA to prepare a report for Congress on the FDA’s approach for
determining when a new 510(k) will be required for modifications or changes to a previously cleared device. After submitting this report, the FDA is
expected to issue revised guidance to assist device manufacturers in making this determination. Until then, manufacturers may continue to adhere to
the FDA’s 1997 guidance on this topic when making a determination as to whether or not a new 510(k) is required for a change or modification to a
device, but the practical impact of the FDA’s continuing scrutiny of these issues remains unclear. It is possible that any new guidance will make
substantive changes to existing policy and practice regarding the assessment of whether a new 510(k) is required for changes or modifications to
existing devices. Specifically, industry has interpreted the withdrawn draft guidance to take a more conservative approach in requiring a new 510(k)
for certain changes or modifications to existing, cleared devices that might not have triggered a new 510(k) under the 1997 guidance. As of July 28,
2014, the FDA released final guidance entitled “The 510(k) Program: Evaluating Substantial Equivalence in Premarket Notifications” which is
intended to identify, explain, and clarify each of the critical decision points in the decision-making process FDA uses to determine substantial
equivalence. We cannot predict which of the 510(k) marketing clearance reforms currently being discussed or proposed might be enacted, finalized
or implemented by the FDA and whether the FDA will propose additional modifications to the regulations governing medical devices in the future.
Any such modification could have a material adverse effect on our ability to commercialize our products.
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Medical devices can be marketed only for the indications for which they are cleared or approved. After a device receives 510(k) marketing
clearance, any modification that could significantly affect its safety or effectiveness, or that would constitute a new or major change in its intended
use, will require a new 510(k) marketing clearance or, depending on the modification, PMA approval. The FDA requires each manufacturer to
determine whether the proposed changes requires submission of a 510(k) or a PMA, but the FDA can review any such decision and can disagree with
a manufacturer’s determination. If the FDA disagrees with a manufacturer’s determination, the FDA can require the manufacturer to cease marketing
or recall the modified device until 510(k) marketing clearance or PMA approval is obtained. Also, in these circumstances, we may be subject to
significant regulatory fines or penalties. We have made, and plan to continue to make, additional product enhancements to MUSE™ system and other
products that we believe do not require new 510(k) marketing clearances. We cannot be assured that the FDA would agree with any of our decisions
not to seek 510(k) marketing clearance or PMA approval. For risks related to 510(k) marketing clearance, see “Item 3. Key information—D. Risk
Factors – Risks Related to Regulatory Compliance.”
PMA Approval Pathway
A PMA must be submitted to the FDA if the device cannot be cleared through the 510(k) process or is not otherwise exempt from the
FDA’s premarket clearance and approval requirements. A PMA must generally be supported by extensive data, including, but not limited to,
technical, preclinical, clinical trials, manufacturing and labeling, to demonstrate to the FDA’s satisfaction the safety and effectiveness of the device
for its intended use. Also, an advisory panel of experts from outside the FDA may be convened to review and evaluate the application and provide
recommendations to the FDA as to the approvability of the device. The FDA may or may not accept the panel’s recommendation. In addition, the
FDA will generally conduct a pre-approval inspection of the applicant or its third-party manufacturers’ or suppliers’ manufacturing facility or
facilities to ensure compliance with the QSR.
New PMAs or PMA supplements are required for modifications that affect the safety or effectiveness of the device, including, for example,
certain types of modifications to the device’s indication for use, manufacturing process, labeling and design. 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. None of our products are
currently approved under a PMA approval. However, we may in the future develop devices which will require the approval of a PMA. There is no
guarantee that the FDA will grant PMA approval of our future products and failure to obtain necessary approvals for our future products would
adversely affect our ability to grow our business.
Clinical Trials
Clinical trials are generally required to support a PMA application and are sometimes required for 510(k) marketing clearance. Such trials
generally require an Investigational Device Exemption application, or IDE, approved in advance by the FDA for a specified number of patients and
study sites, unless the product is deemed a non-significant risk device eligible for more abbreviated IDE requirements. 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. Clinical trials are subject to extensive monitoring, recordkeeping and reporting
requirements. Clinical trials must be conducted under the oversight of an Institutional Review Board, or IRB, for the relevant clinical trial sites and
must comply with FDA regulations, including but not limited to those relating to good clinical practices. To conduct a clinical trial, we are also
required to obtain the patient’s informed consent in form and substance that complies with both FDA requirements and state and federal privacy and
human subject protection regulations. We, the FDA or the IRB could suspend a clinical trial at any time for various reasons, including a belief that
the risks to study subjects outweigh the anticipated benefits. Even if a trial is completed, the results of clinical testing may not adequately
demonstrate the safety and efficacy of the device or may otherwise not be sufficient to obtain FDA clearance or approval to market the product in the
United States. Similarly, in Europe the clinical study must be approved by a local ethics committee and in some cases, including studies with high-
risk devices, by the ministry of health in the applicable country.
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Pervasive and Continuing Regulation
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After a device is placed on the market, numerous regulatory requirements continue to apply. In addition to the requirements below, the
Medical Device Reporting, or MDR, regulations require that we report to the FDA any incident in which our products may have caused or
contributed to a death or serious injury or in which our product malfunctioned and, if the malfunction were to recur, would likely cause or contribute
to death or serious injury. See “Item 4. Information on the Company —D. Risk Factors – Risks Related to Regulatory Compliance,” for further
information regarding our reporting obligations under MDR regulations. Additional regulatory requirements include:
● product listing and establishment registration, which helps facilitate FDA inspections and other regulatory action;
● QSR, which requires manufacturers, including third-party manufacturers, to follow stringent design, testing, control, documentation and
other quality assurance procedures during all phases of the design and manufacturing process;
● labeling regulations and FDA prohibitions against the promotion of products for uncleared, unapproved or off-label use or indication;
● clearance of product modifications that could significantly affect safety or efficacy or that would constitute a major change in intended
use of one of our cleared devices;
● approval of product modifications that affect the safety or effectiveness of one of our approved devices;
● post-approval restrictions or conditions, including post-approval study commitments;
● post-market surveillance regulations, which apply, when necessary, to protect the public health or to provide additional safety and
effectiveness data for the device;
● the FDA’s recall authority, whereby it can ask, or under certain conditions order, device manufacturers to recall from the market a
product that is in violation of governing laws and regulations; and
● notices of corrections or removals.
We must also register with the FDA as a medical device manufacturer and must obtain all necessary state permits or licenses to operate our
business.
Failure to comply with applicable regulatory requirements, including delays in or failures to report incidents to the FDA as required under
the MDR regulations, can result in enforcement action by the FDA, which may include any of the following sanctions:
● warning letters, fines, injunctions, consent decrees and civil penalties;
● customer notifications or repair, replacement, refunds, recall, detention or seizure of our products;
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● 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) marketing clearances or PMA approvals that have already been granted;
● refusal to grant export approval for our products; or
● criminal prosecution.
In January 2016, we performed an FDA mock audit by an FDA veteran specialist, following which we implemented improvements in our
quality management system. We cannot be assured that we have adequately complied with all regulatory requirements or that one or more of the
referenced sanctions will not be applied to us as a result of a failure to comply.
Marketing Approvals Outside the United States
Sales of medical devices outside the United States are subject to foreign government regulations, which vary substantially from country to
country. The time required to obtain approval by a foreign country may be longer or shorter than that required for FDA clearance or approval, and the
requirements may differ.
The European Union has adopted numerous directives and standards regulating the design, manufacture, clinical trials, labeling and adverse
event reporting for medical devices. Each European Union member state has implemented legislation applying these directives and standards at the
national level. Other countries, such as Switzerland, have voluntarily adopted laws and regulations that mirror those of the European Union with
respect to medical devices. Devices that comply with the requirements of the laws of the relevant member state applying the applicable European
Union directive are entitled to bear CE conformity marking and, accordingly, can be commercially distributed throughout the member states of the
European Union and other countries that comply with or mirror these directives. The method of assessing conformity varies depending on the type
and class of the product, but normally involves a combination of self-assessment by the manufacturer and a third-party assessment by a “Notified
Body,” an independent and neutral institution appointed to conduct conformity assessment. This third-party assessment consists of an audit of the
manufacturer’s quality system and clinical information, as well as technical review of the manufacturer’s product. An assessment by a Notified Body
in one country within the European Union is required in order for a manufacturer to commercially distribute the product throughout the European
Union. In addition, compliance with ISO 13845 on quality systems issued by the International Organization for Standards, among other standards,
establishes the presumption of conformity with the essential requirements for a CE marking. In addition, many countries apply requirements in their
reimbursement, pricing or health care systems that affect companies’ ability to market products.
We have been authorized by Health Canada and have received AMAR approval in Israel. In addition, we received approval form the
MedCert Zertifizierungs und Prufungsgsesellschaft fur die Medizin GmbH of Germany, and are entitled to print the CE Mark on our products, after
having examined the EU Technical File for each new product.
Health Care Laws and Regulations
Reimbursement
In the United States and elsewhere, health care providers that perform surgical procedures using medical devices such as ours generally rely
on third-party payors, including governmental payors such as Medicare and Medicaid and private payors, to cover and reimburse the associated
medical and surgical costs. Consequently, sales of medical devices are dependent in part on the availability of reimbursement to the customer from
third-party payors. 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 the implanted or disposable devices themselves. Most
payors, however, will not pay separately for capital equipment. Instead, payment for the cost of using the capital equipment is considered to be
covered as part of payments received for performing the procedure. In determining payment rates, third-party payors are increasingly scrutinizing the
prices charged for medical products and services in comparison to other therapies. The procedures in which our products are used may not be
reimbursed by these third-party payors at rates sufficient to allow us to sell our products on a competitive and profitable basis.
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In addition, in many foreign markets, including the countries in the European Union, pricing of medical devices is subject to governmental
control. 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.
In March 2010, comprehensive health care reform legislation was enacted through the passage of the Affordable Care Act of 2010.
Significant measures contained in the health care reform legislation include initiatives to revise Medicare payment methodologies, initiatives to
promote quality indicators in payment methodologies (including the bundling of hospital and physician payments), initiatives related to the
coordination and promotion of research on comparative clinical effectiveness of different technologies and procedures, and annual reporting
requirements related to payments to physicians and teaching hospitals. At this time it is not possible to predict whether these initiatives will have a
positive or negative impact on us. The health care reform legislation also includes new taxes impacting certain health-related industries, including
medical device manufacturers. As of 2013, each medical device manufacturer or importer has to pay an excise tax (or sales tax) in an amount equal to
2.3% of the price for which such manufacturer sells its medical devices. In addition to the health care reform legislation, various healthcare reform
proposals have also emerged at the state level. 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. The taxes imposed by the health care reform legislation and
the expansion in government’s role in the U.S. healthcare industry may result in decreased profits to us, lower reimbursements by payors for our
products, and reduced medical procedure volumes, all of which may adversely affect our business, financial condition and results of operations,
possibly materially.
Medicare and Medicaid
The Medicare program is a federal health benefit program administered by the CMS that covers and pays for certain medical care items and
services for eligible elderly persons. The Medicaid program is a federal-state partnership under which states receive matching federal payments to
fund healthcare services for the poor. In January 2018, the American Medical Association’s, or the AMA, Current Procedural Terminology, or CPT,
published an updated payment for Category I CPT Code for transoral esophagogastric fundoplasty procedures, which describes procedures conducted
with the MUSE™ system. In the U.S., the CPT Editorial Panel assigns specific billing codes for physician services and outpatient hospital
procedures, which are used by providers, who are our customers, to bill for procedures. Once a CPT code is established, the Centers for Medicare and
Medicaid Services, or CMS, in turn establishes payment levels and coverage rules under Medicare, and private payors establish rates and coverage
rules. Notwithstanding the issuance of a CPT to report the MUSE procedure and the establishment of payment rates for the code, we cannot
guarantee that the MUSE™ system is or will be covered and, if covered, that reimbursement will be sufficient, and furthermore, we cannot guarantee
that the MUSE™ system or any future product will be approved for coverage or reimbursement by Medicare, Medicaid or any third-party
payor. Reimbursement decisions in the European Union and in other jurisdictions outside of the United States vary by country and region and there
can be no assurance that we will be successful in obtaining adequate reimbursement.
Commercial Insurers
Many private payors look to CMS policies as a guideline in setting their coverage policies and payment amounts. A decrease of, or
limitation on, reimbursement payments for physicians and hospitals by CMS or other agencies may affect coverage and reimbursement
determinations by many private payors. Additionally, some private payors may reimburse only a portion of the costs associated with the use of our
products, or not at all.
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Fraud and Abuse Laws
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Because of the significant federal funding involved in Medicare and Medicaid, Congress and the states have enacted, and actively enforce, a
number of laws whose purpose is to eliminate fraud and abuse in federal health care programs. Our business is subject to compliance with these laws.
Anti-Kickback Statutes and Federal False Claims Act
The federal healthcare programs’ Anti-Kickback Statute prohibits persons from soliciting, offering, receiving or providing remuneration,
directly or indirectly, in exchange for or to induce either the referral of an individual, or the furnishing or arranging for a good or service, for which
payment may be made under a federal healthcare program such as Medicare or Medicaid. Penalties for violations include criminal penalties and civil
sanctions such as fines, imprisonment and possible exclusion from Medicare, Medicaid and other federal healthcare programs. The Anti-Kickback
Statute is broad and prohibits many arrangements and practices that are lawful in businesses outside of the healthcare industry. There are a number of
statutory exceptions as well as regulatory safe harbors protecting certain common activities from prosecution or other regulatory sanctions, however,
the exceptions and safe harbors are drawn narrowly, and practices that do not fit squarely within an exception or safe harbor may be subject to
scrutiny. 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 source, not only the Medicare and Medicaid programs.
Government officials have focused their enforcement efforts on marketing of healthcare services and products, among other activities, and
recently have brought cases against companies, and certain sales, marketing and executive personnel, for allegedly offering unlawful inducements to
potential or existing customers in an attempt to procure their business. Another development affecting the healthcare industry is the increased use of
the federal Civil False Claims Act and, in particular, actions brought pursuant to the False Claims Act’s “whistleblower” or “qui tam” provisions. The
federal civil False Claims Act prohibits, among other things, individuals or entities from knowingly presenting, or causing to be presented, a false or
fraudulent claim 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 concealing or knowing and improperly avoiding, decreasing or concealing an obligation
to pay money to the federal government. Violation of the False Claims Act can result in significant civil and administrative penalties, up to treble
damages and exclusion from participation in federal health care programs like Medicare and Medicaid. The False Claims Act also allows a private
individual or entity to sue on behalf of the government. Medical device manufacturers and other health care companies have been investigated by the
U.S. Department of Justice and have reached substantial financial settlements with the federal government under the civil False Claims Act for a
variety of alleged improper marketing activities, including providing free product, providing consulting fees, grants, free travel and other benefits to
physicians to induce them to prescribe the company’s products, and for causing false claims to be submitted as a result of the marketing of their
products for unapproved, and thus non-reimbursable, uses. Resolution of such investigations has often included manufacturers entering into corporate
integrity agreements with the Office of Inspector General for the U.S. Department of Health and Human Services that require, among other things,
substantial reporting and remedial actions.
Additionally, several bills have been passed or are pending, at both the state and federal levels that expand the anti-kickback laws to require,
among other things, extensive tracking and maintenance of databases regarding relationships to physicians and healthcare providers. The PPACA
imposes new reporting and disclosure requirements on device manufacturers for any “transfer of value” made or distributed to physicians and
teaching hospitals, otherwise known as the Physician Payment Sunshine Act. Device manufacturers were required to begin collecting data on August
1, 2013 and were be required to submit reports to CMS by March 31, 2014 (and the 90th day of each subsequent calendar year). In addition, there has
been a recent trend of increased federal and state regulation of payments made to physicians. Some states, such as California, Massachusetts and
Nevada, mandate implementation of commercial compliance programs, while certain states, such as Massachusetts and Vermont, impose restrictions
on device manufacturer marketing practices and tracking and reporting of gifts, compensation and other remuneration to physicians. The
implementation of the infrastructure to comply with these bills and regulations could be costly and any failure to provide the required information
may result in civil monetary penalties.
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We believe our current consulting agreements with physicians represent legitimate compensation for needed documented services actually
furnished to us. However, engagement of physician consultants by medical device manufacturers has recently been subject to heightened scrutiny. In
this environment, our engagement of physician consultants in product development or clinical testing could subject us to similar scrutiny. We are
unable to predict whether we would be subject to actions under the Anti-Kickback Statute or False Claims Act or any similar state law, or the impact
of such actions.
HIPAA and Other Fraud and Privacy Regulations
Among other things, HIPAA created two new federal crimes: healthcare fraud and false statements relating to healthcare matters. The
HIPAA health care 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 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 imprisonment.
In addition to federal regulations issued under HIPAA, some states have enacted privacy and security statutes or regulations that, in some
cases, are more stringent than those issued under HIPAA. In those cases, it may be necessary to modify our planned operations and procedures to
comply with the more stringent state laws. If we fail to comply with applicable state laws and regulations, we could be subject to additional
sanctions.
Anti-Bribery Laws
Compliance with complex foreign and U.S. laws and regulations that apply to our international operations increases our cost of doing
business in international jurisdictions and could expose us or our employees to fines and penalties in the U.S. and abroad. These numerous and
sometimes conflicting laws and regulations include the Foreign Corrupt Practices Act of 1977, or the FCPA. The FCPA prohibits U.S. companies,
companies whose securities are listed for trading in the United States and other entities, and their officers, directors, employees, shareholders acting
on their behalf and agents from offering, promising, authorizing or making payments to foreign officials for the purpose of obtaining or retaining
business abroad or otherwise obtaining favorable treatment. The FCPA also requires companies to maintain records that fairly and accurately reflect
transactions and maintain internal accounting controls. In many countries, hospitals are government-owned and healthcare professionals employed by
such hospitals, with whom we regularly interact, may meet the definition of a foreign official for purposes of the FCPA. Additionally, recently
enacted U.S. legislation increases the monetary reward available to whistleblowers who report violations of federal securities laws, including the
FCPA, which may result in increased scrutiny and allegations of violations of these laws and regulations. Violations of these laws and regulations
could result in fines, criminal sanctions against us, our officers, or our employees, prohibitions on the conduct of our business, and damage to our
reputation.
Israeli Government Programs
Under the Encouragement of Research, Development and Technological Innovation in the Industry Law, 5744-1984, or the Innovation Law,
research and development programs which meet specified criteria and are approved by a committee of the Israeli Innovation Authority of the Israeli
Ministry of Economy and Industry, or IIA (formerly known as Office of Chief Scientist, or the OCS) are eligible for grants from the IIA. The grant
amounts are determined by the research committee, and are typically a percentage of the project’s expenditures. Under most programs, the grantee is
required to pay royalties to the State of Israel from the sale of products developed under the program. Regulations under the Innovation Law
generally provide for the payment of royalties of 3% to 6% on sales of products and services based on or incorporating technology developed using
grants or know-how deriving therefrom, up to 100% of the grant, linked to the dollar and bearing interest at the LIBOR rate, is repaid. The royalty
rates and the aggregate repayment amount may be higher if manufacturing rights are transferred outside of Israel, as further detailed below. The
manufacturing rights of products incorporating technology developed thereunder may not be transferred outside of Israel, unless approval is received
from the IIA and additional royalty payments are made to the State of Israel, as further detailed below. However, this does not restrict the export of
products that incorporate the funded technology.
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The pertinent obligations under the Innovation Law are as follows:
● Local Manufacturing Obligation. The terms of the grants under the Innovation Law require that we manufacture the products developed
with these grants in Israel. Under the regulations promulgated under the Innovation Law, the products may be manufactured outside
Israel by us or by another entity only if prior approval is received from the IIA (such approval is not required for the transfer of less
than 10% of the manufacturing capacity in the aggregate, in which case a notice should be provided to the IIA). As a condition to
obtaining approval to manufacture outside Israel, we would be required to pay royalties at an increased rate (usually 1% in addition to
the standard rate and increased royalties cap (between 120% and 300% of the grants, depending on the manufacturing volume that is
performed outside Israel). We note that a company also has the option of declaring in its IIA grant applications of its intention to
exercise a portion of the manufacturing capacity abroad, thus avoiding the need to obtain additional approvals and pay the increased
royalties cap with respect to the portion declared.
● Know-How transfer limitation. The Innovation Law restricts the ability to transfer know-how funded by the IIA outside of Israel.
Transfer of IIA funded know-how outside of Israel requires prior approval of IIA and in certain circumstances is subject to certain
payment to the IIA, calculated according to formulae provided under the Innovation Law. If we wish to transfer IIA funded know-how,
the terms for approval will be determined according to the character of the transaction and the consideration paid to us for such transfer.
The IIA approval to transfer know-how created, in whole or in part, in connection with a IIA-funded project to third party outside Israel
where the transferring company remains an operating Israeli entity is subject to payment of a redemption fee to the IIA calculated
according to a formula provided under the Innovation Law that is based, in general, on the ratio between the aggregate IIA grants to the
company’s aggregate investments in the project that was funded by these IIA grants, multiplied by the transaction consideration,
considering depreciation mechanism and less royalties already paid to the IIA. The transfer of such know-how to a party outside Israel
where the transferring company ceases to exist as an Israeli entity is subject to a redemption fee formula that is based, in general, on the
ratio between aggregate IIA grants received by the company and the company’s aggregate research and development expenses,
multiplied by the transaction consideration considering depreciation mechanism and less royalties already paid to the IIA. The
regulations promulgated under the Innovation Law establish a maximum payment of the redemption fee paid to the IIA under the above
mentioned formulas and differentiates between two situations: (i) in the event that the company sells its IIA funded know-how, in
whole or in part, or is sold as part of an M&A transaction, and subsequently ceases to conduct business in Israel, the maximum
redemption fee under the above mentioned formulas will be no more than six times the amount received (plus annual interest) for the
applicable know-how being transferred, or the entire amount received from the IIA, as applicable; (ii) in the event that following the
transactions described above (i.e. asset sale of IIA funded know-how or transfer as part of an M&A transaction) the company continues
to conduct its research and development activity in Israel (for at least three years following such transfer and maintain staff of at least
75% of the number of research and development employees it had for the six months before the know-how was transferred and keeps
the same scope of employment for such research and development staff), then the company is eligible for a reduced cap of the
redemption fee of no more than three times the amounts received (plus annual interest) for the applicable know-how being transferred.
● Approval of the transfer of IIA funded technology to another Israeli company may be granted only if the recipient abides by the
provisions of the Innovation law and related regulations, including the restrictions on the transfer of know-how and manufacturing
rights outside of Israel (note that there will be an obligation to pay royalties to the IIA from the income of such sale transaction as part
of the royalty payment obligation).
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Approval to manufacture products outside of Israel or consent to the transfer of technology, if requested, might not be granted. Furthermore,
the IIA may impose certain conditions on any arrangement under which it permits us to transfer technology or development out of Israel.
Grants Received from the IIA (formerly the OCS)
We have received grants from the IIA as part of our participation in two programs as described below:
Membership in the Activities of the Bio Medical Photonic Consortium
The Bio Medical Photonic Consortium, or the Consortium, commenced its activities in June 2007, and concluded its activities on December
31, 2012. The purpose of the Consortium was to develop generic photonic technologies in the field of diagnostics and therapeutics in the biomedical
industry in Israel, and specifically on the subject of the digestive system. The activities of the Consortium were performed under our management
and the management of Given Imaging Ltd., where each would develop technological models which are based on their internal developments and on
developments of the members of the Consortium.
Within the framework of the activities of the Consortium, the Company worked to develop the next generation technology of miniature
cameras. The cameras were integrated, within the framework of the Consortium, in technological models for minimally invasive procedures which
were developed by the members of the Consortium. The various combinations of surgical tools and advanced visual capabilities with miniature
endoscopes are innovative, and we predict that the Consortium framework will continue serving as a fruitful basis for the development of innovative
medical procedures through the creation of intellectual property. Additionally, we will cooperate with research groups which develop indicators for
early detection of colorectal cancer, with the aim of integrating the visualization techniques and key products in this field.
The following are details regarding the rights and obligations within the framework of our activity in the Consortium, which continue to
apply notwithstanding the conclusion of the program:
(i) The property rights to information which has been developed belongs to the Consortium member that developed it. However, the
developing entity is obligated to provide the other members in the Consortium a license for the use of the new information, without
consideration, provided that the other members do not transfer such information to any entity which is not a member of the Consortium.
The provision of a license or of the right to use the new information to a third party is subject to approval by the administration of the
MAGNET Program at the IIA;
(ii) We are is entitled to register a patent for the new information which has been developed by it within the framework of its activity in the
Consortium. The foregoing registration does not require approval from the administration; and
(iii) The know-how and technology developed under the program is subject to the restrictions set forth under the Innovation Law, including
restrictions on the transfer of such know-how and any manufacturing rights with respect thereto, without first obtaining the approval of
the IIA. Such approval may entail additional payments to the IIA, as determined under the Innovation Law and regulations, and as
further detailed above.
Collaboration Grant for the Development of a Miniature Diameter Endoscope for Use in Dental Implants
In July 2011, the IIA approved our application for support for a joint project regarding the development of an innovative, miniature diameter
endoscopic product in the field of dental surgery, or the Dental Project. In October 2012, the Company received a notice according to which approval
was given for continued support for the Dental Project for a second year. The IIA support for the Dental Project concluded on July 31, 2013.
The Dental Project was performed in collaboration with Qioptiq GmbH, a German corporation, or Qioptiq, in the field of sophisticated
medical micro-optics, including in the medical and life sciences sector. The collaboration between the Company and Qioptiq was performed within
the framework of the Eureka organization, a Pan-European organization which includes approximately 40 member states, including the State of
Israel, and which acts to coordinate and to finance research and development enterprises in and outside of Europe.
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In accordance with the outline of the Dental Project, we and Qioptiq collaborated on the development of an innovative miniature-diameter
endoscope, with side viewing capabilities, intended for use in various dental implant procedures, the Dental Endoscope. During the Dental Project,
each of the parties developed different parts of the Dental Endoscope. In accordance with the terms of the collaboration, the intellectual property
which originated from the development of the Dental Endoscope remained the exclusive property of the party which developed it. Subject to the
completion of the project, the parties agreed to conduct negotiations regarding the method used to produce and market the Product (the foregoing
negotiations have not yet been conducted and we have notified the IIA that there are no revenues from this project).
Implantation procedures are complex, and in many cases, damage is caused to the tissue of the mouth and the jaw due to the dentist’s
inability to see the entire operating area. The Dental Endoscope is intended to allow improved visual monitoring of the surgical procedure using a
miniature video camera which has been developed by us, which is installed on the edge of the endoscope, thereby significantly reducing the risk to
the patient. It is estimated that hundreds of thousands of procedures of the kind for which the product is intended are performed each year in Europe.
Construction of a prototype for the product concluded in November 2012. The prototype is intended for use in pre-clinical trials and in human
clinical trials.
As of the date hereof, there is no certainty that it will be possible to produce and market the product, which may be developed or that the
regulatory approvals required for the product’s marketing will be received. At present, we and Qioptiq are not acting to commercialize the Dental
Project.
Grants and Royalty Obligations
We received various grants from the IIA in connection with our participation in its programs. We received a grant of approximately $2.3
million in connection with our participation in the Bio Medical Photonics Consortium in the production of generic technology related to the partial
development of miniature or the Consortium Grant. Under the terms of the Consortium Grant we are not required to pay royalties. In addition, we
received a grant of approximately $0.2 million in connection with a collaboration within the framework of the Eureka organization related to
miniature endoscope for dental implants, or the Eureka Grant. Under the terms of the Eureka Grant, we would have to pay royalties at a rate of 3%
-5% from the actual sales of the relevant device, up to the repayment of the grant, with the addition of interest and linkage. As of December 31, 2016,
there have been no sales that requires us to pay royalties under the Eureka Grant and we believe that the probability we could generate income from
the miniature endoscope for dental implants is low.
C.
Organizational Structure
We currently have one wholly owned subsidiary: Medigus USA LLC, a limited liability company, incorporated in the State of Delaware,
United States.
D.
Property, Plant and Equipment
Our offices and main research and development facility are located at Omer Industrial Park, No. 7A, P.O. Box 3030, Omer 8496500 Israel,
where we occupy approximately 807 square meters. We lease our facilities and our lease ends on December 31, 2018.
We consider that our current office space is sufficient to meet our anticipated needs for the foreseeable future and is suitable for the conduct
of our business. We have no current plans to construct, expend or improve our facilities.
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ITEM 4A. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 5.
OPERATING AND FINANCIAL REVIEW AND PROSPECTS
The following discussion of our financial condition and results of operations should be read in conjunction with “Item 3. Key
Information—Selected Financial Data” and our consolidated financial statements and the related notes to those statements included elsewhere in
this annual report. In addition to historical consolidated financial information, the following discussion and analysis contains forward-looking
statements that involve risks, uncertainties and assumptions. Our actual results and timing of selected events may differ materially from those
anticipated in these forward-looking statements as a result of many factors, including those discussed under “Item 3. Key Information—D. Risk
Factors” and elsewhere in this annual report.
The audited consolidated financial statements for the years ended December 31, 2017, 2016 and 2015 in this Annual Report have been
prepared in accordance with International Financial Reporting Standards, which are standards and interpretations thereto issued by the
International Accounting Standard Board.
Overview
We are a medical device company specializing in developing innovative endoscopic procedures and devices. We are a developer of a unique
proprietary endoscopic system for the treatment of GERD, a common chronic disease. We have an advanced technology platform for performing a
wide range of endoscopic procedures. The platform includes various types of rigid, semi-flexible and flexible video endoscopes, as well as respective
endoscopy suites.
From our date of incorporation, we have invested the majority of our research and development efforts on the MUSE™ system, intended for
the minimally invasive and endoscopic treatment of GERD, one of the most widespread chronic diseases in the western world. The MUSE™ system
has also been given marketing approval by the FDA through the 510(k) track and bears a CE mark, as required in order to market the system in
European Union countries. In addition, we have obtained the necessary license to market the product in Canada, Turkey and Israel, and we are also in
the process of obtaining regulatory approvals in China.
While at present significant portion of our revenue is still derived from the miniature camera and related equipment, our strategy is focused
on the development and promotion of our MUSETM System.
We have incurred net losses each year since inception. The Company’s accumulated deficit as of December 31, 2017 aggregated to
approximately $55.9 million. We anticipate that we are likely to continue to incur significant net losses for at least the next several years as we
continue development of the MUSE™ system and potentially other products, expand our sales and marketing capabilities in the endoscopy-based
products market, continue the commercialization of the MUSE™ system and work to expand its adoption and clinical implementation, and continue
to develop the corporate infrastructure required to sell and market our products.
Recent business events and key milestones in the development of our business, include the following:
● In November 2017, pursuant to a shelf prospectus in the United States, we raised approximately $1.62 million (gross) through the
issuance of ADSs and warrants. See “Item 10. Additional Information – C. Material Contracts.”
● In March 2017, pursuant to a registration statement in the United States, we raised approximately $7.5 million (gross) through the
issuance of ADSs and warrants. See “Item 10. Additional Information – C. Material Contracts.”
● In December 2016, pursuant to a shelf prospectus in the United States, we raised approximately $0.76 million (gross) through the
issuance of ADSs and warrants. See “Item 10. Additional Information – C. Material Contracts.”
● In September 2016, pursuant to a shelf prospectus in the United States, we raised approximately $1.47 (gross) million through the
issuance of ADSs. See “Item 10. Additional Information – C. Material Contracts.”
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Summary of Critical Accounting Policies and Significant Judgments and Estimates
The preparation of consolidated financial statements in conformity with general accepted accounting principles require management to make
estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the
consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Critical accounting policies are
those that are the most important to the portrayal of our financial condition and results of operations, and that require our most difficult, subjective
and complex judgments. While our significant accounting policies are described in more detail in the notes to our financial statements, our most
critical accounting policies, discussed below, pertain to revenue recognition, warrants, share- based compensation, government participation in
research and development expenses, functional currency and accounting for income taxes.
Estimates, by their nature, are based upon judgments and information currently available to us. The estimates that we make are based upon
historical factors, current circumstances and the experience and judgment of management. We evaluate our assumptions and estimates on an ongoing
basis.
Revenue Recognition
Our revenues in recent years was primarily derived from the sale of miniature camera and related equipment which we develop and
manufacture. Such revenue was sold primarily in the United States, Asia and several countries in Europe. The remainder revenues relates to the sale
of the MUSE ™ system, our strategy is focused on the development and promotion of our MUSETM System.
We recognize revenues in accordance with International Accounting Standard No. 18, or IAS 18. Under IAS 18, revenues from the sale of
goods are recognized when all of the following criteria have been met:
● The significant risks and rewards that are derived from the ownership of the goods have been transferred to the purchaser;
● We do not retain continuing managerial involvement at a level that generally typifies ownership and we do not retain effective control
over the goods being sold;
● The amount of the revenues can be measured reliably;
● It is expected that the economic benefits that are connected to the transaction will flow to us; and
● The costs that have been incurred or that will be incurred in respect of the transaction can be measured reliably.
We also recognize revenues in accordance with International Accounting Standard No. 11, or IAS 11. A “construction contract” is defined
by IAS 11 as a contract specifically negotiated for the construction of an asset. When the outcome of a construction contract can be estimated reliably
and it is probable that the contract will be profitable, the revenue and the associated costs recognized over the contract period by reference to the
stage of completion. We recognize expected loss immediately once concluded that it’s probable. When the outcome of a construction contract cannot
be estimated reliably, then we recognize revenue only to the extent of contract costs incurred that it is probable will be recoverable. Variations in
contract work, claims and incentive payments are included in contract revenue to the extent that may have been agreed with the customer and are
capable of being reliably measured. We use the “percentage-of-completion method” to determine the appropriate amount to recognize in a given
period. The stage of completion is measured by reference to the contract costs incurred up to the end of the reporting period as a percentage of total
estimated costs for each contract. Costs incurred in the period in connection with the future activities on a contract are excluded from contract costs
in determining the stage of completion. We classified the net contract position for each contract as either an asset or a liability as part of the balance
sheet. Net contract classified as an asset when the incurred costs plus recognized profits (less recognized losses) exceed progress billings and as a
liability if otherwise.
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Warrants
Receipts from investors in respect of warrants are classified as equity to the extent that they confer the right to purchase a fixed number of
shares for a fixed exercise price. In the event that the exercise price is not deemed to be fixed, the warrants are classified as non-current liability. This
liability initially recognized at its fair value on the issue date and subsequently accounted for at fair value at each reporting date. The fair value
changes are charged to profit from changes in fair value of warrants issued to investors on the statement of comprehensive loss. The fair value of the
warrants is measured at issue date on the basis of accepted valuation models and assumptions regarding unobservable inputs used in the valuation
models.
In August 2014, in connection with a private placement, we issued investors warrants to purchase 43,695 of our ADSs at an exercise price of
NIS 6.27. The warrants were exercisable for a period of three years from the date of issuance. The warrants expired in August 2017 without being
exercised.
In December 2016, in connection with a registered direct offering, we issued warrants to purchase 39,871 of our ADSs at an exercise price
of $9.0. The warrants are exercisable for a period of five and half years from the date of issuance.
In March 2017, in connection with our public offering, we issued warrants to purchase 2,142,858 of our ADSs at an exercise price of $3.5.
The warrants are exercisable for a period of five years from the date of issuance.
In November 2017, in connection with a registered direct offering, we issued warrants to purchase 405,000 of our ADSs at an exercise price
of $2.25. The warrants are exercisable for a period of five and half years from the date of issuance.
The fair value of the warrants was calculated according to valuation methods, and based on the following assumptions:
2017
2016
December 31
Standard
deviation
Risk-free
interest
63.47%
66.72%
65.74%
0.97%
0.56%
0.70%
Fair value
(USD
thousands)
228
325
6
Standard
deviation
Risk-free
interest
Fair value
(USD
thousands)
155.39%
155.39%
1.26%
0.00%
237
-
Warrants issued November 2017
Warrants issued March 2017
Warrants issued December 2016
Warrants issued August 2014
Share-Based Compensation
We granted several equity-settled share based compensation plans to the Company’s employees and other service providers in connection
with their service to the Company. The fair value of such services is calculated at the grant date and amortized to the statement of loss and other
comprehensive loss during the vesting period.
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The fair value of the options which was granted on December 2015 (Series F) and October 2017 (Series K) was calculated using the Black
and Scholes options pricing model, and based on the following assumptions:
Fair value on
grant date-
NIS in
thousands
Share price
on date of
grant (NIS)
607
1.627
Plan
Series F
Expected
dividend
None
Expected
volatility
Risk free
interest
Vesting
conditions
54%
1.39% Four
Expected
term
6 years
equal portions,
following each
anniversary of
the grant date
Series K
1,109
0.162
None
64%
1.16% Four equal
6 years
portions,
following each
anniversary of
the grant date
Inventory impairment
The company continually evaluates inventory for potential loss due to excess quantity or obsolete or slow-moving inventory by comparing
sales history and sales projection to the inventory on hand. When evidence indicates that the carrying value of a product may not be recoverable, a
charge is recorded to reduce the inventory to its current net realizable value.
Functional Currency
Until December 31, 2015, our consolidated financial statements were presented in NIS, which was the Company’s functional and
presentation currency as of such date. Effective January 1, 2016, the Company changed its functional currency to the U.S. dollar. The 2015, 2014 and
2013, financial data presented in this annual report were translated from NIS to USD as follows: (1) assets and liabilities were translated using the
December 31 exchange rates of each year, as applicable; (2) equity items were translated using historical exchange rates at the relevant transaction
dates; (3) the consolidated statements of loss and other comprehensive loss line items were translated using the average exchange rates for each year;
and (4) the translation net effect was recorded as “currency translation differences” within the consolidated statements of loss and other
comprehensive loss for each year.
Accounting for Income Taxes
As part of the process of preparing our consolidated financial statements we are required to estimate our income taxes in each of the
jurisdictions in which we operate. This process requires us to estimate our actual current tax exposures and make an assessment of temporary
differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities,
which are included within our consolidated balance sheet. Significant management judgment is required in determining our provision for income
taxes, deferred tax assets and liabilities. Changes to these estimates may result in a significant increase or decrease to our tax provision in the current
or subsequent period.
We recognize deferred tax assets for unused tax losses, tax benefits, and deductible temporary differences to the extent that it is probable
that future taxable profits will be available against which that can be utilized. Deferred tax assets are reviewed at each reporting date and are reduced
to the extent that it is no longer probable that the related tax benefit will be realized.
The calculation of our tax liabilities or reduction in deferred tax asset involves dealing with uncertainties in the application of complex tax
regulations and estimates of future taxable income in different geographical jurisdictions. We recognize liabilities for uncertain tax positions if it is
probable to be realized. It is inherently difficult and subjective to estimate such amounts, as we have to determine the probability of various possible
outcomes. We reevaluate these uncertain tax positions on a quarterly basis. This evaluation is based on factors including, but not limited to, changes
in facts or circumstances, changes in tax law, effective settlement of audit issues, and new audit activity. Such a change in recognition or
measurement would result in the recognition of a tax benefit or an additional charge to the tax provision.
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No deferred tax assets have been recorded in the Group’s books and records with respect to accumulated losses since it is not probable that
the Group will be able to utilize such losses in the foreseeable future against taxable income.
A.
Results of Operations
The following table sets forth a summary of our operating results:
Revenues
Cost of revenues:
Products and services
Inventory impairment
Gross Profit (Loss)
Research and development expenses, net
Sales and marketing expenses
General and administrative expenses
Other income, net
Operating loss
Profit from changes in fair value of warrants issued to investors
Finance income (expenses), net
Loss before taxes on income
Taxes benefit (Taxes on income)
Loss for the year
Other comprehensive loss for the year
Total comprehensive loss for the year
Basic and diluted loss per share
Year ended December 31, 2017 compared to year ended December 31, 2016
Revenues
2017
Year ended December 31,
2016
U.S. Dollars, in thousands, except per share and
weighted average shares data
467
2015
549
624
219
297
(49)
2,208
846
3,005
(6,108)
3,502
54
(2,552)
7
(2,545)
(2,545)
(0.02)
176
373
3,655
2,125
3,684
(9,091)
25
87
(8,979)
(28)
(9,007)
(9,007)
USD
(0.26)
277
347
4,384
2,680
2,842
3
(9,556)
106
(14)
(9,464)
(68)
(9,532)
(211)
(9,743)
(0.34)
Revenues for the year ended December 31, 2017 were $467,000, a decrease of $82,000, or 15%, compared to total revenues of $549,000 for
the year ended December 31, 2016.
The tables below set forth our revenues, by region and by product for the periods presented:
U.S. dollars; in thousands
United States
Europe
Asia
Other
Total
Year Ended December 31,
2017
115
193
116
43
467
25%
41%
25%
9%
100%
2016
345
53
5
146
549
63%
10%
1%
26%
100%
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U.S. dollars; in thousands
MUSETM system and related equipment
Miniature camera and related equipment
Total
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2017
161
306
467
34%
66%
100%
2016
100
449
549
18%
82%
100%
Our revenues in recent years were primarily derived from the sale of miniature camera and related equipment which we develop and
manufacture, such revenue was sold primarily in the United States, Asia and several countries in Europe. The remainder revenues relates to the sale
of the MUSE ™ system, our strategy is focused on the development and promotion of our MUSETM System.
The decrease in revenues in 2017 was primarily due to a decrease of $143,000 in miniature camera and related equipment revenues which
was partially offset by an increase of $61,000 in revenues from MUSETM systems.
During 2016 we recognized two large projects aggregated to $239,000 and $118,000 for National Aeronautics and Space Administration
and to one of Israel’s leading industrial companies, respectively, both relate to the miniature camera and related equipment and both were disclosed
as major customers within Note 17d in the Company’s consolidated financial statements included elsewhere in this annual report. Those projects
were not repeated during 2017, the loss of such revenues was partially offset by overall increase in the sales of the Company’s products.
Cost of revenues and inventory impairment
Cost of revenues and inventory impairment for the year ended December 31, 2017 were $516,000, an increase of $340,000, or 193%,
compared to cost of revenues of $176,000 for the year ended December 31, 2016. The increase was primarily due to the inventory impairment of
$297,000 that was recorded during 2017 due to an inventory analysis management performed. Such analysis matched between the inventory items
held by the Company each balance sheet cut-off date compared to management forecast. The excess inventory represented the inventory impairment
that was recorded.
Gross Profit (Loss)
Gross loss for the year ended December 31, 2017 was $49,000, a decrease of $422,000 compared to gross profit of $373,000 for the year
ended December 31, 2016. The decrease was primarily due to the inventory impairment of $297,000 mentioned above. The remainder decrease
relates to the fact that the 2016 projects mentioned above, that were not repeated during 2017, were more profitable than the Company’s products.
Research and Development Expenses
Research and development expenses for the year ended December 31, 2017, were $2.2 million, a decrease of $1.5 million, or 40%,
compared to $3.7 million for the year ended December 31, 2016. The decrease was primarily due to the Company’s cost reduction program which
was implemented since the third quarter of 2016.
Sales and Marketing Expenses
Sales and marketing expenses for the year ended December 31, 2017, were $0.8 million, a decrease of $1.3 million, or 60%, compared to
$2.1 million for the year ended December 31, 2016. The decrease was primarily due to the Company’s cost reduction program, which was
implemented since the third quarter of 2016, which resulted in a termination of headcount (mainly in the Company’s subsidiary in the U.S.) and also
due to a reduction of our marketing activities such as participation in exhibits.
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General and Administrative Expenses
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Administrative and General expenses for the year ended December 31, 2017, were $3.0 million, a decrease of $0.7 million, or 18%,
compared to $3.7 million for the year ended December 31, 2016. The decrease was primarily due to a decrease in professional services of $1.3
million in connection with an intellectual property litigation that took place during 2016 and a decrease of $0.2 million primarily due to the cost
reduction program, which was implemented since the third quarter of 2016, partially offset by an increase in professional services of $0.9 million in
connection with issuance expenses which were attributed to the warrants classified as liabilities during 2017 and therefore allocated directly to the
consolidated statement of loss and other comprehensive loss (for additional information regarding such expenses, please refer to Note 13b in the
Company’s consolidated financials included elsewhere in this Annual Report).
Operating loss
We incurred an operating loss of $6.1 million for the year ended December 31, 2017, a decrease of $3.0 million, or 33%, compared to
operating loss of $9.1 million for the year ended December 31, 2016. The decrease in operating results was due to $1.5 million decrease in research
and development expenses, $1.3 million decrease in sales and marketing expenses and $0.7 million in administrative and general expenses, $0.1
million decrease in revenues and $0.3 million increase in cost of revenues.
Profit from Change in Fair Value of Warrants Issued to Investors
Profit from change in the fair value of warrants issued to investors for the year ended December 31, 2017, was $3.5 million, an increase of
almost $3.5 million, compared to $25,000 for the year ended December 31, 2016.
Warrants issued to investors classified as either liabilities or as part of the shareholders’ equity based on the accounting guidance established
in connection with the rights attached to the warrants. The warrants that were classified as liabilities due to a cashless exercise mechanism are subject
to adjustment to fair value each balance sheet cut-off date based on the Black and Scholes model. This adjustment is presented separately within the
consolidated statement of loss and other comprehensive loss. The significant profit recorded during the year ended December 31, 2017 derived from
a decrease in the fair value of the warrants classified as liabilities relating primarily to warrants that were issued during the first quarter of 2017, and
was primarily due to a reduction in price of the Company’s ordinary shares and the fact that remaining exercise period was shortened. The profit
during the year ended December 31, 2016 was relatively immaterial.
Finance income, net
Finance income, net for the year ended December 31, 2017, was $54,000, a decrease of $33,000, or 38%, compared to $87,000 for the year
ended December 31, 2016. The decrease was primarily due to changes in currencies exchange rates.
Loss before taxes on income
We incurred loss before taxes on income of $2.6 million for the year ended December 31, 2017, a decrease of $6.4 million, or 72%,
compared to loss before taxes on income of $9.0 million for the year ended December 31, 2016. The decrease was primarily due to $3.0 million
decrease in operating loss and $3.5 million increase in profit from change in the fair value of warrants issued to investors.
Taxes benefit (Taxes on income)
Taxes benefit for the year ended December 31, 2017, were $7,000, a decrease of $35,000, compared to $28,000 taxes on income for the
year ended December 31, 2016. The decrease was due to tax adjustment entry recorded during 2017 due to prior year final tax assessment for the
Company’s U.S. subsidiary.
Loss for the year
Loss for the year was $2.5 million, or a loss of $0.02 per basic and diluted share, for the year ended December 31, 2017, a decrease of $6.5
million, compared to loss for the year of $9.0 million, or loss of $0.26 per basic and diluted share, for the year ended December 31, 2016. The
decrease was primarily due to $6.4 million decrease in loss before taxes on income.
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Year ended December 31, 2016 compared to year ended December 31, 2015
Revenues
Revenues for the year ended December 31, 2016 were $549,000, a decrease of $75,000, or 12%, compared to total revenues of $624,000 for
the year ended December 31, 2015.
The tables below set forth our revenues, by region and by product for the periods presented:
U.S. dollars; in thousands
United States
Europe
Asia
Other
Total
U.S. dollars; in thousands
MUSETM system and related equipment
Miniature camera and related equipment
Total
Year Ended December 31,
2016
345
53
5
146
549
2016
100
449
549
63%
10%
1%
26%
100%
18%
82%
10%
2015
446
105
51
22
624
2015
66
558
624
72%
17%
8%
3%
100%
11%
89%
100%
Our revenues in recent years were primarily derived from the sale of miniature camera and related equipment which we develop and
manufacture, such revenue was sold primarily in the United States, Asia and several countries in Europe. The remainder revenues relates to the sale
of the MUSE ™ system Our strategy is focused on the development and promotion of our MUSETM System.
The decrease in revenues was primarily due to a decrease in sales of our miniature camera and related equipment of $109,000, partially
offset by an increase of sales of our MUSETM system of $34,000.
Cost of revenues
Cost of revenues for the year ended December 31, 2016 was $176,000, a decrease of $101,000, or 36%, compared to cost of revenues of
$277,000 for the year ended December 31, 2015. The decrease is consistent with the decrease in the revenues.
Gross Profit
Gross profit for the year ended December 31, 2016 was $373,000, an increase of $26,000, or 7% compared to gross profit of $347,000 for
the year ended December 31, 2015. Gross profit as a percentage of total revenues increased to 68% for the year ended December 31, 2016, compared
to 56% for the year ended December 31, 2015, primarily due to the development services provided to the National Aeronautics and Space
Administration and to one of Israel’s leading industrial companies during 2016 which were more profitable projects.
Research and Development Expenses
Research and development expenses for the year ended December 31, 2016, were $3.7 million, a decrease of $0.7 million, or 17%,
compared to $4.4 million for the year ended December 31, 2015. The decrease was primarily due to the decrease in the acquisition of materials by the
Company and services rendered to the Company for trainings activities during 2016, due to a cost reduction program which was implemented by the
Company since the third quarter of 2016.
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Sales and Marketing Expenses
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Sales and marketing expenses for the year ended December 31, 2016, were $2.1 million, a decrease of $0.6 million, or 21%, compared to
$2.7 million for the year ended December 31, 2015. The decrease was primarily due to the Company’s cost reduction program which was
implemented since the third quarter of 2016, which resulted in a termination of headcount (mainly in the Company’s subsidiary in the U.S.) and also
due to a reduction of our marketing activities such as participation in exhibits.
General and Administrative Expenses
Administrative and General expenses for the year ended December 31, 2016, were $3.7 million, an increase of $0.9 million, or 30%,
compared to $2.8 million for the year ended December 31, 2015. The increase was primarily due to an increase in professional services in connection
with an intellectual property litigation.
Operating loss
We incurred an operating loss of $9.1 million for the year ended December 31, 2016, a decrease of $0.5 million, or 5%, compared to
operating loss of $9.6 million for the year ended December 31, 2015. The decrease in operating results was primarily due to $0.7 million decrease
research and development expenses and $0.6 million decrease in sales and marketing expenses, partially offset by $0.9 million increase in
administrative and general expenses.
Profit from Change in Fair Value of Warrants Issued to Investors
Profit from change in the fair value of warrants issued to investors for the year ended December 31, 2016, was $25,000, a decrease of
$81,000, or 76% compared to $106,000 for the year ended December 31, 2015.
Warrants issued to investors are classified as either liabilities or as part of the shareholders’ equity based on the accounting guidance
established in connection with the rights attached to the warrants. The warrants that were classified as liabilities due to a cashless exercise mechanism
are subject to adjustment to fair value each balance sheet cut-off date based on the Black and Scholes model. This adjustment is presented separately
within the consolidated statement of loss and other comprehensive loss. The variance year over year is a result of the fair value calculation in each
balance sheet cut-off date.
Finance income (expenses), net
Finance income, net, for the year ended December 31, 2017, were $87,000, an increase of $101,000 compared to $14,000 finance expense,
net for the year ended December 31, 2015, The increase was primarily due to changes in currencies exchange rates.
Loss before taxes on income
We incurred loss before taxes on income of $9.0 million for the year ended December 31, 2016, a decrease of $0.5 million, or 5%,
compared to loss before taxes on income of $9.5 million for the year ended December 31, 2015. The decrease was primarily due to $0.5 decrease in
operating loss, increase of $0.1 million in finance income, net, partially offset by $0.1 million decrease in profit from change in the fair value of
warrants issued to investors.
Taxes on income
Taxes on income for the year ended December 31, 2016, were $28,000, a decrease of $40,000, or 59% compared to $68,000 for the year
ended December 31, 2015.
Loss for the year
Loss for the year was $9.0 million, or a loss of $0.26 per basic and diluted share, for the year ended December 31, 2016, a decrease of $0.5
million, compared to loss for the year of $9.5 million, or loss of $0.34 per basic and diluted share, for the year ended December 31, 2015. The
decrease was primarily due to $0.5 million decrease in loss before taxes on income.
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Effective Corporate Tax Rate
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Our effective consolidated tax rate for the years ended December 31, 2017, 2016 and 2015 was almost zero percent (0%), primarily due to
the fact that the Company did not record deferred tax asset in connection with the losses incurred in Israel, since it is not probable that the Company
will be able to utilize such losses in the foreseeable future against taxable income.
Impact of Inflation, Devaluation and Fluctuation in Currencies on Results of Operations, Liabilities and Assets
We generate part of our revenues in different currencies than our functional currency (U.S. dollars), such as NIS and Euro. As a result, some
of our financial assets are denominated in these currencies, and fluctuations in these currencies could adversely affect our financial results. A
considerable amount of our expenses are generated in U.S. dollars, but a significant portion of our expenses such as salaries are generated in other
currencies such as NIS. In addition to our operations in Israel, we are expanding our international operations in the European Union. Accordingly, we
incur and expect to continue incurring additional expenses in non U.S. dollar currencies, such as described above. Due to the mentioned, our results
could be adversely affected as a result of a strengthening or weakening of the U.S. Dollar compared to these other currencies.
The inflation in Israel during the last several years was relatively immaterial and therefore had immaterial effect on our results of operations.
Effective January 1, 2016, we changed our functional currency to the U.S. dollar from NIS. This change was based on management's
assessment that the U.S. dollar is the primary currency of the economic environment in which we operates. Accordingly, the functional and reporting
currency of our consolidated financial statements is the U.S. dollar.
B.
Liquidity and Capital Resources
Liquidity
During the year ended December 31, 2017, we incurred a total comprehensive loss of approximately $2.5 million and a negative cash flow used in
operating activities of approximately $4.7 million. As of December 31, 2017, we incurred accumulated deficit of approximately $55.9 million. Based
on the projected cash flows, cash and cash equivalents and short-term deposit balances as of December 31, 2017, which totaled to USD 2.8 million
and USD 3.5 million, respectively, we are of the opinion that without further fund raising we will not have sufficient resources to enable us to
continue our operating activities including the development, manufacturing and marketing of our products for a period of at least 12 months from the
date of this report. As a result, there are substantial doubts about our ability to continue as a going concern. At our expected burn rate, our current
cash balance will be sufficient until approximately December 2018, taking into account shut down costs.
We will need to seek additional sources of funds, including selling additional equity, debt or other securities or entering into a credit facility,
take costs reduction steps or modify our current business plan to achieve profitability. If we raise additional funds through the issuance of debt
securities, these securities may have rights senior to those of our ordinary shares and could contain covenants that could restrict our operations and
ability to issue dividends. We may also require additional capital beyond our currently forecasted amounts. Any required additional capital, whether
forecasted or not, may not be available on reasonable terms, or at all. If we are unable to obtain additional financing, we may be required to reduce
the scope of, delay or eliminate some or all of our planned research, development and commercialization activities, which could materially harm our
business and results of operations.
Because of the numerous risks and uncertainties associated with the development of medical devices and the current economic situation, we
are unable to estimate the exact amounts of capital outlays and operating expenditures necessary to complete the development of our products and
successfully deliver commercial products to the market. Our future capital requirements will depend on many factors, including but not limited to the
following:
●
the revenue generated by sales of our current and future products;
● the expenses we incur in selling and marketing our products and supporting our growth;
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● the costs and timing of regulatory clearance or approvals for new products or upgrades or changes to our products;
● the expenses we incur in complying with domestic or foreign regulatory requirements imposed on medical device companies;
● the expenses associated with achieving a reimbursement code for MUSETM system procedure;
● the rate of progress, cost and success or failure of on-going development activities;
● the emergence of competing or complementary technological developments;
● the costs of filing, prosecuting, defending and enforcing any patent or license claims and other intellectual property rights;
● the terms and timing of any collaborative, licensing, or other arrangements that we may establish;
● the future unknown impact of recently enacted healthcare legislation;
● the acquisition of businesses, products and technologies; and
● general economic conditions and interest rates.
Cash Flows
Operating Activities
Net cash used in operating activities for the year ended December 31, 2017 was $4.7 million, a decrease of $4.6 million, compared to net
cash used in operating activities of $9.3 million for the year ended December 31, 2016, which reflect an increase of $2.3 million compared to net
cash used in operating activities of $7.0 million for the year ended December 31, 2015.
Net cash used in operating activities for the year ended December 31, 2017, consisted primarily of loss for the year before taxes on income
of $2.6 million and profit on change in the fair value of warrants issued to inventors of $3.5 million, partially offset by issuance expenses which were
attributed to the warrants classified as a financial liability and charged directly to profit or loss of $1.0 million.
Net cash used in operating activities for the year ended December 31, 2016, consisted primarily of loss for the year before taxes on income
of $9.0 million, an increase in inventory of $0.8 million and a decrease in accounts payable and accruals of $0.4 million, partially offset by a decrease
in accounts receivables of $0.6 million and a decrease in accounts receivables of $0.2 million.
Net cash used in operating activities for the year ended December 31, 2015, consisted primarily of loss for the year before taxes on income
of $9.5 and a decrease in accounts receivables of $0.4 million, partially offset by net sales of financial assets at fair value through profit or loss of
$2.1 million and an increase in accounts payable and accruals of $0.7 million.
Investing Activities
Net cash used in investing activities for the year ended December 31, 2017 was $3.5 million, an increase of almost $3.5 million, compared
to net cash used in investing activities of $38,000 for the year ended December 31, 2016, which reflect a decrease of $58,000 compared to net cash
used in investing activities of $96,000 for the year ended December 31, 2015.
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Net cash used in investing activities for the year ended December 31, 2017, consisted primarily of investment in short-term deposit of $5.0
million, partially offset by withdrawal of short-term deposit of $1.5 million.
Net cash used in investing activities for the year ended December 31, 2016, consisted primarily of purchase of property and equipment of
$32,000.
$84,000.
Net cash used in investing activities for the year ended December 31, 2015, consisted primarily of purchase of property and equipment of
Financing Activities
Net cash generated from financing activities for the year ended December 31, 2017 was $7.9 million, an increase of $6.0 million, compared
to net cash generated from financing activities of $1.9 million for the year ended December 31, 2016, which reflect a decrease of $4.9 million
compared to net cash generated from financing activities of $6.8 million for the year ended December 31, 2015.
Net cash generated from financing activities for the year ended December 31, 2017, consisted primarily of proceeds from issuance of shares
and warrants, net of $7.9 million.
Net cash generated from financing activities for the year ended December 31, 2016, consisted of proceeds from issuance of shares and
warrants, net of $1.9 million.
Net cash generated from financing activities for the year ended December 31, 2015, consisted of proceeds from issuance of shares and
warrants, net of $6.8 million.
C.
Research and Development, Patents and Licenses, Etc.
Our research and development efforts are focused on continuous improvement of the MUSE™ system, as well as investment in future
products. We conduct all of our research activities in Israel.
As of December 31, 2017, our research and development team, including regulatory and quality team members, consisted of eight
employees and one consultant. In addition, we work with subcontractors for the development of our products as needed. We have assembled an
experienced team with recognized expertise in mechanical and electrical engineering, software, control algorithms and systems integration, as well as
significant medical and clinical knowledge and expertise.
We finance our research and development activities mainly through sale of our products, capital raising and grants received from the IIA. As
of December 31, 2017, we had received total aggregated grants of $2.5 million from the IIA. For further information see “Item 4. Information on the
Company—B. Business Overview — Health Care Laws and Regulations—Israeli Government Programs.”
The table below set forth our research and development expenses for the periods presented:
Research and development expenses
2017
Year Ended December 31,
2016
(U.S. Dollars, in thousands)
2015
$
2,208
$
3,655
$
4,384
From time to time we file applications for patent registration in the certain countries, some in which we are active and some which we
consider as potential markets in order to protect our developed intellectual property.
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Trend Information
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The following is a description of factors that may influence our future results of operations, including significant trends and challenges that
we believe are important to an understanding of our business and results of operations:
To date, significant portion of our revenues was generated from the sale of imaging equipment and the remainder from the sale of
the MUSE™ system. The level of our future revenues is hard to predict as it depends on many factors, which most of them are outside of our control.
For instance, future revenues from the sale of our products may be adversely affected by current general economic conditions and the resulting
tightening of credit markets, which may cause purchasing decisions to be delayed, our customers may have difficulty securing adequate funding to
buy our products or, in an extraordinary event, may cause our customers to experience difficulties in complying with their engagements with us. In
addition, revenue growth depends on the acceptance of our technology in the market.
The healthcare industry in the United States has experienced a trend toward cost containment as government and private insurers seek to
manage healthcare costs by imposing lower payment rates and negotiating reduced contract rates with service providers. This trend may result in
inadequate coverage for procedures, especially those utilizing new technology, or result in new technology not receiving reimbursement coverage,
which may negatively impact utilization of our products. In addition, medical malpractice carriers are withdrawing coverage in certain states or
substantially increasing premiums. If this trend continues or worsens, physicians and surgeons may discontinue using our MUSE™ system or may
choose to not purchase it in the future due to the cost or inability to procure insurance coverage. However, we believe there is also a trend for
hospitals and physicians to use devices which enable less invasive procedures and to replace older more invasive devices which may result in longer
hospital stays and therefore higher medical costs. We believe this trend provides a positive market outlook for our products.
We sell our products using a direct sales force and in certain markets via third-party distributors.. Sales via third-party distributers - we have
entered into certain distribution agreements to sell our MUSETM system in Italy, Spain, Switzerland, Liechtenstein, Germany and China (pending
achievement of regulatory clearance for our MUSETM system in China).
E.
Off-Balance Sheet Arrangements
We have no material off-balance sheet arrangements
F.
Tabular Disclosure of Contractual Obligations
The following table summarizes our known contractual obligations and commitments as of December 31, 2017:
Car lease obligations
Premises leasing obligations
Total
Other Non-Current Liabilities Reflected on our Balance Sheet:
Total
Less than
1 year
(U.S. Dollars, in thousands)
1 – 3 years
91
85
176
49
85
134
42
42
Long-term advanced payments aggregated to approximately $0.1 million as of December 31, 2017. For further details, please refer to our
2017 consolidated financial statements and the related notes included elsewhere in this annual report.
Warrants that were classified as liabilities in our consolidated financial statements aggregated to approximately $0.6 million as of December
31, 2017. For further details refer to our 2017 consolidated financial statements and the related notes included elsewhere in this annual report.
Retirement benefit obligation, net aggregated to $65,000 as of December 31, 2017. For further details refer to our 2017 consolidated
financial statements and the related notes included elsewhere in this annual report.
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ITEM 6.
DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A.
Directors and Senior Management
The following table lists the names and ages of our directors and senior management:
Name
Christopher (Chris) Rowland
Oded Yatzkan
Minelu (Menashe) Sonnenschein
Dr. Yaron Silberman
Amir Govrin
Doron Birger(1)(2)
Eitan Machover(1)(2)
Efrat Venkert(1)(2)
Yuval Yanai(1)
Age
56
52
53
48
51
66
56
51
65
Position(s)
Chief Executive Officer, Director
Chief Financial Officer
VP, Israel Operations
VP, Sales and Marketing
VP, Research and Development
Chairman of the Board of Directors
Director
Director
Director
(1) Member of the audit committee.
(2) Member of the compensation and investment committees.
Christopher (Chris) Rowland has been serving as a member of our Board since March 2013 and as Chief Executive Officer since October
2013. Between 2011 and 2013, Mr. Rowland served as President of IntraPace Inc., a company that develops medical equipment in the field of
obesity. Mr. Rowland has served as President and CEO of Neo Tract Inc., a medical equipment company in the field of urology, and as President of
Americas Given Imaging Inc. Mr. Rowland holds a B.Sc. in marketing from the University of Southern Illinois. Mr. Rowland completed the
Executive Management Program of Columbia Business School, and the Executive Leadership Program of Harvard Business School.
Oded Yatzkan has served as our Chief Financial Officer since February 2017 and from September 2003 to August 2015. From August 2015
to February 2017, Mr. Yatzkan served as our VP Director of finance and accounting. Since August 2015, Mr. Yatzkan is also serving as an external
director at Oron Group Holdings and Investments. Mr. Yatzkan previously served as Controller and Administrative Director of the Be’er Sheva
Municipal Theatre from 1997 to 2003, as an Internal Auditor of Pandor Ltd., a TASE-listed Israeli company, from 1999 to 2001, as Assistant to
Chief Financial Manager of Gold & Honey Ltd. Mr. Yatzkan is a licensed CPA, and holds a BA in Economics with a specialization in Accounting
and an MBA with specialization in finance, both from Ben-Gurion University of Be’er Sheva, Israel.
Minelu (Menashe) Sonnenschein is a founding member and officer of our company who has been serving as our VP, Israel Operations since
June 2014. Among other roles, Mr. Sonnenschein previously served as our Director of Research and Development and has been directly responsible
for the development of the MUSETM System since the founding of the Company. Mr. Sonnenschein holds a M.Sc. in Electrical and Electronics
Engineering from Ben-Gurion University of Be’er Sheva, Israel.
Dr. Yaron Silberman has been serving as VP, Sales and Marketing since January 2011. Dr. Silberman has served as Marketing Director of
Niti Surgical Solutions Ltd., and as Product Manager of Given Imaging Ltd. Dr. Silberman holds a PhD in Computational Neuroscience and Data
Processing from Hebrew University of Jerusalem, Israel, an MBA from the College of Management Academic Studies of Rishon Le’Zion, Israel, and
a B.A. in Theoretical Mathematics from The Technion Institute of Technology, Israel.
Amir Govrin has been serving as VP, research and development since 2017. Prior to that, Mr. Govrin held several positions at the Company
since 2003, including research and development manager and mechanical development manager. Mr. Govrin hold a B.Sc. in Mechanical
Engendering from the Tel Aviv University.
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Doron Birger has been serving as a member of our Board since May 2015 and as Chairman of our Board since August 2017. Mr. Birger
currently serves as a director of MCS Medical Compression Ltd. (TASE:MDCL) and Icecure Medical Ltd. (TASE:ICCM), and as chairman and
director of several private companies in Israel in the hi-tech sector mainly in the medical device field. From 2002 to 2007, Mr. Birger served as the
chairman of the board of directors of Given Imaging Ltd. and later on as board member until February 2014. Mr. Birger served as chief executive
officer of Elron Electronic Industries, Ltd., or Elron, from August 2002 to April 2009. Prior to that, he held other executive positions at Elron,
including President since 2001, Chief Financial Officer from 1994 to August 2002, and Corporate Secretary from 1994 to 2001. Mr. Birger is a
director of variety of none profit organizations in Israel. Mr. Birger holds a B.A. and an M.A. in economics from the Hebrew University Jerusalem.
Eitan Machover has been serving as a member of our Board since September 29, 2016. Mr. Machover has been the Principal and Owner of
EM Advisory Services since August 2011. Mr. Machover is a Partner at Ziegler Meditech Equity Partners, L.P., a find specializing in the medical
device space, since January 2006. He serves as the fund’s representative on the board of directors of numerous public and private companies,
including: Brenmiller Energy, Ltd. (TASE:BRNG), since July 2017; WCG Properties, Ltd. (TASE:WCG.B2), since June 2017; Electra Real Estate
(TASE:ELTR), since October 2014; Related Commercial Portfolio, Ltd. (TASE:RLCM:B1), since July 2015 and MedyMatch Ltd. since December
2014. Mr. Machover served as Chief Executive Officer at Enhanced Surface Dynamics Inc. (Wellsense) from January 2013 to April 2014. He was
the VC Partner at Meditech Advisors LLC from January 2003 to August 2011. Mr. Machover previously held various business development and
M&A positions at GE Capital in the U.S., Europe and Asia from 1989 until May 2010, and led integrations into GE's Israeli operations, having been
named the National Executive for General Electric Israel, overseeing all of GE's activities in Israel. Mr. Machover holds a BS in Business
Communications from Emerson College, Boston, Massachusetts, and MBA in Finance and Marketing from Boston College.
Efrat Venkert has been serving as a member of our Board since September 2013. Ms. Venkert is the owner of a law firm specializing in legal
advice to companies and in business law. From 2009 to 2010, Ms. Venkert served as a member of an advisory group advising to the Government
Investigation Committee for the water sector. From 2007 to 2009, Ms. Venkert served as the chairperson secretary of the Steering Committee, and
Chairperson Manager of the Ministry of Justice and Ministry of Welfare pilot project on the subject of changes in the legislation of minors’
participation in legal proceedings and from 2004 to 2008 Ms. Venkert served as a lecturer in the Law Faculty of the University of Haifa. Ms. Venkert
holds an LL.B. from Hebrew University, Jerusalem, Israel and an MBA from Haifa University, Haifa, Israel. Ms. Venkert is a Certified Mediator of
ICNM, a graduate of the Companies Secretary Course of the Israel Management Center, and a graduate of Directors’ Course, Lahav, Tel-Aviv
University, Israel.
Yuval Yanai was appointed by our Board to serve as a member of our Board since February 2018. Mr. Yanai currently serves as a member
of the board of directors of Mazor Robotics Ltd. (NASDAQ:MZOR; TASE:MZOR), Check-Cap Ltd. (NASDAQ:CHEK) and Clal Biotechnology
Ltd. (TASE:CBI). Mr. Yanai also serves as a director of Hadassah Medical Center and Standard & Poors Maalot, Efranat Ltd., Endobetix Ltd., Nobio
Ltd. and as the chairman of the Israeli Fund for UNICEF. Mr. Yanai served as Senior Vice President and Chief Financial Officer of Given Imaging
Ltd. from September 2005 through March 2014. Prior to that, from October 2000 through August 2005, Mr. Yanai served as Senior Vice President
and Chief Financial Officer of Koor Industries Ltd. (TASE:KOOR), and from April 1998 to September 2000, Mr. Yanai served as Vice President and
Chief Financial Officer of NICE Systems Ltd. (NASDAQ:NICE; TASE:NICE). Mr. Yanai holds a B.A. degree in Accounting and Economics from
Tel-Aviv University.
Family Relationships
There are no family relationships between any members of our executive management and our directors.
Arrangements for Election of Directions and Members of Management
There are no arrangements or understandings with major shareholders, customers, suppliers or others pursuant to which any of our executive
management or our directors were appointed.
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B.
Compensation
Compensation of Executive Officers
In accordance with the provisions of the Companies Law, the compensation of our directors and officer holders must generally comply with
the terms and conditions of our compensation policy, as approved by our compensation committee, board of directors and general meeting of our
shareholders, subject to certain exceptions under the Companies Law. Our current compensation policy was approved by our general meeting on
December 29, 2015.
The table below reflects the compensation granted to our five most highly compensated office holders (as defined in the Companies Law)
during or with respect to the year ended December 31, 2017:
Name and Position
Salary(1)
Bonus
Equity-Based
Compensation
(2)
All
other
compensation
(3)
U.S. Dollars in thousands
Total
Christopher (Chris) Rowland
Chief Executive Officer
Minelu (Menashe) Sonnenschein
VP, Israel Operations
Yaron Silberman
VP, Sales and Marketing
Oded Yatzkan
Chief Financial Officer
Amir Govrin
VP, Research and Development
347
165
149
155
146
120
34
32
38
24
11
7
7
6
5
-
27
20
17
16
478
233
208
216
191
(1) Salary includes the office holders gross salary plus payment of social benefits made by us on behalf of such office holder. Such benefits may
include, to the extent applicable to the office holder, payments, contributions and/or allocations for savings funds (such as managers’ life
insurance policy), education funds (referred to in Hebrew as “keren hishtalmut”), pension, severance, risk insurances (e.g., life, or work
disability insurance), payments for social security and tax gross-up payments, vacation, medical insurance and benefits, convalescence or
recreation pay and other benefits and perquisites consistent with our policies.
(2) Represents the equity-based compensation expenses recorded in the Company’s consolidated financial statements for the year ended December
31, 2017, based on the option’s fair value, calculated in accordance with accounting guidance for equity-based compensation.
(3) Includes car expenses.
The aggregate compensation paid by us to our executive officers for the year ended December 31, 2017 was approximately $1.4 million.
This amount includes set aside or accrued to provide pension, severance, retirement or similar benefits or expenses, car expenses and value of the
ordinary shares underlying the options representing accounting expenses, but does not include business travel, relocation, professional and business
association dues and expenses reimbursed to officers, and other benefits commonly reimbursed or paid by companies in Israel.
As of December 31, 2017, the total amount set aside as an actuarial estimate by the Company to provide post-employment benefits for our
office holders was approximately $42,000.
Compensation of Directors
Under the Companies Law and the rules and regulations promulgated thereunder, our directors are entitled to fixed annual compensation and
to an additional payment for each meeting attended. We currently pay Mr. Eitan Machover, Ms. Efrat Venkert and Mr. Yuval Yanai an annual fee of
NIS 37,115 and a per meeting fee of NIS 1,860, and pay Mr. Doron Birger, our chairman of the board of directors, an annual fee of NIS 37,115 and a
per meeting fee of NIS 2,480, all in accordance with the director fees allowed pursuant to applicable regulations under the Companies Law, as
applicable to the Company. We currently do not pay Mr. Christopher Rowland any cash fees for his service as a director. The aggregate amount paid
by us to our directors for the year ended December 31, 2017, was approximately $71,000.
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In addition, during 2017 we granted each of Mr. Doron Birger, Mr. Eitan Machover and Ms. Efrat Venkert options to purchase up to
750,000 ordinary shares of the Company with the following terms: (i) the vesting schedule of the options shall be over a four (4) year period with a
one fourth of such options vest on each anniversary of the grant, (ii) the term of the options shall be of six (6) years after the grant date, unless they
have been exercised or cancelled in accordance with the terms of and conditions of the applicable incentive plan of the Company, (iii) the exercise
price of the options is NIS 0.162 per ordinary share, and (iv) acceleration upon the closing of a material transaction, resulting in change of control.
Equity Based Compensation of our Executive Officers and Directors
As of March 15, 2018, options to purchase 7,839,000 of our ordinary shares were outstanding and held by current executive officers and
directors (consisting of nine persons) with an average exercise price of NIS 0.72 per ordinary share, of which, options to purchase 618,250 of our
ordinary shares are currently exercisable or exercisable within 60 days as of March 15, 2018. See “Item 6. Directors, Senior Management and
Employees—E. Share Ownership” in this annual report on Form 20-F.
Employment Agreements
We have entered into written employment agreements with each of our executive officers. All of these agreements contain customary
provisions regarding non-competition, confidentiality of information and assignment of inventions. However, the enforceability of the
noncompetition provisions may be limited under applicable law. In addition, we have entered into agreements with each executive officer and
director pursuant to which we have agreed to indemnify each of them to the fullest extent permitted by law to the extent that these liabilities are not
covered by directors and officers insurance.
Our office holders are generally eligible for bonuses each year. The bonuses are established and granted in accordance with our
compensation policy and, and are generally payable upon meeting objectives and targets that are approved by our compensation committee and board
of directors (and if required by our shareholders).
Employment Agreement with Mr. Rowland
On September 29, 2013, our shareholders approved that as of October 1, 2013, our U.S. Subsidiary, Medigus USA LLC, would enter into an
employment agreement with Mr. Rowland, who serves as our Chief Executive Officer and currently carries out his work from our U.S. Subsidiary’s
office in California, USA. The agreement has a term of 3 years, and may be automatically renewed for additional periods of one year unless either
party gives 60 days advance notice of non-renewal of the agreement. The agreement may be terminated by either party by giving 60 days advance
notice, or shorter periods in some cases.
In accordance with the employment agreement with Mr. Rowland, he is entitled to an annual base salary of $315,000. In addition, by
meeting certain pre-determined milestones or goals, set by our board of directors, Mr. Rowland may be entitled to an annual target bonus, which may
not exceed 35% of Mr. Rowland’s annual base salary. The annual target bonus may be reduced by our board of directors according to our financial
position and Mr. Rowland’s performance, and must be returned by Mr. Rowland if later shown to be granted in error which shall be restated in our
financial statements.
Mr. Rowland is also entitled to various social benefits, such as medical and dental insurance, for himself and his immediate family,
participation in a “401(k)” plan (similar to provident fund in Israel), and a manager’s insurance plan, which may not exceed total inclusive costs of
25% of his annual salary (approximately $79,000).
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In the event that we terminate Mr. Rowland’s employment without cause or if we elect not to renew his employment, Mr. Rowland will be
entitled to (i) receive the amounts owed to him up to the termination of his employment, (ii) receive a severance payment in an amount equal to six
monthly base salaries (total inclusive amount of approximately $158,000), (iii) continue his group health and dental insurance following the date of
termination until the earlier of the six months anniversary of the date of termination or until an alternate employer assumes his group health and
dental insurance (subject to certain conditions), (iv) a pro-rated incentive payment for the quarter or a year in which his employment is terminated
subject to the attainment of established targets, and (v) acceleration of option vesting.
On September 29, 2013, our shareholders approved a grant of options under the 2013 Share Option and Incentive Plan exercisable into
450,000 of our ordinary shares to Mr. Rowland, for an exercise price of NIS 8.3 per share, of which 3,200,000 options vest over a period of 24
months, commencing one year following the start of his employment, 650,000 options vested on June 30, 2014, following achievement of goals set
by the board of directors, and the remaining 650,000 options were to vest on February 1, 2015, subject to achieving the goals set by the board of
directors, and the latter 650,000 options expired on March 31, 2015 following a decision by the board of directors. The options granted will expire at
the earliest of: (a) following 5 years from the start date of the agreement; (b) 180 days from the date Mr. Rowland’s employment shall end or he shall
resign; or (c) immediately following the dismissal of Mr. Rowland, for various causes. In addition, options not vested by the termination of Mr.
Rowland’s employment agreement shall expire at such date.
On December 29, 2015, our shareholders approved a grant of options under the 2013 Share Option and Incentive Plan to purchase 100,000
of our ordinary shares to Mr. Rowland, for an exercise price of NIS 2.05, which vest annually in four equal parts over four years. The options granted
will expire at the earliest of: (a) 6 years following the grant date; or (b) at the time at which the options expire pursuant to the terms of 2013 Share
Option and Incentive Plan. In addition, options not vested by the termination of Mr. Rowland’s employment agreement shall expire at such date.
On August 15, 2017, our shareholders approved a grant of options to purchase up to 1,750,000 ordinary shares of the Company with the
following terms: (i) the vesting schedule of the options shall be over a four (4) year period with a one fourth of such options vest on each anniversary
of the grant, (ii) the term of the options shall be of six (6) years after the grant date, unless they have been exercised or cancelled in accordance with
the terms of and conditions of the applicable incentive plan of the Company, (iii) the exercise price of the options is NIS 0.162 per ordinary share,
and (iv) acceleration upon the closing of a material transaction, resulting in change of control.
C.
Board Practices
Introduction
Under the Companies Law and our articles of association, the management of our business is vested in our board of directors. Our board of
directors may exercise all powers and may take all actions that are not specifically granted to our shareholders or to management. Our executive
officers are responsible for our day-to-day management and have individual responsibilities established by our board of directors. Our chief executive
officer is appointed by the general meeting of our shareholders, subject to his personal contract with the Company.
Under our articles of association, our board of directors must consist of at least three and not more than 12 directors, not including two
external directors appointed as required under the Companies Law. Our board of directors currently consists of five members, none of which are
external directors, including our non-executive chairman of the board of directors, which is also appointed by the general meeting of our
shareholders. Our directors are elected at the annual general meeting of our shareholders by a simple majority. Because our ordinary shares do not
have cumulative voting rights in the election of directors, the holders of a majority of the voting power represented at a shareholders meeting have
the power to elect all of our directors. The general meeting of our shareholders may resolve, at any time, by an ordinary majority resolution prior to
the termination of his respective term of service and it may appoint another director in his place, provided that the director was given a reasonable
opportunity to state his case before the general meeting.
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In addition, if a director’s office becomes vacant, the remaining serving directors may continue to act in any manner, provided that their
number is of the minimal number specified in our articles of association. If the number of serving directors is lower than three, then our board of
directors shall not be permitted to act, other than for the purpose of convening a general meeting of the Company’s shareholders for the purpose of
appointing additional directors. In addition, the directors may appoint, immediately or of a future date, additional director(s) to serve until the
subsequent annual general meeting of our shareholders, provided that the total number of directors in office shall not exceed twelve directors (not
including external directors).
Pursuant to the Companies Law and our articles of association, a resolution proposed at any meeting of our board of directors at which a
quorum is present is adopted if approved by a vote of a majority of the directors present and eligible to vote. A quorum of the board of directors
requires at least a majority of the directors then in office who are lawfully entitled to participate in the meeting.
According to the Companies Law, the board of directors of a public company must determine the minimum number of board members that
should have financial and accounting expertise while considering, among other, the nature of the company, its size, the scope and complexity of its
operations and the number of directors stated in the articles of association. Our board of directors resolved that the minimum number of board
members that need to have financial and accounting expertise is one and that Mr. Doron Birger, Mr. Eitan Machover and Mr. Yuval Yanai have
accounting and financial expertise as required under the Companies Law.
External Directors
Under the Companies Law, companies incorporated under the laws of the State of Israel that are “public companies,” including companies
with shares listed on the Nasdaq Capital Market, are required to appoint at least two external directors. External directors must meet certain
independence criteria to ensure that they are unaffiliated with the company and its controlling shareholder, as well certain other criteria. External
directors are elected for three-year terms in accordance with specific rules set forth in the Companies Law and the regulations promulgated
thereunder and may be removed from office only under limited circumstances. Under the Companies Law, each committee of a company’s board of
directors that is authorized to exercise powers of the board of directors is required to include at least one external director, and all external directors
must be members of the company’s audit committee and compensation committee.
Pursuant to regulations promulgated under the Companies Law, companies with shares traded on a U.S. stock exchange, including the
Nasdaq Capital Market, may, subject to certain conditions, “opt out” from the Companies Law requirements to appoint external directors and related
Companies Law rules concerning the composition of the audit committee and compensation committee of the board of directors. In accordance with
these regulations, effective of June 28, 2017, we have “opted out” from the Companies Law requirements to appoint external directors and related
Companies Law rules concerning the composition of the audit committee and compensation committee of the board of directors.
Under these regulations, the exemptions from such Companies Law requirements will continue to be available to us so long as: (i) we do not
have a “controlling shareholder” (as such term is defined under the Companies Law), (ii) our shares are traded on a U.S. stock exchange, including
the Nasdaq Capital Market, and (iii) we comply with the director independence requirements, the audit committee and the compensation committee
composition requirements, under U.S. laws (including applicable Nasdaq Rules) applicable to U.S. domestic issuers.
Alternate directors
Our articles of association provide, as allowed by the Companies Law, that any director may, by written notice to us, appoint another person
who is qualified to serve as a director to serve as an alternate director and to terminate such appointment. Under the Companies Law, a person who is
not qualified to be appointed as a director, a person who is already serving as a director or a person who is already serving as an alternate director for
another director, may not be appointed as an alternate director. Nevertheless, a director who is already serving as a director may be appointed as an
alternate director for a member of a committee of the board of directors as long as he or she is not already serving as a member of such committee.
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Board committees
The board of directors may, subject to the provisions of the Companies Law, delegate any or all of its powers to committees, each consisting
of one or more directors (except the audit and compensation committees, as described below), and it may, from time to time, revoke such delegation
or alter the composition of any such committees. Unless otherwise expressly provided by the board of directors, the committees shall not be
empowered to further delegate such powers. The composition and duties of our audit committee and compensation committee are described below.
Audit committee
Our audit committee is currently comprised of Ms. Efrat Venkert, Mr. Eitan Machover, Mr. Doron Birger and Mr. Yuval Yanai. Ms. Efrat
Venkert acts as the chairperson of our audit committee.
Companies Law Requirements
Under the Companies Law, our board of directors is required to appoint an audit committee, which is responsible, among others, for:
(i)
(ii)
determining whether there are deficiencies in the business management practices of our Company, including in consultation with our
internal auditor or the independent auditor, and making recommendations to our board of directors to improve such practices;
determining the approval process for transactions that are ‘non-negligible’ (i.e., transactions with a controlling shareholder that are
classified by the audit committee as non-negligible, even though they are not deemed extraordinary transactions), as well as
determining which types of transactions would require the approval of the audit committee, optionally based on criteria which may be
determined annually in advance by the audit committee;
(iii)
determining whether to approve certain related party transactions (including transactions in which an office holder has a personal
interest and whether such transaction is extraordinary or material under Companies Law. See “— Fiduciary duties and approval of
specified related party transactions and compensation under Israeli law".
(iv) where the board of directors approves the working plan of the internal auditor, to examine such working plan before its submission to
our board of directors and proposing amendments thereto;
(v)
(vi)
examining our internal controls and internal auditor’s performance, including whether the internal auditor has sufficient resources and
tools to dispose of its responsibilities;
examining the scope of our auditor’s work and compensation and submitting a recommendation with respect thereto to our board of
directors or shareholders, depending on which of them is considering the appointment of our auditor; and
(vii) establishing procedures for the handling of employees’ complaints as to the management of our business and the protection to be
provided to such employees.
Nasdaq requirements
Under the NASDAQ corporate governance rules, we are required to maintain an audit committee consisting of at least three independent
directors, all of whom are financially literate and one of whom has accounting or related financial management expertise. All members of our audit
committee meet the requirements for financial literacy under the applicable rules and regulations of the SEC and the NASDAQ corporate governance
rules. Our board of directors has determined that each of Mr. Doron Birger, Mr. Eitan Machover and Mr. Yuval Yanai is an audit committee financial
expert as defined by the SEC rules and has the requisite financial experience as defined by the NASDAQ Marketplace Rules.
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Each of the members of the audit committee is required to be “independent” as such term is defined in Rule 10A-3(b)(1) under the Exchange
Act, which is different from the general test for independence of board and committee members.
Audit committee role
Our board of directors has adopted an audit committee charter setting forth the responsibilities of the audit committee consistent with the
rules of the SEC and the Nasdaq Rules, which include, among others:
● retaining and terminating our independent auditors, subject to the ratification of the board of directors, and in the case of retention, to
that of the shareholders;
● pre-approving of audit and non-audit services and related fees and terms, to be provided by the independent auditors;
● overseeing the accounting and financial reporting processes of our company and audits of our financial statements, the effectiveness of
our internal control over financial reporting and making such reports as may be required of an audit committee under the rules and
regulations promulgated under the Exchange Act;
● reviewing with management and our independent auditor our annual and quarterly financial statements prior to publication or filing (or
submission, as the case may be) to the SEC;
● recommending to the board of directors the retention and termination of the internal auditor, and the internal auditor's engagement fees
and terms, in accordance with the Companies Law as well as approving the yearly or periodic work plan proposed by the internal
auditor.
● reviewing with our general counsel and/or external counsel, as deem necessary, legal and regulatory matters that could have a material
impact on the financial statements;
● identifying irregularities in our business administration, inter alia, by consulting with the internal auditor or with the independent
auditor, and suggesting corrective measures to the board of directors; and
● reviewing policies and procedures with respect to transactions (other than transactions related to the compensation or terms of services)
between the company and officers and directors, or affiliates of officers or directors, or transactions that are not in the ordinary course
of the company’s business and deciding whether to approve such acts and transactions if so required under the Companies Law.
The audit committee charter states that in fulfilling its obligations, the committee is entitled to demand from us any document, file, report or
any other information that is required for the fulfillment of its roles and duties and to interview any of our employees or any employees of our
subsidiaries in order to receive more details about his or her line of work or other issues that are connected to the roles and duties of the audit
committee.
Compensation Committee
Our compensation committee is currently comprised of Ms. Efrat Venkert, Mr. Eitan Machover and Mr. Doron Birger. Mr. Eitan Machover
acts as the chairperson of our compensation committee.
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Under the Companies Law, the board of directors of a public company must appoint a compensation committee which roles are, among
others, as follows:
● to recommend to the board of directors the approval of compensation policy for directors and officers in accordance with the
requirements of the Companies Law;
● to oversee the development and implementation of such compensation policy and recommending to the board of directors regarding any
amendments or modifications that the compensation committee deems appropriate;
● to determine whether to approve transactions concerning the terms of engagement and employment of office holders that require
approval of the compensation committee; and
● to resolve whether to exempt a transaction with a candidate for chief executive officer from shareholder’s approval.
Nasdaq requirements
Our board of directors has adopted a compensation committee charter setting forth the responsibilities of the committee consistent with the
Nasdaq Rules, which include among others:
● recommending to the our board of directors for its approval a compensation policy in accordance with the requirements of the
Companies Law as well as other compensation policies, incentive-based compensation plans and equity-based compensation plans, and
overseeing the development and implementation of such policies and recommending to our board of directors any amendments or
modifications to the committee deems appropriate, including as required under the Companies Law;
● reviewing and approving the granting of options and other incentive awards to the chief executive officer and other executive officers,
including reviewing and approving corporate goals and objectives relevant to the compensation of our chief executive officer and other
executive officers, including evaluating their performance in light of such goals and objectives;
● approving and exempting certain transactions regarding office holders’ compensation pursuant to the Companies Law; and
● administer the our equity-based compensation plans, including without limitation to approve the adoption of such plans, to amend and
interpret such plans and the awards and agreements issued pursuant thereto, and to make awards to eligible persons under the plans and
determine the terms of such awards.
The compensation committee is also authorized to retain and terminate compensation consultants, legal counsel or other advisors to the
committee and to approve the engagement of any such consultant, counsel or advisor, to the extent it deems necessary or advisable.
Our board of directors has determined that each member of our compensation committee is independent under the Nasdaq Rules, including
the additional independence requirements applicable to the members of a compensation committee.
Compensation policy
Under the Companies Law, companies incorporated under the laws of the State of Israel, whose shares are listed for trading on a stock
exchange or have been offered to the public in or outside of Israel, such as us, are required to adopt a policy governing the compensation of “office
holders” (as defined in the Companies Law). Following the recommendation of our compensation committee and approval by our board of directors,
our shareholders approved our current compensation policy at our annual general meeting of shareholders held on December 29, 2015. Our
compensation policy must be approved at least once every three years, first, by our board of directors, upon recommendation of our compensation
committee, and second, by a simple majority of the ordinary shares present, in person or by proxy, and voting at a shareholders meeting, provided
that either:
● such majority includes at least a majority of the shares held by shareholders who are not controlling shareholders and do not have a
personal interest in such compensation arrangement and who are present and voting (excluding abstentions); or
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● the total number of shares of non-controlling shareholders and shareholders who do not have a personal interest in the compensation
arrangement and who vote against the arrangement, does not exceed 2% of the company’s aggregate voting rights.
Such majority determined in accordance with the majority requirement described above is hereinafter referred to as the Compensation
Special Majority Requirement.
To the extent a compensation policy is not approved by shareholders at a duly convened shareholders meeting or by the Compensation
Special Majority Requirement, the board of directors of a company may override the resolution of the shareholders following a re-discussion of the
matter by the board of directors and the compensation committee and for specified reasons, and after determining that despite the rejection by the
shareholders, the adoption of the compensation policy is in the best interest of the company. A compensation policy that is for a period of more than
three years must be approved in accordance with the above procedure once every three years.
The compensation policy must serve as the basis for decisions concerning the financial terms of employment or engagement of office
holders, including exculpation, insurance, indemnification or any monetary payment or obligation of payment in respect of employment or
engagement. The compensation policy must relate to certain factors, including advancement of the company’s objectives, the company’s business
plan and its long-term strategy, and creation of appropriate incentives for office holders. It must also consider, among other things, the company’s
risk management, size and the nature of its operations. The compensation policy must furthermore consider the following additional factors:
● the knowledge, skills, expertise and accomplishments of the relevant office holder;
● the office holder’s roles and responsibilities and prior compensation agreements with him or her;
● the ratio between the cost of the terms of employment of an office holder and the cost of the compensation of the other employees of
the company, including those employed through manpower companies, in particular the ratio between such cost and the average and
median compensation of the other employees of the company, as well as the impact such disparities may have on the work relationships
in the company;
● the possibility of reducing variable compensation, if any, at the discretion of the board of directors; and the possibility of setting a limit
on the exercise value of non-cash variable equity-based compensation; and
● as to severance compensation, if any, the period of service of the office holder, the terms of his or her compensation during such service
period, the company’s performance during that period of service, the person’s contribution towards the company’s achievement of its
goals and the maximization of its profits, and the circumstances under which the person is leaving the company.
The compensation policy must also include the following principles:
● the link between variable compensation and long-term performance and measurable criteria;
● the relationship between variable and fixed compensation, and the ceiling for the value of variable compensation;
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● the conditions under which an office holder would be required to repay compensation paid to him or her if it was later shown that the
data upon which such compensation was based was inaccurate and was required to be restated in the company’s financial statements;
● the minimum holding or vesting period for variable, equity-based compensation; and
● maximum limits for severance compensation.
Investment Committee
Our investment committee consists of three directors, Ms. Efrat Venkert, Mr. Eitan Machover and Mr. Doron Birger. Mr. Eitan Machover
acts as the chairperson of our investment committee. The investment committee’s duties include reviewing and making recommendations to the
board of directors regarding the company’s investment policies, hedging policy and other banking related matters.
Internal auditor
Under the Companies Law, the board of directors of a public company must appoint an internal auditor based on the recommendation of the
audit committee. Under the Companies Law, Each of the following may not be appointed as internal auditor:
● a person (or a relative of a person) who holds more than 5% of the company’s outstanding shares or voting rights;
● a person (or a relative of a person) who has the power to appoint a director or the general manager of the company;
● an office holder (including a director) of the company (or a relative thereof); or
● a member of the company’s independent accounting firm, or anyone on his or her behalf.
The role of the internal auditor is, among other things, to examine whether a company’s actions comply with applicable law and orderly
business procedure. The audit committee is required to oversee the activities and to assess the performance of the internal auditor as well as to review
the internal auditor’s work plan. Our internal auditor is Hila Bar of Brightman Almagor Zohar & Co., a member of Deloitte Touche Tohmatsu.
Fiduciary duties and approval of specified related party transactions and compensation under Israeli law
Fiduciary duties of office holders
The Companies Law imposes a fiduciary duties on all office holders of a company comprised of a duty of care and a duty of loyalty.
The duty of care requires an office holder to act in the same degree of proficiency with which a reasonable office holder in the same position
would have acted under the same circumstances. The duty of care includes, among other things, a duty to use reasonable means, in light of the
circumstances, to obtain:
● information on the business advisability of a given action brought for his or her approval or performed by virtue of his or her position;
and
● all other important information pertaining to such action.
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The duty of loyalty requires an office holder to act in good faith and for the benefit of the company, and includes, among other things, the
duty to:
● refrain from any act involving a conflict of interest between the performance of his or her duties in the company and his or her other
duties or personal affairs;
● refrain from any activity that is competitive with the business of the company;
● refrain from exploiting any business opportunity of the company for the purpose of gaining a personal advantage for himself or herself
or others; and
● disclose to the company any information or documents relating to the company’s affairs which the office holder received as a result of
his or her position as an office holder.
We may approve an act specified above, provided that the office holder acted in good faith, the act or its approval does not harm the
company’s best interest, and the office holder discloses his or her personal interest a sufficient time before the approval of such act, including any
relevant document.
Disclosure of personal interests of an office holder and approval of transactions
The Companies Law requires that an office holder promptly disclose to the company any personal interest that he or she may have and all
related material information or documents relating to any existing or proposed transaction by the company. An interested office holder’s disclosure
must be made promptly and in any event no later than the first meeting of the board of directors at which the transaction is considered. Under the
Companies Law, once an office holder complies with the above disclosure requirement, the board of directors at which the transaction is considered.
An office holder is not obliged to disclose such information if the personal interest of the office holder derives solely from the personal interest of his
or her relative in a transaction that is not considered an extraordinary transaction.
Under the Companies Law, a company may approve a transaction between the company and the office holder or a third party in which the
office holder has a personal interest only if the office holder has complied with the above disclosure requirement, provided, however, that a company
may not approve a transaction or action that is not to the company’s benefit.
Under the Companies Law, unless the articles of association of a company provide otherwise, a transaction with an office holder or with a
third party in which the office holder has a personal interest, which is not an extraordinary transaction, requires approval by the board of directors.
Our articles of association do not state otherwise. If the transaction considered with an office holder or third party in which the office holder has a
personal interest is an extraordinary transaction, then the audit committee’s approval is required prior to approval by the board of directors. For the
approval of compensation arrangements with directors and executive officers, see “Item 6. Directors, Senior Management and Employees —C. Board
Practices—Compensation of directors and executive officers.”
Any person who has a personal interest in the approval of a transaction that is brought before a meeting of the board of directors or the audit
committee may not be present at the meeting or vote on the matter. However, if the chairperson of the board of directors or the chairperson of the
audit committee has determined that the presence of an office holder with a personal interest is required, such office holder may be present at the
meeting for the purpose of presenting the matter. Notwithstanding the foregoing, a director who has a personal interest may be present at the meeting
and vote on the matter if a majority of the directors or members of the audit committee have a personal interest in the approval of such transaction’
provided, however, that if a majority of the directors at a board of directors meeting have a personal interest in the approval of the transaction, such
transaction also requires the approval of the shareholders of the company.
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A “personal interest” is defined under the Companies Law as the personal interest of a person in an action or in a transaction of the
company, including the personal interest of such person’s relative or the interest of any other corporate body in which such person and/or such
person’s relative is a director or general manager, a 5% shareholder or holds 5% or more of the voting rights, or has the right to appoint at least one
director or the general manager, but excluding a personal interest stemming solely from the fact of holding shares in the company. A personal interest
also includes (1) a personal interest of a person who votes according to a proxy of another person, including in the event that the other person has no
personal interest, and (2) a personal interest of a person who gave a proxy to another person to vote on his or her behalf regardless of whether the
discretion of how to vote lies with the person voting or not.
An “extraordinary transaction” is defined under the Companies Law as any of the following:
● a transaction other than in the ordinary course of business;
● a transaction that is not on market terms; or
● a transaction that may have a material impact on the company’s profitability, assets or liabilities.
An extraordinary transaction in which an office holder has a personal interest requires approval of the company’s audit committee followed
by the approval of the board of directors.
Disclosure of personal interests of a controlling shareholder and approval of transactions
The Companies Law also requires that a controlling shareholder promptly disclose to the company any personal interest that he or she may
have and all related material information or documents relating to any existing or proposed transaction by the company. A controlling shareholder’s
disclosure must be made promptly and in any event no later than the first meeting of the board of directors at which the transaction is considered. The
following require the approval of each of (i) the audit committee (or the compensation committee with respect to the terms of engagement of the
controlling shareholder or relative thereof with the company related for the provision of service, including among others as an office holder or
employee of the company), (ii) the board of directors and (iii) the shareholders (in that order): (a) extraordinary transactions with a controlling
shareholder or in which a controlling shareholder has a personal interest (including a private placement in which a controlling shareholder has a
personal interest), (b) the engagement with a controlling shareholder or his or her relative, directly or indirectly, for the provision of services to the
company, (c) the terms of engagement and compensation of a controlling shareholder or his or her relative as an office holder, and (d) the
employment of a controlling shareholder or his or her relative by the company, other than as an office holder (collectively referred as Transaction
with a Controlling Shareholder). In addition, the shareholder approval must fulfill one of the following requirements:
● at least a majority of the shares held by shareholders who have no personal interest in the transaction and are voting at the meeting must
be voted in favor of approving the transaction, excluding abstentions; or
● the shares voted by shareholders who have no personal interest in the transaction who vote against the transaction represent no more
than two percent (2%) of the voting rights in the company.
In addition, any extraordinary transaction with a controlling shareholder or in which a controlling shareholder has a personal interest with a
term of more than three years requires the abovementioned approval every three years, however, unless, with respect to certain transactions the audit
committee determines that such longer term is reasonable under the circumstances.
Pursuant to regulations promulgated under the Companies Law, certain transactions with a controlling shareholder, a relative thereof, or
with a director, that would otherwise require approval of a company’s shareholders may be exempt from shareholder approval upon certain
determinations of the audit committee and board of directors.
The Companies Law requires that every shareholder that participates, in person, by proxy or by voting instrument, in a vote regarding a
transaction with a controlling shareholder, must indicate in advance or in the ballot whether or not that shareholder has a personal interest in the vote
in question. Failure to so indicate will result in the invalidation of that shareholder’s vote.
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Disclosure of Compensation of Executive Officers
Form Type: 20-F
Medigus Ltd.
Page 81
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For so long as we qualify as a foreign private issuer, we are not required to comply with the proxy rules applicable to U.S. domestic
companies, including the requirement applicable to emerging growth companies to disclose the compensation of our chief executive officer and other
two most highly compensated executive officers on an individual, rather than an aggregate, basis. Under the Companies Law and the regulations
promulgated thereunder we are required to disclose the annual compensation of our five most highly compensated office holders on an individual
basis, rather than on an aggregate basis. This disclosure will not be as extensive as that required of a U.S. domestic issuer. As of the date of this
annual report we only employ four office holders.
Approval of the compensation of directors and executive officers
The compensation of, or an undertaking to indemnify, insure or exculpate, an office holder who is not a director requires the approval of the
company’s compensation committee, followed by the approval of the company’s board of directors, and, if such compensation arrangement or an
undertaking to indemnify or insure is inconsistent with the company’s stated compensation policy, or if the said office holder is the chief executive
officer of the company (apart from a number of specific exceptions), then such arrangement is subject to the approval of our shareholders, subject to
the Compensation Special Majority Requirement.
Directors. Under the Companies Law, the compensation of our directors requires the approval of our compensation committee, the
subsequent approval of the board of directors and, unless exempted under the regulations promulgated under the Companies Law, the approval of the
general meeting of our shareholders. If the compensation of our directors is inconsistent with our stated compensation policy, then, provided that
those provisions that must be included in the compensation policy according to the Companies Law have been considered by the compensation
committee and board of directors, shareholder approval will also be required to be approved by the Compensation Special Majority Requirement.
Executive officers other than the chief executive officer. The Companies Law requires the approval of the compensation of a public
company’s executive officers (other than the chief executive officer) in the following order: (i) the compensation committee, (ii) the company’s
board of directors, and (iii) if such compensation arrangement is inconsistent with the company’s stated compensation policy, the company’s
shareholders by the Compensation Special Majority Requirement. However, if the shareholders of the company do not approve a compensation
arrangement with an executive officer that is inconsistent with the company’s stated compensation policy, the compensation committee and board of
directors may override the shareholders’ decision if each of the compensation committee and the board of directors provide detailed reasons for their
decision.
Chief executive officer. Under the Companies Law, the compensation of a public company’s chief executive officer is required to be
approved by: (i) the company’s compensation committee; (ii) the company’s board of directors, and (iii) the company’s shareholders by the
Compensation Special Majority Requirement. However, if the shareholders of the company do not approve the compensation arrangement with the
chief executive officer, the compensation committee and board of directors may override the shareholders’ decision if each of the compensation
committee and the board of directors provide a detailed reasoning for their decision. The approval of each of the compensation committee and the
board of directors must be in accordance with the company’s stated compensation policy; however, under special circumstances, the compensation
committee and the board of directors may approve compensation terms of a chief executive officer that are inconsistent with the company’s
compensation policy provided that they have considered those provisions that must be included in the compensation policy according to the
Companies Law and that shareholder approval was obtained by the Compensation Special Majority Requirement. In addition, the compensation
committee may resolve that the shareholder approval is not required for the approval of the engagement terms of a candidate to serve as the chief
executive officer, if the compensation committee determines that the compensation arrangement is consistent with the company’s stated
compensation policy, that the chief executive officer did not have a prior business relationship with the company or a controlling shareholder of the
company, and that subjecting the approval to a shareholder vote would impede the company’s ability to attain the candidate to serve as the
company’s chief executive officer.
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Duties of shareholders
Form Type: 20-F
Medigus Ltd.
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Under the Companies Law, a shareholder has a duty to refrain from abusing its power in the company and to act in good faith and in an
acceptable manner in exercising its rights and performing its obligations to the company and other shareholders, including, among other things, when
voting at meetings of shareholders on the following matters:
● an amendment to the articles of association;
● an increase in the company’s authorized share capital;
● a merger; and
● the approval of related party transactions and acts of office holders that require shareholder approval.
A shareholder also has a general duty to refrain from discriminating against other shareholders.
The remedies generally available upon a breach of contract will also apply to a breach of the shareholder duties mentioned above, and in the
event of discrimination against other shareholders, additional remedies are available to the injured shareholder.
In addition, any controlling shareholder, any shareholder that knows that its vote can determine the outcome of a shareholder vote and any
shareholder that, under a company’s articles of association, has the power to appoint or prevent the appointment of an office holder, or any other
power with respect to a company, is under a duty to act with fairness towards the company. The Companies Law does not describe the substance of
this duty except to state that the remedies generally available upon a breach of contract will also apply in the event of a breach of the duty to act with
fairness, taking each shareholder’s position in the company into account.
Approval of private placements
Under the Companies Law and the regulations promulgated thereunder, a private placement of securities does not require approval at a
general meeting of the shareholders of a company; provided however, that in special circumstances, such as a private placement completed in lieu of
a special tender offer (See “Item 10. Additional Information —Memorandum and Articles of Association—Acquisitions under Israeli law”) or a
private placement which qualifies as a related party transaction (See “Item 6. Directors, Senior Management and Employees —C. Board
Practices—Fiduciary duties and approval of specified related party transactions and compensation under Israeli law”), approval at a general meeting
of the shareholders of a company is required.
Exemption, Insurance and Indemnification of Directors and Officers
Under the Companies Law, a company may not exculpate an office holder from liability for a breach of a fiduciary duty. An Israeli company
may exculpate an office holder in advance from liability to the company, in whole or in part, for damages caused to the company as a result of a
breach of duty of care but only if a provision authorizing such exculpation is included in its articles of association. Our articles of association include
such a provision. The company may not exculpate in advance a director from liability arising out of a prohibited dividend or distribution to
shareholders.
Under the Companies Law and the Securities Law, 5738-1968, or the Securities Law, a company may indemnify an office holder in respect
of the following liabilities, payments and expenses incurred for acts performed by him or her as an office holder, either in advance of an event or
following an event, provided its articles of association include a provision authorizing such indemnification:
● a monetary liability incurred by or imposed on the office holder in favor of another person pursuant to a court judgment, including
pursuant to a settlement confirmed as judgment or arbitrator’s decision approved by a competent court. However, if an undertaking to
indemnify an office holder with respect to such liability is provided in advance, then such an undertaking must be limited to events
which, in the opinion of the board of directors, can be foreseen based on the company’s activities when the undertaking to indemnify is
given, and to an amount or according to criteria determined by the board of directors as reasonable under the circumstances, and such
undertaking shall detail the abovementioned foreseen events and amount or criteria;
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● reasonable litigation expenses, including reasonable attorneys’ fees, which were incurred by the office holder as a result of an
investigation or proceeding filed against the office holder by an authority authorized to conduct such investigation or proceeding,
provided that such investigation or proceeding was either (i) concluded without the filing of an indictment against such office holder
and without the imposition on him of any monetary obligation in lieu of a criminal proceeding; (ii) concluded without the filing of an
indictment against the office holder but with the imposition of a monetary obligation on the office holder in lieu of criminal proceedings
for an offense that does not require proof of criminal intent; or (iii) in connection with a monetary sanction;
● reasonable litigation expenses, including attorneys’ fees, incurred by the office holder or which were imposed on the office holder by a
court (i) in a proceeding instituted against him or her by the company, on its behalf, or by a third party, (ii) in connection with criminal
indictment of which the office holder was acquitted, or (iii) in a criminal indictment which the office holder was convicted of an offense
that does not require proof of criminal intent;
● a monetary liability imposed on the office holder in favor of a payment for a breach offended at an Administrative Procedure (as
defined below) as set forth in Section 52(54)(a)(1)(a) to the Securities Law;
● expenses expended by the office holder with respect to an Administrative Procedure under the Securities Law, including reasonable
litigation expenses and reasonable attorneys’ fees; and
● any other obligation or expense in respect of which it is permitted or will be permitted under applicable law to indemnify an office
holder, including, without limitation, matters referenced in Section 56H(b)(1) of the Securities Law.
An “Administrative Procedure” is defined as a procedure pursuant to chapters H3 (Monetary Sanction by the Israeli Securities Authority),
H4 (Administrative Enforcement Procedures of the Administrative Enforcement Committee) or I1 (Arrangement to prevent Procedures or
Interruption of procedures subject to conditions) to the Securities Law.
Under the Companies Law and the Securities Law, a company may insure an office holder against the following liabilities incurred for acts
performed by him or her as an office holder if and to the extent provided in the company’s articles of association:
● a breach of a fiduciary duty to the company, provided that the office holder acted in good faith and had a reasonable basis to believe
that the act would not harm the company;
● a breach of duty of care to the company or to a third party, to the extent such a breach arises out of the negligent conduct of the office
holder;
● a monetary liability imposed on the office holder in favor of a third party;
● a monetary liability imposed on the office holder in favor of an injured party at an Administrative Procedure pursuant to Section 52(54)
(a)(1)(a) of the Securities Law; and
● expenses incurred by an office holder in connection with an Administrative Procedure, including reasonable litigation expenses and
reasonable attorneys’ fees.
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Under the Companies Law, a company may not indemnify, exculpate or insure an office holder against any of the following:
● a breach of fiduciary duty, except for indemnification and insurance for a breach of the fiduciary duty to the company to the extent that
the office holder acted in good faith and had a reasonable basis to believe that the act would not prejudice the company;
● a breach of duty of care committed intentionally or recklessly, excluding a breach arising out of the negligent conduct of the office
holder;
● an act or omission committed with intent to derive illegal personal benefit; or
● a civil or administrative fine or forfeit levied against the office holder.
Under the Companies Law, exculpation, indemnification and insurance of office holders must be approved by the compensation committee
and the board of directors and, with respect to directors or controlling shareholders, their relatives and third parties in which such controlling
shareholders have a personal interest, also by the shareholders.
Our articles of association permit us to exculpate, indemnify and insure our office holders to the fullest extent permitted or to be permitted
by law. Our office holders are currently covered by a directors’ and officers’ liability insurance policy.
Employment and consulting agreements with executive officers
We have entered into written employment or service agreements with each of our executive officers. See “Item 7. Major Shareholders and
Related Party Transactions— B. Related Party Transactions – Employment Agreements” for additional information.
Directors’ service contracts
There are no arrangements or understandings between us, on the one hand, and any of our directors, on the other hand, providing for
benefits upon termination of their employment or service as directors of our company.
D.
Employees
Number of Employees
As of December 31, 2017, we employed 27 employees: 26 in Israel, and one, our Chief Executive Officer, in the United States by our U.S.
subsidiary, Medigus USA LLC.
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Distribution of Employees
Form Type: 20-F
Medigus Ltd.
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The following is the distribution of our employees (including those employed by our subsidiary) by areas of engagement and geographic
location:
Numbers of employees by category of activity
Management and administrative
Research and development
Operations
Sales and marketing
Production
Total workforce
Numbers of employees by geographic location
Israel
Europe
United States
Total workforce
As of December 31,
2016
2017
2015
6
6
6
3
6
27
26
-
1
27
9
8
8
2
8
35
34
-
1
35
9
12
13
9
12
55
47
1
7
55
During the years covered by the above table, we did not employ a significant number of temporary employees. We consider our relations
with our employees excellent and have never experienced a labor dispute, strike or work stoppage. None of our employees is represented by a labor
union.
In Israel we are subject to certain labor statutes and national labor court precedent rulings, as well as to 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’ Associations. These provisions of collective bargaining agreements are applicable to our Israeli employees by virtue of
extension orders issued in accordance with relevant labor laws by the Israeli Ministry of Economy and Industry, and which apply such agreement
provisions to our employees even though they are not directly part of a union that has signed a collective bargaining agreement. The laws and labor
court rulings that apply to our employees principally concern the minimum wage laws, length of the work day and workweek, overtime payment,
procedures for dismissing employees, determination of severance pay, leaves of absence (such as annual vacation or maternity leave), sick pay and
other conditions for employment. The extension orders which apply to our employees principally concern mandatory contributions to a pension fund
or managers’ insurance, annual recreation allowance, travel expenses payment and other conditions of employment. We generally provide our
employees with benefits and working conditions beyond the required minimums.
Israeli law generally requires severance pay, which may be funded by allocating payments to a managers’ insurance and/or a pension fund
described below, upon the retirement or death of an employee or termination of employment without cause (as defined in the law). The payments to
the managers’ insurance and/or pension fund in respect of severance pay amount to approximately 8.33% of an employee’s wages, in the aggregate.
Furthermore, Israeli employees and employers are required to pay predetermined sums to the National Insurance Institute, which is similar to the
United States Social Security Administration. Such amounts also include payments for national health insurance.
The employees of U.S. Subsidiary are subject to local labor laws and regulations in the United States.
E.
Share Ownership
Share ownership by Directors and Executive Officers
For information regarding ownership of our ordinary shares by our directors and executive officers, see Item 7.A “Major Shareholders and
Related Party Transactions ― Major Shareholders”.
Share Option Plans
All of our option plans are administered by our board of directors. Upon the expiration of the plans, no further grants may be made there
under, although any existing awards will continue in full force in accordance with the terms under which they were granted. Options granted under
any of the plans which are currently outstanding generally may not expire later than six years from the date of grant, unless otherwise specified.
Unvested awards that are cancelled and/or forfeited go back into the respective plan.
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2013 Share Option and Incentive Plan
Form Type: 20-F
Medigus Ltd.
Page 86
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In August 2013, our board of directors approved and adopted our 2013 Share Option and Incentive Plan, or the 2013 Plan, which expires in
August 2023. The 2013 Plan provides for the issuance of shares and the granting of options, restricted shares, restricted share units and other share-
based awards to employees, directors, officers, consultants, advisors, and service providers of us and our U.S. Subsidiary. The Plan provides for
awards to be issued at the determination of our board of directors in accordance with applicable law. As of March 15, 2018, there were 4,112,200
ordinary shares reserved under the 2013 Plan and 12,587,800 ordinary shares issuable upon the exercise of awards issued under the 2013 Plan:
Plan
Series C
Series D
Series F
Series K
Number of options
outstanding – March 15,
2018
3,850,000
1,640,000
408,800
11,630,000
exercise price per one
ordinary share (NIS)
8.3
5.37
2.05
0.162
Number of shares issuable
upon the exercise
385,000
164,000
408,800
11,630,000
Expiration date
September 30, 2018
July 17, 2020
December 29, 2021
October 17, 2023
The 2013 Plan provides for the grant to residents of Israel of options that qualify under the provisions of Section 102 of the Israeli Income
Tax Ordinance (New Version) 1961, as well as for the grant of options that do not qualify under such provisions. The 2013 Plan was submitted to the
ITA, as required by applicable law. The 2013 Plan also provides for the grant of options to U.S. resident employees that are “qualified”, i.e.,
incentive stock options, under the U.S. Internal Revenue Code of 1986, as amended, or the Code, and options that are not qualified. In addition to the
grant of awards under the relevant tax regimes of the United States and Israel, the 2013 Plan allows for the grant of awards to grantees in other
jurisdictions, with respect to which our board of directors is empowered to make the requisite adjustments in the plan.
Series B Option Plan
In February 2012, we adopted our Series B Option Plan. Our directors, officers, employees and certain consultants and dealers were eligible
to participate in this plan. As of March 15, 2018, there were 68,000 ordinary shares issuable upon the exercise of outstanding options under the plan.
These options have an expiration date of April 23, 2018. No additional options will be issued under this plan. Israeli grantees who were directors,
officers and employees could be granted options under the plan that would qualify for special tax treatment under the Capital Gains Route. This plan
was submitted to the ITA as required by applicable law. The exercise price for the Series B Options is NIS 6.8 per share, linked to the consumer price
index as of February 6 of each calendar year following the grant of the Series B Options, compared to the known consumer price index as of
February 6 of the previous calendar year or as of the date of grant. If the rate of increase of the consumer price index is higher than 3%, the exercise
price is increased by the difference between 3% and the rate of increase of the consumer price index.
Series A Option Plan
In August 2011, we adopted our Series A Option Plan. Our directors, officers, employees and certain consultants and dealers were eligible
to participate in this plan. As of March 15, 2018, there were 10,000 ordinary shares issuable upon the exercise of outstanding options under the plan.
These options have an expiration date of April 23, 2018. No additional options will be issued under this plan. Israeli grantees who were directors,
officers and employees could be granted options under the plan that would qualify for special tax treatment in Israel. This plan was submitted to the
ITA, as required by applicable law. The exercise price for the Series A Options is NIS 9.1per share, linked to the consumer price index as of August
1 of each calendar year following the grant of the Series A Options, compared to the known consumer price index as of August 1 of the previous
calendar year or as of the date of grant. If the rate of increase of the consumer price index is higher than 3%, the exercise price is increased by the
difference between 3% and the rate of increase of the consumer price index.
ITEM 7.
MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A.
Major Shareholders
The following table sets forth information with respect to the beneficial ownership of our ordinary shares as of March 15, 2018 (unless
otherwise noted below), the beneficial ownership of our ordinary shares by:
● each of our directors and executive officers individually; and
● all of our executive officers and directors as a group.
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As of March 15, 2018, there was no person or entity known by us to own 5% or more of our outstanding ordinary shares.
The beneficial ownership of our ordinary shares is determined in accordance with the rules of the SEC. Under these rules, a person is
deemed to be a beneficial owner of a security if that person has or shares voting power, which includes the power to vote or to direct the voting of the
security, or investment power, which includes the power to dispose of or to direct the disposition of the security. For purposes of the table below, we
deem ordinary shares issuable pursuant to options that are currently exercisable or exercisable within 60 days as of March 15, 2018, if any, to be
outstanding and to be beneficially owned by the person holding the options or warrants for the purposes of computing the percentage ownership of
that person, but we do not treat them as outstanding for the purpose of computing the percentage ownership of any other person. The percentage of
ordinary shares beneficially owned is based on 191,785,784 ordinary shares outstanding as of March 15, 2018.
Except where otherwise indicated, we believe, based on information furnished to us by such owners, that the beneficial owners of the
ordinary shares listed below have sole investment and voting power with respect to such shares. In addition, none of our shareholders will have
different voting rights from other shareholders. To the best of our knowledge, we are not owned or controlled, directly or indirectly, by another
corporation or by any foreign government. We are not aware of any arrangement that may, at a subsequent date, result in a change of control of our
company.
As of March 15, 2018, there was one shareholder of record of our ordinary shares, which was located in Israel. The number of record
holders is not representative of the number of beneficial holders of our ordinary shares, as the shares of all shareholders for a publicly traded
company such as ours which is listed on the Tel Aviv Stock Exchange are recorded in the name of our Israeli share registrar, Bank Hapoalim
Registration Company Ltd.
Unless otherwise noted below, each beneficial owner’s address is Medigus Ltd., Omer Industrial Park, No. 7A, P.O. Box 3030, Omer
8496500, Israel.
Our principal shareholders do not have different or special voting rights.
Name of Beneficial Owner
Directors and executive officers
Christopher (Chris) Rowland
Oded Yatzkan
Minelu (Menashe) Sonnenschein
Yaron Silberman
Amir Govrin
Doron Birger
Eitan Machover
Efrat Venkert
Yuval Yanai
Number of
Shares
Beneficially
Owned
Percentage of
Shares
Beneficially
Owned
*
*
*
*
*
*
*
*
-
*
*
*
*
*
*
*
*
-
All directors and executive officers as a group (nine persons)(1)
1,438,349
*%
*
less than 1%.
(1) Consists of 613,099 ordinary shares and options to purchase 825,250 ordinary shares currently exercisable or exercisable within 60 days as of
March 15, 2018.
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Significant Changes in Percentage Ownership by Major Shareholders
To our knowledge, the significant changes in the percentage of ownership held by our major shareholders during the past three years have
been: (i) the increase in the percentage of ownership held by Orbimed Israel GP Ltd. above 5% as of 2013 and 2014, and the decrease in the
percentage of ownership in 2015, 2016 and in 2017; (ii) the increase in the percentage of ownership held by Migdal Insurance & Financial Holdings
Ltd. above 5% as of 2014 and the decrease in the percentage of ownership in 2015, 2016 and in 2017 below 5%; (iii) the increase in the percentage of
ownership held by Senvest Management LLC above 5% as of 2013, 2014, 2015 and 2016, and the decrease in the percentage of ownership in 2017
below 5%; (iv) the increase in the percentage of ownership held by Oren Dan above 5% as of 2012, and the decrease in the percentage of ownership
in 2013, 2014, 2015, 2016 and 2017 below 5%; (v) the increase in the percentage of ownership held by Armistice Capital Master Fund Ltd. above
5% as of 2014, and the decrease in the percentage of ownership in 2015, 2016 and 2017 below 5%; (vi) the increase in the percentage of ownership
held by Sabby Healthcare Master Fund Ltd. and Sabby Volatility Warrant Master Fund, Ltd. above 5% as of 2016 and 2017, and the decrease in the
percentage of ownership in 2018 below 5%; and (vii) the increase in the percentage of ownership held by Empery Asset Management LP above 5%
as of 2016 and 2017, and the decrease in the percentage of ownership in 2018 below 5%.
B.
Related Party Transactions
Employment Agreements
We have entered into written employment agreements with each of our executive officers. All of these agreements contain customary
provisions regarding non-competition, confidentiality of information and assignment of inventions. However, the enforceability of the non-
competition provisions may be limited under applicable law. In addition, we have entered into agreements with each executive officer and director
pursuant to which we have agreed to indemnify each of them to the fullest extent permitted by law to the extent that these liabilities are not covered
by directors and officers insurance.
Our office holders are generally eligible for bonuses each year. The bonuses are established and granted in accordance with our
compensation policy and, and are generally payable upon meeting objectives and targets that are approved by our compensation committee and board
of directors (and if required by our shareholders).
Directors and Officers Insurance Policy and Indemnification Agreements
Our articles of association permit us to exculpate, indemnify and insure our directors and officeholders to the fullest extent permitted by the
Companies Law.
We have entered into agreements with each of our current director and officers exculpating them from a breach of their duty of care to us to
the fullest extent permitted by law, subject to limited exceptions, and undertaking to indemnify them to the fullest extent permitted by law, to the
extent that these liabilities are not covered by insurance. This indemnification is limited, with respect to any monetary liability imposed in favor of a
third party, to events determined as foreseeable by the board of directors based on our activities. The maximum aggregate amount of indemnification
that we may pay to our directors and officers based on such indemnification agreement is equal to 25% of our shareholders’ equity pursuant to our
latest audited or unaudited consolidated financial statements, as applicable, as of the date of the indemnification payment. Such indemnification
amounts are in addition to any insurance amounts. Each director or officer who agrees to receive this letter of indemnification also gives his approval
to the termination of all previous letters of indemnification that we have provided to him or her in the past, if any.
We currently have directors’ and officers’ liability insurance policy providing total coverage of $12 million for the benefit of all of our
directors and officers, in respect of which we are charged a twelve-month premium of $80,000, and which includes a deductible of up to $50,000 per
claim, other than securities related claims filed in the United States or Canada, for which the deductible shall not exceed $350,000.
In addition, at general meeting of our shareholders held on December 29, 2015, our shareholders approved our compensation policy, which
determines, among others, that we may provide our directors and officers, including those serving in any of our subsidiaries from time or time and
those who are controlling shareholders, with liability insurance policies provided that the engagement is in the ordinary course of business, in market
terms and is not expected to materially influence our profits, properties and undertakings. The coverage limit shall be of up to $20 million per
occurrence and for the insurance period (additional coverage for legal expenses not included), provided that the annual premium shall not exceed
$80,000 and that the deductible (except for extraordinary matters as prescribed in the insurance policy, such as lawsuits against the Company
pursuant to securities laws and/or lawsuits to be filed in the US/Canada) shall not exceed $50,000 per occurrence.
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C.
Interests of Experts and Counsel
Not applicable.
ITEM 8.
FINANCIAL INFORMATION
A.
Consolidated Statements and Other Financial Information.
See “Item 18. Financial Statements.”
Export Sales
The following table presents total export sales for each of the fiscal years indicated (USD, in thousands):
For the year ended December 31,
2016
2015
2017
Total export sales*
as a percentage of total revenues
445
95%
430
78%
624
100%
*
Export sales, as presented, are defined as sales to customers located outside of Israel.
Legal Proceedings
From time to time we may assert or be subject to various asserted or unasserted legal proceedings and claims. Any such claims, regardless of
merit, could be time-consuming and expensive to defend and could divert management’s attention and resources from our operations. While
management believes we have adequate insurance coverage and we accrue loss contingencies for all known matters that are probable and can be
reasonably estimated, we cannot assure that the outcome of all current or future litigation will not have a material adverse effect on us and our results
of operations.
On March 30, 2016, a former secretary and internal legal advisor filed a lawsuit against us and our chief executive officer. The lawsuit notes
several claims, among which is that the employee was wrongfully terminated. On July 19, 2017, we have entered into a settlement agreement with
our former secretary and internal legal advisor in consideration for him dismissing his claims against us.
Following a withholding tax audit in Israel conducted on October 6, 2016, we are deemed to be in debt of approximately NIS 2.7 million
(which is approximately $0.8 million based on the exchange rate as of March 15, 2018) of additional withholding taxes, including penalties and
interest. It is our management’s opinion, based on the assessment of our legal counsel, that the chances for the claims being dismissed are more likely
than not.
Dividends
We have never paid cash dividends on our ordinary shares and do not anticipate that we will pay any cash dividends on our ordinary shares
or ADSs in the foreseeable future.
We intend to retain our earnings to finance the development and expenses of our business. Any future determination relating to our dividend
policy will be at the discretion of our board of directors and will depend on a number of factors, including future earnings, our financial condition,
operating results, contractual restrictions, capital requirements, business prospects, applicable Israeli law and other factors our board of directors may
deem relevant.
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Significant Changes
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No significant change, other than as otherwise described in this annual report, has occurred in our operations since the date of our
consolidated financial statements included in this annual report.
ITEM 9.
THE OFFER AND LISTING
A.
Offer and Listing Details
Our ordinary shares have been trading on the TASE under the symbol “MDGS” since February 2006. The ADSs are listed on the NASDAQ
under the symbol “MDGS” with one ADS representing 50 ordinary shares.
The following table sets forth, for the periods indicated, the reported high and low sale prices of our ordinary shares on the TASE in NIS
and U.S. dollars. U.S. dollar per ordinary share amounts are calculated using the U.S. dollar representative rate of exchange on the date for which the
high or low market price is applicable, as reported by the Bank of Israel.
Annual:
2018 (until March 15, 2018)
2017
2016
2015
2014
2013
Quarterly:
First Quarter 2018 (until March 15, 2018)
Fourth Quarter 2017
Third Quarter 2017
Second Quarter 2017
First Quarter 2017
Fourth Quarter 2016
Third Quarter 2016
Second Quarter 2016
First Quarter 2016
Most Recent Six Months:
March (until March 15, 2018)
February 2018
January 2018
December 2017
November 2017
October 2017
September 2017
NIS
Price Per
Ordinary Share*
USD
Price Per
Ordinary Share*
High
Low
High
Low
0.12
0.63
2.23
5.89
6.73
11.30
0.12
0.17
0.19
0.26
0.63
1.19
2.23
1.42
1.87
0.10
0.10
0.12
0.12
0.16
0.17
0.16
0.09
0.09
0.47
0.26
1.50
5.61
0.09
0.09
0.14
0.15
0.23
0.47
0.65
0.74
1.26
0.09
0.09
0.09
0.09
0.12
0.15
0.14
0.04
0.17
0.58
0.71
1.93
2.99
0.04
0.05
0.05
0.07
0.17
0.31
0.58
0.38
0.48
0.03
0.03
0.04
0.03
0.05
0.05
0.05
0.03
0.03
0.12
1.48
0.39
1.59
0.03
0.03
0.04
0.04
0.06
0.12
0.17
0.19
0.32
0.02
0.03
0.03
0.03
0.03
0.04
0.04
On March 15, 2018, the last reported sale price of our ordinary shares on the TASE was NIS 0.096 per share, or approximately $0.03 per
share (based on the exchange rate reported by the Bank of Israel for such date). On March 15, 2018, the exchange rate of the NIS to the dollar was
$1.00 = NIS 3.434 as reported by the Bank of Israel.
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ADSs
Our ADSs commenced trading on the NASDAQ under the symbol “MDGS” on August 5, 2015. Each ADS represents 50 ordinary shares.
The following table sets forth, for the periods indicated, the reported high and low sale prices of the ADSs on the NASDAQ in U.S. dollars.
Yearly:
2018 (until March 15, 2018)
2017
2016
2015 (commencing August 5, 2015)
Quarterly:
First Quarter 2018 (until March 15, 2018)
Fourth Quarter 2017
Third Quarter 2017
Second Quarter 2017
First Quarter 2017
Fourth Quarter 2016
Third Quarter 2016
Second Quarter 2016
First Quarter 2016
Most Recent Six Months:
March 2018 (until March 15, 2018)
February 2018
January 2018
December 2017
November 2017
October 2017
September 2017
U.S. $ Price Per ADS*
Low
High
1.71
10.7
32.5
51.7
1.71
3.18
2.94
3.35
10.7
17.8
32.5
19.0
26.80
1.48
1.50
1.71
1.73
3.18
2.47
2.58
1.23
1.25
5.23
25.1
1.23
1.25
1.84
2.03
2.91
5.23
7.63
10.1
15.0
1.25
1.23
1.32
1.25
1.55
2.13
1.85
*
price per ADS adjusted to reflect (i) the 10:1 reverse share split and the change in the ratio of ordinary shares per ADS to five deposited
ordinary shares per ADS effected on November 6, 2015, and (ii) retroactively the change in the ratio of ordinary shares per ADS from five
deposited ordinary shares per ADS to 50 deposited ordinary shares per ADS effected on March 15, 2017.
On March 15, 2018, the last reported sale price of the ADS on the NASDAQ was $1.39 per ADS.
For a description of the ADSs, see “Item 12. Description of Securities Other Than Equity Securities – D. American Depositary Shares.”
B.
Plan of Distribution
Not Applicable.
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C.
Markets
Our ordinary shares are listed and traded on the TASE. The ADSs, each representing 50 ordinary share and evidenced by an American
depositary receipt, or ADR, are traded on the NASDAQ under the symbol “MDGS.” The ADRs were issued pursuant to a Depositary Agreement
entered into with The Bank of New York.
D.
Selling Shareholders
Not Applicable.
E.
Dilution
Not Applicable.
F.
Expenses of the Issue
Not Applicable.
ITEM 10.
ADDITIONAL INFORMATION
A.
Share Capital
General
Our legal and commercial name is Medigus Ltd. We were incorporated in the State of Israel on December 9, 1999, as a private company
pursuant to the Israeli Companies Ordinance (New Version), 1983. In February 2006, we completed our initial public offering in Israel, and our
ordinary shares have since traded on the TASE, under the symbol “MDGS”. In May 2015, we listed our ADSs on NASDAQ, and since August 2015
our ADSs have been traded on the NASDAQ under the symbol “MDGS”. Each ADS represents 50 ordinary shares.
Our authorized share capital consists of 800,000,000 ordinary shares, par value NIS 0.10 per share. As of March 15, 2018, we had
191,785,784 ordinary shares issued and outstanding. All of our outstanding ordinary shares have been fully paid and non-assessable. Holders of paid-
up ordinary shares are entitled to participate equally in the payment of dividends and other distributions and, in the event of liquidation, in all
distributions after the discharge of liabilities to creditors. Our ordinary shares are not redeemable.
Pursuant to the terms of the securities purchase agreements relating to an offering of our ADSs and warrants which closed on December 6,
2016, we granted the purchasers in such offering an eighteen month contractual preemptive right to participate in future financings, subject to certain
exceptions, in an amount equal to up to 50% of the amount raised in such future financings. Other than the preemptive rights described herein, our
ordinary shares are not subject to any other preemptive rights.
Options
As of March 15, 2018, options to purchase an aggregate of 12,665,800 ordinary shares have been granted under our share option plans. See
“Item 4. Information on the Company - B. Business Overview – E. Share Ownership.”
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Warrants
As of March 15, 2018, the following warrants are outstanding:
● Warrants publicly traded on the TASE to purchase an aggregate of 3,526,250 ordinary shares at an exercise price per ordinary share of
NIS 5.32, approximately $1.55. These warrants expire on July 8, 2018;
● Unregistered warrants to purchase an aggregate of 3,955 ADSs at an exercise price per ADS of $14.375. These warrants expire on
September 8, 2021.
● Unregistered warrants to purchase an aggregate of 41,864 ADSs at an exercise price per ADS of $9.0. These warrants expire on June 6,
2022.
● Unregistered warrants to purchase an aggregate of 3,987 ADSs at an exercise price per ADS of $7.37. These warrants expire on
December 6, 2021.
● Warrants to purchase an aggregate of 2,142,858 ADSs at an exercise price per ADS of $3.50. These warrants expire on March 29,
2022.
● Warrants to purchase an aggregate of 150,000 ADSs at an exercise price per ADS of $4.375. These warrants expire on March 29, 2022.
● Unregistered warrants to purchase an aggregate of 405,000 ADSs at an exercise price per ADS of $2.25. These warrants expire on May
27, 2023.
● Unregistered warrants to purchase an aggregate of 56,700 ADSs at an exercise price per ADS of $2.50. These warrants expire on
November 24, 2022.
B.
Memorandum and Articles of Association
Registration Number and Purposes of the Company
Our registration number with the Israeli Registrar of Companies is 51-286697-1. Our purpose as set forth in our articles of association is to
engage in any lawful activity.
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 certain countries that are, or have been, in a state of war with Israel.
Liability to further capital calls
Our board of directors may make, from time to time, such calls as it may deem fit upon shareholders with respect to any sum unpaid with
respect to shares held by such shareholders which is not payable at a fixed time. Such shareholder shall pay the amount of every call so made upon
him or her.
Election of Directors
Under our articles of association, our board of directors must consist of at least three and not more than 12 directors, not including two
external directors appointed as required under the Companies Law. Our board of directors currently consists of five members, none of which are
external directors, including our non-executive chairman of the board of directors, which is also appointed by the general meeting of our
shareholders. Our directors are elected at the annual general meeting of our shareholders by a simple majority. Because our ordinary shares do not
have cumulative voting rights in the election of directors, the holders of a majority of the voting power represented at a shareholders meeting have
the power to elect all of our directors. The general meeting of our shareholders may resolve, at any time, by an ordinary majority resolution prior to
the termination of his respective term of service and it may appoint another director in his place, provided that the director was given a reasonable
opportunity to state his case before the general meeting.
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In addition, our articles of association allows our board of directors to appoint new directors to fill vacancies on the board of directors to
serve until the subsequent annual general meeting of our shareholders, provided, that the number of directors shall not exceed 12 directors. For
further information on the election and removal of directors see “Item 6. Directors, Senior Management and Employees—C. Board Practices.”
Dividend and liquidation rights
We may declare a dividend to be paid to the holders of our ordinary shares in proportion to their respective shareholdings. Under the
Companies Law, dividend distributions are determined by the board of directors and do not require the approval of the shareholders of a company
unless the company’s articles of association provide otherwise. Our articles of association do not require shareholder approval of a dividend
distribution and provide that dividend distributions may be determined by our board of directors.
Pursuant to the Companies Law, the distribution amount is limited to the greater of retained earnings or earnings generated over the previous
two years, according to our then last reviewed or audited consolidated financial statements, provided that the date of the financial statements is not
more than six months prior to the date of the distribution, or we may distribute dividends that do not meet such criteria only with court approval. In
each case, we are only permitted to distribute a dividend if our board of directors and the court, if applicable, determines 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.
In the event of our liquidation, after satisfaction of liabilities to creditors, our assets will be distributed to the holders of our ordinary shares
in proportion to their shareholdings. This right, as well as the right to receive dividends, 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.
Exchange controls
There are currently no Israeli currency control restrictions on remittances of dividends on our ordinary shares, proceeds from the sale of the
shares or interest or other payments to non-residents of Israel, except for shareholders who are subjects of certain countries that are, or have been, in a
state of war with Israel.
Shareholder Meetings
Under the Companies Law, we are required to hold an annual general meeting of our shareholders once every calendar year that must be
held no later than 15 months after the date of the previous annual general meeting. All general meetings other than the annual meeting of
shareholders are referred to in our articles of association as extraordinary meetings. Our board of directors may call extraordinary meetings whenever
it sees fit, at such time and place, within or outside of Israel, as it may determine. In addition, the Companies Law provides that our board of directors
is required to convene a special meeting upon the written request of (i) any two of our directors or one-quarter of the members of our board of
directors or (ii) one or more shareholders holding, in the aggregate, either (a) 5% or more of our outstanding issued shares and 1% or more of our
outstanding voting power or (b) 5% or more of our outstanding voting power.
Under the Companies Law, one or more shareholders holding at least 1% of the voting rights at the general meeting may request that the
board of directors include a matter in the agenda of a general meeting to be convened in the future, provided that it is appropriate to discuss such a
matter at the general meeting.
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 and 40 days prior to the
date of the meeting. Furthermore, the Companies Law requires that resolutions regarding the following matters must be passed at a general meeting
of our shareholders:
● amendments to our articles of association;
● appointment or termination of our auditors;
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● appointment of external directors;
● approval of certain related party transactions;
● increases or reductions of our authorized share capital;
● mergers; and
● the exercise of our board of directors powers by a general meeting, if our board of directors is unable to exercise its powers and the
exercise of any of its powers is required for our proper management.
Under our articles of association, we are not required to give notice to our registered shareholders pursuant to the Companies Law, unless
otherwise required by law. The Companies Law requires that a notice of any annual general meeting or extraordinary general meeting be provided to
shareholders at least 21 days prior to the meeting and if the agenda of the meeting includes the appointment or removal of directors, the approval of
transactions with office holders or interested or related parties, or an approval of a merger, or as otherwise required under applicable law, notice must
be provided at least 35 days prior to the meeting.
Voting rights
Voting rights
All our ordinary shares have identical voting and other rights in all respects.
Quorum requirements
Pursuant to our articles of association, holders of our ordinary shares have one vote for each ordinary share held on all matters submitted to
a vote before the shareholders at a general meeting. The quorum required for our general meetings of shareholders consists of at least two
shareholders, present in person or by proxy, holding at least ten percent (10%) of the voting rights of the Company. A meeting adjourned for lack of a
quorum will be adjourned to the same day of the following week at the same time and place, or to such other day, time or place if such is stated in the
notice of the meeting. At the reconvened meeting, if a quorum is not present within an half an hour, any number of shareholders present in person or
by proxy shall constitute a lawful quorum.
Vote requirements
Our articles of association provide that all resolutions of our shareholders require a simple majority vote, unless otherwise required by the
Companies Law or by our articles of association. Under the Companies Law, each of (i) the approval of an extraordinary transaction with a
controlling shareholder and (ii) the terms of employment or other engagement of the controlling shareholder of the company or such controlling
shareholder’s relative (even if not extraordinary) requires the approval described under “Item 6. Directors, Senior Management and
Employees—C.Board Practices—Fiduciary duties and approval of specified related party transactions and compensation under Israeli
law—Disclosure of personal interests of a controlling shareholder and approval of transactions.” Certain transactions with respect to remuneration of
our office holders and directors require further approvals described under “Item 6. Directors, Senior Management and Employees—C. Board
Practices—Fiduciary duties and approval of specified related party transactions and compensation under Israeli law—Approval of compensation of
directors and executive officers.” Another exception to the simple majority vote requirement is a resolution for the voluntary winding up, or an
approval of a scheme of arrangement or reorganization, of the company pursuant to Section 350 of the Companies Law, which requires the approval
of the majority of the shareholders voting their shares, other than abstainees, holding at least 75% of the voting rights represented at the meeting, in
person, by proxy or by voting deed and voting on the resolution.
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Access to corporate records
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Under the Companies Law, shareholders are provided access to minutes of our general meetings, our shareholders register and principal
shareholders register, our articles of association, our financial statements and any document that we are required by law to file publicly with the
Israeli Companies Registrar 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 interest or protect a trade secret or patent.
Modification of class rights
Under the Companies Law and our articles of association, the rights attached to any class of shares, such as voting, liquidation and dividend
rights, may be amended by adoption of a resolution by the holders of a majority of the shares of that class present at a separate class meeting, or
otherwise in accordance with the rights attached to such class of shares, as set forth in our articles of association.
Acquisitions under Israeli law
Full tender offer
A person wishing to acquire shares of an Israeli public company and who would as a result hold over 90% of the target company’s issued
and outstanding share capital is required by the Companies Law to make a tender offer to all of the company’s shareholders for the purchase of all of
the issued and outstanding shares of the company. A person wishing to acquire shares of a public Israeli company and who would as a result hold
over 90% of the issued and outstanding share capital of a certain class of shares is required to make a tender offer to all of the shareholders who hold
shares of the relevant class for the purchase of all of the issued and outstanding shares of that class. If the shareholders who do not accept the offer
hold less than 5% of the issued and outstanding share capital of the company or of the applicable class, and more than half of the shareholders who
do not have a personal interest in the offer accept the offer, all of the shares that the acquirer offered to purchase will be transferred to the acquirer by
operation of law. However, a tender offer will also be accepted if the shareholders who do not accept the offer hold less than 2% of the issued and
outstanding share capital of the company or of the applicable class of shares.
Upon a successful completion of such a full tender offer, any shareholder that was an offeree in such tender offer, whether such shareholder
accepted the tender offer or not, may, within six months from the date of acceptance of the tender offer, petition an Israeli court to determine whether
the tender offer was for less than fair value and that the fair value should be paid as determined by the court. However, under certain conditions, the
offeror may include in the terms of the tender offer that an offeree who accepted the offer will not be entitled to petition the Israeli court as described
above.
If a tender offer is not accepted in accordance with the requirements set forth above, the acquirer may not acquire shares of the company that
will increase its holdings to more than 90% of the company’s issued and outstanding share capital or of the applicable class from shareholders who
accepted the tender offer.
Special tender offer
The Companies Law provides that an acquisition of shares of an Israeli public company must be made by means of a special tender offer if
as a result of the acquisition the purchaser would become a holder of 25% or more of the voting rights in the company. This requirement does not
apply if there is already another holder of at least 25% of the voting rights in the company. Similarly, the Companies Law 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 the purchaser would
become a holder of more than 45% of the voting rights in the company, if there is no other shareholder of the company who holds more than 45% of
the voting rights in the company, subject to certain exceptions.
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A special tender offer must be extended to all shareholders of a company but the offeror is not required to purchase shares representing more
than 5% of the voting power attached to the company’s outstanding shares, regardless of how many shares are tendered by shareholders. A special
tender offer may be consummated only if (i) at least 5% of the voting power attached to 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 (excluding the purchaser
and its controlling shareholder, holders of 25% or more of the voting rights in the company or any person having a personal interest in the acceptance
of the tender offer or any other person acting on their behalf, including relatives and entities under such person’s control). 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.
Merger
The Companies Law permits merger transactions if approved by each party’s board of directors and, unless certain requirements described
under the Companies Law are met, by a majority vote of each party’s shares, and, in the case of the target company, a majority vote of each class of
its shares voted on the proposed merger at a shareholders meeting.
For purposes of the shareholder vote, unless a court rules otherwise, the merger will not be deemed approved if a majority of the votes of the
shares represented at the shareholders meeting that are held by parties other than the other party to the merger, or by any person (or group of persons
acting in concert) who holds (or hold, as the case may be) 25% or more of the voting rights or the right to appoint 25% or more of the directors of the
other party, vote against the merger. If, however, the merger involves a merger with a company’s own controlling shareholder or if the controlling
shareholder has a personal interest in the merger, then the merger is instead subject to the same special majority approval that governs all
extraordinary transactions with controlling shareholders (as described under “Item 6. Directors, Senior Management and Employees—C. Board
Practices—Fiduciary duties and approval of specified related party transactions and compensation under Israeli law—Disclosure of personal interests
of a controlling shareholder and approval of transactions”).
If the transaction would have been approved by the shareholders of a merging company but for the separate approval of each class or the
exclusion of the votes of certain shareholders as provided above, a court may still approve the merger upon the request of holders of at least 25% of
the voting rights of a company, if the court holds that the merger is fair and reasonable, taking into account the value to the parties to the merger and
the consideration offered to the shareholders of the company.
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 the merging entities, and
may further give instructions to secure the rights of creditors.
In addition, a merger may not be consummated unless at least 50 days have passed from the date on which a proposal for approval of the
merger was filed by each party with the Israeli Registrar of Companies and at least 30 days have passed from the date on which the merger was
approved by the shareholders of each party.
Borrowing powers
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 a certain organ of the Company, including the power to borrow
money for company purposes.
Changes in capital
Our articles of association enable us to increase or reduce our share capital. Any such changes are subject to the provisions of the
Companies Law and must be approved by a resolution duly adopted by our shareholders at a general meeting. In addition, transactions that have the
effect of reducing capital, such as the declaration and payment of dividends in the absence of sufficient retained earnings or profits, require the
approval of both our board of directors and an Israeli court.
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Transfer agent and registrar
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Our transfer agent and registrar is the Depositary for the ADSs, Bank of New York Mellon, and its address is 101 Barclay Street, 22W New
York, NY 10286.
Preemptive Rights
Pursuant to the terms of the securities purchase agreements relating to an offering of our ADSs and warrants which closed on December 6,
2016, we granted the purchasers in such offering an eighteen month contractual preemptive right to participate in future financings, subject to certain
exceptions, in an amount equal to up to 50% of the amount raised in such future financings. Other than the preemptive rights described herein, our
ordinary shares and ADSs are not subject to any other preemptive rights.
Listing
Our ordinary shares currently trade on the TASE in Israel under the symbol “MDGS,” and our ADSs are listed on the NASDAQ under the
symbol “MDGS.”
C.
Material Contracts
Except as set forth below, we have not entered into any material contract within the three years prior to the date of this annual report filed on
Form 20-F, other than contracts entered into in the ordinary course of business.
Securities Purchase Agreement, November 24, 2017
On November 24, 2017, we entered into a securities purchase agreements as part of an offering of our ADSs pursuant to our shelf
registration statement in the United States. As part of the offering we issued a total of 810,000 of our ADSs representing a total of 40,500,000
ordinary shares, at a purchase price of US$2.00 per ADS, and warrants to purchase up to a total of 405,000 ADSs representing 20,250,000 ordinary
shares, at an initial exercise price of $2.25 per ADS, in a concurrent private placement. In addition, as part of such offering, we issued to H.C.
Wainwright & Co., acting as placement agent in our offering, warrants to purchase up to an aggregate of 56,700 ADSs representing 2,835,000
ordinary shares, with an exercise price of $2.5 per ADS. Pursuant to the engagement letter executed with H.C. Wainwright & Co. relating to the
offering, we agreed to provide the placement agent with the right of first refusal, expiring on the twelve month anniversary following the closing of
the offering, if we or our subsidiaries decide to raise funds by means of a public offering or a private placement of equity or debt securities using an
underwriter or placement agent in the U.S.
Securities Purchase Agreement, dated March 24, 2017
On March 24, 2017, we entered into a securities purchase agreements as part of an offering of our ADSs pursuant to a registration statement
in the United States. As part of the offering we issued a total of 979,714 Class A Units at a purchase price per unit of $3.50 and of 1,163,144 Class B
Units at a purchase price per unit of $3.49. Each Class A unit consists of (i) one American Depositary Share, or ADS, and (ii) one Series A warrant to
purchase one ADS, and each Class B unit consists of (i) one pre-funded warrant to purchase one ADS, and (ii) one Series A warrant to purchase one
ADS. The Series A warrants have a term of five years, and are exercisable immediately (or, at the election of the purchaser, six months following the
issuance date) and have an exercise price of $3.50 per ADS. The pre-funded warrants are exercisable immediately until exercised in full and have an
exercise price of $0.01 per ADS. In addition, as part of such offering, we issued to Rodman & Renshaw, a unit of H.C. Wainwright & Co., acting as
placement agent in our offering, warrants to purchase up to an aggregate of 150,000 ADSs representing 7,500,000 ordinary shares, with an exercise
price of $4.375 per ADS. Pursuant to the engagement letter executed with Rodman & Renshaw relating to the offering, we agreed to provide the
placement agent with the right of first refusal, expiring on the twelve month anniversary following the closing of the offering, if we or our
subsidiaries decide to raise funds by means of a public offering or a private placement of equity or debt securities using an underwriter or placement
agent in the United States.
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Securities Purchase Agreement, November 30, 2016
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On November 30, 2016, we entered into a securities purchase agreements as part of an offering of our ADSs pursuant to our shelf
registration statement in the United States. As part of the offering we issued a total of 113,917 of our ADSs representing a total of 5,695,850 ordinary
shares, at a purchase price of US$6.7 per ADS, and warrants to purchase up to a total of 39,871 ADSs representing 1,993,550 ordinary shares, at an
initial exercise price of $9.00 per ADS, in a concurrent private placement. In addition, as part of such offering, we issued Rodman and Renshaw, a
unit of H.C. Wainwright & Co, LLC, acting as placement agent warrants to purchase up to an aggregate of 3,987 ADSs representing 199,355
ordinary shares, with an exercise price of $7.37 per ADS. Pursuant to the engagement letter executed with the placement agent, Rodman & Renshaw,
relating to the offering, we agreed to provide the placement agent with the right of first refusal, expiring on the twelve month anniversary following
the closing of the offering, if we or our subsidiaries decide to raise funds by means of a public offering or a private placement of equity or debt
securities using an underwriter or placement agent in the U.S.
Securities Purchase Agreement, dated September 8, 2016
On September 8, 2016, we entered into a securities purchase agreements as part of an offering of our ADSs pursuant to our shelf registration
statement in the United States. As part of the offering we issued a total of 128,000 of our ADSs representing a total of 6,400,000 ordinary shares, at a
purchase price of US$11.50 per ADS. In addition, as part of such offering, we issued to Roth Capital Partners, LLC, acting as the lead placement
agent, and Maxim Group LLC, acting as the co-placement agent warrants to purchase up to an aggregate of 3,955 ADSs representing 197,750
ordinary shares, with an exercise price of $14.375 per ADS.
D.
Exchange Controls
There are currently no Israeli currency control restrictions on payments of dividends or other distributions with respect to our securities or
the proceeds from the sale of our securities, except or otherwise as set forth in this section and under “Item 10E. Additional
Information — Taxation.” 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 that are in a state of
war with Israel, is not restricted in any way by our articles or by the laws of the State of Israel.
E.
Taxation
The following description is not intended to constitute a complete analysis of all tax consequences relating to the acquisition, ownership and
disposition of our ordinary shares. You should consult your own tax advisor concerning the tax consequences of your particular situation, as well as
any tax consequences that may arise under the laws of any state, local, foreign or other taxing jurisdiction.
Israeli Tax Considerations and Government Programs
The following is a summary of the material Israeli tax laws applicable to us, and some Israeli Government programs benefiting us. This
section also contains a discussion of some Israeli tax consequences to persons owning our ordinary shares. 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. Examples of this kind of investor include traders in securities or persons that own, directly or
indirectly, 10% or more of our outstanding voting capital, all of whom are subject to special tax regimes not covered in this discussion. Some parts of
this discussion are based on a new tax legislation which has not been subject to judicial or administrative interpretation. The discussion should not be
construed as legal or professional tax advice and does not cover all possible tax considerations.
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SHAREHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE ISRAELI OR OTHER TAX
CONSEQUENCES OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF OUR ORDINARY SHARES, INCLUDING, IN
PARTICULAR, THE EFFECT OF ANY FOREIGN, STATE OR LOCAL TAXES.
General Corporate Tax Structure in Israel
Israeli resident companies are generally subject to corporate tax on their taxable income at the rate of 23% of a company’s taxable income as
of 2018 tax year (in 2017 the taxable income rate was 24%). However, the effective tax rate payable by a company that derives income from a
Benefited Enterprise or a Preferred Enterprise (as discussed below) may be considerably less. Capital gains derived by an Israeli resident company
are subject to tax at the prevailing corporate tax rate.
Law for the Encouragement of Industry (Taxes), 5729-1969
The Law for the Encouragement of Industry (Taxes), 5729-1969, generally referred to as the Industry Encouragement Law, provides several
tax benefits for “Industrial Companies.”
The Industry Encouragement Law defines an “Industrial Company” as a company resident in Israel, of which 90% or more of its income in
the tax year, other than income from defense loans, is derived from an “Industrial Enterprise” owned by it and located in Israel. An “Industrial
Enterprise” is defined as an enterprise whose principal activity in a given tax year is industrial activity.
The following corporate tax benefits, among others, are available to Industrial Companies:
● 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;
● under limited conditions, an election to file consolidated tax returns with related Israeli Industrial Companies; and
● expenses related to a public offering are deductible in equal amounts over three years.
we may qualify as an Industrial Company and may be eligible for the benefits described above.
Tax Benefits and Grants for Research and Development
Israeli tax law allows, under certain conditions, a tax deduction for expenditures, including capital expenditures, for the year in which they
are incurred. Expenditures are deemed related to scientific research and development projects, if:
● The expenditures are approved by the relevant Israeli government ministry, determined by the field of research;
● The research and development must be for the promotion of the company; and
● The research and development is carried out by or on behalf of the company seeking such tax deduction.
The amount of such deductible expenses is reduced by the sum of any funds received through government grants for the finance of such
scientific research and development projects. 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 income Tax Ordinance, 1961. Expenditures not so
approved are deductible in equal amounts over three years.
From time to time we may apply the IIA for approval to allow a tax deduction for all research and development expenses during the year
incurred. There can be no assurance that such application will be accepted.
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Law for the Encouragement of Capital Investments, 5719-1959
The Law for the Encouragement of Capital Investments, 5719-1959, generally referred to as the Investment Law, provides certain incentives
for capital investments in production facilities (or other eligible assets) by “Industrial Enterprises” (as defined under the Investment Law).
Tax Benefits Subsequent to the 2005 Amendment
The 2005 Amendment applies to new investment programs and investment programs commencing after 2004, but does not apply to
investment programs approved prior to April 1, 2005. The 2005 Amendment provides that terms and benefits included in any certificate of approval
that was granted before the 2005 Amendment became effective (April 1, 2005) will remain subject to the provisions of the Investment Law as in
effect on the date of such approval. Pursuant to the 2005 Amendment, the Investment Center will continue to grant Approved Enterprise status to
qualifying investments. The 2005 Amendment, however, limits the scope of enterprises that may be approved by the Investment Center by setting
criteria for the approval of a facility as an Approved Enterprise, such as provisions generally requiring that at least 25% of the Approved Enterprise’s
income be derived from exports.
The 2005 Amendment provides that Approved Enterprise status will only be necessary for receiving cash grants. As a result, it was no
longer necessary for a company to obtain Approved Enterprise status in order to receive the tax benefits previously available under the alternative
benefits track. Rather, a company may claim the tax benefits offered by the Investment Law directly in its tax returns, provided that its facilities meet
the criteria for tax benefits set forth in the amendment. Companies are entitled to approach the Israeli Tax Authority for a pre-ruling regarding their
eligibility for benefits under the Investment Law, as amended
In order to receive the tax benefits, the 2005 Amendment states that a company must make an investment which meets all of the conditions,
including exceeding a minimum investment amount specified in the Investment Law. Such investment allows a company to receive “Benefited
Enterprise” status, and may be made over a period of no more than three years that will end at the year in which the company requested to have the
tax benefits apply to its Benefited Enterprise. Where the company requests to apply the tax benefits to an expansion of existing facilities, only the
expansion will be considered to be a Benefited Enterprise and the company’s effective tax rate will be the weighted average of the applicable rates. In
this case, the minimum investment required in order to qualify as a Benefited Enterprise is required to exceed a certain percentage of the value of the
company’s production assets before the expansion.
The extent of the tax benefits available under the 2005 Amendment to qualifying income of a Benefited Enterprise depend on, among other
things, the geographic location in Israel of the Benefited Enterprise. The location will also determine the period for which tax benefits are available.
Such tax benefits include an exemption from corporate tax on undistributed income for a period of between two to ten years, depending on the
geographic location of the Benefited Enterprise in Israel, and a reduced corporate tax rate of between 10% to the applicable corporate tax for the
remainder of the benefits period, depending on the level of foreign investment in the company in each year. A company qualifying for tax benefits
under the 2005 Amendment which pays a dividend out of income derived by its Benefited Enterprise during the tax exemption period will be subject
to corporate tax in respect of the gross amount of the dividend at the otherwise applicable corporate tax rate, or a lower rate in the case of a qualified
FIC which is at least 49% owned by non-Israeli residents. Dividends paid out of income attributed to a Benefited Enterprise are generally subject to
withholding tax at source at the rate of 15% or such lower rate as may be provided in an applicable tax treaty.
The benefits available to a Benefited Enterprise are subject to the fulfillment of conditions stipulated in the Investment Law and its
regulations. If a company does not meet these conditions, it may be required to refund the amount of tax benefits, as adjusted by the Israeli consumer
price index, and interest, or other monetary penalties.
We applied for tax benefits as a “Benefited Enterprise” with 2012 as a “Year of Election.” We may be entitled to tax benefits under this
regime once we are profitable for tax purposes and subject to the fulfillment of all the relevant conditions. If we do not meet these conditions, the tax
benefits may not be applicable which would result in adverse tax consequences to us. Alternatively, and subject to the fulfillment of all the relevant
conditions, we may elect in the future to irrevocably waive the tax benefits available for Benefited Enterprise and claim the tax benefits available to
Preferred Enterprise under the 2011 Amendment (as detailed below).
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Tax Benefits under the 2011 Amendment
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The Investment Law was significantly amended as of January 1, 2011 (the “2011 Amendment”). The 2011 Amendment introduced new
benefits to replace those granted in accordance with the provisions of the Investment Law in effect prior to the 2011 Amendment.
The 2011 Amendment introduced new tax benefits for income generated by a “Preferred Company” through its “Preferred Enterprise,” in
accordance with the definition of such term in the Investments Law, which generally means that a “Preferred Company” is an industrial company
meeting certain conditions (including a minimum threshold of 25% export).
A Preferred Company is entitled to a reduced flat tax rate with respect to the income attributed to the Preferred Enterprise, at the following
rates:
Tax Year
2011 – 2012
2013
2014
2017 onwards(1)
Development
Region “A”
10%
7%
9%
7.5%
Other Areas
within Israel
15%
12.5%
16%
16%
(1)
In December 2016, the Israeli Parliament (the Knesset) approved an amendment to the Investment Law pursuant to which the tax rate applicable
to Preferred Enterprises in Development Region “A” would be reduced to 7.5% as of 2017.
Dividends distributed from income which is attributed to a “Preferred Enterprise” will be subject to withholding tax at source at the
following rates: (i) Israeli resident corporations — 0% (although, if such dividends are subsequently distributed to individuals or a non-Israeli
company, withholding tax at a rate of 20% or such lower rate as may be provided in an applicable tax treaty will apply), (ii) Israeli resident
individuals — 20%, and (iii) non-Israeli residents — 20%, subject to a reduced tax rate under the provisions of an applicable double tax treaty.
Under the 2011 Amendment, a company located in Development Region “A” may be entitled to cash grants and the provision of loans
under certain conditions, if approved. The rates for grants and loans shall not be fixed, but up to 20% of the amount of the approved investment (may
be increased with additional 4%). In addition, a company owning a Preferred Enterprise under the Grant Track may be entitled also to the tax benefits
which are prescribed for a Preferred Company.
The termination or substantial reduction of any of the benefits available under the Investment Law could materially increase our tax
liabilities.
We are currently not entitled to tax benefits for Preferred Enterprise.
Taxation of Our Shareholders
Capital Gains
Capital gain tax is imposed on the disposition of capital assets by an Israeli resident, and on the disposition of such assets by a non-Israeli
resident if those assets are either (i) located in Israel; (ii) are shares or a right to a share in an Israeli resident corporation, or (iii) represent, directly or
indirectly, rights to assets located in Israel. The Israeli Income Tax Ordinance of 1961 (New Version) (the “Ordinance”) distinguishes between “Real
Gain” and the “Inflationary Surplus.” Real Gain is the excess of the total capital gain over Inflationary Surplus computed generally on the basis of the
increase in the Israeli CPI between the date of purchase and the date of disposition. Inflationary Surplus is not subject to tax in Israel.
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Real Gain accrued by individuals on the sale of our ordinary shares will be taxed at the rate of 25%. However, if the individual shareholder
is a “Controlling Shareholder” (i.e., a person who holds, directly or indirectly, alone or together with another, 10% or more of one of the Israeli
resident company’s means of control) at the time of sale or at any time during the preceding 12 months period, such gain will be taxed at the rate of
30%.
Real Gain derived by corporations will be generally subject to a corporate tax rate of 24% in 2017 and 23% as of 2018.
Individual and corporate shareholder dealing in securities in Israel are taxed at the tax rates applicable to business income — 23% for
corporations as of 2018 and a marginal tax rate of up to 47% in 2018 for individuals.
Notwithstanding the foregoing, capital gain derived from the sale of our ordinary shares by a non-Israeli shareholder may be exempt under
the Ordinance from Israeli taxation provided that the following cumulative conditions are met: (i) the shares were purchased upon or after the
registration of the securities on the stock exchange (this condition will not apply to shares purchased on or after January 1, 2009), (ii) the seller does
not have a permanent establishment in Israel to which the derived capital gain is attributed, (iii) if the seller is a corporation, no more than 25% of its
means of control are held, directly and indirectly, by an Israeli resident shareholders, and there is no Israeli Resident that is entitled to 25% or more
of the revenues or profits of the corporation directly or indirectly. In addition, such exemption would not be available to a person whose gains from
selling or otherwise disposing of the securities are deemed to be business income.
In addition, the sale of shares may be exempt from Israeli capital gain tax under the provisions of an applicable tax treaty. For example, the
U.S.-Israel Double Tax Treaty exempts U.S. resident from Israeli capital gain tax in connection with such sale, provided (i) the U.S. resident owned,
directly or indirectly, less than 10% of an Israeli resident company’s voting power at any time within the 12 month period preceding such sale; (ii)
the seller, being an individual, is present in Israel for a period or periods of less than 183 days at the taxable year; and (iii) the capital gain from the
sale was not derived through a permanent establishment of the U.S. resident in Israel. In each case, the sale, exchange or disposition of such shares
would be subject to Israeli tax, to the extent applicable; however, under the U.S.-Israel Double Tax Treaty, a U.S. resident would be permitted to
claim a credit for the Israeli tax against the U.S. federal income tax imposed with respect to the sale, exchange or disposition, subject to the
limitations in U.S. laws applicable to foreign tax credits. The U.S-Israel Double Tax Treaty does not provide such credit against any U.S. state or
local taxes.
In some instances where our shareholders may be liable for Israeli tax on the sale of their ordinary shares, the payment of the consideration
may be subject to the withholding of Israeli tax at source. Shareholders may be required to demonstrate that they are exempt from tax on their capital
gains in order to avoid withholding at source at the time of sale. Specifically, in transactions involving a sale of all of the shares of an Israeli resident
company, in the form of a merger or otherwise, the Israel Tax Authority may require from shareholders who are not liable for Israeli tax to sign
declarations in forms specified by this authority or obtain a specific exemption from the Israel Tax Authority to confirm their status as non-Israeli
resident, and, in the absence of such declarations or exemptions, may require the purchaser of the shares to withhold taxes at source.
Either the purchaser, the Israeli stockbrokers or financial institution through which the shares are held is obliged, subject to the above
mentioned exemptions, to withhold tax upon the sale of securities from the Real Gain at the rate of up to 25%.
At the sale of securities traded on a stock exchange a detailed return, including a computation of the tax due, must be filed and an advanced
payment must be paid on January 31 and June 30 of every tax year in respect of sales of securities made within the previous six months. However, if
all tax due was withheld at source according to applicable provisions of the Ordinance and regulations promulgated thereunder the aforementioned
return need not be filed and no advance payment must be paid. Capital gain is also reportable on the annual income tax return.
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Dividends
We have never paid cash dividends. A distribution of dividend by our company from income attributed to a Benefited Enterprise will
generally be subject to withholding tax in Israel at a rate of 15% unless a reduced tax rate is provided under an applicable tax treaty. A distribution of
dividend by our company from income attributed to a Preferred Enterprise (if the company will be entitled to tax benefits of a Preferred Enterprise)
will generally be subject to withholding tax in Israel at the following tax rates: Israeli resident individuals — 20%; Israeli resident companies — 0%;
Non-Israeli residents — 20%, subject to a reduced rate under the provisions of any applicable double tax treaty. A distribution of dividends from
income, which is not attributed to a Preferred Enterprise or a Benefited Enterprise to an Israeli resident individual, will generally be subject to
withholding tax at a rate of 25%. However, a 30% tax rate will apply if the dividend recipient is a “Controlling Shareholder” (as defined above) at the
time of distribution or at any time during the preceding 12 months period. If the recipient of the dividend is an Israeli resident corporation, such
dividend will be exempt from withholding tax provided the income from which such dividend is distributed was derived or accrued within Israel and
was subject to tax in Israel.
The Ordinance provides that a non-Israeli resident (either individual or corporation) is generally subject to an Israeli income tax on the
receipt of dividends at the rate of 25% (30% if the dividends recipient is a “Controlling Shareholder” (as defined above), at the time of distribution or
at any time during the preceding 12 months period); those rates are subject to a reduced tax rate under the provisions of an applicable double tax
treaty. Thus, under the U.S.-Israel Double Tax Treaty the following 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 shares of the voting share capital 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 tax rate is 12.5%, (ii) if both the conditions mentioned in section (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 or a
Benefited Enterprise — the tax rate is 15% and (iii) in all other cases, the tax rate is 25%. The aforementioned rates under the Israel U.S. Double 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 dividends from which tax was withheld is generally exempt from the obligation to file tax returns in
Israel with respect to such income, provided that (i) such income was not generated from business conducted in Israel by the taxpayer, and (ii) the
taxpayer has no other taxable sources of income in Israel with respect to which a tax return is required to be filed.
Payers of dividends on our ordinary shares, including the Israeli stockbroker effectuating the transaction, or the financial institution through
which the securities are held, are generally required, subject to any of the foregoing exemptions, reduced tax rates and the demonstration of a
shareholder regarding his, her or its foreign residency, to withhold tax upon the distribution of dividend at the rate of 25%, so long as the shares are
registered with a nominee company.
Excess Tax
Individuals who are subject to tax in Israel are also subject to an additional tax at a rate of 3% as of 2017 on annual income exceeding a
certain threshold (NIS 640,000 for 2017 and thereafter, linked to the annual change in the Israeli Consumer Price Index), including, but not limited to
income derived from, dividends, interest and capital gains.
Foreign Exchange Regulations
Non-residents of Israel who hold our ordinary shares are able to receive any dividends, and any amounts payable upon the dissolution,
liquidation and winding up of our affairs, repayable in non-Israeli currency at the rate of exchange prevailing at the time of conversion. However,
Israeli income tax is generally required to have been paid or withheld on these amounts. In addition, the statutory framework for the potential
imposition of currency exchange control has not been eliminated, and may be restored at any time by administrative action.
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Israeli law presently does not impose estate or gift taxes.
U.S. Federal Income Tax Consequences
The following discussion describes certain material U.S. federal income tax consequences to U.S. Holders (as defined below) under present
law of an investment in our ordinary shares. This discussion applies only to U.S. Holders that hold our ordinary shares as capital assets within the
meaning of Section 1221 of the Internal Revenue Code of 1986, as amended (the “Code”), that have acquired their ordinary shares or ADSs and that
have the U.S. dollar as their functional currency.
This discussion is based on the tax laws of the United States, including the Code, as in effect on the date hereof and on U.S. Treasury
regulations as in effect or, in some cases, as proposed, on the date hereof, as well as judicial and administrative interpretations thereof available on or
before such date. All of the foregoing authorities are subject to change, which change could apply retroactively and could affect the tax consequences
described below. There can be no assurances that the IRS will not take a different position concerning the tax consequences of the acquisition,
ownership and disposition of our shares or that such a position would not be sustained. This summary does not address any estate or gift tax
consequences, the alternative minimum tax, the Medicare tax on net investment income or any state, local, or non-U.S. tax consequences.
The following discussion neither deals with the tax consequences to any particular investor nor describes all of the tax consequences
applicable to persons in special tax situations such as:
● banks;
● certain financial institutions;
● insurance companies;
● regulated investment companies;
● real estate investment trusts;
● broker-dealers;
● traders that elect to mark to market;
● certain former citizens or residents of the United States;
● tax-exempt entities;
● persons holding our ordinary shares as part of a straddle, hedging, constructive sale, conversion or integrated transaction;
● persons that actually or constructively own 10% or more of the total combined voting power of all classes of our voting share capital;
● persons that are resident or ordinarily resident in or have a permanent establishment in a jurisdiction outside the United States;
● persons who acquired our ordinary shares pursuant to the exercise of any employee share option or otherwise as compensation; or
● S-corporation and partnerships, including entities classified as partnerships for U.S. federal income tax purposes.
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INVESTORS ARE URGED TO CONSULT THEIR TAX ADVISORS ABOUT THE APPLICATION OF THE U.S. FEDERAL TAX
RULES TO THEIR PARTICULAR CIRCUMSTANCES AS WELL AS THE STATE, LOCAL, NON-U.S. AND OTHER TAX CONSEQUENCES
TO THEM OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF OUR ORDINARY SHARES.
The discussion below of the U.S. federal income tax consequences to “U.S. Holders” will apply to you if you are the beneficial owner of our
ordinary shares and you are, for U.S. federal income tax purposes,
● an individual who is a citizen or resident of the United States;
● a corporation (or other entity taxable as a corporation for U.S. federal income tax purposes) created or organized in the United States or
under the laws of the United States, any state thereof or the District of Columbia;
● an estate, the income of which is subject to U.S. federal income taxation regardless of its source; or
● a trust that (1) is subject to the primary supervision of a court within the United States and the control of one or more U.S. persons for
all substantial decisions or (2) has a valid election in effect under applicable U.S. Treasury regulations to be treated as a U.S. person.
If an entity or other arrangement treated as a partnership for U.S. federal income tax purposes holds our ordinary shares, the tax treatment of
a partner will generally depend upon the status of the partner and the activities of the partnership. A person that would be a U.S. Holder if it held our
ordinary shares directly and that is a partner of a partnership holding our ordinary shares is urged to consult its own tax advisor.
Passive Foreign Investment Company
Based on our anticipated income and the composition of our income and assets, there is a significant risk that we will be a passive foreign
investment company (“PFIC”) for U.S. federal income tax purposes at least until we start generating a substantial amount of active revenue.
However, because PFIC status is a factual determination based on actual results for the entire taxable year, our U.S. counsel expresses no opinion
with respect to our PFIC status. A non-U.S. entity treated as a corporation for U.S. federal income tax purposes will generally be a PFIC for U.S.
federal income tax purposes for any taxable year after applying certain look-through rules with respect to the income and assets of subsidiaries if
either:
● at least 75% of its gross income for such year is passive income (such as interest income); or
● at least 50% of the value of its assets (based on an average of the quarterly values of the assets) during such year is attributable to assets
that produce passive income or are held for the production of passive income.
Passive income for this purpose generally includes dividends, interest, royalties, rents, gains from commodities and securities transactions,
the excess of gains over losses from the disposition of assets which produce passive income, and includes amounts derived by reason of the
temporary investment of funds raised in offerings of our shares.
For this purpose, we will be treated as owning our proportionate share of the assets and earning our proportionate share of the income of any
other entity treated as a corporation for U.S. federal income tax purposes in which we own, directly or indirectly, 25% or more (by value) of the
stock.
A separate determination must be made after the close of each taxable year as to whether we were a PFIC for that year. Because the value of
our assets for purposes of the PFIC test will generally be determined by reference to the market price of our ordinary shares, our PFIC status may
depend in part on the market price of our ordinary shares, which may fluctuate significantly. In addition, there may be certain ambiguities in applying
the PFIC test to us. No rulings from the U.S. Internal Revenue Service (the “IRS”), however, have been or will be sought with respect to our status as
a PFIC.
If we are a PFIC for any taxable year during which you hold our ordinary shares, we generally will continue to be treated as a PFIC with
respect to your investment in our ordinary shares for all succeeding years during which you hold our ordinary shares, unless we cease to be a PFIC
and you make a “deemed sale” election with respect to our ordinary shares. If such election is made, you will be deemed to have sold our ordinary
shares you hold at their fair market value on the last day of the last taxable year in which we were a PFIC, and any gain from such deemed sale would
be subject to taxation under the excess distribution regime described below. After the deemed sale election, your ordinary shares with respect to
which the deemed sale election was made will not be treated as shares in a PFIC unless we subsequently become a PFIC.
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For each taxable year that we are treated as a PFIC with respect to you, you will be subject to special tax rules with respect to any “excess
distribution” (as defined below) you receive and any gain you realize from a sale or other disposition (including a pledge) of our ordinary shares,
unless you make a valid “mark-to-market” election as discussed below. Distributions you receive in a taxable year that are greater than 125% of the
average annual distributions you received during the shorter of the three preceding taxable years or your holding period for our ordinary shares will
be treated as an excess distribution. Under these special tax rules:
● the excess distribution or gain will be allocated ratably over your holding period for our ordinary shares;
● the amount allocated to the current taxable year, and any taxable years in your holding period prior to the first taxable year in which we
were a PFIC, will be treated as ordinary income; and
● the amount allocated to each other taxable year will be subject to the highest tax rate in effect for individuals or corporations, as
applicable, for each such year and the interest charge generally applicable to underpayments of tax will be imposed on the resulting tax
attributable to each such year.
The tax liability for amounts allocated to taxable years prior to the year of disposition or excess distribution cannot be offset by any net
operating losses, and gains (but not losses) realized on the sale of our ordinary shares cannot be treated as capital gains, even if you hold our ordinary
shares as capital assets.
If we are treated as a PFIC with respect to you for any taxable year, to the extent any of our subsidiaries are also PFICs, you may be deemed
to own shares in such lower-tier PFICs that are directly or indirectly owned by us in that proportion which the value of our ordinary shares you own
bears to the value of all of our ordinary shares, and you may be subject to the adverse tax consequences described above with respect to the shares of
such lower-tier PFICs you would be deemed to own. As a result, you may incur liability for any excess distribution described above if we receive a
distribution from our lower-tier PFICs or if any shares in such lower-tier PFICs are disposed of (or deemed disposed of). You should consult your
tax advisor regarding the application of the PFIC rules to any of our subsidiaries.
A U.S. Holder of “marketable stock” (as defined below) in a PFIC may make a mark-to-market election for such stock to elect out of the tax
treatment discussed above. If you make a valid mark-to-market election for our ordinary shares, you will include in income for each year that we are
treated as a PFIC with respect to you an amount equal to the excess, if any, of the fair market value of our ordinary shares as of the close of your
taxable year over your adjusted basis in such ordinary shares. You will be allowed a deduction for the excess, if any, of the adjusted basis of our
ordinary shares over their fair market value as of the close of the taxable year. However, deductions will be allowable only to the extent of any net
mark-to-market gains on our ordinary shares included in your income for prior taxable years. Amounts included in your income under a mark-to-
market election, as well as gain on the actual sale or other disposition of our ordinary shares, will be treated as ordinary income. Ordinary loss
treatment will also apply to the deductible portion of any mark-to-market loss on our ordinary shares, as well as to any loss realized on the actual sale
or disposition of our ordinary shares, to the extent the amount of such loss does not exceed the net mark-to-market gains for such ordinary shares
previously included in income. Your basis in our ordinary shares will be adjusted to reflect any such income or loss amounts. If you make a mark-to-
market election, any distributions we make would generally be subject to the rules discussed below under “— Taxation of dividends and other
distributions on our ordinary shares,” except the lower rates applicable to qualified dividend income would not apply.
The mark-to-market election is available only for “marketable stock,” which is stock that is regularly traded on a qualified exchange or other
market, as defined in applicable U.S. Treasury regulations. We expect our ordinary shares will be listed on NASDAQ. Because a mark-to-market
election cannot be made for equity interests in any lower-tier PFICs we own, you generally will continue to be subject to the PFIC rules with respect
to your indirect interest in any investments held by us that are treated as an equity interest in a PFIC for U.S. federal income tax purposes. The
NASDAQ is a qualified exchange, but there can be no assurance that the trading in our ordinary shares will be sufficiently regular to qualify our
ordinary shares as marketable stock. You should consult your tax advisor as to the availability and desirability of a mark-to-market election, as well
as the impact of such election on interests in any lower-tier PFICs. Alternatively, if a non-U.S. entity treated as a corporation is a PFIC, a holder of
shares in that entity may avoid taxation under the PFIC rules described above regarding excess distributions and recognized gains by making a
“qualified electing fund” election to include in its income, on a current basis: (1) as ordinary income, its pro rata share of the “ordinary earnings” of
the qualified electing fund; and (2) as long-term capital gain, its pro rata share of the “net capital gain” of the qualified electing fund. However, you
may make a qualified electing fund election with respect to your ordinary shares only if we furnish you annually with certain tax information, and we
currently do not intend to prepare or provide such information.
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A U.S. Holder of a PFIC may be required to file an IRS Form 8621. The failure to file this form when required could result in substantial
penalties. If we are a PFIC, you should consult your tax advisor regarding any reporting requirements that may apply to you. You are urged to consult
your tax advisor regarding the application of the PFIC rules to the acquisition, ownership and disposition of our ordinary shares.
YOU ARE STRONGLY URGED TO CONSULT YOUR TAX ADVISOR REGARDING THE IMPACT OF OUR BEING A PFIC ON
YOUR INVESTMENT IN OUR ORDINARY SHARES AS WELL AS THE APPLICATION OF THE PFIC RULES AND THE POSSIBILITY OF
MAKING A MARK-TO-MARKET ELECTION.
Taxation of Dividends and Other Distributions on our Ordinary Shares
Subject to the PFIC rules discussed above, the gross amount of any distributions we make to you (including the amount of any tax withheld)
with respect to our ordinary shares generally will be includible in your gross income as dividend income on the date of receipt by the holder, but only
to the extent the distribution is paid out of our current or accumulated earnings and profits (as determined under U.S. federal income tax principles).
The dividends will not be eligible for the dividends-received deduction allowed to corporations in respect of dividends received from other U.S.
corporations. To the extent the amount of the distribution exceeds our current and accumulated earnings and profits (as determined under U.S. federal
income tax principles), such excess amount will be treated first as a tax-free return of your tax basis in your ordinary shares, and then, to the extent
such excess amount exceeds your tax basis in your ordinary shares, as capital gain. We currently do not, and we do not intend to, calculate our
earnings and profits under U.S. federal income tax principles. Therefore, you should expect that a distribution will generally be reported 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.
With respect to certain non-corporate U.S. Holders, including individual U.S. Holders, dividends may be taxed at the lower capital gain rates
applicable to “qualified dividend income,” provided (1) our ordinary shares are readily tradable on an established securities market in the United
States (such as NASDAQ), (2) we are neither a PFIC nor treated as such with respect to you (as discussed above) for either the taxable year in which
the dividend was paid or the preceding taxable year, (3) certain holding period requirements are met and (4) you are not under an obligation to make
related payments with respect to positions in substantially similar or related property. As discussed above under “Passive foreign investment
company,” there is a significant risk that we will be a PFIC for U.S. federal income tax purposes, and, as a result, the qualified dividend rate may be
unavailable with respect to dividends we pay.
The amount of any distribution paid in a currency other than U.S. dollars will be equal to the U.S. dollar value of such currency on the date
such distribution is includible in your income, regardless of whether the payment is in fact converted into U.S. dollars at that time. If the foreign
currency is converted into U.S. dollars on the date of receipt, a U.S. Holder generally will not be required to recognize foreign currency gain or loss
in respect of the distribution. A U.S. Holder may have foreign currency gain or loss if the foreign currency is converted into U.S. dollars after the
date of receipt, depending on the exchange rate at the time of conversion. Any gains or losses resulting from the conversion of foreign currency into
U.S. dollars generally will be treated as ordinary income or loss, as the case may be, and generally will be treated as U.S. source. In addition,
proposed Treasury regulations (which taxpayers may rely upon pending publication of final regulations) issued on December 18, 2017, provide that
certain taxpayers may elect to ‘mark to market’ gain or loss resulting from exchange rate fluctuations. The proposed regulations are complex, and
you should consult your tax advisor regarding the availability of the proposed regulations in your particular circumstances. The amount of any
distribution of property other than cash will be the fair market value of such property on the date of distribution.
Any dividends will constitute foreign source income for foreign tax credit limitation purposes. If the dividends are taxed as qualified
dividend income (as discussed above), the amount of the dividend taken into account for purposes of calculating the foreign tax credit limitation will
in general be limited to the gross amount of the dividend, multiplied by the reduced tax rate applicable to qualified dividend income and divided by
the highest tax rate normally applicable to dividends. The limitation on foreign taxes eligible for credit is calculated separately with respect to
specific classes of income. For this purpose, dividends distributed by us with respect to our ordinary shares will generally constitute “passive
category income” but could, in the case of certain U.S. Holders, constitute “general category income.”
If Israeli withholding taxes apply to any dividends paid to you with respect to our ordinary shares, subject to certain conditions and
limitations, such withholding taxes may be treated as foreign taxes eligible for credit against your U.S. federal income tax liability. Instead of
claiming a credit, you may elect to deduct such taxes in computing taxable income, subject to applicable limitations. If a refund of the tax withheld is
available under the applicable laws of Israel or under the Israel-U.S. income tax treaty (the “Treaty”), the amount of tax withheld that is refundable
will not be eligible for such credit against your U.S. federal income tax liability (and will not be eligible for the deduction against your U.S. federal
taxable income). The rules relating to the determination of the foreign tax credit are complex, and you should consult your tax advisor regarding the
availability of a foreign tax credit in your particular circumstances, including the effects of the Treaty.
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Taxation of Disposition of Ordinary Shares
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Subject to the PFIC rules discussed above, upon a sale or other disposition of ordinary shares, you will generally recognize capital gain or
loss for U.S. federal income tax purposes in an amount equal to the difference between the amount realized (including the amount of any tax
withheld) and your tax basis in such ordinary shares. If the consideration you receive for our ordinary shares is not paid in U.S. dollars, the amount
realized will be the U.S. dollar value of the payment received determined by reference to the spot rate of exchange on the date of the sale or other
disposition. However, if our ordinary shares are treated as traded on an “established securities market” and you are either a cash basis taxpayer or an
accrual basis taxpayer that has made a special election (which must be applied consistently from year to year and cannot be changed without the
consent of the IRS), you will determine the U.S. dollar value of the amount realized in a non-U.S. dollar currency by translating the amount received
at the spot rate of exchange on the settlement date of the sale. If you are an accrual basis taxpayer that is not eligible to or does not elect to determine
the amount realized using the spot rate on the settlement date, you will recognize foreign currency gain or loss to the extent of any difference between
the U.S. dollar amount realized on the date of sale or disposition and the U.S. dollar value of the currency received at the spot rate on the settlement
date. In addition, proposed Treasury regulations (which taxpayers may rely upon pending publication of final regulations) issued on December 18,
2017 provide that certain taxpayers may elect to ‘mark to market’ gain or loss resulting from exchange rate fluctuations. The proposed regulations are
complex, and you should consult your tax advisor regarding the availability of the proposed regulations in your particular circumstances.
Your tax basis in our ordinary shares generally will equal the cost of such ordinary shares. If you are a non-corporate U.S. Holder, capital
gain from the sale, exchange or other disposition of shares is generally eligible for a preferential rate of taxation applicable to capital gains, if your
holding period determined at the time of such sale, exchange or other disposition for such shares exceeds one year (i.e., such gain is long-term capital
gain). The deductibility of capital losses is subject to significant limitations.
As mentioned above, to the extent that, the sale, exchange or disposition of our ordinary shares would be subject to Israeli tax, the U.S holder
would be permitted to claim a credit for any such taxes incurred against U.S. federal income tax imposed on any gain from such sale, exchange or
disposition, under the circumstances and subject to the limitations specified in the U.S-Israel Double Tax Treaty and U.S. domestic law applicable to
foreign tax credit.
Information Reporting and Backup Withholding
Dividend payments with respect to ordinary shares and proceeds from the sale, exchange or redemption of ordinary shares may be subject to
information reporting to the IRS and possible U.S. backup withholding. Backup withholding will not apply, however, to a U.S. Holder that furnishes
a correct taxpayer identification number and makes any other required certification or that is otherwise exempt from backup withholding. U.S.
Holders that are required to establish their exempt status generally must provide such certification on IRS Form W-9. You should consult your tax
advisor regarding the application of the U.S. information reporting and backup withholding rules.
Backup withholding is not an additional tax. Amounts withheld as backup withholding may be credited against your U.S. federal income tax
liability, and you may obtain a refund of any excess amounts withheld under the backup withholding rules by filing the appropriate claim for refund
with the IRS and furnishing any required information in a timely manner.
Information with respect to Foreign Financial Assets
Certain U.S. Holders may be required to report information relating to an interest in our ordinary shares, subject to certain exceptions
(including an exception for ordinary shares held in accounts maintained by certain U.S. financial institutions). Penalties can apply if U.S. Holders fail
to satisfy such reporting requirements. You should consult your tax advisor regarding the effect, if any, of this requirement on your ownership and
disposition of our ordinary shares.
Information with respect to the Foreign Account Tax Compliance Act
The Foreign Account Tax Compliance Act, or FATCA, encourages foreign financial institutions to report information about their U.S.
account holders (including holders of certain equity interests) to the IRS. Foreign financial institutions that fail to comply with the withholding and
reporting requirements of FATCA and certain account holders that do not provide sufficient information under the requirements of FATCA are
subject to a 30% U.S. withholding tax on certain payments they receive, including foreign pass-through payments (which may include payments
made by us with respect to our shares). The term “foreign pass thru payment” is not currently defined in U.S. Treasury Regulations, and therefore,
the future application of FATCA withholding tax on foreign pass-thru payments to holders of shares is uncertain. If a holder of shares is subject to
withholding, there will be no additional amounts payable by way of compensation to the holder of such securities for the deducted amount. Holders
of shares should consult their own tax advisors regarding this legislation in light of such holder’s particular situation.
Information with respect to Net Investment Income Tax
Certain U.S. Holders who are individuals, estates or trusts may be required to pay an additional 3.8% Net Investment Income Tax, or NIIT,
on, among other things, dividends and capital gains from the sale or other disposition of our shares. For individuals, the additional NIIT tax applies to
the lesser of (i) “net investment income” or (ii) the excess of “modified adjusted gross income” over $200,000 ($250,000 if married and filing jointly
or $125,000 if married and filing separately). “Net investment income” generally equals the taxpayer’s gross investment income reduced by the
deductions that are allocable to such income. U.S. Holders will likely not be able to credit foreign taxes against the 3.8% NIIT.
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Certain U.S. Holders owning “specified foreign financial assets” may be required to file IRS Form 8938, or Statement of Specified Foreign
Financial Assets, with respect to such assets with their tax returns. “Specified foreign financial assets” generally include any financial accounts
maintained by foreign financial institutions, as well as any of the following, but only if they are not held in accounts maintained by financial
institutions: (i) stocks and securities issued by non-U.S. persons (ii) financial instruments and contracts held for investment that have non-U.S. issuers
or counterparties and (iii) interests in foreign entities. The IRS has issued guidance exempting “specified foreign financial assets” held in a financial
account from reporting under this provision (although the financial account itself, if maintained by a foreign financial institution, may remain subject
to this reporting requirement). The failure to file this form when required could result in substantial penalties. You are urged to consult your tax
advisors regarding the application of these requirements to your ownership of our shares.
In addition, certain U.S. Holders may be required to report additional information relating to an interest in our ordinary shares, subject to
certain exceptions. You are urged to consult your tax advisors regarding your information reporting obligations, if any, with respect to your
ownership and disposition of our ordinary shares.
THE SUMMARY OF U.S. FEDERAL INCOME TAX CONSEQUENCES SET OUT ABOVE IS FOR GENERAL INFORMATIONAL
PURPOSES ONLY. INVESTORS ARE URGED TO CONSULT THEIR TAX ADVISORS ABOUT THE APPLICATION OF THE U.S.
FEDERAL TAX RULES TO THEIR PARTICULAR CIRCUMSTANCES AS WELL AS THE STATE, LOCAL, NON-U.S. AND OTHER TAX
CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF OUR ORDINARY SHARES.
B.
Dividends and Paying Agents
Not applicable.
C.
Statement by Experts
Not applicable.
D.
Documents on Display
We are subject to the informational requirements of the United States Securities Exchange Act of 1934, as amended, and in accordance
therewith file annual and special reports with, and furnish other information to, the SEC. You may read and copy the registration statement and any
other documents we have filed at the SEC, including any exhibits and schedules, at the SEC’s public reference room at 100 F Street N.E.,
Washington, D.C. 20549. You may call the SEC at 1-800-SEC-0330 for further information on this public reference room. In addition, the SEC
maintains a web site that contains reports and other information regarding issuers that file electronically with the SEC. You may access the SEC’s
website at http://www.sec.gov. These SEC filings are also available to the public on the Israel Securities Authority’s Magna website at
www.magna.isa.gov.il and from commercial document retrieval services.
As a foreign private issuer, we will be exempt from the rules under the Exchange Act related to the furnishing and content of proxy
statements, and our officers, directors and principal shareholders will be exempt from the reporting and short-swing profit recovery provisions
contained in Section 16 of the Exchange Act. In addition, we will not be required under the Exchange Act to file annual, quarterly and current reports
and financial statements with the SEC as frequently or as promptly as United States companies whose securities are registered under the Exchange
Act. However, we will be required to comply with the informational requirements of the Securities Exchange Act of 1934, as amended, applicable to
foreign private issuers, and, accordingly, will file current reports on Form 6-K, annual reports on Form 20-F and other information with the Securities
and Exchange Commission.
In addition, because our ordinary shares are traded on the TASE, prior to our listing on Nasdaq we have filed Hebrew language periodic and
immediate reports with, and furnish information to, the TASE and the ISA, as required under Chapter Six of the Israeli Securities Law, 5768-1968.
Copies of our filings with the ISA can be retrieved electronically through the MAGNA distribution site of the ISA (www.magna.isa.gov.il) and the
TASE website (www.maya.isa.gov.il). We maintain a corporate website at www.medigus.com. Information contained on, or that can be accessed
through, our website does not constitute a part of this annual report on Form 20-F.
E.
Subsidiary Information
Not applicable.
ITEM 11.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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.
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Risk of Interest Rate Fluctuation
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Currently, our investments consist primarily of cash and cash equivalents and short-term bank deposits. We follow an investment policy that
was set by the investment committee of our board of directors, pursuant to which we currently invest in tradable short term Israeli government loans
or bank deposits. Our investments are exposed to market risk due to fluctuation in interest rates, which may affect our interest income and the fair
market value of our investments. However, given the low levels of interest rates worldwide, our interest income is not material and a further
reduction in interest rates would not cause us a significant reduction in the absolute amounts of interest income to us. We manage this exposure by
performing ongoing evaluations of our investments. Due to the short-term maturities of our investments to date, their carrying value has always
approximated their fair value. It is be our current policy to hold investments to maturity in order to limit our exposure to interest rate fluctuations.
Foreign Currency Exchange Risk
Our reporting and functional currency is the U.S. dollar. Our revenues are currently primarily payable in U.S. dollars and Euros and we
expect our future revenues to be denominated primarily in U.S. dollars and Euros. However, certain amount of our expenses are in NIS and as a
result, we are exposed to the currency fluctuation risks relating to the recording of our expenses in U.S. dollars. We may, in the future, decide to enter
into currency hedging transactions. These measures, however, may not adequately protect us from material adverse effects.
To date, we have not engaged in hedging transactions, however we hold our investments in both NIS and US dollars. In the future, we may
enter into currency hedging transactions to decrease the risk of financial exposure from fluctuations in the exchange rates of our principal operating
currencies. These measures, however, may not adequately protect us from the material adverse effects of such fluctuations.
Our interest rate risk exposure is in respect to bank deposits, which expose us to risk due to change in fair value interest rates. As of
December 31, 2017, these deposits carried relatively low interest rates and under these low interest rates, reasonable changes in interest rates are
expected have negligible impact on the fair value of these assets.
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
General
The following is a summary description of the ADSs and does not purport to be complete. Each ADS represents 50 ordinary shares (or a
right to receive 50 ordinary shares) deposited with the principal Tel Aviv office of either of Bank Hapoalim or Bank Leumi, as custodian for the
Bank of New York Mellon as the Depositary. Each ADS also represents any other securities, cash or other property which may be held by the
Depositary. The Depositary’s office at which the ADSs will be administered is located at 101 Barclay Street, New York, New York 10286.
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You may hold ADSs either (A) directly (i) by having an American Depositary Receipt, or 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. 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.
The following is a summary of the material provisions of the deposit agreement. For more complete information, you should read the entire
deposit agreement and the form of ADR.
Dividends and Other Distributions
How will you receive dividends and other distributions on the shares?
The Depositary has agreed to pay to ADS holders the cash dividends or other distributions it or the custodian receives on shares or other
deposited securities, after deducting 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 NIS only to those ADS holders to whom it is possible to do so. It will hold the
NIS it cannot convert for the account of the ADS holders who have not been paid. It will not invest the NIS 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. For more
information see “Item 10. Addition Information—E. Taxation.” 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 NIS, you may lose
some or all 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 sufficient to pay its fees and expenses in
connection with that distribution (or ADSs representing those shares).
Rights to purchase additional shares. If we offer holders of our securities any rights to subscribe for additional ordinary shares or any other
rights, the Depositary may make these rights available to ADS holders. If the Depositary decides it is not legal and practical to make the rights
available but that it is practical to sell the rights, the Depositary will use reasonable efforts to sell the rights and distribute the proceeds in the same
way as it does with cash. The Depositary will allow rights that are not distributed or sold to lapse. In that case, you will receive no value for them.
If the Depositary makes rights available to ADS holders, it will exercise the rights and purchase the shares on your behalf. The Depositary
will then deposit the shares and deliver ADSs to the persons entitled to them. It will only exercise rights if you pay it the exercise price and any other
charges the rights require you to pay.
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U.S. securities laws may restrict transfers and cancellation of the ADSs represented by shares purchased upon exercise of rights. For
example, you may not be able to trade these ADSs freely in the United States. In this case, the Depositary may deliver restricted depositary shares
that have the same terms as the ADSs described in this section except for changes needed to put the necessary restrictions in place.
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.
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?
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 at the Depositary’s office. 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.
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.
Alternatively, 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. The Depositary will notify ADS
holders of shareholders’ meetings and arrange to deliver our voting materials to them if we ask it to. 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 much reach the Depositary by a
date set by the Depositary. Otherwise, you won’t be able to exercise your right to vote unless you withdraw the shares. However, you may not know
about the meeting enough in advance to withdraw the shares.
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The Depositary will try, as far as practical, subject to the laws of Israel, and 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. The Depositary will only vote or attempt to vote as
instructed.
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 your right to vote 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.
Each of our American Depositary Shares, or ADSs, represents 50 of our ordinary shares. The ADSs trade on the NASDAQ Capital Market.
The form of the deposit agreement for the ADSs and the form of American Depositary Receipt (ADR) that represents an ADS as filed as
exhibits to the Company’s registration statement on Form F-6 with the SEC on May 7, 2015. Copies of the deposit agreement are available for
inspection at the principal office of the Bank of New York Mellon, located at 101 Barclay Street, New York, New York 10286, and at the principal
office of our custodians Bank Hapoalim B.M., 104 Hayarkon Street, Tel Aviv 63432, Israel.
Fees and Expenses
Persons depositing or withdrawing shares or ADS holders must pay:
$5.00 (or less) per 100 ADSs (or portion of 100 ADSs)
For:
● Issuance of ADSs, including issuances resulting from a distribution of
$0.05 (or less) per ADS
A fee equivalent to the fee that would be payable if securities distributed
to you had been shares and the shares had been deposited for issuance of
ADSs
$0.05 (or less) per ADS per calendar year
Registration or transfer fees
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
shares or rights or other property
● Cancellation of ADSs for the purpose of withdrawal, including if the
deposit agreement terminates
● Any cash distribution to ADS holders
● Distribution of securities distributed to holders of deposited securities
which are distributed by the Depositary to ADS holders
● Depositary services
● Transfer and registration of shares on our share register to or from the
name of the Depositary or its agent when you deposit or withdraw
shares
● Cable, telex and facsimile transmissions (when expressly provided in
the deposit agreement)
● converting foreign currency to U.S. dollars
● As necessary
● As necessary
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 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.
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From time to time, the Depositary may make payments to us to reimburse and/or share revenue from the fees collected from ADS holders,
or waive fees and expenses for services provided, generally relating to costs and expenses arising out of establishment and maintenance of the ADS
program. In performing its duties under the deposit agreement, the Depositary may use brokers, dealers or other service providers that are affiliates of
the Depositary and that may earn or share fees or commissions.
Payment of Taxes
You will be responsible for any taxes or other governmental charges payable on your ADSs or on the deposited securities represented by
any of your ADSs. The Depositary may refuse to register any transfer of your ADSs or allow you to withdraw the deposited securities represented by
your ADSs until such taxes or other charges are paid. It may apply payments owed to you or sell deposited securities represented by your ADSs to
pay any taxes owed and you 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.
Reclassifications, Recapitalizations and Mergers
If we:
● Change the nominal or par value of our shares
● Reclassify, split up or consolidate any of the deposited securities
● Distribute securities on the shares that are not distributed to you
● Recapitalize, reorganize, merge, liquidate, sell all or
substantially all of our assets, or take any similar action
Amendment and Termination
How may the deposit agreement be amended?
Then:
The cash, shares or other securities received by the Depositary will
become deposited securities. Each ADS will automatically represent its
equal share of the new deposited 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.
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?
The Depositary will terminate the deposit agreement at our direction by mailing notice of termination to the ADS holders then outstanding
at least 30 days prior to the date fixed in such notice for such termination. The Depositary may also terminate the deposit agreement by mailing
notice of termination to us and the ADS holders if 60 days have passed since the Depositary told us it wants to resign but a successor depositary has
not been appointed and accepted its appointment.
After termination, the Depositary and its agents will do the following under the deposit agreement but nothing else: collect distributions on
the deposited securities, sell rights and other property, and deliver shares and other deposited securities upon cancellation of ADSs. Four months after
termination, the Depositary may sell any remaining deposited securities by public or private sale. 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 for the pro rata benefit of the ADS holders that have not
surrendered their ADSs. It will not invest the money and has no liability for interest. The Depositary’s only obligations will be to account for the
money and other cash. After termination our only obligations will be to indemnify the Depositary and to pay fees and expenses of the Depositary that
we agreed to pay.
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Limitations on Obligations and Liability
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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;
● are not liable if we are or it is prevented or delayed by law or circumstances beyond our or its control from performing our or its
obligations under the deposit agreement;
● are not liable if we or it exercises discretion permitted under the deposit agreement;
● 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;
● are not liable for the acts or omissions of any securities depository, clearing agency or settlement system; and
● 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.
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.
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Right to Receive the Shares Underlying your ADSs
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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.
Pre-release of ADSs
The deposit agreement permits the Depositary to deliver ADSs before deposit of the underlying shares. This is called a pre-release of the
ADSs. The Depositary may also deliver shares upon cancellation of pre-released ADSs (even if the ADSs are canceled before the pre-release
transaction has been closed out). A pre-release is closed out as soon as the underlying shares are delivered to the Depositary. The Depositary may
receive ADSs instead of shares to close out a pre-release. The Depositary may pre-release ADSs only under the following conditions: (1) before or at
the time of the pre-release, the person to whom the pre-release is being made represents to the Depositary in writing that it or its customer owns the
shares or ADSs to be deposited; (2) the pre-release is fully collateralized with cash or other collateral that the Depositary considers appropriate; and
(3) the Depositary must be able to close out the pre-release on not more than five business days’ notice. In addition, the Depositary will limit the
number of ADSs that may be outstanding at any time as a result of pre-release, although the Depositary may disregard the limit from time to time if it
thinks it is appropriate to do so.
Direct Registration System
In the deposit agreement, all parties to the deposit agreement acknowledge that the Direct Registration System, or DRS, and Profile
Modification System, or Profile, will apply to uncertificated ADSs upon acceptance thereof to DRS by the Depository Trust Company, or DTC. DRS
is the 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 required feature of DRS that allows a DTC participant, claiming to act on
behalf of a registered holder of 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 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 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.
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ITEM 13.
DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
There are no defaults, dividend arrangements or delinquencies that are required to be disclosed.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
Not applicable.
ITEM 15.
CONTROLS AND PROCEDURES
(a) Disclosure controls and procedures
We performed an evaluation of the effectiveness of our disclosure controls and procedures that are designed to ensure that information
required to be disclosed on Form 20-F and filed with the Securities and Exchange Commission is recorded, processed, summarized and reported
timely within the time period specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Securities
Exchange Act of 1934, as amended, is accumulated and communicated to the issuer’s management, including its principal executive and principal
financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. There can be no
assurance that our disclosure controls and procedures will detect or uncover all failures of persons within the company to disclose information
otherwise required to be set forth in our reports. Nevertheless, our disclosure controls and procedures are designed to provide reasonable assurance of
achieving the desired control objectives. Based on our evaluation, our management, including our Chief Executive Officer and Chief Financial
Officer, have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15(d) - 15(e) of the Securities Exchange Act
of 1934, as amended) as of the end of the period covered by this annual report on Form 20-F are effective at such reasonable assurance level.
(b) Management report on internal control over financial reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in
Rule 13a-15(f) under the Exchange Act. Under the supervision and with the participation of our management, including our chief executive officer
and chief financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting. Based on the framework
in Internal Control - Integrated Framework (2013 framework) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Based on this evaluation, our management has concluded that our internal control over financial reporting was effective as of December 31, 2017.
Attestation Report of the Registered Public Accounting Firm
Not applicable.
(c) Changes in internal control over financial reporting
There were no changes in our internal control over financial reporting that occurred during the year ended December 31, 2017, that have
materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
Our board of directors has determined that each of Mr. Birger, Mr. Machover and Mr. Yanai qualifies as an “audit committee financial
expert” and that all of them are considered independent under the applicable SEC and Nasdaq Marketplace rules.
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ITEM 16B. CODE OF ETHICS
Form Type: 20-F
Medigus Ltd.
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In March 2016, we adopted a code of ethics, which applies to all our directors, officers and employees, including without limitation our,
Chief Executive Officer, Chief Financial Officer, and controller, or persons performing similar functions. This code of ethics is posted on our
website, www.medigus.com.
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Fees and services
The table below summarizes the total amounts that we were billed by our independent accountants, Kesselman & Kesselman, an
independent registered public accounting firm, a member firm of PricewaterhouseCoopers International Limited, related to the following periods.
Audit fees(1)
Tax Fees(2)
Total
Year Ended
Year Ended
December 31,
December 31,
2017
2016
(USD in thousands)
160
33
193
128
10
138
(1)
Includes professional services rendered in connection with the audit of our annual financial statements and the review of our interim financial
statements. Includes professional fees related to annual tax returns.
(2) Represents fees paid for tax consulting services.
Audit committee’s pre-approval policies and procedures
Our audit committee’s specific responsibilities in carrying out its oversight of the quality and integrity of the accounting, auditing and
reporting practices of the Company include the approval of audit and non-audit services to be provided by the external auditor. The audit committee
approves in advance the particular services or categories of services to be provided to the Company during the following yearly period and also sets
forth a specific budget for such audit and non-audit services. Additional non-audit services may be pre-approved by the audit committee.
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
None.
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
Not applicable.
ITEM 16F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT
Not applicable.
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ITEM 16G. CORPORATE GOVERNANCE
Nasdaq Stock Market Listing Rules and Home Country Practices
As a foreign private issuer, we are permitted to follow Israeli corporate governance practices instead of Nasdaq Marketplace rules, provided
that we disclose which requirements we are not following and the equivalent Israeli requirement. We rely on this “foreign private issuer exemption”
with respect to the following items:
● Quorum. While the Marketplace Rules of the Nasdaq Stock Market require that the quorum for purposes of any meeting of the holders
of a listed company’s common voting stock, as specified in the company’s bylaws, be no less than 33 1/3% of the company’s
outstanding common voting stock, under Israeli law, a company is entitled to determine in its articles of association the number of
shareholders and percentage of holdings required for a quorum at a shareholders meeting. Our Articles of Association provide that a
quorum of two or more shareholders holding at least 10% of the voting rights in person or by proxy is required for commencement of
business at a general meeting. However, the quorum set forth in our Articles of Association with respect to an adjourned meeting
consists of any number of shareholders present in person or by proxy.
● Approval of Related Party Transactions. All related party transactions are approved in accordance with the requirements and
procedures for approval of interested party acts and transactions, set forth in sections 268 to 275 of the Companies Law, and the
regulations promulgated thereunder, which require the approval of the audit committee, the compensation committee, the board of
directors and shareholders, as may be applicable, for specified transactions, rather than approval by the audit committee or other
independent body of our board of directors as required under the Marketplace Rules of the Nasdaq Stock Market.
● Equity Compensation Plans. We do not necessarily seek shareholder approval for the establishment of, and amendments to, stock
option or equity compensation plans (as set forth in NASDAQ Listing Rule 5635(c)), as such matters are not subject to shareholder
approval under Israeli law. We will attempt to seek shareholder approval for our stock option or equity compensation plans (and the
relevant annexes thereto) to the extent required in order to ensure they are tax qualified for our employees in the United States.
However, even if such approval is not received, then the stock option or equity compensation plans will continue to be in effect, but we
will not be able to grant options to our U.S. employees that qualify as Incentive Stock Options for U.S. federal tax purpose. Our stock
option or other equity compensation plans are also available to our non-U.S. employees, and provide features necessary to comply with
applicable non-U.S. tax laws.
Otherwise, we comply with the rules generally applicable to U.S. domestic companies listed on the Nasdaq Stock Market. We may in the
future decide to use the foreign private issuer exemption with respect to some or all of the other Nasdaq Marketplace Rules related to corporate
governance. We also comply with Israeli corporate governance requirements under the Israeli Companies Law applicable to public companies.
ITEM 16H. MINE SAFETY DISCLOSURE
Not applicable.
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ITEM 17.
FINANCIAL STATEMENTS
Not applicable.
ITEM 18.
FINANCIAL STATEMENTS
Form Type: 20-F
Medigus Ltd.
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PART III
The consolidated financial statements and the related notes required by this Item are included in this annual report on Form 20-F beginning
on page F-1.
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To the shareholders of Medigus Ltd.
Opinion on the Financial Statements
Form Type: 20-F
Medigus Ltd.
Page 122
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MEDIGUS LTD.
Report of Independent Registered Public Accounting Firm
We have audited the accompanying consolidated balance sheets of Medigus Ltd. and its subsidiary as of December 31, 2017 and 2016, and the
related consolidated statements of loss and other comprehensive loss, changes in equity and cash flows for each of the three years in the period ended
December 31, 2017 including the related notes (collectively referred to as 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, 2017 and 2016, and the results
of their operations and their cash flows for each of the three years in the period ended December 31, 2017, in conformity with International Financial
Reporting Standards as issued by the International Accounting Standards Board.
Substantial doubt about the company’s ability to continue as a going concern
The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As discussed in
Note 1b to the financial statements, the Company has suffered recurring losses from operations and negative cash flows from operating activities.
These factors, among others, raise substantial doubt about its ability to continue as a going concern. Management’s plans in regards to these matters
are also described in Note 1b. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management and board of directors. Our responsibility is to express
an opinion on the Company’s 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 of these consolidated financial statements 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/ Kesselman& Kesselman
Kesselman& Kesselman
Certified Public Accountants (Isr.)
A member of PricewaterhouseCoopers International Limited
Tel - Aviv, Israel
March 22, 2018
We have served as the Company’s auditor since 1999.
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MEDIGUS LTD.
CONSOLIDATED BALANCE SHEETS
Assets
(Continued) - 1
December 31,
Note
2017
2016
USD in thousands
5
6
7
2(h),8
2(h),8
9
2,828
3,498
18
290
180
6,814
260
120
16
396
7,210
3,001
21
366
198
3,586
934
178
26
1,138
4,724
CURRENT ASSETS:
Cash and cash equivalents
Short-term deposit
Accounts receivable, net:
Trade
Other
Inventory
NON-CURRENT ASSETS:
Inventory
Property and equipment, net
Intangible assets
TOTAL ASSETS
The accompanying notes are an integral part of these consolidated financial statements.
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MEDIGUS LTD.
CONSOLIDATED BALANCE SHEETS
(Concluded) - 2
December 31,
Note
2017
2016
USD in thousands
Liabilities and equity
CURRENT LIABILITIES -
Accounts payable and accruals:
Trade
Other
NON-CURRENT LIABILITIES:
Long-term advanced payments
Warrants at fair value
Retirement benefit obligation, net
COMMITMENTS AND CONTINGENT LIABILITIES
TOTAL LIABILITIES
EQUITY:
Ordinary share capital
Share premium
Other capital reserves
Warrants
Accumulated deficit
TOTAL EQUITY
TOTAL LIABILITIES AND EQUITY
11
4
12
13
190
767
957
118
559
65
742
367
967
1,334
149
237
77
463
1,699
1,797
5,292
55,040
330
730
(55,881)
5,511
1,189
53,817
200
1,057
(53,336)
2,927
7,210
4,724
The accompanying notes are an integral part of these consolidated financial statements.
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CONSOLIDATED STATEMENTS OF LOSS AND OTHER COMPREHENSIVE LOSS
MEDIGUS LTD.
Note
2017
Year Ended December 31,
2016
USD in thousands
2015
REVENUES
COST OF REVENUES:
PRODUCTS AND SERVICES
INVENTORY IMPAIRMENT
GROSS PROFIT (LOSS)
RESEARCH AND DEVELOPMENT EXPENSES
SALES AND MARKETING EXPENSES
GENERAL AND ADMINISTRATIVE EXPENSES
OTHER INCOME, NET
OPERATING LOSS
PROFIT FROM CHANGES IN FAIR VALUE OF WARRANTS
ISSUED TO INVESTORS
FINANCING INCOME IN RESPECT OF DEPOSITS AND
EXCHANGE DIFFERENCES
FINANCING EXPENSES IN RESPECT OF BANK COMMISSIONS
FINANCING INCOME, NET
LOSS BEFORE TAXES ON INCOME
TAXES BENEFIT (TAXES ON INCOME)
LOSS FOR THE YEAR
OTHER COMPREHENSIVE LOSS FOR THE YEAR
Amounts which will not be reclassified to profit or loss -
Currency translation differences
TOTAL COMPREHENSIVE LOSS FOR THE YEAR
BASIC LOSS PER SHARE
DILUTED LOSS PER SHARE
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING
USED TO COMPUTE (IN THOUSANDS)
17
14
2(h)
14
14
14
4
10
15
15
15
467
219
297
(49)
2,208
846
3,005
(6,108)
3,502
71
(17)
3,556
(2,552)
7
(2,545)
549
176
-
373
3,655
2,125
3,684
(9,091)
25
99
(12)
112
(8,979)
(28)
(9,007)
624
277
-
347
4,384
2,680
2,842
3
(9,556)
106
19
(33)
92
(9,464)
(68)
(9,532)
(211)
(2,545)
(9,007)
(9,743)
USD
(0.26)
(0.26)
(0.02)
(0.02)
(0.34)
(0.34)
BASIC LOSS PER SHARE
DILUTED LOSS PER SHARE
125,685
129,690
34,397
34,397
28,415
28,415
The accompanying notes are an integral part of these consolidated financial statements.
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(Continued) - 1
MEDIGUS LTD.
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
Equity attributed to the owners of the company
Capital
reserves
from
transactions
with
controlling
shareholders
Capital
reserves
from
options
granted
Note
Ordinary
shares
Share
premium
Currency
translation
differences Warrants
Accumulated
deficit
Total
equity
USD in thousands
683
46,066
664
538
(906)
802
(34,797)
13,050
(211)
(9,532)
(9,743)
13B
13B
13C
13C
187
5,841
83
187
5,924
870
51,990
116
(83)
33
697
730
730
6,758
116
-
6,874
538
(1,117)
1,532
(44,329)
10,181
BALANCE AS OF
DECEMBER 31, 2014
TOTAL
COMPREHENSIVE
LOSS FOR THE YEAR
TRANSACTIONS WITH
SHAREHOLDERS:
Proceeds from issuance of
shares and warrants, net
Options granted to
employees and service
providers
Forfeiture of options
TOTAL TRANSACTIONS
WITH
SHAREHOLDERS
BALANCE AS OF
DECEMBER 31, 2015
The accompanying notes are an integral part of these consolidated financial statements.
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MEDIGUS LTD.
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
Equity attributed to the owners of the company
Capital
reserves
from
transactions
with
controlling
shareholders
Capital
reserves
from
options
granted
Note
Ordinary
shares
Share
premium
Currency
translation
differences Warrants
Accumulated
deficit
Total
equity
USD in thousands
870
51,990
697
538
(1,117)
1,532
(44,329)
10,181
13B
13C
13B,C
319
1,260
70
567
319
1,827
1,189
53,817
104
(92)
82
779
(9,007)
(9,007)
1,649
104
-
1,753
(475)
(475)
538
(1,117)
1,057
(53,336)
2,927
BALANCE AS OF
DECEMBER 31, 2015
TOTAL
COMPREHENSIVE
LOSS FOR THE YEAR
TRANSACTIONS WITH
SHAREHOLDERS:
Proceeds from issuance of
shares and warrants, net
Options granted to
employees and service
providers
Forfeiture and expiration of
options and warrants
TOTAL TRANSACTIONS
WITH
SHAREHOLDERS
BALANCE AS OF
DECEMBER 31, 2016
The accompanying notes are an integral part of these consolidated financial statements.
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MEDIGUS LTD.
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
Equity attributed to the owners of the company
Capital
reserves
from
transactions
with
controlling
shareholders
Capital
reserves
from
options
granted
Note
Ordinary
shares
Share
premium
Currency
translation
differences Warrants
Accumulated
deficit
Total
equity
USD in thousands
1,189
53,817
779
538
(1,117)
1,057
(53,336)
2,927
13C
13C
13C
2,501
1,602
69
626
267
64
528
(201)
4,103
1,223
5,292
55,040
130
909
538
(1,117)
(2,545)
(2,545)
2,837
2,228
64
-
5,129
(55,881)
5,511
(327)
(327)
730
The accompanying notes are an integral part of these consolidated financial statements.
F-7
BALANCE AS OF
DECEMBER 31, 2016
TOTAL
COMPREHENSIVE
LOSS FOR THE YEAR
TRANSACTIONS WITH
SHAREHOLDERS:
Proceeds from issuance of
shares and warrants, net
Exercise of warrant, net
Options granted to
employees and service
providers
Forfeiture and expiration of
options and warrants
TOTAL TRANSACTIONS
WITH
SHAREHOLDERS
BALANCE AS OF
DECEMBER 31, 2017
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MEDIGUS LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued) - 1
2017
For the year ended December 31,
2016
USD in thousands
2015
CASH FLOWS FROM OPERATING ACTIVITIES:
CASH FLOWS USED IN OPERATIONS (see Appendix)
Income tax paid
Interest received
NET CASH USED IN OPERATING ACTIVITIES
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment
Purchase of intangible assets
Investment in short-term deposits
Withdrawal of short-term deposits
Net cash used in investing activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of shares and warrants, net
Proceeds from exercise of warrants
Net cash generated from financing activities
DECREASE IN CASH AND CASH EQUIVALENTS
BALANCE OF CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR
GAINS (LOSSES) FROM EXCHANGE DIFFERENCES ON CASH AND CASH
EQUIVALENTS
BALANCE OF CASH AND CASH EQUIVALENTS AT END OF YEAR
Supplementary information on activities not involving cash flows -
Exercise of warrants
(9,255)
(14)
4
(9,265)
(32)
(6)
-
-
(38)
1,902
1,902
(7,401)
10,312
90
3,001
(6,969)
(45)
33
(6,981)
(84)
(12)
-
-
(96)
6,758
6,758
(319)
10,817
(186)
10,312
(4,659)
(22)
-
(4,681)
(2)
(7)
(5,000)
1,500
(3,509)
7,908
11
7,919
(271)
3,001
98
2,828
2,217
The accompanying notes are an integral part of these consolidated financial statements.
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MEDIGUS LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
APPENDIX TO THE STATEMENTS OF CASH FLOWS:
2017
For the year ended December 31,
2016
USD in thousands
2015
NET CASH USED IN OPERATIONS:
Loss for the year before taxes on income
Adjustment in respect of:
Profit from changes in the fair value of warrants issued to investors
Losses (gains) from exchange differences on cash and cash equivalents
Retirement benefit obligation, net
Inventory impairment
Gains on change in the fair value of financial instruments at fair value through profit or loss
Issuance expenses which were attributed to the warrants classified as a financial liability
and charged directly to profit or loss
Revaluation of and exchange differences on short-term deposits
Interest received
Depreciation
Amortization
Options granted to employees and service providers
CHANGES IN OPERATING ASSET AND LIABILITY ITEMS:
Decrease (increase) in accounts receivable:
Trade
Other
Increase (decrease) in accounts payable and accruals:
Trade
Other
Decrease (increase) in inventory
Net sales of financial assets at fair value through profit
or loss
NET CASH USED IN OPERATIONS
(2,552)
(3,502)
(98)
(12)
297
-
970
2
-
60
17
64
3
262
(177)
(202)
209
-
(4,659)
(8,979)
(9,464)
(25)
(90)
(21)
-
-
-
-
(4)
80
19
104
233
640
9
(393)
(828)
-
(9,255)
(106)
4
-
-
(3)
-
-
(33)
100
22
116
(126)
(425)
155
657
56
2,078
(6,969)
The accompanying notes are an integral part of these consolidated financial statements.
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NOTE 1 - GENERAL:
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MEDIGUS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
a. Medigus Ltd. (the “Company”) was incorporated in Israel on December 9, 1999 and is resident in Israel. The address of its registered
office is P.O. Box 3030, Omer, 8496500.
On July 22, 2007 the Company established a wholly owned subsidiary, MEDIGUS USA LLC, in the USA (hereinafter - the
“Subsidiary”).
The Subsidiary has not been engaged in any business activities until October 2013.
On October 1, 2013, the Company and its Subsidiary entered into an inter-company agreement whereby the Subsidiary provides
services to the Company in consideration for a reimbursement of its costs plus a reasonable premium.
The Company together with its subsidiary (hereinafter – the “Group”) is a medical device group specializing in developing innovative
endoscopic procedures and devices. To date most of the Group’s research and development activities have been focused in developing
and manufacturing of the Medigus Ultrasonic Surgical Endostapler (hereinafter - “MUSE”) endoscopy system, an FDA approved
system, for the treatment of gastroesophageal reflux disease (hereinafter - “GERD”). In addition, the Group uses the technological
platform it developed for the purpose of additional special systems and products that are suitable for both medical and industrial
applications.
To date, the Group continues negotiations to market the MUSE endoscopy system, together with marketing and selling miniature
cameras and related equipment.
The Company’s shares are listed on the Tel Aviv Stock Exchange Ltd. (hereinafter - “TASE”) and as of May 20, 2015, the Company’s
American Depository Shares (hereinafter – “ADSs”) evidenced by American Depositary Receipts (hereinafter – “ADRs”) are listed on
the NASDAQ Capital Market. The Company’s depositary agent for the ADR program is The Bank of New York Mellon.
On March 15, 2017, the Company effected a change in the ratio of its ordinary shares per ADS from 5 ordinary shares per ADS to 50
ordinary shares per ADS. The change in the ordinary shares ratio for the ADSs had the same effect as a 1-for-10 reverse stock split of
the ADSs (hereinafter – the “Revenue Split”). As a result of such change each ADR represents 50 ordinary shares of the Company as of
December 31, 2017.
Unless stated otherwise, all ADS and ordinary shares per ADS numbers are after the Reverse Split.
b. During the year ended December 31, 2017, the Group incurred a total comprehensive loss of approximately USD 2.5 million and a
negative cash flows from operating activities of approximately USD 4.7 million. As of December 31, 2017, the Group had incurred
accumulated deficit of approximately USD 55.9 million. Based on the projected cash flows, cash and cash equivalents and short-term
deposit balances as of December 31, 2017, which totaled to USD 2.8 million and USD 3.5 million, respectively, Management is of the
opinion that without further fund raising it will not have sufficient resources to enable it to continue its operating activities including the
development, manufacturing and marketing of its products for a period of at least 12 months from the sign-off date of these financial
statements. As a result, there is a substantial doubt about the Group’s ability to continue as a going concern.
Management’s plans include continuing commercialization of the Group’s products and securing sufficient financing through the sale of
additional equity securities, debt or capital inflows from strategic partnerships and others. There are no assurances however, that the
Group will be successful in obtaining the level of financing needed for its operations. If the Group is unsuccessful in commercializing
its products and securing sufficient financing, it may need to reduce activities, curtail or even cease operations.
The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded assets
and the amounts and classification of liabilities that might be necessary should the Group be unable to continue as a going concern.
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MEDIGUS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES:
a. Basis for preparation of the financial statements:
The Group’s consolidated financial statements as of December 31, 2017 and 2016 and for each of the three years in the period ended
December 31, 2017, are in compliance with International Financial Reporting Standards, which are standards and interpretations thereto
issued by the International Accounting Standard Board (hereinafter “IFRS”).
In connection with the presentation of these consolidated financial statements it is noted as follows:
1) The significant accounting policies applied in the preparation of these consolidated financial statements are set out below. These
policies have been consistently applied to all years presented, unless otherwise stated.
2) These consolidated financial statements have been prepared under the historical cost convention, as modified by the revaluation of
plan assets related to the retirement benefit obligation, and financial liabilities (including derivative instruments) measured at fair
value through profit or loss.
3) The preparation of consolidated financial statements in conformity with IFRS requires the use of certain critical accounting
estimates. It also requires management to exercise its judgment in the process of applying the Group’s accounting policies. Areas
involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the consolidated
financial statements are disclosed in note 3. Actual results may differ materially from estimates and assumptions used by
management.
4) The Group analyzes the expenses recognized in the consolidated statement of loss using a classification method based on the
expenses’ function.
b. Consolidation
Inter-company transactions and balances eliminated as part of the consolidation.
Accounting policies of the Subsidiary are those of the Company and have been consistently applied.
c. Translation of foreign currency balances and transactions:
1) The functional currency and the presentation currency
Items included in the financial statements of the Company and its Subsidiary have been prepared in the currency of the principal
economic environment in which it operates (hereinafter – “the functional currency”). Effective January 1, 2016, the Group changed
its functional currency to the U.S. dollar (hereinafter – “dollar” or “USD”) from the New Israeli Shekel (hereinafter – “NIS”). This
change was based on management’s assessment that the dollar is the primary currency of the economic environment in which the
Group operates. Accordingly effective January 1, 2016, the functional currency of the Group is the USD.
The consolidated financial statements are presented in USD, which is the Group’s presentation currency, and rounded to the nearest
thousand.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (continued):
2) Transactions and balances
Transactions made in a currency which is different from the functional currency (hereinafter – “foreign currency”) are translated into
the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting
from the settlement of such transactions and from the translation at the end-of-year exchange rates of monetary assets and liabilities
denominated in foreign currencies are recognized in income or loss.
Gains and losses from changes in exchange rates are presented in the consolidated statement of loss and other comprehensive loss
within the “Financing income in respect of deposits and exchange differences” line item.
d. Property and equipment
Property and equipment are initially recognized at purchased cost. Subsequent costs are included in the asset’s carrying amount or
recognized as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow
to the Group and the cost of the item can be measured reliably. The carrying amount of replaced items is derecognized. All other repairs
and maintenance are charged to income or loss during the financial period in which they are incurred.
Property and equipment is recognized at cost less accumulated depreciation.
Depreciation is calculated using the straight line method over the estimated useful life of the asset as follows:
Machinery and equipment
Furniture
Computers
6 – 10 years (primarily 10)
7 – 14 years
3 years
Leasehold improvements are depreciated using the straight line method over the shorter of the term of the lease or the estimated useful
lives of the assets.
The assets’ residual values, their useful lives and the depreciation method are reviewed, and adjusted if appropriate, at the end of each
year.
Gains or losses with respect to disposals are determined by comparing the net proceeds with the carrying amount and recognized in the
consolidated statement of loss and other comprehensive loss within “Other income – net” line item.
e.
Intangible assets:
Computer programs
Licenses to use purchased computer programs are capitalized on the basis of the costs incurred in their purchase and preparation for use
of the specific program. These costs are amortized using the straight line method over the estimated useful life of the assets (usually
three years).
Costs related to the maintenance of computer programs are recognized as expenses when incurred.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (continued):
f.
Impairment of non-monetary assets
Non-monetary assets are tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not
be recoverable.
An impairment loss is recognized for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable
amount is the higher of an asset’s fair value less selling costs and value in use. For the purposes of assessing impairment, assets are
grouped at the lowest levels of identifiable cash flows (cash-generating units). Non-monetary assets that were impaired are reviewed for
possible reversal of the impairment recognized at each balance sheet date.
g. Financial instruments:
1) Classification
The Group classifies its financial assets to the category of receivables. The classification depends, among other things, on the
purpose for which the financial assets were purchased. Management determines the classification of financial assets upon initial
recognition.
Receivables
Receivables are non-derivative financial assets with fixed or determinable payments that are not quoted on an active market.
These assets are classified as current assets, except for maturities longer than 12 months following the date of the balance sheet
which are classified as non-current assets. The Group’s receivables are included in “accounts receivable”, “short-term
deposits” and “cash and cash equivalents” in the consolidated balance sheet (see also sections i and j below).
The Group classifies its financial liabilities to the following categories: financial liabilities at fair value through profit or loss and
financial liabilities at amortized cost. The Group’s management determines the classification of financial liabilities upon initial
recognition.
a) Financial liabilities at fair value through profit or loss.
Warrants allotted to investors with a cashless exercise mechanism. In accordance with International Accounting Standard 32:
“Financial Instruments: Presentation”, these warrants classified as a “financial liability”. As the aforementioned liability is a
non-equity derivative financial instrument, it is classified in accordance with IAS 39 as a financial liability at fair value
through profit or loss, which is measured at its fair value at each date of the balance sheet, with changes in the fair value
carried to “profit from changes in fair value of warrants issued to investors” in the consolidated statement of loss and
comprehensive loss.
b) Financial liabilities at amortized cost
Trade payables and financial liabilities included in “other liabilities” are recognized initially at fair value and subsequently
measured at amortized cost using the effective interest method.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (continued):
2) Recognition and measurement
Regular purchases and sales of financial assets are recorded at the date of the settlement which is the date on which the asset was
delivered to the Group or delivered from the Group.
Investments are initially recognized at fair value plus transaction costs for all financial assets not carried at fair value through profit
or loss. Financial assets are derecognized when the rights to receive cash flows from the investments have expired or have been
transferred and the Group has transferred substantially all risks and rewards of ownership associated with these assets. Receivables
are subsequently carried at amortized cost using the effective interest method.
Gains or losses arising from the changes in the fair value of financial assets at fair value through profit or loss are presented in the
consolidated statement of loss and other comprehensive loss within “other income - net” line item in the period in which they were
incurred.
As to methods for measurement of the Group’s financial instruments, see note 4.
3)
Impairment of financial assets
The Group assesses at each date of the balance sheet whether there is objective evidence that a financial asset or group of financial
assets measured at amortized cost is impaired. A financial asset or a group of financial assets is impaired and impairment losses are
incurred only if there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition
of the asset (a ‘loss event’) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or
group of financial assets that can be reliably estimated.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (continued):
h.
Inventory
Inventory is measured at the lower of cost or net realizable value.
The cost is determined on the basis of “first in-first out” basis. Cost of purchased products and inventory in process includes costs of
design, raw materials, direct labor, other direct costs and fixed production overheads.
Net realizable value is an estimated selling price in the ordinary course of business less applicable variable selling expenses.
Provisions for potentially obsolete or slow-moving inventory are made based on management’s analysis of inventory levels and
historical obsolescence.
Materials and other supplies held for use in the production of inventories are not written down below cost if the finished products in
which they will be incorporated are expected to be sold at or above cost.
The Group periodically analyzes anticipated product sales based on historical results, current backlog and marketing plans. Based on
these analyses, the Group anticipates that certain products will not be sold during the next twelve months, such products were classified
within the non-current assets.
i. Trade receivables
The balance of trade receivables includes amounts due from customers for products sold or services rendered in the ordinary course of
business. If collection is expected in one year or less, they are classified as current assets. If not, they are presented as non-current
assets.
Trade receivables are recognized initially at fair value and subsequently measured at amortized cost using the effective interest method,
less provision for doubtful accounts.
j. Cash and cash equivalents
Cash and cash equivalents include cash on hand and deposits held at call with banks with original maturities of three months or less.
k. Current and deferred taxes
Tax expenses for the reported years include current taxes. The taxes are recognized in the consolidated statements of Loss and other
comprehensive Loss.
The amount that was recorded as current taxes, is calculated based on the tax laws that have been enacted or substantively enacted at the
balance sheet date, in countries in which the Company and its Subsidiary operate and generate taxable income. The Group’s
management periodically evaluates the tax implications applicable to the taxable income, in accordance with the relevant tax laws, and
creates provisions in accordance with the amounts expected to be paid to the tax authorities.
The Group recognizes deferred taxes using the liability method, for temporary differences between the amounts of assets and liabilities
included in the financial statements, and the amounts for tax purposes. Deferred taxes are not recognized, if the temporary differences
arise at the initial recognition of the asset or liability which at the time of the transaction has no effect on profit or loss, whether for
accounting or tax reporting. The amount of deferred taxes is determined using the tax rates (and laws) which are expected to apply
when the related deferred tax assets is realized or the deferred tax liabilities will be settled.
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NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (continued):
Deferred tax assets are recognized for temporary differences that are tax deductible, up to the amount of the differences that are
expected to be utilized in the future, against taxable income.
No deferred tax assets have been recorded in the Group’s books and records with respect to accumulated losses since it is not probable
that the Group will be able to utilize such losses in the foreseeable future against taxable income.
Deferred tax assets and liabilities are offset only if:
There is a legally enforceable right to offset current tax assets against current tax liabilities; and
Deferred income tax assets and liabilities relate to income taxes imposed by the same taxation authority on the same taxable entity.
In the event of a dividend distribution originating from tax exempted “benefited enterprises”, tax will be levied on the amount
distributed using the tax rate that would have been applicable to Company had it not been exempted from tax. In the event of such a
distribution, the amount of tax will be recognized as an expense in the consolidated statement of loss and other comprehensive loss.
l. Employee benefits
1) Pension and severance pay obligations
Israeli labor laws and Company’s work agreements require the Company to pay retirement benefits to employees terminated or
leaving their employment, in certain circumstances. Most of the Company’s employees are covered by a defined contribution plan
under Section 14 of the Israel Severance Pay Law. According to the plan, the Company regularly makes payments to severance pay
or pension funds without having a legal or constructive obligation to pay further contributions if the funds does not hold sufficient
assets to pay all employees in the plan the benefits relating to employee service in the current and prior periods. Contributions for
severance pay or pension are recognized as employee benefit expenses when they are due commensurate with receipt of work
services from the employee and no further provision is required in the financial statements.
With respect to the remaining employees, the Company records a liability on its balance sheet for defined benefit plans that
represent the present value of the defined benefit obligation as of each reporting date, net of the fair value of plan assets. The
present value of the defined benefit liability is determined by discounting the anticipated future cash outflows, using interest rates
that are denominated in the currency in which the benefits will be payable.
2) Vacation and recreation pay
Under the Israeli law each employee is legally entitled to vacation and recreation benefits. The entitlement is based on term of
employment. The Group records such obligations as incurred.
3) Bonus plans
The Group record bonus obligation when a contractual or constructive obligation exists. Such bonus obligation is record in the
amount expected to be paid, to the extent that the Group can reliably estimate the amount expected to be paid.
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NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (continued):
m. Share based payments
The Company granted several equity-settled share based compensation plans to the Group’s employees and other service providers in
connection with their service to the Group. The fair value of such services is calculated at the grant date and amortized to the statement
of loss and other comprehensive loss during the vesting period. The total amount charged as an expense is determined taking into
consideration the fair value of the options granted:
- Without considering service and performance conditions, which are non-market vesting conditions (e.g. meeting profit and sales
targets and continued employment in the Company for a certain period).
-
Non-market vesting conditions are included among the assumptions in connection with the estimate level of options vesting period.
The total expense is recognized during the vesting period, which is the period over which all of the specified vesting conditions of
the share-based payment are to be satisfied.
The Group analyze the estimate level of options vesting period at each cut-off date, based on non-market vesting conditions. In case
such analysis result in a variance vs. the original estimates, the Group records such variance in profit or loss, with a corresponding
adjustment to equity.
When the options are exercised, the Company issues new shares. The proceeds, less directly related transaction costs, are reflected in
the share capital (at par value) and in share premium.
n. Revenue recognition
Revenues are measured in accordance with the fair value of the consideration received or receivable in respect of sales supplied in the
ordinary course of business. Revenues are presented net of value added tax, returns, rebates and discounts.
1) Sales of goods:
Revenue from the sale of goods is recognized when all of the following conditions are met:
● The Group transferred the significant risks and rewards of ownership of the goods to the purchaser;
● The Group does not retain continuing managerial involvement to the degree usually associated with ownership nor effective
control over the goods sold;
● The amount of the revenue can be measured reliably. The amount of the revenue is not considered as being reliably measured
until all the conditions relating to the transaction are met. The Group bases its estimates on past experience, considering the
type of customer, type of transaction and special details of each arrangement;
● It is probable that the economic benefits that are associated with the transaction will flow to the Group; and
● The costs incurred or to be incurred in respect of the transaction can be measured reliably.
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NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (continued):
2) Construction contracts:
A construction contract is defined by IAS 11, “Construction contracts”, as a contract specifically negotiated for the construction of
an asset.
When the outcome of a construction contract can be estimated reliably and it is probable that the contract will be profitable, the
revenue and the associated costs recognized over the contract period by reference to the stage of completion. The Group recognizes
expected loss immediately once concluded that it’s probable.
When the outcome of a construction contract cannot be estimated reliably, the Group recognizes revenue only to the extent of
contract costs incurred that it is probable will be recoverable.
Variations in contract work, claims and incentive payments are included in contract revenue to the extent that may have been
agreed with the customer and are capable of being reliably measured.
The Group uses the “percentage-of-completion method” to determine the appropriate amount to recognize in a given period. The
stage of completion is measured by reference to the contract costs incurred up to the end of the reporting period as a percentage of
total estimated costs for each contract. Costs incurred in the period in connection with the future activities on a contract are
excluded from contract costs in determining the stage of completion.
The Group classified the net contract position for each contract as either an asset or a liability as part of the balance sheet. Net
contract classified as an asset when the incurred costs plus recognized profits (less recognized losses) exceed progress billings and
as a liability if otherwise.
o. Leases
Lease agreements in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as
operating leases. Payments made in connection with operating leases are recognized in profit or loss using the straight-line basis over
the term of the lease.
p. Loss per share
Loss per share is based on the loss that is attributed to the shareholders holding ordinary shares, divided by the weighted average
number of ordinary shares in issue during the period.
For purposes of the calculation of the diluted loss per share, the Group adjusts the loss that is attributed to the holders of the Company’s
ordinary shares, and the weighted average number of ordinary shares in issue, to assume conversion of all of the dilutive potential
shares.
The potential shares are taken into account only if their effect is dilutive (increases loss per share).
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NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (continued):
q. New international financial reporting standards, amendments to standards and new interpretations:
Standards, amendments and interpretations to existing standards which are not yet effective and have not been early adopted by the
Group:
a)
International Financial Reporting Standard 9 “Financial Instruments” (hereinafter – “IFRS 9” or “the Standard”):
IFRS 9 deals with the classification, measurement and recognition of financial assets and financial liabilities. The full version of
IFRS 9 was published in July 2014. This Standard replaces the present existing directives in International Accounting Standard 39
“Financial Instruments: Recognition and Measurement” (hereinafter – “IAS 39”) regarding the classification and measurement of
financial instruments. IFRS 9 leaves the measurement model connected with measuring financial assets, but simplifies it and sets
forth three main categories: amortized cost, fair value through other comprehensive income and fair value through profit or loss.
The classification is based on the business model of the entity and on characteristics of the contractual cash flows of the financial
asset. Investments in capital instruments will be measured at fair value through profit or loss. Nevertheless, the entity’s
management can choose, on the date of initial recognition, irrevocably, to present the changes in fair value of an investment in a
capital instrument in other comprehensive income, without recycling them to profit or loss.
The Standard presents a new model for an impairment of financial instruments, based on the Expected Credit Loss Model. This
model replaces the existing model in IAS 39, which is based on the Incurred Loss Model. The new impairment model requires the
recognition of impairment provisions based on expected credit losses (hereinafter – “ECL”) rather than only incurred credit losses
as is the case under IAS 39. It applies to financial assets classified at amortized cost, debt instruments measured at fair value in
other comprehensive income and contract assets under IFRS 15 Revenue from Contracts with Customers. The new model, may
result in an earlier recognition of credit losses.
Regarding classification and measurement of financial liabilities, there were no changes, excluding the recognition of changes in
the fair value of liabilities designated to the fair value through “profit or loss” category, resulting from the entity’s own credit risk,
in other comprehensive income.
The Standard will be implemented retrospectively as from annual periods starting January 1, 2018. The Group will implement
IFRS 9 commencing January 1, 2018. According to the provisions of IFRS 9 it may be implemented earlier. The Group has
assessed IFRS 9’s potential impacts on its consolidated financial statements and concluded that the implementation will not have a
material effect.
b)
International Financial Reporting Standard 15 “Revenues from Contracts with Customers” (hereinafter – “IFRS 15”).
IFRS 15 will replace, on its first implementation, the directives on the subject of recognizing revenues existing today under
International Financial Reporting Standards.
The core principle of IFRS 15 is that revenues from contracts with customers must be recognized in a way that reflects the transfer
of control of goods or services supplied to customers in the framework of the contracts by amounts which reflect the proceeds that
the entity expects that it will be entitled to receive for those goods or services.
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NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (continued):
IFRS 15 sets forth a single model for recognizing revenues, according to which the entity will recognize revenues according to the
said core principle by implementing five stages:
(1) Identifying the contract(s) with the customer.
(2) Identifying the separate performance obligations in the contract.
(3) Determining the transaction price.
(4) Allocating the transaction price to separate performance obligations in the contract.
(5) Recognizing revenue when (or as) each of the performance obligations is satisfied.
The Standard will be implemented retrospectively as from annual periods starting January 1, 2018.
The Group has established a team to examine the expected effects of the application of IFRS 15 on its consolidated financial
statements. The Group intends to apply IFRS 15 on the date it becomes effective as from the first quarter of 2018, in accordance
with the transitional directive, which allows recognition of the cumulative effect of the initial application as an adjustment to the
opening balance of equity of initial application.
Based on such examination, management concluded that the implementation of IFRS 15 will not have a material effect on its
consolidated financial statements.
c)
International Financial Reporting Standard 16 “Leases” (hereafter – “IFRS 16”).
IFRS 16, Leases, which replaces the current guidance in IAS 17. IFRS 16 requires lessees, with certain exceptions, to recognize a
lease liability reflecting future lease payments and a ‘right-of-use asset’ for lease contracts. The standard is effective for annual
periods beginning on or after January 1, 2019, with earlier application permitted if IFRS 15, Revenue from Contracts with
Customer, is also applied. The Group is yet to assess IFRS 16’s full impact.
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NOTE 3 – SIGNIFICANT ACCOUNTING ESTIMATES AND JUDGMENTS:
The preparation of consolidated financial statements under IFRS requires the Group to make estimates and judgements that affect
the application of policies and reported amounts. Estimates and judgements are continually evaluated and are based on historical
experience and other factors including expectations of future events that are believed to be reasonable under the circumstances.
Actual results may differ from these estimates.
Included in this note are accounting judgments and/or estimates which cover areas that the Directors and Management consider to
have a significant risk of causing a material adjustment to the carrying amount of assets and liabilities in the future:
a. Deferred tax assets
Based on management’s judgment, no deferred tax assets have been recorded in the Group’s books of accounts for current losses
carried forward for tax purposes since it is not probable that the Group will be able to utilize those losses in the foreseeable future
against taxable income as of December 31, 2017. The deferred tax asset in connection with the accumulated losses for tax purposes
(which was not recorded due to the reason mentioned above) aggregated to approximately USD 16 million.
b. Fair value measurement of share-based payment transactions
The Company granted several equity-settled share based compensation plans to the Group’s employees and other service providers in
connection with their service to the Group. The fair value of the share options is measured at grant date on the basis of accepted
valuation models and assumptions regarding unobservable inputs used in the valuation models. The fair value mentioned above is
expensed to the statement of loss and other comprehensive loss during the vesting period and concurrently recorded as capital reserves
from options granted within the consolidated statement of changes in equity.
c.
Inventory impairment
The Company continually evaluates inventory for potential loss due to excess quantity or obsolete or slow-moving inventory by
comparing sales history and sales projection to the inventory on hand. When evidence indicates that the carrying value of a product may
not be recoverable, a charge is recorded to reduce the inventory to its current net realizable value. During 2017, the Company recorded
in its books an inventory impairment of $297 thousands, charged to cost of revenues.
d. Fair value measurement of warrants
Receipts from investors in respect of warrants are classified as equity to the extent that they confer the right to purchase a fixed number
of shares for a fixed exercise price. In the event that the exercise price is not deemed to be fixed, the warrants are classified as non-
current liability. This liability initially recognized at its fair value on the issue date and subsequently accounted for at fair value at each
reporting date. The fair value changes are charged to profit from changes in fair value of warrants issued to investors on the statement of
comprehensive loss. The fair value of the warrants is measured at issue date on the basis of accepted valuation models and assumptions
regarding unobservable inputs used in the valuation models.
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NOTE 3 – SIGNIFICANT ACCOUNTING ESTIMATES AND JUDGMENTS (continued):
e. Considering the likelihood of contingent losses and quantifying possible settlements:
Provisions are recorded when a loss is considered probable and can be reasonably estimated. Judgment is necessary in assessing the
likelihood that a pending claim or litigation against the Group will succeed, or a liability will arise, quantifying the possible range of
final settlement. These judgments are made by management with the support of internal specialists or with the support of outsource
consultants such as legal counsel. Because of the inherent uncertainties in this evaluation process, actual results may be different from
these estimates.
NOTE 4 - FINANCIAL INSTRUMENTS AND FINANCIAL RISK MANAGEMENT:
Financial risk management:
1) Financial risk factors
The Group is exposed to a variety of financial risks such as: market risks (including currency risks, fair value interest rate risk, cash
flow interest rate risk and price risk), credit risks and liquidity risks. The Group’s overall risk management plan focuses on the
unpredictability of financial markets and seeks to minimize the potential adverse effects on the Group’s financial performance.
Risk management is performed by the finance department according to the policy authorized by the board of directors.
a) Market risk - Currency risk
Currency risk is the risk that the value of financial instruments will fluctuate due to changes in foreign exchange rates.
The Group operates internationally and is exposed to foreign exchange risks due to exposure to foreign currencies, primarily
the NIS. Foreign exchange risk arises from future commercial transactions, assets or liabilities denominated in foreign
currency.
The Group’s policy to reduce the exposure to changes in exchange rates is based on maintaining, where possible, the balances
of current monetary assets, according to the currency of the current liabilities.
As of December 31, 2017, if the Group’s functional (USD) had weakened/strengthened by 10% against the NIS, with all other
variables held constant, the loss for the year would increase/decrease by USD 24 thousand (the effect for 2016 and 2015 was a
decrease/increase by USD 32 thousand and USD 308 thousand, respectively).
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NOTE 4 - FINANCIAL INSTRUMENTS AND FINANCIAL RISK MANAGEMENT (continued):
b) Credit risk
Credit risk arises when a failure by counterparties to discharge their obligations could reduce the amount of future cash inflows
from financial assets on hand at the end of the reporting year.
Credit risks are treated at the Group level. Credit risks arise typically from cash and cash equivalents, bank deposits and from
credit exposures in connection with outstanding receivables and committed transactions.
No credit limits were exceeded during the reported periods and Group’s management does not expect any losses from non-
performance of these parties.
c) Liquidity risk
Liquidity risk exists where the Group might encounter difficulties in meeting its financial obligations as they become due. The
Group monitors its liquidity in order to ensure that sufficient liquid resources are available to allow it to meet its obligations.
Cash flow forecasting is performed by the Group’s finance department. The finance department monitors rolling forecasts of
the Group’s liquidity requirements to ensure that it has sufficient cash to meet operational needs, while maintaining sufficient
headroom on its undrawn committed borrowing facilities, so that the Group does not breach any of its credit facilities.
The Group invests cash surpluses in interest bearing investments such as time deposits and short-term government debentures,
choosing instruments with appropriate maturities or sufficient liquidity to provide sufficient headroom as determined by the
above-mentioned forecasts.
Liquidity risk arises from financial liabilities due to payable balances (except for institutions and advanced payments) and
amounted to USD 896 thousands on December 31, 2017 (December 31, 2016 - USD 1,141 thousands).
These liabilities are classified as current liabilities, and are expected to mature within 12 months following the balance sheet
date.
2) Estimates of fair value
The following is an analysis of the financial instruments measured at fair value, according to valuation methods. Inputs for the asset
or liability that are not based on observable market data (unobservable inputs) (Level 3).
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NOTE 4 - FINANCIAL INSTRUMENTS AND FINANCIAL RISK MANAGEMENT (continued):
The following table presents the financial assets and liabilities that were measured at fair value as of December 31, 2017 and 2016:
Financial liabilities at fair value through profit or loss -
Fair value of warrants
Unrecognized Day 1 loss
Warrants, net
Financial instruments in level 3
December 31
2017
2016
Level 3
Total
Level 3
Total
USD in thousands
1,028
(469)
559
1,028
(469)
559
237
-
237
237
-
237
The Group’s financial liability at fair value through profit or loss is the obligation for warrants (series E), warrants (series I),
warrants (series A) and warrants (series L) (see Note 13(b).
2017
2016
December 31
Standard
deviation
Risk-free
interest
63.47%
66.72%
65.74%
0.97%
0.56%
0.70
Fair value
(USD
thousands)
228
325
6
Standard
deviation
Risk-free
interest
Fair value
(USD
thousands)
155.39%
155.39%
1.26%
0.00%
237
-
Warrants (Series L)
Warrants (Series A)
Warrants (Series I)
Warrants (Series E)
As part of calculating the warrants fair value by utilizing the Black and Scholes model, if the change in standard deviation for that
warrants shifted +5%, the impact on profit or loss would be USD 93 thousand. If the change in standard deviation for that warrants
shifted -5%, the impact on profit or loss would be USD 186 thousand. The higher the standard deviation, the higher the fair value.
The expected volatility is based on fluctuations in the price of the Company’s share.
On August 25, 2017 the warrants (Series E) expired as the exercise period was ended and the holders did not exercise such
warrants.
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NOTE 4 - FINANCIAL INSTRUMENTS AND FINANCIAL RISK MANAGEMENT (continued):
The following table presents the Level 3 instruments roll-forward during 2017:
Opening balance as of January 1, 2017
Granted (see note 13(b))
Exercised
Profit from changes in fair value of warrants issued to investors
Closing balance as of December 31, 2017
Total unrealized profits for the period included in profit or loss for liabilities held at the end of the reporting period
The following table presents the Level 3 instruments roll-forward during 2016:
Opening balance as of January 1, 2016
Granted (see note 13(b))
Changes in fair value of warrants issued to investors
Closing balance as of December 31, 2016
Total unrealized profits for the period included in profit or loss for liabilities held at the end of the reporting period
The following table presents the Level 3 instruments roll-forward during 2015:
Opening balance as of January 1, 2015
Changes in fair value of warrants issued to investors
Currency translation differences
Closing balance as of December 31, 2015
Total unrealized profits for the period included in profit or loss for liabilities held at the end of the reporting period
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Warrants
USD in
thousands
237
6,041
(2,217)
(3,502)
559
3,502
Warrants
USD in
thousands
9
253
(25)
237
25
Warrants
USD in
thousands
110
(106)
5
9
106
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NOTE 5 - CASH AND CASH EQUIVALENTS:
Cash in banks
Short-term bank deposits
As of December 31
2017
2016
USD in thousands
1,828
1,000
2,828
1,944
1,057
3,001
The currencies in which the cash and cash equivalents are denominated or to which they are linked are as follows:
USD
NIS
Other currencies
December 31
2017
2016
USD in thousands
2,220
354
254
2,828
2,040
880
81
3,001
The carrying amount of the cash and cash equivalents approximates their fair value.
NOTE 6 -SHORT-TERM DEPOSIT:
Short-term deposit amounted to approximately USD 3.5 million as of December 31, 2017, including a bank deposit with a maturity
period of up to 12 months.
The deposit bear interest of 1% per year.
NOTE 7 - OTHER RECEIVABLE:
Institutions
Prepaid expenses*
Advances to suppliers
Other
December 31
2017
2016
USD in thousands
56
225
9
290
70
277
17
2
366
* Such amount includes materials that were used to manufacture MUSE systems and MUSE systems which were used for testing,
training, demonstrations and promotional activities aggregated to USD 177 thousand and USD 214 thousand as of December 31,
2017 and 2016, respectively. The amount is charged to profit or loss based on usage and presented within research and development
expenses or sales and marketing expenses based on the usage nature.
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Composed as follows:
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Current assets:
Raw materials and supplies
Work in progress
Finished goods
Non-current assets:
Raw materials and supplies
Work in progress
Finished goods
Provision for impairment of raw materials and supplies
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December 31
2016
2017
USD in thousands
67
79
34
180
557
(297)
260
128
70
198
829
66
39
934
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NOTE 9 -PROPERTY AND EQUIPMENT:
a. Composition of property and equipment and accumulated depreciation thereon, grouped by major classifications and changes
therein, and their movements during 2017:
Property and equipment:
Machinery and equipment
Leasehold improvements
Office furniture and
equipment (including
computers)
Balance at
beginning
of year
Cost
Additions
during the
year
USD in thousands
Balance at
end of year
Balance at
beginning
of year
Accumulated Depreciation
Additions
during the
year
USD in thousands
Balance at
end of year
Depreciated balance
December 31,
2017
2016
USD in thousands
736
47
391
1,174
736
47
393
1,176
2
2
609
41
346
996
30
6
24
60
639
47
370
1,056
97
23
120
127
6
45
178
b. Composition of property and equipment and accumulated depreciation thereon, grouped by major classifications and changes
therein, and their movements during 2016:
Property and equipment:
Machinery and equipment
Leasehold improvements
Office furniture and
equipment (including
computers)
Balance at
beginning
of year
Cost
Additions
during
the year
USD in thousands
Balance at
end
of year
Balance at
beginning
of year
Accumulated Depreciation
Additions
during
the year
USD in thousands
Balance at
end of
year
712
47
383
1,142
24
8
32
736
47
391
1,174
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557
36
323
916
52
5
23
80
609
41
346
996
Depreciated balance
December 31,
2016
2015
USD in thousands
127
6
45
178
155
11
60
226
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NOTE 10 - TAXES ON INCOME:
a. Corporate taxation in Israel:
1) Measurement of results for tax purposes:
Commencing with tax year 2008 the results of the Company for tax purposes are measured in nominal values. Through the end of
tax year 2007 the results of the Company for tax purposes were measured having regard to the changes in the Israeli consumer
price index (hereinafter - “CPI”), in accordance with the Income Tax Law (Inflationary Adjustments), 1985 (hereinafter - the
“Inflationary Adjustments Law”). The transitional provisions regarding the discontinuation of the application of the Inflationary
Adjustments Law stipulate that losses carried forward for tax purposes, deduction for depreciation, and real loss from sale of a
depreciable asset or security will be linked to the CPI until the end of tax year 2007 and linkage shall be discontinued as of this
date.
2) Tax rates
The income of the Company (other than income which is eligible for reduced tax rates in accordance with encouragement laws in
Israel, see C below) is subject to corporate tax at the regular corporate tax rates.
According to the Law for the Amendment of National Priorities (Legislative Amendments for Achieving the Budgetary Goals for
2013-2014), 2013 (hereinafter - the Law), which was published in the official gazette on August 2015, stipulated that the corporate
tax rate will be 26.5% for 2014 and thereafter. (As to the tax rates on the income of a Preferred Enterprise as set out in the Law for
the Encouragement of Capital Investments-1959, see C below).
In January 2016, published the Amendment of the Income Tax Ordinance (No. 216), 2016, which stipulated a reduction of the
corporate tax, commencing 2016 and thereafter from 26.5% to 25%.
In December 2016, the Economic Efficiency Law (Legislative Amendments for Implementing the Economic Policy for the 2017
and 2018 Budget Year), 2016 was published, introducing a gradual reduction in corporate tax rate from 25% to 23%. However, the
law also included a temporary provision setting the corporate tax rate in 2017 at 24%. As a result, the corporate tax rate will be
24% in 2017 and 23% in 2018 and thereafter.
The Company’s capital gains are subject to tax at the regular corporate tax rates.
b. Taxation of the Subsidiary
The Subsidiary was incorporated in the United States and is subject to the Federal and State tax laws established in the United States.
On December 22, 2017, the Tax Cuts and Jobs Act (the “Act”) was signed into law. The Act reduces the corporate tax rate to 21 percent
from 35 percent, among other things. The Group does not expect that the Act will have a material effect on its consolidated financial
statements.
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NOTE 10 - TAXES ON INCOME (continued):
c. Encouragement laws in Israel:
Tax benefits under the Law for the Encouragement of Capital Investments-1959 (hereinafter- the “Law for the Encouragement of
Capital Investments”):
a) General
Under the Law for the Encouragement of Capital Investments, companies are entitled to various tax benefits by virtue of their
“approved enterprise” or “benefited enterprise” status subject to the fulfillment of certain conditions. In addition, companies may
be entitled to additional tax benefits as “foreign investors’ companies,” as defined by the Law for the Encouragement of Capital
Investments.
According to the Economic Policy Law for 2011 and 2012 (Legislative Amendments), 2011, which was published in
December 2010 also amended the Capital Investment Encouragement Law (hereinafter – the amendment).
The amendement sets alternative benefit tracks to the ones that were in place under the provisions of the Law for the
Encouragement of Capital Investments, as follows: investment grants track designed for enterprises located in national
development zone A and two new tax benefits tracks (preferred enterprise and a special preferred enterprise), which
provide for application of a unified tax rate to all preferred income of the company, as defined in the law.
Under the amended law, a company which qualifies for benefits under the encouragement law prior to the amendment
thereof may opt for application of the amendment on each year, commencing with the first year in which the amendment
became effective (2011) thereby making available to itself the tax benefits in accordance with the tracks set in the
amendment subject to the fulfillment of certain conditions. A company’s election for application of the amendment is
irrevocable and once it opts for application thereof, it will no longer be entitled to the tax benefits available to it under the
pre-amendment regime of the Law for the Encouragement of Capital Investments. A company will be allowed to continue
and enjoy the tax benefits available under the law prior to its amendment until the end of the period of benefits, as defined
in the law.
In December 2016, the Economic Efficiency Law (Legislative Amendments to Achieving the Budget Goals for 2017 and
-2018), 2016 was published. Under this law, two new benefit programs for high-tech industries” benefited technology
enterprise “and “special benefited technology enterprise ” were added.
b) Tax benefits
The Company has not decided at this stage whether and when to elect the application of the amendment of the law. Once the
Company generates taxable income, it is currently scheduled to be eligible for tax benefits available under the Law for the
Encouragement of Capital Investments before it was amended in accordance with the provisions of the benefited enterprise
regime, as follows:
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NOTE 10 - TAXES ON INCOME (continued):
Reduced tax rates
During the period of benefits - 10 years commencing in the first year in which the Company earns taxable income from
the benefited enterprises (provided the maximum period to which it is restricted by law has not elapsed) - the income from
the benefited enterprises owned by the Company is tax exempt so long as it is not distributed or deemed to be distributed.
The portion of income which qualifies for tax exemption as above is based on the ratio between the turnover relating to the
“benefited enterprise” and the total turnover of the Company.
In the event of a dividend distribution or deemed dividend distribution from income which was previously exempt, the
Company will be subject to tax on the grossed-up amount of the (deemed) dividend, according to the tax rate which would
have applied to the income were it not eligible for the exemption.
The Company has not yet utilized the tax benefits for the main plant, nor for the expansion of the plant.
c) Conditions to receive the benefits
The entitlement to the above benefits is conditional upon the Company’s fulfillment of the conditions stipulated by the
Law for the Encouragement of Capital Investments, and the regulations promulgated thereunder. In the event of failure to
comply with these conditions, the benefits may be cancelled and the Company may be required to refund the amount of
the benefits, in whole or in part, with the addition of interest. As of the date of approval of these financial statements, the
Company has met the aforementioned conditions.
d. Carry forward tax losses
Carry forward tax losses aggregate NIS 231 million (approximately USD 67 million) and NIS 204 million (approximately USD 59
million) as of December 31, 2017 and 2016, respectively. The Company did not record deferred taxes asset in respect of these losses, as
the utilization thereof is not expected to occur in the foreseeable future.
e. Tax advances for certain employee benefits expenses
Tax advances for certain employee benefits expenses that are not deductible for tax purposes paid to the tax authorities are charged to
the Statement of loss and other comprehensive loss on a current basis; the Company does not record these advances as a tax asset in its
books of accounts, as utilization thereof is not expected to occur in the foreseeable future.
The total said tax advances paid which have not yet been offset is approximately NIS 191 thousand (approximately – USD 50 thousand)
and approximately NIS 174 thousand (approximately – USD 45 thousand) as of December 31, 2017 and 2016, respectively.
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NOTE 10 - TAXES ON INCOME (continued):
f. Tax assessments
The Company was subject to a withholding tax audit in Israel for the four years ended December 31, 2014. The Israeli Tax authorities
completed their audit on October 6, 2016 and issued an assessment claiming additional NIS 5.3 million (approximately USD 1.5
million) withholding taxes for the period mentioned, mainly related to the Company's prior CEO’s compensation. It is the
management’s opinion, based on legal opinion, that it’s more likely than not that the claim will be dismissed. Accordingly, no provision
was recorded in these consolidated financial statements.
In accordance with Israeli tax regulations, as of December 31, 2017, the tax returns filed by the Company through the 2010 tax year are
considered final. As of the date of the approval of these financial statements, tax years 2011-2012 are considered final and the related
tax audit exposure decreased to USD 0.8 million.
g. Taxes on income included in the Statements of Loss and Other Comprehensive Loss for the periods presented:
The following is reconciliation between the “theoretical” tax, which would apply to the Group if all of its income were taxed at the
regular rate applicable to the Company in Israel (see a2 above) and the amount of tax reflected in the Statements of Loss for the
reported year:
Loss before taxes on income
Theoretical tax savings
Increase in taxes arising from mainly tax losses created in the reported year for which deferred
taxes were not recorded
Taxes on income (Tax benefit)
2017
2016
USD in thousands
2015
(2,552)
(587)
580
(7)
(8,979)
(2,245)
2,273
28
(9,464)
(2,508)
2,576
68
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NOTE 11 - ACCOUNTS PAYABLE AND ACCRUALS:
a. Trade payables are denominated in the following currencies:
NIS unlinked
USD
Euro
b. Other:
Payroll and related expenses
Wages and fees of related parties and related expenses
Institutions
Provision for vacations and recreation
Advanced payments from customers
Accrued expenses
Other payable balances (except for advances from customers) are denominated in the following currencies:
NIS unlinked
USD
Euro
December 31,
2016
2017
USD in thousands
123
54
13
190
December 31,
2016
2017
USD in thousands
180
72
96
158
61
200
767
As of December 31,
2017
2016
USD in thousands
461
215
30
706
108
252
7
367
150
90
132
170
193
232
967
469
274
31
774
The balances of the financial instruments included within the trade payables and other payables approximate their fair value as the
effect of the discounting is immaterial.
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NOTE 12 - COMMITMENTS AND CONTINGENT LIABILITIES:
a. Commitments:
Lease agreements:
1) The Company has an operating lease agreement with respect to the building it use. The lease period ends in December 31, 2018.
The lease payments are linked to the Israeli CPI.
The annual lease payments amounted to approximately USD 124 thousands for the year ended December 31, 2017.
The minimum annual lease payments under the agreements for 2018 are USD 85 thousands.
2) The Company leases vehicles under operating lease agreements for a period of 36 months. With regards to these agreements, the
Company has deposited amounts as security for the future lease payments. As of the balance sheet date the balance of such deposits
is approximately USD 13 thousands which was recorded as part of the prepaid expenses within the Accounts receivables – other.
The minimum annual lease payments according to the agreements are as follows:
2018
2019
2020
b. Contingent liabilities:
December 31,
2017
USD in
thousands
49
32
10
91
1) On June 16, 2015, the Company filed a claim in the District Court of Delaware against EndoChoice, Inc. (“EndoChoice”) for its
patent infringement, seeking an injunctive order and damages. On October 6, 2015, the Company filed claims against
EndoChoice’s trademark applications with the Israeli Patent Office. On December 29, 2015, EndoChoice filed a separate trademark
and unfair competition action against the Company and its U.S. Subsidiary. In addition, on January 27, 2016, EndoChoice
commenced an opposition procedure with the Israeli Patent Office against the Company’s trademark application in Israel.
On October 28, 2016, the Group and EndoChoice settled all litigation and administrative proceedings between themselves,
including those actions pending in the U.S. District Court for the District of Delaware C.A. Nos. 15-505-LPS-CJB and C.A. No.
15-1215-LPS-CJB and the trademark opposition proceedings in the State of Israel involving Trademark Application Nos. 257172,
260433 and 262423. Under the settlement agreement, Medigus was granted a covenant not to sue with respect to EndoChoice
FUSE-related trademarks and EndoChoice was granted a non-exclusive license to Medigus’ U.S. Patent No. 6,997,871 and related
patents. Each party has agreed to bear its own costs and fees associated with the Litigations.
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NOTE 12 - COMMITMENTS AND CONTINGENT LIABILITIES (continued):
2) On March 30, 2016, a former secretary and internal legal advisor (the “Employee”) filed a lawsuit against the Company and its
chief executive officer. The lawsuit notes several claims, among which is that the Employee was wrongfully terminated. On July
19, 2017, the Company entered into a settlement agreement with the Employee in consideration for him dismissing his claims.
3) Refer to Note 10f regarding withholding tax audit.
NOTE 13 - EQUITY:
a. Share capital:
1) Composed as follows:
Number of shares
Amount
Authorized
December 31,
Issued and
paid
December 31,
2017
2016
2017
2016
In thousands
Authorized
December 31,
2017
2016
NIS in thousands
Issued and paid
December 31,
2017
2016
USD in thousands
Ordinary shares of NIS 0.1
par value*
800,000
150,000
191,786
44,143
80,000
15,000
5,292
1,189
* Traded on TASE at NIS 0.094 per ordinary share of NIS 0.1 par value on December 31, 2017. Traded on the NASDAQ at USD 1.32 per
ADS on December 31, 2017.
2) The ordinary shares confer upon their holders voting rights and the right to participate in shareholders’ meetings, the right to
receive dividends and the right to participate in surplus assets in the event of liquidation of the Company.
3) On March 20, 2017 a general meeting of the Company’s shareholders approved an increase of the authorized share capital of the
Company by an additional NIS 65,000,000 such that the authorized share capital of the Company following such increase shall be
NIS 80,000,000, consisting of 800,000,000 ordinary shares, NIS 0.1 par value per share.
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NOTE 13 – EQUITY (continued):
b. Share offering to the public and existing shareholders:
1) On July 8, 2015, the Company issued a shelf offering report in Israel in accordance with a shelf prospectus of the Company dated
August 28, 2013.
In accordance with results of the offering to the public the Company issued 70,525 units at the price of NIS 380 per unit. Each unit
was comprised of 100 ordinary shares and 500 warrants (Series 9).
Each 10 warrants (Series 9) is exercisable into 1 share in consideration for an exercise price of NIS 5.32 until July 8, 2018.
The immediate proceeds (gross) from the issuance of all securities offered amounted to approximately NIS 26.8 million.
Net proceeds from the issuance, net of issuance expenses, amounted to approximately USD 6.8 million (NIS 25.5 million) of which
a total of USD 6 million were allocated to shares, and a total of USD 0.8 million to warrants (Series 9) in accordance to the fair
value ratios of the instruments.
2) On September 12, 2016, the Company closed a registered direct offering, pursuant to which the Company issued a total of 128,000
ADS representing a total of 6,400,000 ordinary shares, at a purchase price of USD 11.5 per ADS.
The immediate gross and net of issuance proceeds from such securities issuance aggregated to approximately USD 1.47 million and
USD 1.30 million, respectively.
The Company issued to the co-placement agent on this offering warrants (Series H) to purchase up to a total 3,955 ADSs
representing 197,750 ordinary shares, with an exercise price of USD 14.375 per ADS during the 5 years following the allotment.
The warrants may, under certain circumstances, also be exercised via a cashless exercise mechanism as defined in the agreement.
The fair value of such warrants as was calculated by the Company amounted to USD 38 thousand.
3) On October 17, 2016 warrants (Series 8) expired as the exercise period was ended.
4) On December 6, 2016, the Company closed a registered direct offering, pursuant to which the Company issued a total of a total of
113,917 ADSs representing a total of 5,695,850 ordinary shares, at a purchase price of USD 6.7 per ADS, and warrants (Series I) to
purchase up to a total of 39,871 ADSs representing 1,993,550 ordinary shares.
The immediate gross and net of issuance expenses proceeds from such securities issuance aggregated to approximately USD 0.8
million and USD 0.6 million, respectively.
Each warrant (Series I) is exercisable into 1 ADS at an exercise price of USD 9 per ADS during the 5.5 years following the
allotment.
As the warrants may be net share settled these warrants are classified as financial liabilities measured at fair value through profit or
loss at each reporting period.
As to the fair value of the said warrants as of December 31, 2017 see note 4(2).
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The Company issued to the placement agent on this offering warrants (Series J) to purchase up to a total 3,987 ADSs representing
199,355 ordinary shares, with an exercise price of USD 7.37 per ADS during the 5 years following the allotment. The warrants
may, under certain circumstances, also be exercised via a cashless exercise mechanism.
As part of the December 2016 offering, the Company issued to Roth Capital Partners and Maxim Group LLC, which served as the
transaction bankers, warrants (Series J) to purchase up to a total 1,993 ADSs representing 99,675 ordinary shares, with an exercise
price of USD 9 per ADS during the 5.5 years following the allotment. The warrants may, under certain circumstances, also be
exercised via a cashless exercise mechanism as defined in the agreement.
The fair value of such warrants as was calculated by the Company as of the date of grant amounted to USD 32 thousand.
5) On March 29, 2017, the Company allotted in a public issue, a total of 48,985,700 ordinary shares of the Company, a total of
2,142,858 warrants (Series A) for the purchase of an additional 107,142,900 shares and a total of 1,163,144 warrants (Series B) for
the purchase of an additional 58,157,200 shares for total cash consideration of approximately USD 7.5 million. Each warrant
(Series A) is exercisable into 50 ordinary shares of the Company at an exercise price of USD 3.50 per warrant during the five years
following the allotment. Each warrant (Series B) is exercisable into 50 ordinary shares of the Company at an exercise price of USD
0.01 per warrant.
Warrants (Series A) and warrants (Series B) may, under certain circumstances, also be exercised via a cashless exercise mechanism
as defined in the agreement, whereby the number of shares the value of which equals the exercise premium in cash will be deducted
from the number of shares to be issued upon exercise of the warrant. In addition, the number of warrants outstanding will be
adjusted for certain events specified in the warrant agreement.
In addition, the Company issued to the placement agent on this offering 150,000 warrants (Series Placement). Each warrant is
immediately exercisable into 50 shares in consideration for an exercise price of USD 4.375 per warrant during the 5 years
following the allotment. The warrants may, under certain circumstances, also be exercised via a cashless exercise mechanism as
defined in the agreement. The fair value of such warrants as calculated by the Company as of the date of grant amounted to USD
221 thousand.
As the warrants may be net share settled these warrants, other than the warrants issued to the placement, are classified as financial
liabilities measured at fair value through profit or loss at each reporting period. The warrants are initially recognized at fair value
adjusted to defer the difference between the fair value at initial recognition and the transaction price (“Day 1 loss”), as the
Company uses valuation techniques that incorporate data not obtained from observable markets. Transaction costs allocated to the
warrants are recognized immediately in profit or loss.
Unrecognized Day 1 loss is amortized over the life of the instrument. Any unrecognized Day 1 loss is immediately recognized in
income statement if fair value of the financial instrument in question can be determined either by using only market observable
model inputs or by reference to a quoted price for the same product in an active market.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Upon exercise, the carrying amount of the warrants (which is presented net of the related unrecognized Day loss, if any) is
reclassified to equity with no impact on profit or loss.
Net proceeds from the issuance, net of cash issuance expenses, aggregated to approximately USD 6.5 million. Issuance expenses
were attributed to equity and liability in proportion with the allocation of the proceeds.
During 2017 all warrants (Series B) were exercised. Accordingly, 58,157,200 ordinary shares of the Company were allotted.
The warrants (Series A) are presented as non-current liabilities, as cash settlement is not required.
6) On November 28, 2017, the Company closed a registered direct offering, pursuant to which the Company issued a total of of
810,000 ADSs representing a total of 40,500,000 ordinary shares, at a purchase price of USD 2 per ADS, and warrants (Series L) to
purchase up to a total of 405,000 ADSs representing 20,250,000 ordinary shares.
The immediate gross and net of issuance expenses proceeds from such securities issuance aggregated to approximately USD 1.6
million and USD 1.4 million, respectively.
Each warrant (Series L) is exercisable within six months following its issuance into 50 ordinary share of the Company at an
exercise price of USD 2.25 per warrant during the five and a half years following the allotment.
As the warrants may be net share settled these warrants are classified as financial liabilities measured at fair value through profit or
loss at each reporting period.
As to the fair value of the said warrants as of December 31, 2017 see note 4(2).
To the placement agent on this offering the Company issued warrants (Series M) to purchase up to an aggregate 56,700 ADSs
representing 2,835,000 ordinary shares. Each warrant (Series M) is exercisable into 50 share in consideration for an exercise price
of USD 2.50 per warrant during the 5 years following the allotment. The warrants may, under certain circumstances, also be
exercised via a cashless exercise mechanism as defined in the agreement. The fair value of such warrants as was calculated by the
Company as of the date of grant amounted to USD 46 thousand.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
c. Share based payments (not include warrants (Series H, Series J, Series Placement and Series M) as described above):
1) The following are the grants of options to employees and other service providers:
Date of grant
April 2012
April 2012
October 2013
July 2014
July 2014
December 2015
December 2015
October 2017
October 2017
Total
exercise
price per
option
(NIS)
Fair value
on grant
date-NIS
in
thousands
Number of
options
outstanding-
December
31, 2017
Number of
options
granted
Number of
options
exercisable
at 31,
December
2017
230,000
(**)0.91
1,150,000
(**)0.68
117
659
100,000
100,000
680,000
680,000
Plan
Series A
Series B
Series C
(***)4,500,000
(**)0.83
1,357
3,850,000
3,850,000
Series D
Series D
Series F
Series F
(*)310,000
(**)0.537
3,070,000
(**)0.537
(*)157,500
664,800
2.05
2.05
0.162
0.162
Series K
(*)1,750,000
Series K
9,880,000
21,712,300
56
554
116
491
167
942
60,000
45,000
1,580,000
1,185,000
157,500
78,750
251,300
125,650
1,750,000
9,880,000
18,308,800
6,064,400
Expiration
date
April 23,
2018
April 23,
2018
September
30, 2018
July 17,
2020
July 17,
2020
December
29, 2021
December
29, 2021
October 17,
2023
October 17,
2023
(*) Granted to related parties.
(**) Linked to the CPI as set out in the option allotment plan.
(***)The board of directors meeting dated August 12, 2013, and the general meeting of the Company’s shareholders dated September 29, 2013
authorized the allotment of 4,500,000 options (Series C), to the Group’s CEO. The options (Series C) are subject to the conditions of the option
allotment plan, for the allotment of non-marketable options to officers, employees and advisors of the Group. Each 10 options is exercisable
into one ordinary Company share of NIS 0.1 par value at the exercise price of NIS 8.3.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 - EQUITY (continued):
The right to exercise options (Series C) options granted to the CEO are vested as follows:
(1) 3,200,000 options will vest in 24 equal monthly batches, on the first day of each month, for a period of 24 months, commencing one
year following the date employment started according to the agreement, i.e., commencing October 1, 2014.
(2) 650,000 options will vest on June 30, 2014, provided that a target is met which was set by the Company’s board of directors and which
is related to clinical activities of the MUSE system in the US through this date. These options were vested as of June 30, 2014.
(3) 650,000 options will vest on February 1, 2015 provided that a sales revenues target is met in 2014, as set by the Company’s board of
directors. In accordance with the decision of the Company’s board, these options expired on March 31, 2015 due to failure to meet the
target.
Vesting conditions of all of the above options, except for the 1,300,000 options (Series C) as detailed in (2) and (3) above are service
conditions.
Each 10 options (Series A, Series B, Series C and Series D) is exercisable into 1 ordinary share.
Each 1 option (Series F and Series K) is exercisable into 1 ordinary share.
The fair value of all of the options was calculated using the Black and Scholes options pricing model, and based on the following
assumptions:
Fair value
on grant
date-NIS
in
thousands
607
Share
price on
date of
grant
(NIS)
1.627
Expected
dividend
None
Date of grant
December 2015
October 2017
1,109
0.162
None
Expected
volatility
Risk free
interest
Vesting conditions
54%
64%
1.39% four equal batches, following one, two, three
and four years from their grant date
1.16% four equal batches, following one, two, three
and four years from their grant date
Expected
term
6 years
6 years
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 - EQUITY (continued):
1) The changes in the number of share options and the weighted averages of their exercise prices are as follows:
2017
For the year ended December 31,
2016
2015
Weighted
average of
exercise price
per 1
ordinary
share-(NIS)
4.69
0.162
3.52
3.74
0.58
Number of
options
10,459,800
(302,500)
(1,434,800)
8,722,500
6.11
7,208,542
Weighted
average of
exercise price
per 1
ordinary
share-(NIS)
4.80
6.45
5.09
4.69
6.32
Weighted
average of
exercise price
per 1
ordinary
share-(NIS)
8.44
2.05
15.6
6.98
4.80
9.23
Number of
options
11,110,000
1,172,300
(485,833)
(1,336,667)
10,459,800
6,034,999
Number of
options
8,722,500
11,630,000
(801,064)
(1,242,636)
18,308,800
6,064,400
Outstanding at the beginning of year
Granted
Forfeited
Expired
Outstanding at year end
Exercisable at year end
2) The amounts of expenses that were recorded for options to employees and other service providers in the reported years are USD 64
thousand, USD 104 thousand and USD 116 thousand for the years ended December 31, 2017, 2016 and 2015, respectively.
3) The plans are intended to be governed by the terms stipulated by Section 102 to the Israeli Income Tax Ordinance (except for the
options to controlling shareholders and directors).
In accordance with these general rules and the track chosen by the Company pursuant to the terms thereof, in respect of options
granted to employees under the option allotment plan, the Company is not allowed to claim as an expense for tax purposes the
amounts credited to employees as a benefit, including amounts recorded as salary benefits in the Company’s books, with the
exception of the salary-benefit component, if exists, determined on the grant date.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 - EXPENSES BY NATURE:
Payroll and related expenses
Professional fees
Materials used and subcontracted work
Travel
Advertising and participation in exhibitions
Rent and office maintenance
Vehicle maintenance
Preparation of patents
Depreciation and amortization
Other
Inventory impairment
TOTAL COST OF REVENUES, INVENTORY IMPAIRMENT, RESEARCH AND
DEVELOPMENT, SALES AND MARKETING AND GENERAL AND
ADMINISTRATIVE EXPENSES
NOTE 15 - LOSS PER SHARE:
2017
Year ended
December 31,
2016
USD in thousands
2015
2,666
1,609
903
189
170
206
140
118
77
200
297
4,104
2,129
1,566
605
403
212
202
110
99
210
4,575
1,222
2,120
710
648
238
177
114
122
257
6,575
9,640
10,183
Basic net loss per share is computed by dividing net loss attributable to ordinary shareholders of Medigus Ltd. by the weighted average number of
shares outstanding for the reporting periods.
Diluted net loss per share is computed by dividing the basic net loss per share including adjustment of the dilutive effect of the Company’s
revaluation of warrants, by the weighted-average number of ordinary shares and the potential dilutive ordinary shares outstanding during the period.
Diluted shares outstanding include the dilutive effect of in-the-money options using the treasury stock method and presumed share settlement of the
Company’s deferred payments liability.
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Medigus Ltd.
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MEDIGUS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 - LOSS PER SHARE (continued):
The following table presents the numerator and denominator of the basic and diluted net loss per share computations:
Numerator (USD in thousands):
Net loss attributable to Medigus Ltd. for basic loss per share
Adjustment of revaluation of warrants issued to investors
Net loss attributable to Medigus Ltd. for diluted loss
Denominator (in thousands):
Weighted average shares – denominator for basic net loss per share
Shares settlement presumed for warrants issued to investors
Denominator for diluted loss per share
Net loss per share attributable to Medigus Ltd. (USD)
Basic
Diluted
F-43
Year ended
December 31,
2016
2015
2017
(2,545)
(476)
(3,021)
125,685
4,005
129,690
(0.02)
(0.02)
(9,007)
-
(9,007)
34,397
-
34,397
(0.26)
(0.26)
(9,532)
-
(9,532)
28,415
-
28,415
(0.34)
(0.34)
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MEDIGUS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 -TRANSACTIONS AND BALANCES WITH RELATED PARTIES
“Related Parties” – As defined in IAS 24 – ‘Related Party Disclosures” (hereinafter- “IAS 24”)
Key management personnel of the Company - included together with other entities, in the said definition of “Related Parties” mentioned
in IAS 24, include some members of senior management.
a. Transactions with related parties:
1):
Preparation of patents
Benefits to related parties:
Payroll and related expenses to related parties employed by the Company* (2017: 1 recipients,
2016 and 2015: 3 recipients)
Compensation to directors not employed by the Company (2017: 3 recipients, 2016: 4
recipients, 2015: 3 recipients)
Compensation to a director employed by the Company
Directors’ and Officers’ insurance
2017
Year ended on
December 31,
2016
USD in thousands
2015
18
377
52
14
61
114
716
58
13
48
478
71
71
*
Includes granted options benefit aggregated to USD 11 thousand, USD 20 thousand and USD 71 thousand for the years ended December 31,
2017, 2016 and 2015, respectively. As for the method used to determine the said value and the assumptions used in calculation thereof, see Note
13 C.
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MEDIGUS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 -TRANSACTIONS AND BALANCES WITH RELATED PARTIES (continued):
2) Compensation to key management personnel
The compensation to key management personnel for employment services they provide to the Company is as follows:
For employment services:
Payroll and other short-term benefits
Share based payments
Year ended on
December 31,
2016
USD in thousands
2015
330
19
349
*456
62
518
2017
**467
11
478
*Including provision for bonus of approximately USD 86 thousand.
**Including provision for bonus of approximately USD 56 thousand.
3)
Indemnification, exemption and insurance for directors and officers of the Company
a. The Company provides its directors and officers with an obligation for indemnification and exemption.
b. The Company has a directors and officers’ liability insurance policy covering all Company’s directors and officers. We
currently have directors’ and officers’ liability insurance providing total coverage of $12 million for the benefit of all of our
directors and officers, in respect of which we are charged a twelve-month premium of $80 thousand, and which includes a
deductible of up to $50,000 per claim, other than securities related claims filed in the U.S. or Canada, for which the deductible
shall not exceed $350,000.
b. Balances with related parties:
Current liabilities, presented in the balance sheets among “accounts payable and accruals”:
Directors fee
Provision for bonus
c. As to options granted to related parties, see Note 13 C.
F-45
December 31,
2017
2016
USD in thousands
16
56
72
4
86
90
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MEDIGUS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17 – ENTITY LEVEL DISCLOSURES:
a. Revenues by product:
Miniature camera and related equipment
MUSE and related equipment
b. Revenues by geographical area (based on the location of customers):
USA
Switzerland
South Korea
Italy
Israel
Other
Year ended on
December 31,
2016
USD in thousands
2015
2017
2017
306
161
467
115
74
52
49
22
155
467
449
100
549
Year ended on
December 31,
2016
USD in thousands
2015
345
3
119
82
549
558
66
624
446
39
139
624
c. All of the Group’s long-lived assets are located in Israel.
d. Major customers
Set forth below is a breakdown of Company’s revenue by major customers (major customer –revenues from these customers constitute
at least 10% of total revenues in a certain year):
Customer A
Customer B
Customer C
F-46
2017
Year ended on
December 31,
2016
USD in thousands
2015
49
9
261
239
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ITEM 19.
EXHIBITS
Exhibit
Number
Form Type: 20-F
Medigus Ltd.
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Exhibit Description
1.1
2.1
2.2
2.3
4.1
4.2
4.3
4.4
4.7
4.8
4.9
4.10
4.11
4.12
4.13
4.14
8.1
12.1
12.2
13.1
13.2
15.1
101
Articles of Association of Medigus Ltd., as amended(1)∞
Form of Deposit Agreement between Medigus Ltd., The Bank of New York Mellon as Depositary, and owners and holders from time to
time of ADSs issued thereunder, including the Form of American Depositary Shares(2)
Form of Series A Warrant to purchase Ordinary Shares Represented by American Depositary Shares issued in connection with the
March 2017 Securities Purchase Agreements(3)
Form of Placement Agent Warrant to purchase Ordinary Shares Represented by American Depositary Shares issued in connection with
the March 2017 Securities Purchase Agreements(3)
2013 Share Option and Incentive Plan(2)
Series A Option Plan(2)∞
Series B Option Plan(2)∞
Compensation Policy of Medigus Ltd.(4)
Summary of Lease Agreement between Medigus Ltd. and Tefen Yazamut Ltd. regarding main offices in Omer Industrial Park dated
January 6, 2004, as amended(1)
Form of Indemnification and Exculpation Undertaking(2)
Securities Purchase Agreement by and between the Registrant and the purchasers named therein, dated September 8, 2016(5)
Securities Purchase Agreement by and between the Registrant and the purchasers named therein, dated November 30, 2016(6)
Form of Warrant to purchase Ordinary Shares Represented by American Depositary Shares issued in connection with the November 30,
2016 Securities Purchase Agreements(6)
Securities Purchase Agreement by and between the Registrant and the purchasers named therein, dated March 24, 2017(3)
Securities Purchase Agreement by and between the Registrant and the purchasers in the registered direct offering dated November 24,
2017(7)
Form of Warrant to purchase Ordinary Shares Represented by American Depositary Shares issued in connection with the November 24,
2017, Securities Purchase Agreements(7)
List of Subsidiaries(2)
Certification of Chief Executive Officer as required by rule 13a-14(a)(1)
Certification of Chief Financial Officer as required by rule 13a-14(a)(1)
Certification of Chief Executive Officer as required by rule 13a-14(a) and Section 1350 of Chapter 63 of Title 18 of the United States
Code(1)
Certification of Chief Financial Officer as required by rule 13a-14(a) and Section 1350 of Chapter 63 of Title 18 of the United States
Code(1)
Consent of Kesselman & Kesselman, Certified Public Accountant (Isr.), a member of PricewaterhouseCoopers International Limited,
independent registered public accounting firm for the Medigus Ltd.(1)
Financial information from Medigus Ltd.’s Annual Report on Form 20-F for the year ended December 31, 2017 formatted in XBRL
(eXtensible Business Reporting Language)
(1) Furnished herewith.
(2) Previously filed with the Securities and Exchange Commission on May 7, 2015, as an exhibit to the Registrant’s registration statement on Form
20-F (File No 001-37381) and incorporated by reference herein.
(3) Previously filed with the Securities and Exchange Commission on March 23, 2017, as an exhibit to the Registrant’s registration statement on
Form F-1 (File 333-216155) and incorporated by reference herein.
(4) Previously filed with the Securities and Exchange Commission on March 30, 2016, as an exhibit to the Registrant’s annual report on Form 20-F
(File No 001-37381) and incorporated by reference herein.
(5) Previously filed with the Securities and Exchange Commission on September 8, 2016, as an exhibit to the Registrant’s report on Form 6-K (File
No 001-37381) and incorporated by reference herein.
(6) Previously filed with the Securities and Exchange Commission on December 1, 2016, as an exhibit to the Registrant’s report on Form 6-K (File
No 001-37381) and incorporated by reference herein.
(7) Previously filed with the Securities and Exchange Commission on November 24, 2017, as an exhibit to the Registrant’s report on Form 6-K (File
No 001-37381) and incorporated by reference herein.
∞ English translation of original Hebrew document.
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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 registration statement on its behalf.
SIGNATURES
Date: March 22, 2018
Medigus Ltd.
By:
By:
/s/ Christopher (Chris) Rowland
Christopher (Chris) Rowland
Chief Executive Officer
/s/ Oded Yatzkan
Oded Yatzkan
Chief Financial Officer
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Exhibit 1.1
Medigus Ltd.
Articles of Association
In accordance with The Companies Law, 5759-1999
Contents
Interpretation
The Company’s Name
The Company’s Objectives
The Company’s Purpose
The Registered Share Capital
Liability of Shareholders
Public Company
Shares
Share Certificate; Share deed
Calls on Shares
Forfeiture and Lien of Shares
Transfer of Shares
Redeemable Securities
Alteration of Share Capital
General Meetings of the Company’s Shareholders
Voting Rights
Discussions and Adoption of Resolutions in the General Meetings
The Board of Directors
The Board of Directors’ Powers and Duties
Board Meetings
Board Committees
The General Manager
The Company’s Office Holders
Internal Auditor
The Auditor
Validity of Acts and Approval of Non-Extraordinary Transactions
Distribution of Dividends
Dividends and Bonus Shares
Merger
Minutes
Register of Shareholders
Notices
Winding Up and Liquidation
Exemption of Liability
Insurance
Indemnity
Signatory Rights
Amendment to these Articles of Association
- 2 -
2
3
3
3
3
4
4
4
5
6
7
9
10
11
12
14
16
18
20
20
22
23
23
24
24
24
25
25
26
26
27
28
29
29
29
30
31
31
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Interpretation
Article 1:
In these Articles the following terms shall bear the meaning ascribed to them below:
“Person”
“Shareholder”
shall include a corporation;
shall mean a Registered Shareholder or Unregistered Shareholder. Where an effective date, as defined in Section 182 of
the Companies Law, is in effect, a Shareholder shall mean such Registered Shareholder or Unregistered Shareholder as
of the Effective Date;
shall mean a Person registered in the Register;
“Registered Shareholder”
“Unregistered Shareholder”shall mean a Person in whose favor a share is registered with a stock exchange member, and such share is also
“Stock Exchange”
The “Board”
“Director”
The “Companies Law”
The “Law”
The “Company”
“Administrative
Enforcement Proceeding”
“Register”
The “Office”
“In Writing”
“Securities”
The “Companies
Ordinance”
The “Articles”
Article 2:
registered in the Register under a nominee company’s name;
shall mean the Tel Aviv Stock Exchange Ltd.
shall mean the Company’s Board of Directors as appointed in accordance with the Law and these Articles;
shall mean a member of the Board, or any other person or entity serving, de-facto, as a Director, even if referred to
otherwise;
shall mean the Israeli Companies Law, 5759 – 1999, as amended from time to time, and all the rules and regulations
promulgated thereunder;
shall mean the Companies Law, the Israeli Securities Law, 5728-1968, as amended from time to time and its
regulations or regulation prescribed by Law, and any other companies-related law applicable to the company at the
time;
shall mean the company referred to above;
shall mean administrative enforcement proceeding under Chapter 8-C, 8-D or 9-1 to the Israeli Securities Law, 5728-
1968, and proceeding under Article D, Chapter 4 of part 9 of the Companies Law, 5759-1999;
shall mean a register of shareholders as required under Section 127 of the Companies Law, and any additional register
of shareholders maintained by the Company outside of Israel;
shall mean the registered office of the Company, as shall be from time to time in accordance with the Board’s
discretion;
shall mean print, lithography, photo, telegram, telex, facsimile, electronic mail, or any other visual expression or
imprinting of words;
shall include shares, debentures, capital notes, certificates and other documents granting the right to sell or convert
them as such;
shall mean the Israeli Companies Ordinance [New Version], 5743- 1983;
shall mean the articles of association contained in the Articles, as originally registered and as may be amended from
time to time;
Sections 2, 3, 4, 5, 6, 7, 8 and 10 of the Interpretation Law, 5741-1981, shall apply, mutatis mutandis, to the interpretation of these Articles herein,
unless otherwise provided herein or unless the matter at hand, or its context, does not conform to such application.
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Article 3:
Except for this Article 3 herein, all terms and expressions used in these Articles herein shall have the same meaning as provided in the Companies
Law, unless such meaning is in contradiction to the relevant matter at hand or its context.
Article 4:
Provisions which may be conditioned shall apply the Company, unless otherwise provided in these Articles herein, and in any contradiction between
the provisions of these Articles herein and those of the Companies Law, the provisions of these Articles herein shall prevail.
Article 5:
Where these Articles refer to provisions of the Companies Law which were amended or canceled, such provision shall apply as if already stipulated
in these Articles herein, unless otherwise prohibited by law.
Article 6:
Unless otherwise stipulated in these Articles herein, resolutions shall be adopted by the Company’s general meeting of its shareholders or by the
Board by an ordinary majority.
The Company’s Name
Article 7:
The name of the Company shall be as follows:
In Hebrew:
מדיגוס בע”מ
In English: Medigus Ltd.
The Company’s Objectives
Article 8:
The Company may undertake any lawful activity, subject to the provisions stipulated in its Memorandum of Association.
The Company’s Purpose
Article 9:
The purpose of the Company is to operate in accordance with commercial considerations with the intention of generating profits. However, the
Company may donate reasonable amounts for any suitable purpose even if such contributions do not fall within the business considerations of the
Company, as the Board may determine in its discretion.
The Registered Share Capital
Article 10:
A)
B)
The Company’s registered share capital is NIS 80,000,000 divided into 800,000,000 ordinary shares of the Company, par value NIS 0.10 each
(hereinafter: the “Shares”).
All ordinary Shares shall have equal rights for any matter or purpose, and holders of fully paid ordinary shares shall be entitled to the
following rights with respect to each such ordinary share held by them:
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1)
2)
3)
A right to be invited to and participate in, all the general meetings of the Company’s shareholders, and a right to one vote per each
ordinary share he holds, in every voting, in every general meeting of the Company’s shareholders he participates in.
A right to participate in dividends’ distribution, if and when distributed, and a right to be granted with bonus shares, if and when
granted.
A right to participate in the Company’s liquidation distribution in the event of its liquidation.
Liability of Shareholders
Article 11:
The shareholders’ liability is limited. Every shareholder’s liability is limited to the payment of the par value of his Shares. Where the Company
allocated Shares for less than their par value, the liability of every shareholder so allocated shall be limited to the lower par value of such Shares.
Public Company
Article 12:
Subject to the Companies Law, and for as long as the Shares are listed for trade in the Stock Exchange or have been offered to the public under a
prospectus, as such term is defined in the Securities Law, 1968, or have been offered to the public outside of Israel under an applicable public offer
instrument as required by applicable law outside of Israel, and are held by the public, the Company shall qualify as a Public Company. Prior to the
date of becoming a Public Company and upon the date the date of ceasing to be a Public Company (if at all), the Company shall then be a Private
Company.1
Shares
Article 13:
Without prejudice to any special rights previously granted to holders of existing Shares, the Company may issue or allot Shares or other Securities
consisting preference or deferred rights, or to issue from its unissued share capital redeemable Securities, or to issue shares consisting other special
limited rights or limitations regarding dividend distribution rights, voting rights, or other matters, as shall be resolved from time to time by a special
majority resolution of the general meeting of the Company’s shareholders.
Article 14:
If at any time, the Company’s share capital shall be divided into different classes, the general meeting of the Company’s shareholders may resolve by
an ordinary majority, unless otherwise stipulated by the issuance terms of the relevant class of shares, to convert, extend, add or to otherwise amend
the rights, privileges, benefits, limitations and provisions related or unrelated at that time to the relevant class of shares, or as shall otherwise be
resolved by an ordinary majority of the Company’s shareholders holding the relevant class of shares, at the general meeting of the Company’s
shareholders.
Article 15:
The special rights attached to issued shares or classes of shares, including preference rights shares or other special rights shares, shall not be
considered to be amended by creating or issuing additional shares of an equal rank, unless otherwise stipulated by the issuing terms of such shares.
The provisions regarding general meetings of the Company’s shareholders stipulated in these Articles herein shall apply, mutatis mutandis, on any
class meetings.
1 For the avoidance of doubt, it is hereby clarified that any Articles specifically referring to a Private Company shall not apply for as long as the
Company is as a Public Company.
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Article 16:
The Company’s unissued share capital shall be subject to the Board’s supervision, which may allocate it to those Persons for cash or such other
consideration, under the same terms and conditions, at a higher par value, equal par value or lower par value (in accordance with the provisions of the
Companies Law), and at those dates determined by the Board, and the Board shall be authorized to demand payment for any such shares from any
Person, equal, higher or lower than their par value, during such period and for such consideration, terms and conditions as the Board may determine.
Article 17:
Upon allocation of shares, the Board may distinguish between shareholders regarding payment amounts and payment dates.
Article 18:
If any allocation terms stipulate that the consideration for the shares so allocated shall be, in whole or in part, in installments, each such installment
shall be paid by the Person registered as the shareholder at the time of payment, or by his legal guardians.
Article 19:
The Company may pay at any time any Person, for providing underwriting services or for his consent to provide underwriting services, either
conditionally or unconditionally, for any of the Company’s Securities, including debentures and debentures stock, or for his consent to obtain
signatures, either conditionally or unconditionally, for any of the Company’s securities, debentures or debentures stock. Any commission may be
paid or removed in cash, Securities, debentures or debentures stock.
Share Certificate; Share Deed
Article 20:
Subject to and in accordance with the provisions of the Companies Law, each share certificate evidencing proprietary right in the Shares shall carry
the Company’s seal or its printed name, along with one of the signatures of one of the company’s members of the Board and Company secretary, or
as otherwise shall be determined by the Board.
Article 21:
Every registered shareholder (including a nominee company), is entitled to receive from the Company, as requested, one share certificate evidencing
all of the Shares registered under his name, or, if so approved by the Board (upon payment of the amounts determined by the Board from time to
time), several share certificates, each for one or more such Shares; each share certificate shall denote the number of Shares represented by such
certificate, the serial number of such Shares and their par value, all subject to the Companies Law.
Article 22:
Share certificate registered jointly under the names of two Persons or more shall be delivered to the Person whose name is listed first among other
such Persons in the Register, unless otherwise instructed in writing by such joint registered Persons.
Article 23:
A) Where the consideration for Shares is fully paid, the Company may provide a share deed entitling its holder with rights to the Shares denoted
in the share deed and the right to transfer it by transferring the Share, and the provisions regarding Share transfers stipulated in these Articles
herein shall not apply.
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B)
C)
Shareholder lawfully holding a share deed is entitled to return such share deed to the Company to be cancelled and converted to a registered
Share; Such shareholder is further entitled, upon payment of a fee determined by the Board, to be registered in the Register as the holder of the
Shares so represented by the share deed returned to the Company, and to receive a share certificate representing such Shares.
Holder of a share deed may deposit his share deed in the Office, and for as long as it is so deposited, such depositor shall have the right to
request for the general meeting of the Company’s shareholders to convene, in accordance with and subject to the Companies Law and these
Articles herein, to attend it, to vote in it and to uphold all further rights granted to a shareholder in a general meeting of the Company’s
shareholders convened pursuant to his request 48 hours pursuant to such deposit, as though his name was registered in the Register as the
holder of those Shares represented by the deed. Only one Person shall be acknowledged as the share deed depositor, and the Company must
return the share deed to its depositor if so requested by him, in writing, at least two days in advance.
Where a share deed was not deposited in accordance with the above, its holder shall not have the rights stated in subsection C above, and shall have,
subject to these Articles herein, all other rights granted to the Company’s shareholders.
Article 24:
If a share certificate or share deed are lost, damaged or defected, the Board may issue a new share certificate or share deed to replace them, provided
that such share certificate or share deed were not canceled by the Company, or upon proving to the Board’s satisfaction such loss or destruction, and
the Company was provided with guarantees against any possible damage to the Board’s satisfaction, all for the consideration determined by the
Board. Articles 20-23 above shall apply, mutatis mutandis, in connection with the issuance of a new share certificate.
Calls on Shares
Article 25:
The Board may, from time to time, in its discretion, make calls upon to perform payment of any amount of the consideration of their Shares not yet
paid, and which, according to the allocation terms of such Shares are not to be paid in definite dates, and all such shareholder shall pay the calls so
made upon him at the time(s) and place(s) designated in such call. A call may contain a demand for payment in installments. The date of the Board’s
resolution approving such call shall be deemed as the date of such call.
Article 26:
A call shall be delivered to the relevant shareholder not less than fourteen (14) days prior to the date of payment stipulated therein, and shall specify
the installments and the designated place of payment. Notwithstanding the above, prior to the due date stipulated in the call the Board may, by
delivering a written notice to the relevant shareholder, revoke such call or extend the payment period, subject to such revoking being approved prior
to the payment of the call.
Article 27:
The joint holders of a Share shall be bound jointly and severally to pay all calls in respect thereof.
Article 28:
If, according to the terms of issuance of any Share, any amount is due at a definite date or in installments in definite dates, such amount(s) shall be
paid on same date(s) as though due call had been delivered to the shareholder by the Board, and provisions regarding calls provided in these Articles
herein shall apply such call.
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Article 29:
Any amount not paid by the shareholder of the respective Share, when due or prior to that, shall bear an interest from its due date until its actual
payment at a rate determined by the Board from time to time, or as prescribed by law at the date of call,, unless otherwise prescribed by the Board.
Article 30:
The Board may agree to accept prepayment by any shareholder of any amount yet due with respect to his Shares or any part thereof. The Board may
direct the payment of interest for such prepayment or any part thereof, until the date of such prepayment at a rate as may be agreed upon between the
Board and the shareholder so prepaying.
Forfeiture and Lien of Shares
Article 31:
The Board may require any shareholder failing to pay any due amount on account of his Shares or any part thereof, to pay the unpaid due amount,
including accrued interest and all expenses incurred by the Company with respect to the collection of such payment, on the date and in the terms so
prescribed, by delivering a notice to such shareholder.
Article 32:
The notice shall specify a date, which date shall be not less than 14 days following the delivery date of such notice, and a place(s) where such
payment, including the accrued interest and expenses thereon, is to be paid. Same notice shall specify that, in the event of failure to pay the entire
amount due within the period stipulated in the notice, same failure may cause, ipso facto, the forfeiture of such Shares.
Article 33:
By Shareholder’s failure to meet the demands included in the abovementioned, the Board may, at any time thereafter and prior to the payment of all
due amounts specified in the notice or payment of all expenses and accrued interest to which the company is entitled with respect to such
shareholder’s Shares, resolve to forfeit such Shares. Such forfeiture shall include all dividends declared with respect thereof and not actually paid to
the date of forfeiture thereof.
Article 34:
Any Share so forfeited shall be deemed as the Company’s property, and the Board may resolve, subject to the provisions of these Articles herein, to
resell it, reissue it or otherwise transfer it as it deems fit, all subject to the provisions of the Companies Law.
Article 35:
Shares so forfeited and yet to be resold shall be deemed dormant Shares, and shall not have any rights attached to them for as long as they are held by
the Company.
Article 36:
The Board may, at any time prior to the resell, reissuance or otherwise disposal of an aforesaid forfeited Share, nullify the forfeiture on such
conditions as it deems fit.
A)
Any shareholder whose Shares have been so forfeited shall cease to be a holder of such forfeited Shares, but shall nevertheless continue to be
obligated to pay the Company all amounts at the time of forfeiture due to the Company with respect thereof, including accrued interest and
expenses as aforesaid until actual repayment, and including the interest to be paid for the aforesaid amounts from the time of forfeiture until
the actual repayment, at the maximal interest rate prescribed by law, unless such Shares have been resold and the Company received the full
amount owed by the shareholder, including all expenses incurred by the Company with respect to the sale of such Shares thereof.
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B)
If the consideration received by the Company for the sale of the forfeited Shares shall exceed the amounts owed by the shareholder of whose
Shares have been forfeited, such shareholder shall be entitled to receive the partial consideration paid by him to the Company with respect to
such Shares, if so paid, subject to the allocation agreement, provided that the total remaining consideration shall not be less than the total
obligations of such shareholder, including any sell-related expenses.
Article 37:
Provisions of these Articles herein regarding forfeiture of Shares shall also apply to failure to pay due known amounts in accordance with the
allocation agreement, as if such amount was due to be repaid in accordance with a duly delivered payment notice.
Article 38:
The Company shall have a first and paramount lien upon all the Shares registered in the name of each shareholder on the Register, excluding fully
paid Shares, and upon proceeds from their sale for repayment of such shareholder’s debts and obligations to the Company, whether joint or several,
matured or un-matured, regardless of the origins of such debts and obligations, and no equitable rights for any such Shares shall be constituted. The
abovementioned lien shall apply upon all the declared dividends from time to time with respect to such Shares.
Article 39:
The Board may sell any of the Shares subject to the abovementioned lien, in any manner it deems fit in accordance with its discretion, for the purpose
of enforcing the abovementioned lien; however, such sale may be executed only where the period specified in Article 32 thereof has passed and a
written notice specifying the Company’s intention to sell such Shares have been delivered to the shareholder in question (or to the one entitled to
such notice following his departure or his bankruptcy, liquidation or receivership), and the shareholder or any other Person so entitled to the Share
has failed to fully pay his abovementioned debts or obligations within fourteen (14) days following the delivery of such notice.
Article 40:
The net proceeds of any such sale, after payment of the sale expenses, shall be used for the full payment of the respective shareholder’s debts and
obligations (including the debts, obligations and engagements yet to be due), and the provisions of Article 36(b) herein shall apply, mutatis mutandis.
Article 41:
Upon the sale of forfeited Shares or enforcement of a lien, the Board may appoint any Person to execute a Share transfer deed of the sold Shares and
register the purchaser of such Shares in the Register as the holder of such Shares, and after such registration in the Register, the validity of such sale
shall not be rebutted, and any Person damaged by such sale shall be entitled to claim monetary damages solely from the Company.
Transfer of Shares
Article 42:
Any transfers of Shares registered in the Register by a registered shareholder, including transfer by or to the nominee company, shall be executed in
writing, provided that the Share transfer deed shall be signed by or on behalf of the transferor and the transferee, or by their respective
representatives, and by witnesses to their signatures, and the transferor shall be deemed the holder of such Shares until the registration of the
transferee in the Register with respect to the Shares so transferred. Subject to the provisions of the Companies Law, transfer of Shares shall not be
registered unless the Company was provided with the Share transfer deed, as described above.
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The Share transfer deed shall be drawn-up and filled as below or in a manner as similar as possible or in an ordinary and accepted manner so
approved by the chairman of the Board
“I, the undersigned , of (the “Transferor”), for consideration of NIS paid to me by of (the “Transferee”) do hereby transfer to the
Transferee Shares par value NIS _______ each, numbered through (inclusive) of __________ Ltd., to be held by the Transferee, the
administrators of his estate, his guardians and his representatives, in accordance with the terms and conditions by which they were held by
me on the date of signing this Share transfer deed herein, and I, the Transferee, do hereby accept the transfer of these Shares in accordance
with those terms and conditions.”
In witness whereof we have we have signed this Share transfer deed in this ___ day of __________.
___________________ ___________________________
The Transferor The Transferee
__________________________________ ___________________________________
Witness to the Transferor’s Signature Witness to the Transferee’s Signature
Article 43:
The Company may close the Register for a period as the Board deems fit, provided that such period shall not exceed thirty (30) days per year. The
Company shall notify the shareholders of the closing of the Register as stipulated in these Articles herein in connection the delivery of notices to
shareholders.
Article 44:
A)
Every Share transfer deed shall be submitted to the Office for registration along with the Share certificates to be transferred, if such Share
certificates have been issued, and all such other evidencing instruments as the Board may deem required. Such registered Share transfer deeds
shall remain in the Company’s possession. However, Share transfer deeds which the Board refused to register shall be returned, on demand, to
their respective submitter, along with the Share certificates (if submitted). Where the Board refuses to approve Share transfers, it shall notify
the transferor no later than thirty (30) days following the date in which it received the Share transfer deed.
B)
The Company may require payment of a fee for the registration of the transfer of Share, as shall be determined by the Board from time to time.
Article 45:
Upon the departure of a registered shareholder, the Company shall recognize the guardians, administrators of the estate, executors of the will, and in
the absence of such persons, the inheritors of the deceased shareholder, as the only holders of rights in the deceased shareholder’s registered Shares.
Article 46:
In the event of the deceased shareholder being a registered shareholder of a Share held jointly with others, the surviving shareholder(s) shall be
deemed the sole holder(s) of rights in such Shares, but such rights will not dismiss the deceased shareholder’s estate from any liability relating to
such Shares held jointly. Each joint holder or registered Shares may transfer his rights in such Shares.
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Article 47:
Any Person acquiring rights in Shares by virtue of a shareholder’s departure, shall be entitled, upon provision of a due will or appointment of legal
guardian or issuance of order of probate, evidencing his rights in such Shares, to be registered as a shareholder of the respective Shares, or to transfer
such Shares in accordance with the provisions of these Articles herein.
Article 48:
The Company may recognize an official receiver or liquidator of a shareholder which is a corporate in dissolution proceedings, or trustee in
liquidation proceedings, or any receiver of a bankrupt shareholder, as the acquirer of the rights in the registered Shares of such shareholder.
Article 49:
Subject to the Board’s approval (which may refuse to provide such approval without providing any reason), a Person acquiring a right to a Share by
virtue of being an official receiver, liquidator or trustee in liquidation proceedings regarding a corporate shareholder, or any official receiver of a
bankrupt shareholder, may be registered as the shareholder of the respective Share or transfer such Share in accordance with the provisions of these
Articles herein, subject to the provision of such proof of entitlement as the Board may deem necessary.
Article 50:
All the abovementioned provisions regarding transfer of Shares shall apply to transfer of any other of the Company’s Securities, mutatis mutandis.
Redeemable Securities
Article 51:
Subject to the provisions of these Articles herein regarding issuance of Securities, the Company may issue or allot redeemable Securities.
Article 52:
Where the Company had issued redeemable Securities, it may redeem them without being subject to such limitations as prescribed under Chapter
Two of Part Seven of the Companies Law.
Article 53:
Where the Company had issues redeemable Securities, it may attach them with similar rights to those attached to Shares, including voting rights and
rights to participate in the distribution of dividends.
Alteration of Share Capital
Article 54:
The Company may, from time to time, by an ordinary majority resolution of the general meeting of the Company’s shareholders, increase the
registered share capital of the Company in classes of shares, as it may determine.
Article 55:
Unless otherwise resolved in the abovementioned resolution approving the increase of registered share capital, all newly issued Shares shall be
subject to these Articles herein.
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Article 56:
The Company may, by ordinary majority resolution of the general meeting of the Company’s shareholders:
A)
Consolidate and redistribute its Share capital, or any part thereof, into Shares par higher value than the par value of its already issued Shares,
and if the already issued Shares have no par value - into a Share capital comprised of a smaller number of Shares, provided that the
proportional holdings of the existing shareholders shall not be retained.
For the purpose of executing any such resolution, the Board may settle any difficulty arising as it deems fit, including issuance of Share certificates
for fractional Shares or issuance of several Share certificates for several shareholders which shall include fractional Shares.
Without derogating from the above generality of the Board’s authority, if the consolidation of the Shares results in fractional Shares, the Board may,
subject to an ordinary majority approval of the general meeting of the Company’s shareholders:
1)
2)
3)
sell all the fractional Shares, and for that purpose, assign to a trustee on whose name Share certificates including the fractional
Shares shall be issued, who will sell them, and the net proceeds of any such sale, after deducting commissions and other sale related
expenses, shall be distributed to those eligible; or
issue each shareholder holding fractional Shares due to the consolidation, fully paid Shares of the same class of Shares which existed
prior to the consolidation, in such number that would constitute one whole Share, and such issuance shall be deemed to take effect
immediately prior to the consolidation; or
resolve that shareholders shall not be entitled to receive a consolidated Share due to fractional consolidated Shares, resulting from
consolidation of half or less of the number of Shares which consolidation results one whole consolidated Share, and shall be entitled
to receive one consolidated Share due to fractional consolidated Shares resulting from of more than half of the number of Shares
which consolidation constitutes one whole Share;
Where actions under paragraphs (2) and (3) above require the additional issuance of Shares, such Shares may be redeemed in the manner by which
preferred Shares may be redeemed. The abovementioned consolidation and division shall not change the rights attached to the Shares so consolidated
or divided.
B)
C)
D)
E)
Redistribute all or any of its Share capital through the redistribution of all or any of its existing Shares into shares of a lower par value, and
where its Shares have no par value, into issued Share capital comprised of a larger number of Shares, provided, however, that the proportional
holdings of the existing shareholders is retained.
Cancel registered Share capital yet to be issued, provided that the Company did not undertake (conditionally or otherwise), to issue such Share
capital.
Reduce the Shares in its issued Share capital in such manner that the reduced Shares shall be cancelled and any payment made with respect to
their par value shall be registered in the Company’s financial statements as a capital fund which shall be treated as a premium paid for the
Shares remaining in the Company’s issued Share capital.
Consolidate any or all of its Share capital into one class of Shares, and the Company may resolve to reimburse any or all of its shareholders for
such consolidation, by means of issuing preferred Shares to such shareholders.
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General Meetings of the Company’s Shareholders
Article 57:
An annual meeting of the Company’s shareholders shall be held once in every calendar year, within a period of not more than fifteen (15) months
after the previous annual meeting of the Company’s shareholders. All general meetings of the Company’s shareholders other than those annual
meetings shall be referred to as “Extraordinary Meetings”.
Article 58:
The agenda at the annual meeting of the Company’s shareholders shall include the following matters:
A)
B)
C)
D)
a discussion on the Company’s audited financial statements and the Board’s report on the state of the Company’s affairs, which shall be
submitted to the general meeting of the Company’s shareholders;
appointment of directors;
appointment of an auditor and receiving the Board’s report on the auditor’s remuneration;
other matters brought for discussion and resolution by the Board.
Article 59:
For as long as the Company is a Private Company, the Board may convene an Extraordinary Meeting at its discretion and following the request of
each of the following:
A)
B)
a member of the Board;
One or more shareholders, holding at least 10 percent (10%) of the Company’s issued Share capital and at least one percent (1%) of the
Company’s voting rights, or one or more shareholders holding at least ten percent (10%) of the Company’s voting rights.
Article 60:
Notwithstanding the above, if the Company becomes a Public Company, the Board may convene an Extraordinary Meeting pursuant to a Board
resolution, and must convene such meeting if request is received from two members of the Board or one-fourth of the then serving members of the
Board or one or more shareholders holding at least five percent (5%) of the Company’s issued Share capital and at least one percent (1%) of the
Company’s voting rights or one or more shareholders holding at least five percent (5%) of the Company’s voting rights.
If the Board is requested to convene an Extraordinary Meeting, it shall so convene it within twenty one (21) days pursuant to such request being
submitted to it, at such date resolved in the notice of the Extraordinary Meeting, as provided in Article 63(B) therein, provided that if the Company is
a Public Company, such meeting shall not be held later than thirty five (35) days from the date such notice was published, all subject to the
provisions of the Law.2
Article 61:
If the Board does not convene a duly requested Extraordinary Meeting as stipulated in Articles 59 and 60 thereof, the Person so requesting such
meeting to be convened, and in the case of shareholders – any of them holding more than one half of their voting rights, may convene the meeting
himself, provided that it shall not be held more than three (3) months after the date upon which such was submitted, and it shall be convened, insofar
as possible, in the same manner by which meetings are convened by the Board.
2 Provisions of this Article herein shall not be in effect for as long as the Company is a Private Company, as such term is defined in the Companies
Law.
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Article 62:
A)
B)
C)
A general meeting’s agenda shall be determined by the Board and will include the matters for which an Extraordinary Meeting is requested to
be convened pursuant to Articles 59 and 60 of these Articles herein, as well as matters requested in accordance with sub-Article (b) below.
One or more shareholders holding at least one percent (1%) of the Company’s voting rights may request matters to be included on the agenda
by the Board, provided that such matters are suitable for discussion at a general meeting of the Company’s shareholders.
A request as mentioned in article b) above shall be submitted to the Company in writing no less than seven (7) days prior to the date on which
a notice of the convening of the general meeting of the Company’s shareholders is given, and shall include the language of the proposed
resolution.
Article 63:
A)
B)
If the Company is to become a Public Company, notice of a general meeting of the Company’s shareholders shall be published in no less than
two (2) daily Hebrew-language newspapers with a wide circulation at the date prescribed by Law, and the Company shall not be obligated to
provide any other notice of such general meeting of its shareholders to any registered shareholders.
Notice of a general meeting of the Company’s shareholders shall include the type of meeting and the place, date and time at which such
meeting shall convene and shall further include the agenda, a summary of the proposed resolutions, the majority required for the approval of
the proposed resolutions and the determining date for the purpose of eligibility to vote in the such general meeting. If a differed general
meeting is adjourned at a different day, time or place in the following week, the notice must specify the details of such adjourned meeting.
Article 64:
Notwithstanding the above, for as long as the Company is a Private Company: (a) a notice of a general meeting of the Company’s shareholders shall
be delivered to all those eligible to participate in the meeting no later than seventy two (72) hours prior to the date of the meeting, provided that such
notice shall not be delivered earlier than 45 days prior to the date of meeting; (b) the general meeting of the Company’s shareholders may be
convened on a shorter notice, if so approved by all those eligible to receive such notice. Waiver may be retroactively submitted in writing even after
such general meeting was convened.
Article 65:
The general meeting of the Company’s shareholders may assume powers conferred on another organ. Where the general meeting assumed powers
conferred by law on the Board, the shareholders shall be liable and bound by the liability and duties of Directors regarding the exercise of such
powers, mutatis mutandis, including, among other things and taking into consideration their holdings in the Company, their participation in the
general meeting and the manner in which they vote, the provisions of Chapters 3, 4 and 5 of Part Six of the Companies Law.
Article 66:
A bona fide flaw in convening the general meeting of the Company’s shareholders or in the conduct thereof, including a flaw deriving from non-
compliance with a provision or condition stipulated by the Law or these Articles herein, including in connection with the manner by which the
meeting is to convene or to be conducted, shall not cause any resolutions adopted by such general meeting to be invalid and shall not impair
discussions held thereat, subject to the provisions of any law.
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Voting Rights
Article 67:
A shareholder wishing to vote at a general meeting of the Company’s shareholders shall provide evidence of his ownership in his Shares, as required
by any applicable law.
Article 68:
If, and when, the Company becomes a Public Company, it may set an effective date for the purpose of eligibility to participate and vote at the general
meeting of its shareholders, provided that such date will not be less than twenty one (21) days or will exceed four (4) days prior to the date such
general meeting is to convene.
Article 69:
A Shareholder who is a minor or shareholder who is legally incapacitated by a court of competent jurisdiction may exercise his right to vote by his
custodian, and such custodian may vote by proxy.
Article 70:
Subject to the provisions of any applicable law, where Shares are held jointly, each shareholder so holding the Shares may vote at any meeting, in
person or by proxy, in relation to such Shares, as though he were the sole owner of such Shares. If more than one such shareholders attend a meeting,
in person or by proxy, the vote shall be made by the joint shareholder whose name appears first in the Register in relation to such Shares, or in an
applicable deed or certificate evidencing the ownership of such Shares as determined by the Board for such purpose. Several guardians or
administrators of the estate of a deceased registered shareholder shall be deemed as joint shareholders of such Shares for the purposes of this Article
herein.
Article 71:
A Shareholder may vote in the general meeting of the Company’s shareholders in person or by proxy, subject to the conditions stipulated hereunder.
Article 72:
A corporate body being a shareholder of the Company and entitled to attend and vote at a general meeting of the Company’s shareholders may
exercise such rights by authorizing any Person, whether in general or for such specific general meeting, to be present and/or vote on its behalf. Such
representative may exercise, on behalf of such corporate body, the rights of the corporate body, as if the corporate body was a single shareholder.
Upon the request of the chairman of such general meeting, a reasonable evidence of such authorization and its validity shall be furnished thereto as a
requirement for the participation of such representative in such general meeting.
It is hereby clarifies that Articles 73 through 77 hereunder with respect to a letter of appointment shall not apply an authorized representative of the
corporate body, but shall only apply to its proxy.
Article 73:
A proxy’s letter of appointment (hereinafter: “Letter of Appointment ”) shall be in writing and shall be signed by the appointer or by such other
duly authorized Person. If the appointer is a corporate body, the Letter of Appointment shall be in writing and signed by the corporate body’s
approved signatory, accompanied by the corporate seal or signed by its authorized representative.
Article 74:
The Letter of Appointment, or a suitable copy thereof to the Board’s satisfaction, shall be deposited in the Office or in any other place in which the
general meeting of the Company’s shareholders is to convene, not less than forty eight (48) hours prior to the commencement of the meeting at which
the Person appointed by the Letter of Appointed is to vote. Notwithstanding the aforesaid, the chairman of such meeting may waive such requirement
with respect to all the participants in a general meeting and accept a Letter of Appointment upon the commencement of such meeting.
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Article 75:
A Shareholder holding more than one Share may appoint more than one proxy, subject to the following provisions:
A)
B)
C)
The Letter of Appointment shall specify the class and number of Shares for which it is issued;
If the Letter of Appointment specifies a number of Shares higher than the number of Shares held by the relevant shareholder, all Letters of
Appointment issued by such shareholder with respect to the excess Shares shall be void, without derogating from the validity of the Letters of
Appointment issued with respect to the Shares duly held by such shareholder;
If the Letter of Appointment does not specify the number and class of Shares in respect of which it is being issued, such Letter of Appointment
shall be deemed to have been given in respect of all the shareholder’s registered Shares as of the date he submitted the Letter of Appointment
to the Company or submitted it to the chairman of the general meeting of the Company’s shareholders, as the case may be. If the Letter of
Appointment is issued in respect of fewer Shares than the ones held by the shareholder, then the shareholder shall be deemed to have abstained
from voting in respect of the remaining Shares held by him and the Letter of Appointment shall be valid only in respect of the number of
Shares specified therein.
Article 76:
The Letter of Appointment shall be drawn up in the following form of wording or in a form of wording as similar thereto as possible:
“I ____________, of ____________, as a shareholder of __________ Ltd. (the “Company”), hereby appoint ______________ of
_____________ whose identity number is ____________ or in his absence _____________ of ____________________ whose identity number
is _____________ as my proxy, to vote in my name and stead in respect of ____________number of shares of ______________ class which
are held by me, at the annual/Extraordinary Meeting of the Company’s shareholders to be held on the __________ day of
__________ year__________ and at any deferred meeting thereof.
In witness whereof I have signed this Letter of Appointment in this ___ day of __________.
__________
Signature”
Article 77:
Voting by virtue of a Letter of Appointment shall be valid even if prior to such voting the appointer had died or the Letter of Appointment had been
cancelled or the Share in respect of which it was given was transferred, unless a written notice regarding such death, cancellation or transfer was
received in the Office prior to the respective meeting.
Discussions and Adoption of Resolutions in the General Meetings
Article 78:
Discussions are no to be held unless a quorum is present within half an hour of the time scheduled for the respective meeting. Unless otherwise
stipulated by the Companies Law or these Articles herein, a legal quorum is the presence, in person or by proxy, of at least two (2) shareholders
holding at least ten percent (10%) of the voting rights in the Company.
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Article 79:
If a quorum is not present within half an hour from the time set for the respective meeting’s commencement, the meeting shall be adjourned for the
following week, at the same day, time and place, without it being necessary to notify the shareholders of such adjournment, or to another date if such
is stated in the notice of the meeting, at which the agenda shall be of the first meeting. If a quorum is not present at the adjourned meeting within half
an hour of the time set for its commencement, the adjourned meeting shall then commence at the presence of any number of shareholders (it is hereby
clarified that the provisions of this Article 79 are also applicable to meetings convened upon a Shareholder’s request).
Article 80:
A general meeting chairman shall be appointed at every general meeting of the Company’s shareholders. Such chairman shall be appointed at the
commencement of every such general meeting, subject to the presence of the required quorum, by the Company Secretary or by a Shareholder
authorized by him for that purpose.
Article 81:
The chairman of a general meeting of the Company’s shareholders may, with the consent of the respective meeting in which a quorum is present,
adjourn the meeting or adjourn the discussion or the adoption of a resolution on a particular matter on the agenda to that time place as resolved by the
meeting, and is obliged to so adjourn such meeting, discussion or resolutions at the general meeting’s demand. No matter shall be discussed at an
adjourned meeting save for a matter that was on the agenda and which were not discussed or which discussion did not end in the meeting so decided
to be adjourned.
Article 82:
Subject to the provisions of any applicable law, any resolution shall be adopted by a vote in which every Share shall entitle its respective holder to
one vote. In case of equal votes, the resolution shall be deemed to have been rejected.
Article 83:
Resolution in the general meeting of the Company’s shareholders shall be adopted by an ordinary majority, unless otherwise required by Law or
these Articles herein.
Article 84:
In addition to any matters to be resolved by the general meeting of the Company’s shareholders in accordance with the Law and these Articles herein,
the following matters shall be resolved by ordinary majority in general meeting of the Company’s shareholders:
A)
B)
C)
D)
E)
F)
amending these Articles;
exercising the Board’s powers by the general meeting of the Company’s shareholders, if the Board is unable to exercise such powers and the
exercise of any of its powers is essential for the Company’s adequate management as stipulated in Section 52(a) of the Companies Law;
appointment of the Company’s auditor and the termination of his service;
appointment and dismissal of the Company’s directors;
appointment of the chairman of the Company’s Board;
appointment of the Company’s general manager;
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G)
H)
I)
approval of actions and transactions requiring the general meeting of the Company’s shareholders’ approval;
increase or reduction of the Companies authorized share capital; and
merger.
Article 85:
Declaration of the chairman of the general meeting of the Company’s shareholder’s that a resolution by the general meeting has been adopted
unanimously or in a certain majority or denied, shall constitute evidence prima facie of the minutes of such meeting.
Article 86:
The Board may, from time to time, determine which of the resolutions of the general meeting of the Company’s shareholders may be adopted by
means of voting paper. Unless otherwise determined by the Board and subject to the provisions of the Companies Law and the regulations
thereunder, the general meeting of the Company’s shareholders may vote by means of voting paper on the following matters:
A)
B)
C)
D)
appointment and removal of Directors;
approval of transactions requiring the approval of the general meeting of the Company’s shareholders in accordance with the provisions of
Sections 255 and 268 through 275 of the Companies Law;
approval of a merger in accordance with Section 320 of the Companies Law;
such other matters prescribed by the Minister in accordance with Section 89 of the Companies Law.
Article 86A:
For as long as the Company is a Private Company, a resolution in writing, signed by all of the Company’s Shareholders, shall be, subject to the
provisions of the Law, valid and binding, as any resolution of a duly convened general meeting of the Company’s shareholders in accordance with
these Articles herein.
Article 86B:
For as long as the Company is a Private Company, the Company may hold a general meeting of its shareholders by using any means of
communication, provided that all shareholders so participating in the meeting are able hear each other simultaneously.
The Board of Directors
Article 87:
The number of Directors shall be prescribed, from time to time, by an ordinary majority resolution of the general meeting of the Company’s
shareholders, or by an ordinary majority resolution of the, provided such number shall not be less than three (3) nor more than twelve (12) Directors
(not including external Directors appointed as required under applicable law).
Article 88:
A)
B)
The Directors shall be appointed by the ordinary majority of the then present shareholders in the annual meeting of the Company’s
shareholders. Any Director so appointed shall serve in office until the subsequent annual general meeting of the Company’s shareholders.
Director’s term of service shall commence on the date of appointment, but the general meeting of the Company’s shareholders may determine
a different date for such commencement of service.
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C)
The general meeting of the Company’s shareholders may resolve, at any time, by an ordinary majority resolution, to remove any Director from
office prior to the termination of his respective term of service and it may appoint another Director in his place, provided that the Director is
given a reasonable opportunity to state his case before the general meeting.
Article 89:
A)
B)
C)
D)
Director may, at any time, appoint an alternate director on his behalf (hereinafter: “Alternate Director”). Person who is not qualified to be
appointed as a Director or who is serving as a Director or Alternate Director shall not be appointed to serve as an Alternate Director, unless
otherwise permitted by any applicable law. An Alternate Director may be appointed to serve on a committee of the Board, provided that such
Alternate Director does not serve as a member of another committee of the Board.
For as long as the appointment of the Alternate Director is in effect, the Alternate Director is entitled to receive notices to all of the Board
meetings (without such right derogating from the Director’s right to receive such notices) and to participate and vote in every such Board
meeting in which the appointing Director is absent.
Subject to the provisions of the letter of appointment by which he was appointed, an Alternate Director shall be vested with all of the rights of
the appointing Director and shall be deemed a Director for all purposes.
Appointing Director may terminate his appointment of an Alternate Director at any time thereafter. The appointment of an Alternate Director
shall terminate by delivery of notice regarding the termination of such appointment by the appointing Director to the Company, or by the
appointing Director’s resignation, or by termination of service of the appointing Director in any other way.
E)
Notice of the appointment or termination of appointment of an Alternate Director must be submitted in writing to the Company.
Article 90:
Director whose service was terminated may be reappointed to serve as Director.
Article 91:
Director’s office shall be vacated on the occurrence of any of the following:
A)
B)
C)
D)
E)
F)
he resigns or is removed from office, as stipulated in Sections 229 through 231 (inclusive) of the Companies Law.
he is convicted in a felony specified in Section 232 of the Companies Law.
a competent court orders his termination of service, as stipulated in Section 233 of the Companies Law.
he is declared bankrupt, and in the case of a corporation – has declared its voluntary dissolution or was given a dissolution order.
upon death.
he is declared legally incapacitated.
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Article 92:
If a Director’s office becomes vacant, the remaining serving Directors may continue to act in any manner, provided that their number is of the
minimal number specified above. If the number of serving Directors is lower than their minimal one, the Board shall not be permitted to act, other
than for the purpose of convening a general meeting of the Company’s shareholders for the purpose of appointing additional Directors.
Article 93:
The Directors may appoint, immediately or of a future date, additional Director(s) to serve until the subsequent annual general meeting of the
Company’s shareholders, provided that the number of Directors shall not exceed twelve (12) Directors (not including external Directors).
Article 94:
Subject to the approvals required by any applicable law, the Directors shall be entitled to remuneration by the Company for their services as
Directors. In addition, every Director shall be entitled to reimbursement of his reasonable travel expenses and other expenses related to his
participation at the Board’s meetings and the service as a Director.
Article 95:
If and when so required by any applicable law, not less than 2 external Directors shall serve on the Board, and the provisions stipulated in the
Companies Law regarding their qualifications, service and remuneration shall apply.
The Board of Directors’ Powers and Duties
Article 96:
The Board shall set the policy and guidelines for the Company’s operations and shall supervise the performance of the general manager’s position,
and shall be vested with residual authority not vested or granted to any other organ.
Article 97:
Subject to the provisions of the Companies Law, the Board may delegate any of its powers to the general manager or to one of the Board’s
committees.
Article 98:
A)
The Board may resolve by an ordinary majority that powers vested with the general manager shall be transferred to it, for a particular matter or
for a particular period of time.
B) Without derogating from the above, the Board may instruct the general manager how to act in a particular matter. Should the general manager
fail to follow such instruction, the Board may exercise the power required to execute such instruction in his stead.
C)
Should the general manager be unable to exercise his powers, the Board may exercise them in his stead.
Board Meetings
Article 99:
The Board shall convene in accordance with the Company’s needs and not less than once every three (3) months.
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Article 100:
The chairman of the Board may convene a meeting of the Board at any time. In addition, any Director may request the Board to convene for the
purpose of any matter to be specified.
Article 101:
A)
B)
C)
D)
Notice of a Board meeting may be delivered orally, by telephone, in writing (including via e-mail or facsimile) or by telegram, at least twenty
four (24) hours prior to the scheduled time of the meeting, or with a shorter prior notice or without notice, if so agreed by all Directors or
Alternate Directors (if appointed).
Director exiting the borders of Israel (hereinafter: “Absent Director”) who wishes to receive notices during the time of his absence, shall
provide the Company corporate secretary with sufficient contact details for such purpose (an Absent Director who provided such contact
details as well as any Directors who are present in Israel shall be collectively referred to hereinafter as: “Directors Entitled to Receive
Notices”).
An Absent Director who did not provide the above contact details, shall not be entitled to receive notices during his absence, unless he
requested to deliver the notices to an Alternate Director representing him, who was duly appointed in accordance with these Articles herein.
A written memorandum signed by the Company Secretary shall be deemed conclusive evidence of providing notice to the Absent Director
which is a Director Entitled to Receive Notices.
Article 102:
Notice of a Board meeting shall state the time and place of the meeting and reasonable details of the matters to be discussed thereat, pursuant to the
agenda.
The agenda shall be determined by the chairman of the Board, and shall include such matters so determined by him, as well as any other matter
requested from the chairman of the Board to be included, by a Director or the general manager reasonable time prior to the Board meeting.
Article 103:
The quorum for opening a Board meeting shall be a majority of the Directors Entitled to Receive Notices who are not prohibited from participating
and voting in such meeting under any applicable law. The quorum shall be verified at the opening of such meeting.
Notwithstanding the above, should the Board convene to resolve termination of the Company’s internal auditor’s service, the quorum shall be the
majority of the Board.
Article 104:
The general meeting of the Company’s Board shall appoint one of the Directors to serve as chairman of the Board. The chairman of the Board shall
conduct and administer the Board meetings. Should the chairman of the Board be absent from a Board meeting or should he not wish to conduct and
administer such meeting, the Directors present at the meeting shall elect one of them to serve as chairman for such meeting, to conduct and
administer it, and to sign the its minutes.
Article 105:
Board Resolutions shall be adopted by an ordinary majority. Each Director shall have one vote. The chairman of the Board shall not have an
additional or casting vote.
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Article 106:
Subject to the presence of a due quorum, the Board may exercise all powers and discretion vested in it at the date of meeting, or usually exercised by
it, in accordance with these Articles herein.
Article 107:
The Board may hold meetings using any means of communication, provided that all the participating Directors are able to hear one another at all
times.
Article 108:
The Board may adopt resolutions without actually convening, provided that all Directors Entitled to Receive Notices and those entitled to participate
in the discussion and vote have provided their consent for such non–convening for the matter thereof. Should any such meeting not convene, minutes
of the resolutions, including the resolution not to convene, shall be prepared, and signed by the chairman of the Board, or shall be drafted by the
chairman of the Board and signed by all of the Directors.
For the purpose of this Article 108, a “Director’s signature” may be accompanied by his consent, objection or abstention. Instead of a Director’s
signature, the chairman of the Board or the Company’s corporate secretary may attach a transcript signed by either of them, specifying such
Director’s vote.
Article 108A:
A resolution adopted without the Board actually convening and signed by the chairman of the Board, provided that all Directors Entitled to Receive
Notices and entitled to participate in the discussion and vote on the matter thereof have provided their consent to the above, or a written resolution
signed by all Directors Entitled to Receive Notices and entitled to participate in the discussion and vote on the matter thereof, shall be, subject to the
provisions of the Law, valid and legally binding as a resolution of a duly convened meeting of the Board in accordance with these Articles herein.
Article 109:
Subject to the provisions of any applicable law, all acts performed by the Board or pursuant to a Board resolution or by a Board committee or by any
Person serving as Director or as a member of a Board committee, shall be valid even if a later defect in the appointment of the Board, the Board
committee, the Director, or the committee member is discovered, or if any or all of them were disqualified from service in their respective positions,
as though they were duly nominated for service and have the required skills to serve as Directors or members of the relevant Board committee.
Board Committees
Article 110:
The Board may establish Board committees. Person who is not a member of the Board shall not serve as member of a Board committee to which the
Board has delegated any of its powers. Persons who are not Directors may be appointed to serve on a Board Committee designated solely for the
purpose of advising and consulting. Subject to the provision of the Companies Law and these Articles herein, the Board may delegate all or any of its
powers to a Board committee. Any Board committee shall consist of not less than two (2) Directors.
Article 111:
Each Board committee must exercise its powers in compliance with all terms and regulations prescribed by the Board. Board committees’ meetings
and actions shall comply with the provisions stipulated in these Articled herein relating Board meeting and actions, to the fullest applicable extent,
unless otherwise prescribed by the Board.
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Article 112:
Board committees shall routinely report to the Board regarding their respective resolutions or recommendations, as prescribed by the Board.
Article 113:
The Board may cancel any resolution adopted by a Board committee appointed by it. Nevertheless, such cancellation shall not invalidate such
resolution by which the Company acted in relation to other Person, who was unaware of the cancellation thereof.
All acts made in good faith at a Board meeting or by a Board committee or by any Person acting as a Director shall be valid even if a later defect in
the appointment of the Director or such Person serving or acting as such, or if any or all of them were disqualified from service in their respective
positions, as though they were duly nominated for service and have the required skills to serve as Directors.
The General Manager
Article 114:
The general manager shall be appointed and dismissed by the general meeting of the Company’s shareholders, which may appoint more than one
general manager.
Article 115:
The general manager shall be responsible for the day-to-day management of the Company’s business within the framework of the policy determined
by the Board and subject to its guidelines. The general manager shall have all the management and executive powers of not vested in other organ in
accordance with the Law or these Articles herein, and shall be subject to the Board’s supervision.
Article 116:
A)
The general manager shall notify the chairman of the Board, without delay, of any extraordinary issues material to the Company, and shall
provide the Board with reports on such matters, at such times and of such scope as the Board may determine. Should the Company not have an
acting chairman of the Board, or should he be unable to exercise his powers, the general manager shall notify or report the aforesaid matters to
all members of the Board.
B)
The chairman of the Board may, in his own initiative or pursuant to a Board resolution, request the general manager to provide a report on the
Company’s businesses.
C) Where a notice or report requires an action by the Board, the chairman of the Board shall convene, without delay, a Board meeting to discuss
the notice or the resolution to act as required.
The Company’s Office Holders
Article 117:
The general manager may appoint office holders from time to time (except for Directors and a general manager) for either permanent, temporary or
special positions, as he finds appropriate, and he may terminate the appointment of any of the above officer holder from time to time in his sole
discretion.
Article 118:
The general manager may establish the powers and positions of the officer holders so appointed by him, as well as their respective employment
terms, all subject to the provisions of the Companies Law.
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Internal Auditor
Article 119:
To the extent required by any applicable law, the Board shall appoint an internal auditor in accordance with the recommendation of the audit
committee.
Article 120:
The internal auditor shall examine, among other things, the compliance of the Company’s actions with the provisions of the Law and proper business
procedures.
Article 121:
The internal auditor shall be subject to the chairman of the Board’s supervision.
Article 122:
The internal auditor shall submit to the Board a proposal for an annual or periodic work program for approval. The Board shall approve such
proposal or any modifications it considers necessary.
The Accounting Auditor
Article 123:
One or more accounting auditors shall be appointed by every annual general meeting of the Company’s shareholders, and shall hold office until the
end of the following annual general meeting. Notwithstanding the above, accounting auditor may be appointed for a longer period, which shall
exceed the end of the third annual general meeting following the annual general meeting in which the auditor was appointed, by an ordinary majority
resolution of the general meeting.
Article 124:
The general meeting of the Company’s shareholders may terminate the accounting auditor’s service, subject to, and in accordance with, the
provisions of the Companies Law.
Article 125:
The accounting auditor’s compensation for performing the audit shall be determined by the Board, which shall report such compensation to the
annual general meeting of the Company’s shareholders.
Article 126:
The accounting auditor’s compensation for additional services which are not related to auditing shall be determined by the Board, which shall report
such compensation, including payments and other of the Company’s obligations to the auditor, to every annual general meeting of the Company’s
shareholders; the term “auditor” shall include, for the purposes of this Article 126 herein, a partner, an employee related to the accounting auditor and
a corporate body under his control.
Validity of Acts and Approval of Non-Extraordinary Transactions
Article 127:
Subject to the provisions of any applicable law, all acts done by the Board or by a Board committee or by any Person acting as a Director or as a
member of a Board committee or by the general manager, as the case may be – shall be valid even if later discovered that there was a defect in the
appointment of the Board, the Board committee, the Director, the committee member or the general manager, as the case may be, or that any such
officer holders does not qualify to serve in his position.
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Article 128:
Should an office holder have a personal interest in any of the Company’s transactions, such office holder shall disclose to the Company, reasonable
time prior to the discussion on the approval of such transaction, information regarding the nature of his personal interest, including any relevant fact
or document.
Article 129:
A Company’s transaction with an office holder or a Company’s transaction with another Person in which an office holder has personal interest,
which is not an extraordinary transaction, shall be approved by the Board. The Board may approve such transaction either by providing a general
approval for a particular type of transactions or by approving a particular transaction.
Article 130:
The Company’s extraordinary transaction with an office holder, the Company’s engagement with a Director of the Company regarding the terms and
conditions of his service and/or employment in other positions, the Company’s extraordinary transaction with one of its controlling shareholders, the
Company’s extraordinary transaction with another Person in which one of the Company’s office holders or controlling shareholders have personal
interest and the Company’s engagement with one of its controlling shareholders or any of his relatives (if he also serves as one of the Company’s
office holders – regarding his terms and conditions of services and if he is an employee of the Company who does not serve as an office holder –
regarding his terms and conditions of employment), shall be approved in accordance with any applicable law.
Distribution of Dividends
Article 131:
Subject to the provisions of the Companies Law, the Board may resolve to distribute dividends.
Dividends and Bonus Shares
Article 132:
Subject to any special or limited rights attached to any classes of Shares, dividend or bonus shares shall be distributed relatively to the paid par value
of the Shares, without consideration to any premium paid on such Shares.
Article 133:
The Company may set determining date for determining the right to receive dividends, provided that such date shall be later than the date on which
the dividend distribution was approved.
Article 134:
The Board may delay the distribution of any dividend, bonus, benefit, rights or other amounts to be paid on account of Shares which are subject to
the Company’s lien, and to use any such amount or exercise any such bonus, benefit or right and to use the consideration received upon such exercise
for payment of any debts owed by the holder of such Shares on which the has lien.
Article 135:
The transfer of Shares shall not provide the transferee with the right to participate in the distribution of dividends or any other distribution declared
after such transfer and prior to the registration of the transfer with the Register. Notwithstanding the above, where the transfer of Shares is subject to
the Board’s approval, the date of registration of the transfer with the Register shall be replaced by the date of such approval.
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Article 136:
Dividends unclaimed within seven (7) years from the date of approving their distribution shall be forfeited and shall be reverted to the Company.
Article 137:
Unless other instructions were provided, any dividend may be paid by check or payment order which shall be sent via mail to the registered address
of the Person entitled to receive such dividend, and if there are two or more joint registered owners, to the registered shareholder whose name appears
first in the Register. Any such check shall be in favor of the shareholder entitled to receive it, and its payment shall be used as release of any
payments paid in connection with such Share.
Article 138:
The Board may withhold from any dividend or other distribution in connection with a shareholder’s Shares, whether such shareholder is the sole
holder of such Shares or holds them jointly with others, any amounts due from the shareholder, on account of payment demand or other similar
demands.
Article 139:
The Board may, in accordance with its discretion, set aside to special funds any amounts from its profits or from the revaluation of its assets, or from
the proportional share in the revaluation of its affiliated companies’ assets, and to determine the purpose of such funds.
Merger
Article 140:
A merger shall be approved by an ordinary majority of the general meeting of the Company’s shareholders, unless otherwise stipulated by the Law.
Minutes
Article 141:
The Company shall maintain a register of the minutes of the general meetings of its shareholders, class meetings, Board meetings and Board
committees meetings. All minutes shall be archived at the Office or at such other address in Israel, of which the Company has notified the Registrar
of Companies, for the period of seven (7) years following the date of any such meetings.
Article 142:
The abovementioned minutes shall include the following:
A)
B)
the date and location in which the meeting was held;
the names of participants, and if they are representatives of an Alternate Directors, the names of their respective appointers, and in meetings of
the Company’s shareholders – the number and class of the Shares held by the voters;
C)
the summary of the discussions held and the resolutions adopted;
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D)
E)
directives and instructions provided by the Board to its committees or general manager; and
documents, reports, approvals, opinions and other information presented, discussed or attached.
Article 143:
Minutes of the general meeting of the Company’s shareholders signed by the chairman of the general meeting shall constitute a prima facie evidence
of its content. Minutes of the meetings of the Board or Board committees, approved and signed by the Director chairing such meeting shall constitute
a prima facie evidence of its content.
Register of Shareholders
Article 144:
The company shall maintain a Register which shall include the following:
A) With respect to Shares registered under a Person’s name –
1)
the name, identity number and address of the each shareholder, as provided to the Company;
2)
the number of Shares and their respective classes held by each shareholder, their par value and if any consideration was yet to be paid –
such unpaid consideration;
3)
the issuing date of the Shares or the transfer dates to shareholders, as the case may be; and
4) where the Shares include serial numbers, the Company shall note next to the name of each shareholder the numbers of such Shares
registered under such shareholder’s name.
B) With respect to bearer shares –
1) note indicating issuance of bearer Shares, their issuance date and the number of bearer Shares issued;
2)
the numbering of the bearer Share and of the Share certificates;
If a share deed was cancelled following the Shareholder’s request, such Shareholder’s name and number of Shares registered under his name shall be
registered in the Register.
C) With respect to Dormant Shares - also their numbers and the date on which they became dormant, all to the Company’s knowledge.
D) With respect to Shares which do not confer any voting rights in accordance with Section 309(b) or 333(b) of the Companies Law - also include
their numbers and the date on which they became Shares which do not confer any voting rights, all to the Company’s knowledge.
E) All such other details which required or permitted under the Companies Law or these Articles herein.
Article 145:
The Company may maintain an additional Register outside of Israel.
Article 146:
The Register shall be deemed as a prima facie evidence of its contents. In the event of contradiction between the information provided in the Register
and the one provided in a Share certificate, the evidentiary weight of the Register shall prevail over that of the Share certificate.
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Notices
Article 147:
Notice of a general meeting of the Company’s shareholders shall be provided in accordance with Article 63 above.
Article 148:
A)
B)
Notices which the Company is required to deliver to its registered shareholders in accordance with any applicable law, subject to Article 63
above, shall be delivered to such shareholders by personal delivery shall be delivered to the last addresses they provided the Company.
Delivery by mail shall be deemed duly delivered – If delivered to addresses in Israel within seventy two (72) hours from delivery, and to an
address outside of Israel, within ten (10) days from delivery.
The Company may deliver notices to the registered shareholders, whether they hold Shares registered under their names or bearer Shares, by
publishing the notice in two Hebrew-language daily newspapers with wide circulation as stipulated in Article 63 above, and the publication
date of the 2 newspapers publications shall be deemed as the receipt date of such notice by the shareholders.
Sub-section (a) above shall not apply in such cases where the Company shall send notices in accordance with this subsection (b), unless otherwise
required by any applicable law.
C)
Nothing in sub-Sections (a) and (b) above shall impose upon the Company any obligation to provide notices to shareholders who did not
provide it with their addresses in Israel.
Article 149:
The following Shareholders shall be deemed to have not provided the Company with a mail delivery address in Israel:
A)
B)
Shareholder who failed to confirm the receipt of a registered mail sent to the address he provided the Company with requesting such
confirmation or an update of a new address, within thirty (30) days from the date the mail was sent.
Shareholder whose been sent a registered mail by the Company which was returned to the Company by the postal services or where the postal
services sent the Company a notice that such shareholder no longer resides in that address, or any similar notice.
Article 150:
Where Shares are jointly held, the Company may duly send a notice by sending it to the shareholder whose name is registered first in the Register.
Article 151:
Any document or notice sent to a shareholder in accordance with the provisions of these Articles herein shall be deemed to have been duly sent
despite the departure, bankruptcy or winding up of such shareholder (whether the Company was aware of or not), so long as no other Person was
registered as the holder of his Shares, and such delivery shall be deemed for all purposes as adequate with respect to any Person interested in such
Shares.
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Winding Up and Liquidation
Article 152:
Should the Company be wound up and liquidated, either voluntarily or otherwise, the following shall apply, unless otherwise provided in these
Articles herein or in the terms and conditions of any Share issued:
A)
B)
C)
The liquidator shall first use all of the Company’s assets to discharge its obligations (the Company’s remaining assets following such
discharge of all its obligations shall be referred to hereinafter as the “Remaining Assets”).
Subject to special rights attached to Shares, the liquidator shall distribute all Remaining Assets amongst the shareholders on a pro rata basis to
the par value of their respective Shares.
Pursuant to an ordinary majority resolution of the general meeting of the Company’s shareholders, the liquidator may distribute the Remaining
Assets or any part thereof amongst the shareholders in specie or transfer any part of them to a trustee who shall hold them for the benefit of the
shareholders, as the liquidator deems appropriate.
Exemption of Liability
Article 153:
A)
B)
The Company may exempt an office holder in advance from all or any of his liabilities for damage resulting from breach of his duty of care to
it.
Notwithstanding the above, the Company may not exempt a Director in advance for his liability for a breach of the duty of care in distribution,
as such term is defined in the Companies Law.
Insurance
Article 154:
The Company may enter into an insurance agreement for the insurance of office holders’ liability, in whole or in part, for an obligation imposed upon
him in resulting from an act performed in his capacity as an office holder, in any of the following cases:
A)
B)
C)
D)
a breach of the duty of care to the Company or to another Person;
a breach of the fiduciary duty to the Company, provided that the office holder acted in good faith and had reasonable basis to believe that the
act would benefit the Company;
a monetary obligation imposed on the office holder in favor of another Person;
a payment imposed on the office holder in connection with an Administrative Enforcement Procedure, including reasonable litigation expenses
and attorney’s fees; or
E)
any other insurable act in accordance with the provisions of the Companies Law.
Indemnity
Article 155:
Subject to the provisions of the Companies Law, the Company may indemnify an office holder for any of the following liabilities and expenses he
incurred resulting from an act performed in his capacity as an office holder:
A)
B)
a monetary obligation imposed on him in favor of another Person pursuant to a judgment, including a settlement or arbitrator’s award
approved by court;
reasonable litigation expenses, including attorney’s fees, incurred by the office holder pursuant to an investigation or proceeding conducted
against him by an competent authority, and which concluded without a criminal indictment being filed against him and without a monetary
fine being imposed on him as an alternative to a criminal proceeding, and which does not require proof of criminal thought; in this sub-Article:
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conclusion of a proceeding without a criminal indictment being filed in a matter in which a criminal investigation has been commenced – shall mean
the closing of a file in accordance with Section 62 of the Criminal Procedure Law (Consolidated Version) 5742-1982 (hereinafter in this sub-Article:
the “Criminal Procedure Law”), or the stay of proceedings by the Attorney–General in accordance with Section 231 of the Criminal Procedure
Law;
“Monetary liability as a substitute for legal proceedings” – a monetary liability that has been imposed by any applicable law as a substitute for a legal
proceeding, including an administrative fine pursuant to the Administrative Offences Law, 5746-1985, a fine for an offence that has been determined
as a finable offence pursuant to the provisions of the Criminal Procedure Law, a financial sanction or penalty;
C)
D)
E)
reasonable litigation expenses, including attorney’s fees, incurred by the office holder or which he is ordered to pay by a court in proceedings
filed against him by the Company or on its behalf or by another Person, or in a criminal indictment of which he is acquitted, or in a criminal
indictment in which he is convicted of an offence not requiring proof of criminal thought or in an Administrative Enforcement Procedure
conducted against him;
a payment imposed on the office holder in favor of an injured party in connection with an Administrative Enforcement Procedure;
any other liability or expense for which it is or shall be permitted to indemnify an office holder in accordance with the Companies Law.
Article 156:
The Company may indemnify an office holder retroactively, and it may undertake in advance to indemnify an office holder, or to indemnify him
retroactively, as stipulated in Article 155(A) above, for a liability or expense imposed on him in resulting from an act performed in his capacity as an
office holder, provided that the undertaking shall be limited to events which in the Board’s opinion are to be expected given the
Company’s activities at the time the indemnity undertaking is given, as well as the reasonable amounts or criteria as the Board so determined to be
expected given the Company’s activities when the indemnity is given as well as the amount and the criteria that the board of directors determined as
reasonable in the circumstances of the case, and it may undertake o indemnify him in advance as stipulated in Article 155 (B)-(E) above.
Article 157:
In no case shall the total accumulated sum of indemnity to be paid by the Company (in addition to such sums received from the insurance company,
if received, for Directors and officer holders’ insurance purchased by the Company) to all office holders, in accordance with all letters of indemnity
provided to them by the Company, exceed 25% of the Company’s equity in accordance with the Company’s most recent financial reports as of the
indemnity payment date.
Signatory Rights
Article 158:
A)
B)
The signature of any Person duly authorized by the Board from time to time, alone or together with others, in general or for a particular matter,
accompanied by the Company’s seal or printed name, shall bind the Company.
The Board may determine separate signatory rights with regards to the Company’s different operations and with regards to sums for which
such Persons are authorized to sign.
Amendment to these Articles of Association
Article 159:
The Company may amend these Articles herein by an ordinary majority resolution adopted by the general meeting of the Company’s shareholders.
* * *
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Exhibit 4.7
Summary of Lease Agreement by and among Tefen Yazamut Ltd. and Medigus Ltd.
Note: this summary does not contain a full or direct translation of the terms of the original Hebrew-language lease agreement, and is designated
solely for the purpose of providing a general presentation of such agreement.
On January 6, 2004, Tefen Yazamut Ltd. (the “Lessor”) and Medigus Ltd. (the “Company”) entered into a lease agreement, as amended from time
to time, as further elaborated below.
1. Leased Premises:
Certain areas in building number 7A located in the Omer Industrial Park.
Total square meters of leased premises: approximately 807.
2. Term of Lease:
The premises are currently leased until December 31, 2018.
3. Purpose of the Lease:
The premises are to be used by the Company for the purpose of offices, laboratories and clean rooms.
4. Consideration:
In consideration for the leased premises the Company will pay Lessor a total amount of NIS 24,670 + VAT, per month, linked to the Israeli
consumer price index The consideration shall be paid by the Company on a monthly basis.
The Company has provided the Lessor a deposit in the amount of NIS 45,000 for the purpose of guaranteeing its financial obligations under the
lease agreement.
5. Termination of the Lease Agreement:
The Lessor may immediately terminate the lease agreement upon: (i) the transfer or assignment of the Company’s rights in the premises to a
third party contrary to the terms and conditions stipulated in the lease agreement; or (ii) the Company’s failure to pay any due amount to the
Lessor within thirty (30) days of its due date; or (iii) use of the premises for purposes others than those stipulated in the agreement; or (iv) the
Company creates a nuisance that may disturb the surrounding businesses.
6. Liability for Injury, Damage or Loss:
(a) The Company shall be liable for any injury, damage or loss caused by its act or omission in, or in connection with, the premises, to the body
or property of any person or corporation, including to the Company or its employees or the Lessor and its subsidiaries.
(b) The Company shall be liable and indemnify its employees or any other party for the damages, losses or expenses incurred by them due to
injuries caused in relation with the Company’s activities in the premises and the Lessor shall not be liable for any such damages losses or
expenses.
7.
Insurance and Indemnity:
The Company shall maintain such standard practice insurance policies as required by any applicable law and as customary with respect to the
Company’s operations.
f20f2017ex12-1_medigusltd.htm
Edgar Agents LLC
Form Type: EX-12.1
Medigus Ltd.
I, Christopher (Chris) Rowland, certify that:
CERTIFICATION
Page 1
03/22/2018 12:33 PM
Exhibit 12.1
1.
2.
3.
4.
I have reviewed this annual report on Form 20-F of Medigus Ltd.;
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;
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;
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 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: March 22, 2018
By:
/s/ Christopher (Chris) Rowland
Christopher (Chris) Rowland
Chief Executive Officer
f20f2017ex12-2_medigusltd.htm
Edgar Agents LLC
Form Type: EX-12.2
Medigus Ltd.
I, Oded Yatzkan, certify that:
CERTIFICATION
Page 1
03/22/2018 12:33 PM
Exhibit 12.2
1.
2.
3.
4.
I have reviewed this annual report on Form 20-F of Medigus Ltd.;
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;
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;
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 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: March 22, 2018
By:
/s/ Oded Yatzkan
Oded Yatzkan
Chief Financial Officer
f20f2017ex13-1_medigusltd.htm
Edgar Agents LLC
Form Type: EX-13.1
Medigus Ltd.
Page 1
03/22/2018 12:33 PM
Exhibit 13.1
CERTIFICATION
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
(SUBSECTIONS (a) AND (b) OF SECTION 1350, CHAPTER 63 OF
TITLE 18, UNITED STATES CODE)
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States
Code), the undersigned officer of Medigus Ltd., a company organized under the laws of the State of Israel (the “Company”), does hereby certify that,
to his knowledge:
1.
2.
This Annual Report on Form 20-F for the year ended December 31, 2017 (the “Form 20-F”) of the Company 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 Form 20-F fairly presents, in all material respects, the financial condition and results of operations
of the Company.
Date: March 22, 2018
By:
/s/ Christopher (Chris) Rowland
Christopher (Chris) Rowland
Chief Executive Officer
This certification accompanies this annual report on Form 20-F pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed
filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Such certification will
not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent
that the Company specifically incorporates it by reference.
f20f2017ex13-2_medigusltd.htm
Edgar Agents LLC
Form Type: EX-13.2
Medigus Ltd.
Page 1
03/22/2018 12:33 PM
Exhibit 13.2
CERTIFICATION
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
(SUBSECTIONS (a) AND (b) OF SECTION 1350, CHAPTER 63 OF
TITLE 18, UNITED STATES CODE)
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States
Code), the undersigned officer of Medigus Ltd., a company organized under the laws of the State of Israel (the “Company”), does hereby certify that,
to his knowledge:
1.
2.
This Annual Report on Form 20-F for the year ended December 31, 2017 (the “Form 20-F”) of the Company 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 Form 20-F fairly presents, in all material respects, the financial condition and results of operations
of the Company.
Date: March 22, 2018
By:
/s/ Oded Yatzkan
Oded Yatzkan
Chief Financial Officer
This certification accompanies this annual report on Form 20-F pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed
filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Such certification will
not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent
that the Company specifically incorporates it by reference.
f20f2017ex15-1_medigusltd.htm
Edgar Agents LLC
Form Type: EX-15.1
Medigus Ltd.
Page 1
03/22/2018 12:33 PM
Exhibit 15.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration Statements on Form F-3 (No. 333-213280) and Form S-8 (No. 333-206803
and No. 333-221019) of Medigus Ltd. of our report dated March 22, 2018 relating to the financial statements, which appears in this Form 20-F.
Tel-Aviv, Israel
March 22, 2018
/s/Kesselman & Kesselman
Kesselman & Kesselman
Certified Public Accountants (Isr.)
A member firm of PricewaterhouseCoopers International Limited