UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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
For the transition period from ________ to ________
Commission file number: 001-38389
Motus GI Holdings, Inc.
(Exact name of registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of
incorporation or organization)
1301 East Broward Boulevard, 3rd Floor
Ft. Lauderdale, FL
(Address of principal executive offices)
81-4042793
(I.R.S. Employer
Identification No.)
33301
(Zip code)
786 459 1831
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Common Stock, par value $0.0001 per share
Name of Each Exchange on Which Registered
NASDAQ Capital Market
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes [ ] No [X]
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days. Yes [ ] No [X]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12
months (or for such shorter period that the registrant was required to submit and post such files). Yes [ ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting
company, or emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,”
and “emerging growth company” in Rule 12b-2 of the Exchange Act.:
Large accelerated filer
[ ]
Non-accelerated filer
[ ] (Do not check if a smaller reporting company)
Accelerated filer
Smaller reporting company
Emerging growth company
[ ]
[X]
[X]
If an emerging growth company, 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. [X]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
As of June 30, 2017, the last business day of the registrant’s most recently completed second fiscal quarter, there was no established public
market for the registrant’s Common Stock. The registrant’s Common Stock began trading on the NASDAQ Capital Market on February
14, 2018. Accordingly, the aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant
computed by reference to the price of the registrant’s Common Stock as of the registrant’s most recently completed second fiscal quarter
cannot be determined..
The number of shares outstanding of the registrant’s Common Stock, par value of $0.0001 per share, as of March 1, 2018 was 15,574,752.
None.
DOCUMENTS INCORPORATED BY REFERENCE
Motus GI Holdings, Inc.
ANNUAL REPORT ON FORM 10-K
For the Year Ended December 31, 2017
Business
PART I
Item 1
Item 1A Risk Factors
Item 1B Unresolved Staff Comments
Item 2
Item 3
Item 4 Mine Safety Disclosures
Properties
Legal Proceedings
Selected Financial Data
PART II
Item 5 Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Item 6
Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A Quantitative and Qualitative Disclosures About Market Risk
Item 8
Item 9
Item 9A Controls and Procedures
Item 9B Other Information
Financial Statements and Supplementary Data
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
PART III
Item 10 Directors, Executive Officers and Corporate Governance
Item 11 Executive Compensation
Item 12
Item 13 Certain Relationships and Related Transactions, and Director Independence
Item 14
Principal Accounting Fees and Services
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
PART IV
Item 15 Exhibits, Financial Statement Schedules
Item 16
Form 10-K Summary
EXHIBIT INDEX
SIGNATURES
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
PART I
This report on Form 10-K contains forward-looking statements made pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995 under Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements include statements with respect to our beliefs, plans,
objectives, goals, expectations, anticipations, assumptions, estimates, intentions and future performance, and involve known and unknown
risks, uncertainties and other factors, which may be beyond our control, and which may cause our actual results, performance or
achievements to be materially different from future results, performance or achievements expressed or implied by such forward-looking
statements. All statements other than statements of historical fact are statements that could be forward-looking statements. You can
identify these forward-looking statements through our use of words such as “may,” “can,” “anticipate,” “assume,” “should,” “indicate,”
“would,” “believe,” “contemplate,” “expect,” “seek,” “estimate,” “continue,” “plan,” “point to,” “project,” “predict,” “could,” “intend,”
“target,” “potential” and other similar words and expressions of the future.
There are a number of important factors that could cause the actual results to differ materially from those expressed in any
forward-looking statement made by us. These factors include, but are not limited to:
● our limited operating history;
● our history of operating losses in each year since inception and expectation that we will continue to incur operating losses for
the foreseeable future;
● our current and future capital requirements to support our development and commercialization efforts for the Pure-Vu system
and our ability to satisfy our capital needs;
● our dependence on the Pure-Vu system, our sole product candidate, which is still in development;
● our ability to obtain approval from regulatory agents in different jurisdictions for the Pure-Vu system;
● our Pure-Vu system and the procedure to cleanse the colon in preparation for colonoscopy are not currently reimbursable
through private or governmental third-party payors;
● our lack of a developed sales and marketing organization and our ability to commercialize the Pure-Vu system;
● our dependence on third-parties to manufacture the Pure-Vu system;
● our ability to maintain or protect the validity of our patents and other intellectual property;
● our ability to retain key executives and medical and science personnel;
● our ability to internally develop new inventions and intellectual property;
● interpretations of current laws and the passages of future laws;
● acceptance of our business model by investors;
● the accuracy of our estimates regarding expenses and capital requirements; and
● our ability to adequately support growth.
The foregoing does not represent an exhaustive list of matters that may be covered by the forward-looking statements contained
herein or risk factors that we are faced with that may cause our actual results to differ from those anticipate in our forward-looking
statements. Please see “Part I—Item 1A—Risk Factors” for additional risks which could adversely impact our business and financial
performance.
All forward-looking statements are expressly qualified in their entirety by this cautionary notice. You are cautioned not to place
undue reliance on any forward-looking statements, which speak only as of the date of this report or the date of the document incorporated
by reference into this report. We have no obligation, and expressly disclaim any obligation, to update, revise or correct any of the forward-
looking statements, whether as a result of new information, future events or otherwise. We have expressed our expectations, beliefs and
projections in good faith and we believe they have a reasonable basis. However, we cannot assure you that our expectations, beliefs or
projections will result or be achieved or accomplished.
3
ITEM 1.
BUSINESS
Overview
We have developed a single-use medical device system (the “Pure-Vu system”), cleared by the United States Food and Drug
Administration (the “FDA”), that is intended to connect to standard colonoscopes to help facilitate intraprocedural cleaning of a poorly
prepared colon by irrigating or cleaning the colon and evacuating the irrigation fluid (water), feces and other bodily fluids and matter. The
Pure-Vu system has been designed to integrate with standard colonoscopes to enable cleaning during the procedure while preserving
standard procedural workflow and techniques. Our Pure-Vu system and the procedure to cleanse the colon in preparation for colonoscopy
are not currently reimbursable through private or governmental third-party payors in any country, but we intend to seek reimbursement
through private or governmental third-party payors in the future. We do not currently promote a particular prep regimen as this is left up to
the discretion of the physician since our current indication does not reference any preparation protocol. We will look to expand the Pure-
Vu system indication to allow us to actively promote minimal prep capabilities directly to patients. We plan to initiate a clinical trial in
2018 that should facilitate approval of expanded labeling in 2019. To date, as part of our limited pilot launch, we have focused on
collecting clinical data on the use of the Pure-Vu system. We do not expect to generate significant revenue from product sales unless and
until we expand our commercialization efforts.
Our business was spun out from the New Generation Technology (“NGT”) incubator based in Nazareth, Israel in 2011 to focus
exclusively on the development of the Pure-Vu system. We initiated preclinical testing in 2011 and started clinical testing of the first
prototype version of the Pure-Vu system in Europe in late 2012. In clinical studies performed in Europe and Israel from 2012 through the
second quarter of 2017, the Pure-Vu system and earlier prototype versions have demonstrated effective cleaning in over 175 patients that
followed a significantly reduced pre-procedural colonoscopy preparation regimen, as compared to current prep regimens.
Market Overview
Colonoscopies are one of the most frequently performed medical procedures with over 15 million colonoscopies performed in the
U.S. every year and close to 30 million worldwide. In the U.S., approximately 90% of the 15 million colonoscopies are performed as out-
patient procedures (13.5 million) at an ambulatory endoscopy center, or AEC, and/or hospital out-patient departments, or HOPD, and 10%
as in-patient procedures (1.5 million) in hospitals. The veteran population represents approximately 250,000 colonoscopies performed
annually. Approximately 60% of colonoscopies are performed to detect and prevent colorectal cancer, or CRC, which is the second leading
cause of cancer-related deaths in the U.S. with approximately 140,000 new cases diagnosed and 50,000 deaths every year. Over the past
few decades, CRC has been demonstrated to be one of the most preventable cancers through the use of colonoscopies. The remaining 40%
of colonoscopies are performed to help diagnose and treat other gastrointestinal, or GI, conditions including irritable bowel syndrome, or
IBS, inflammatory bowel disease, or IBD, anemia and lower GI bleeding.
Despite the pervasiveness and effectiveness of colonoscopy, a key ongoing clinical challenge of the procedure is that patients are
required to undergo a potent pre-procedure bowel preparation regimen to try to ensure that the colon is fully cleansed to enable clear
visualization of the tissue. The regimens can be highly disruptive and uncomfortable for many patients. In fact, approximately 57% of
patients cite not wanting to take the bowel preparation as the number one deterrent for the procedure. Further, it has been widely reported
that approximately 23% of out-patients and it has been estimated that approximately 45% of in-patients present with inadequately prepped
colons, resulting in a number of colonoscopies that yield poor diagnostic accuracy or failed colonoscopies that must be repeated. It has also
been widely reported that patients requiring frequent colonoscopies, such as CRC survivors and other surveillance patients, account for
approximately 21% of the out-patient colonoscopies performed annually in the U.S., and that patients with lower GI bleeding or poorly
prepared colons represent approximately 45% of in-patient colonoscopies performed annually in the U.S. Another key problem is that
approximately 35% of eligible patients are not current with their CRC screening in the U.S. based on current guidelines. One of the primary
reasons patients fail to get a screening colonoscopy or to return for follow-up procedures is the unwillingness to undergo or dislike of the
potent and unpleasant preparation required prior to the procedure.
4
Successful bowel preparation is one of the most important factors in delivering a thorough, high quality exam and is well
documented to have a direct impact on the adenoma detection rate (ADR) (the rate of detecting pre-cancer anomalies in the colon tissue),
which in turn predicts a decrease in CRC risk. The preparation regimen typically requires patients to be on a liquid diet for over 24 hours,
drink up to four liters of a purgative, spend up to 12 hours prior to the exam periodically going to the bathroom to empty their bowels, and
disrupting their daily activities, which could include missing work or other activities. The cleansing process is well known to be
inconvenient and uncomfortable for many patients resulting in approximately twenty three percent (23%) of patients arriving for their
colonoscopy inadequately cleansed. An inadequately prepared colon can impact the diagnostic accuracy of the procedure and can lead to
procedures having to be repeated earlier than the medical guidelines advise or can lead to failed procedures especially in the in-patient
setting. Rescheduling the procedure is inconvenient to the patient (and many patients fail to come for their follow-up), creates inefficiencies
in the provider’s workflow, and increases the length of hospital stay for the in-patient, each of which results in increased healthcare costs.
Our Pure-Vu Solution
To address this unmet need, we have developed our FDA-cleared Pure-Vu system, which readily integrates with existing
colonoscopes to cleanse poorly prepped colons during the colonoscopy procedure. The Pure-Vu system has been cleared by the FDA to
help facilitate intra-procedural cleaning of a poorly prepared colon by irrigating or cleaning the colon and evacuating the irrigation fluid
(water), feces and other bodily fluids and matter. We believe that the technology may be useful in the future as a tool to help reduce user
dependency on conventional pre-procedural bowel prep regimens.
Our system consists of a workstation controller and a single-use, disposable sleeve that fits over most standard-size commercial
colonoscopes. Together with the colonoscope, the Pure-Vu system performs rapid, effective and efficient intra-procedural cleaning without
compromising procedural workflow and techniques. The over-sleeve has an umbilical section that connects to a cartridge that mounts to the
workstation and serves as the interface between the disposable over-sleeve and the workstation. The workstation, through a series of
peristaltic pumps activated by foot pedals, delivers an irrigation medium of air and water that creates a pulsed vortex inside the colon to
break up fecal matter while simultaneously evacuating the colon content into waste receptacles already used in a standard colonoscopy
procedure. The proprietary evacuation system in the device has sensors built in that can detect the formation of a blockage and
automatically clear it allowing the physician to remove significant debris from the patient. The Pure-Vu system has been clinically
demonstrated to be capable of cleaning poorly prepared colons in minutes. We are building an extensive intellectual property portfolio
designed to protect key aspects of the system, including the pulsed vortex irrigation and auto-purge functions.
The Pure-Vu System
In the out-patient setting, the Pure-Vu system could create the opportunity to improve patient satisfaction and enhance diagnostic
quality. Additionally, in the in-patient hospital setting, the Pure-Vu system could create the opportunity to improve the time to prepare for
and complete a successful colonoscopy.
5
Out-patient Opportunity: improving patient experience and reducing repeat procedures
The Pure-Vu system is currently cleared to help facilitate intra-procedural cleaning of a poorly prepared colon by irrigating or
cleaning the colon and evacuating the irrigation fluid (water), feces and other bodily fluids and matter, e.g., blood. In this context, users are
able to address visualization concerns and complete endoscopic examinations when patients are found to be poorly prepared by standard
colon preparation methods. We believe that our technology may be useful in the future as a tool to help reduce user dependency on
conventional pre-procedural bowel prep regimens, and we are gathering data and intend to seek FDA clearance or approval for expanded
claims.
The largest commercial market opportunity presented by the Pure-Vu system in relation to these expanded claims is in the out-
patient setting offering patients an alternative to the arduous experience of having to drink large volumes of purgatives that result in
significant discomfort, multiple visits to the bathroom over a many-hour period and disruption of daily activities. Market research
conducted by The Nova Group, which was sponsored by us, indicates that 83% of patients are willing to pay an out-of-pocket premium,
depending on the cost, for this type of technology and the ability to follow a “less-prep” regimen. According to The Nova Group market
research, 29% of patients indicated they were willing to consider paying an out-of-pocket cost of up to $350, despite believing such cost to
be expensive, for the ability to follow a “less-prep” regimen, while 10% believed $350 to be an appropriate out-of-pocket price. Similarly,
according to the same research, 58% of patients indicated they were willing to consider paying an out-of-pocket cost of up to $250, despite
believing such cost to be expensive, for the ability to follow a “less-prep” regimen, while 20% believed $250 to be an appropriate out-of-
pocket price. This research suggests that as the potential out-of-pocket cost of a “less-prep” regimen and examination is reduced, the
percentage of patients willing to consider paying increases dramatically.
Physicians are also motivated to improve bowl preparation. Market research conducted by Healthcare Research & Analytics,
which was sponsored by us, indicates, 99% of physicians understand ADR is influenced by bowl cleanliness and 68% believe ADR will be
tied to reimbursement in the next three years. With increasing pressure on physician and facility reimbursement, most providers are
incorporating ancillary services into their practices to supplement their revenue and increase profit. Incorporation of a “less-prep” regimen
as an ancillary product into an out-patient GI practice is expected to provide an additional source of revenue and profit as well as help to
differentiate the GI practice in an increasingly competitive marketplace. By offering a solution to those patients who either cannot tolerate
the challenging preparation or desire a more tolerable prep, we believe the GI practice can increase their market share and improve patient
satisfaction, a key quality metric being measured by payors. A “less-prep” regimen could also facilitate late afternoon and early evening
procedures for those patients wishing to avoid disruption in their daily activities. Finally, with a “less-prep” regimen, the prep may no
longer be as significant of a deterrent to receiving a colonoscopy, potentially increasing compliance to screening and ultimately increasing
the early detection of CRC.
Based on published literature in several peer reviewed journals from 2010 to 2015 and surveys of physicians conducted in 2015,
approximately 23% of patients can have an inadequate preparation, which may lead to repeat procedures earlier than the medical guidelines
suggest and decrease the ADR negatively affecting the quality of the exam. If a physician has the ability to effectively cleanse the colon
intra-procedurally, a “less-prep” regimen could provide the ability to turn a fair or poor preparation into an optimal preparation and achieve
a high-quality colonoscopy. Further, increased cleanliness (which may be achieved through use of the Pure-Vu system), as measured by the
Boston Bowel Preparation Score, or BBPS, the most commonly used method for evaluating the quality of bowel preparation, is associated
with an increase of adenoma detection, which in turn predicts a decrease in CRC risk.
6
In-patient Opportunity: improving efficiencies and shortening time to complete a successful colonoscopy
In-patient colonoscopy is usually performed to diagnose the source of various gastrointestinal conditions such as lower GI
bleeding or bowel pain. For an in-patient hospital stay, the Centers for Medicare and Medicaid Services, or CMS, uses a prospective
payment system, or PPS, based upon diagnostic related groups, or DRG, to pay for hospital services with the goal of encouraging providers
to minimize their costs. The DRG assignment is influenced by a combination of factors such as a patient’s sex, diagnosis at the time of
discharge and procedures performed. Based on patient specific information, all hospital expenses for their care during an inpatient stay are
packaged and assigned to one of over 500 MS-DRGs. According to Decision Driver Analytics, a reimbursement consulting agency, when a
colonoscopy is performed as the primary procedure (no other procedures or complicating diagnosis), DRGs 395, 394 or 393 would apply
which pay between $3,861 (without complications or major comorbidities) and $9,421 (with major complications and comorbidities). The
cost for just one night in the hospital averages $1,800, so reducing the length of stay can save the hospital significant expense.
7
An in-patient colonoscopy is more problematic than an out-patient procedure due primarily to poorer quality bowel prep which can
lead to lower rates of successful completion of the procedure and a higher frequency of repeat procedures. In-patients are difficult to prep as
exemplified by inadequate bowel prep rates, which have been reported in the literature as high as 45% for the in-patient setting. Managing
these patients is a challenge often requiring significant healthcare provider resources to administer and monitor the prep. The poor bowel
prep can be due to the patient’s condition as a more fragile patient population may be unable to tolerate the significant volume of fluid
required, and the clear liquid diet required, to cleanse the colon. With these patients, a high volume of purgative can also lead to electrolyte
imbalances. The Pure-Vu system is cleared by the FDA for use as an aid to facilitate cleansing in patients with poor bowel preparation. The
impact of the Pure-Vu system on the duration of procedures has not been established. There is a need for a system that can shorten the time
to successfully complete a colonoscopy by streamlining the process with effective and safe intra-procedural cleaning thus reducing
healthcare costs.
Pre-Clinical and Clinical Data & Safety
In clinical studies performed in Europe and Israel, the Pure-Vu system and earlier prototype versions have demonstrated effective
cleaning in over 175 patients receiving a reduced prep regimen. The first 83 patients used three different versions of the system. The prep
regimen used in these patients varied from taking a 50% dose of the standard PEG based prep to as little as taking 20mg of over-the-counter
Dulcolax® (bisocodyl). More recently, the commercial version of the Pure-Vu system was used in two multi-center clinical studies. The
first study involved 48 patients and was completed in the second quarter of 2016. The second study was completed in June 2017 and
involved 46 patients. Patients in these studies had a restricted diet for 18-24 hours and received a split dose of 20mg of over-the-counter
Dulcolax® (bisocodyl). Patients did not take any liquid purgative traditionally prescribed for bowel preparation. The clinical data showing
performance of the Pure-Vu system in these studies using the BBPS, is shown below. The clinical results from the 2016 study were
presented at United European Gastroenterology Week (“UEGW”) in October 2016. The clinical results from the 2017 study were presented
at the UEGW in October 2017, showing similar results, as shown below.
8
In addition, pre-clinical experience in a porcine animal model, which was used in the FDA submission, was also presented at
Digestive Disease Week (“DDW”) in May 2016. In this study the animals were fasted from normal feed following the Day -2 morning
meal. On the afternoon of Day -2, the animals received a standard three (3) liters of PEG-based colon preparation agent (Golytely®). This
data is presented below.
9
We are planning to initiate post-market surveillance and clinical study programs that may involve registries, investigator
sponsored studies and company sponsored studies to drive clinical and health economic data, to support product development, enhance our
marketing efforts and facilitate new indications. The first of these studies was initiated in the fourth quarter of 2017 and will continue into
2018.
The Pure-Vu system is currently indicated to connect to standard colonoscopes to help facilitate intra-procedural cleaning of a
poorly prepared colon by irrigating or cleaning the colon and evacuating the irrigation fluid (water), feces and other bodily fluids and
matter. We do not currently promote a particular prep regimen as this is left up to the discretion of the physician since our current indication
does not reference any preparation protocol. We will look to expand the Pure-Vu system indication to allow us to promote minimal prep
capabilities directly to patients. We plan to initiate a clinical trial in 2018 that should facilitate approval of expanded labeling in 2019.
We received CE Mark approval in Europe in February 2018. We intend to establish relationships with strategic partners for
Europe, Japan, China and other key markets outside the U.S. (“OUS”) to support the regulatory process and market entry. We anticipate
entering OUS markets with our second-generation Pure-Vu system during the second half of 2019. We filed for and received special 510(k)
clearance from the FDA in the fourth quarter of 2017 to adjust our labeling to simplify the process of removing the Pure-Vu system from a
colonoscope and to support minor enhancements to the manufacturing of the system.
Intellectual Property
Our IP position comprises a highly innovative portfolio covering technologies rooted in systems and methods for cleaning body
cavities with or without the use of an endoscope. Currently we have three (3) issued U.S. patents, three (3) issued Japanese patents, one
issued EU patent and 31 (11 in the U.S.) pending patent applications in various regions of the world with a focus on the U.S., EU and Japan.
Our earliest patent application filing dates go back to October 2007. We have also recently received notice of allowance for Motus GI and
for Pure-Vu trademarks from the USPTO. We are pursuing these marks in the EU as well.
Our issued patents cover:
● one patent for an endoscopic device insertable into a body cavity and movable in a predetermined direction and method of
moving the endoscopic device in a body cavity, which expires in October 2026;
● three patents for system and methods for cleaning body cavities, which expire in the U.S. in 2031;
● and three patents for an apparatus and method for coupling between a colonoscope and add-on tubes, which expire in the U.S. in
2035.
10
Our patent application portfolio focuses on cleaning body cavities in a safe and efficient manner, insertion and movement and
steering of an endoscopic device within the body cavity in a predetermined direction, coordinated positioning of an endoscope with a
suction device and cleaning systems with automatic self-purging features. Our applications cover critical aspects of our system that we
believe are key to effectively and efficiently clean the colon or other cavities in the body. These areas include cleansing jet methodologies,
sensing and control of evacuation to avoid clogging, designs for easy attachment to endoscopes and cleaning segments under water.
Our commercial success depends in part on our ability to obtain and maintain patent and other proprietary protection for Pure-Vu
and to operate without infringing the proprietary right of others and to prevent others from infringing our proprietary rights. We strive to
protect our intellectual property through a combination of patents, and trademarks as well as through the confidentiality provisions in our
contracts. With respect to the Pure-Vu system, we endeavor to obtain and maintain patent protection in the United States and internationally
on all patentable aspects of the system. We cannot be sure that the patents will be granted with respect to any patent applications we may
own or license in the future, nor can we be sure that our existing patents or any patents we may own or license in the future will be useful in
protecting our technology.
In addition to patents, we rely on trade secrets and know-how to develop and maintain our competitive position. For example,
significant aspects of our proprietary technology platform are based on unpatented trade secrets and know-how. Trade secrets and know-
how can be difficult to protect. We seek to protect our proprietary technology and processes, in part, by confidentiality agreements and
invention assignment agreements with our employees, consultants, scientific advisors, contractors and commercial partners. These
agreements are designed to protect our proprietary information and, in the case of the invention assignment agreements, to grant us
ownership of technologies that are developed through a relationship with a third party. We also seek to preserve the integrity and
confidentiality of our data and trade secrets by maintaining physical security of our premises and physical and electronic security of our
information technology systems. While we have confidence in these individuals, organizations and systems, agreements or security
measures may be breached, and we may not have adequate remedies for any breach. In addition, our trade secrets may otherwise become
known or be independently discovered by competitors. To the extent that our 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.
We also plan to continue to seek trademark protection in the United States and outside of the United States where available and
when appropriate. We intend to use these registered marks in connection with our research and development as well as our product
candidates.
Our Formation
In connection with our formation in September 2016, we sold an aggregate of 1,650,000 shares of our common stock, par value
$0.0001 per shares (the “Common Stock”) for an aggregate of $82,500 ($0.05 per share).
The Share Exchange Transaction
Effective on December 1, 2016, Motus GI Medical Technologies Ltd., an Israeli Company (“Opco”), and the holders of all issued
and outstanding shares of capital stock of Opco (the “Opco Stockholders”), entered into a share exchange agreement (the “Share Exchange
Agreement”) with us. Pursuant to the terms of the Share Exchange Agreement, as a condition of and contemporaneously with the initial
closing (the “Initial Closing”) of the private placement offering of units we conducted from December 2016 to February 2017 (the “2017
Private Placement”), the Opco Stockholders sold to us, and we acquired, all of the issued and outstanding shares of capital stock of Opco
(the “Share Exchange Transaction”) and Opco became our direct wholly-owned subsidiary. Pursuant to the Share Exchange Transaction (i)
the Opco Stockholders received an aggregate of 4,000,000 shares of our Common Stock in exchange for all of the issued and outstanding
shares of capital stock of Opco, (ii) the Convertible Notes (as defined below) and the Convertible Note Warrants (as defined below) were
exchanged for our securities, as described below, and (iii) all of the issued and outstanding options to purchase or otherwise acquire shares
of Opco capital stock that were outstanding and unexercised as of immediately prior to the Initial Closing were substituted for 125,730
options to acquire shares of our Common Stock pursuant to our 2016 Equity Incentive Plan at exercise prices ranging from $2.38 to $2.52
(see “Part III—Item 11—Executive Compensation—2016 Equity Incentive Plan”).
11
The Share Exchange Transaction was treated as a recapitalization of Opco for financial accounting purposes and the historical
financial statements of Opco are our financial statements as a result of the Share Exchange Transaction.
2017 Private Placement and Exchange of Convertible Notes
In connection with the 2017 Private Placement we issued an aggregate of 3,080,671 units, at a purchase price of $5.00 per unit,
with each unit (a “Unit”) consisting of (i) three-quarter (3/4) of a share of our Common Stock, and (ii) one-quarter (1/4) of a share of our
convertible preferred stock, par value $0.0001 (the “Series A Convertible Preferred Stock”), for gross proceeds of approximately $15.4
million, comprised of an aggregate of 2,310,504 shares of our Common Stock and 770,168 shares of Series A Convertible Preferred Stock
to investors in the 2017 Private Placement.
In addition, from June 2015 through November 2016, pursuant to the terms of a convertible note agreement, as amended (the
“CNA”), Opco issued convertible notes (the “Convertible Notes”) in an aggregate amount of approximately $14.6 million (inclusive of
accrued interest through December 22, 2016, the date of the Initial Closing) to certain investors, including related parties of us and Opco.
As part of the 2017 Private Placement, at the Initial Closing, the holders of the Convertible Notes (the “Convertible Holders”) exchanged
their Convertible Notes (the “Exchange of Convertible Notes”), together with accrued and unpaid interest thereon at a rate of 10% per
annum, for Units of the 2017 Private Placement, at a conversion price of $4.50 per Unit. As a result, upon consummation of the Initial
Closing, the Convertible Notes were exchanged for an aggregate of 3,243,768 Units representing (i) 2,432,808 shares of our Common
Stock (inclusive of shares of our Common Stock resulting from the accrued and unpaid interest of the Convertible Notes through the date of
the Initial Closing) and (ii) 810,960 shares of our Series A Convertible Preferred Stock (inclusive of shares of Series A Convertible
Preferred Stock resulting from the accrued and unpaid interest of the Convertible Notes through the date of the Initial Closing).
Exchange of Convertible Note Warrants
In connection with, and pursuant to the terms of, the CNA, each Convertible Holder also received a seven (7) year warrant (the
“Convertible Note Warrants”) to purchase preferred A shares of Opco (the “Preferred A Shares of Opco”), nominal value NIS 0.01 per
share, with an exercise price per share of $1.00 (the “Convertible Note Warrant Exercise Price”). Each Convertible Note Warrant entitled
the holder to purchase that number of shares of Preferred A Shares of Opco equal to thirty-three percent (33%) of the principal amount of
the Convertible Note in connection with which it was issued. Convertible Note Warrants to purchase an aggregate 4,536,188 shares of
Preferred A Shares of Opco with an exercise price of $1.00 were issued in connection with the CNA. At the Initial Closing, the holders of
the Convertible Note Warrants exchanged their Convertible Note Warrants for five (5) year warrants (the “Exchange Warrants”) to
purchase an aggregate 907,237 shares of our Common Stock at an exercise price of $5.00 per share, such amount being equal to thirty-three
percent (33%) of the principal amount of the Convertible Notes divided by $5.00.
Initial Public Offering
On February 16, 2018, we completed our initial public offering of 3,500,000 shares of our Common Stock at a public offering
price of $5.00 per share, with gross proceeds of $17.5 million (the “IPO”). Simultaneously with the closing of our IPO, all 1,581,128
previously outstanding shares of our Series A Convertible Preferred Stock were converted, on a one-to-one basis, into an aggregate of
1,581,128 shares of our Common Stock. No shares of our Series A Convertible Preferred Stock remain outstanding as a result of such
conversion. Additionally, at the closing of our IPO, we issued warrants to certain of our former Series A Convertible Preferred Stock
holders, pursuant to an amendment to our registration rights agreement entered into with the investors in our 2017 Private Placement (the
“Registration Rights Agreement”) and an amendment to our Certificate of Designation of Preferences, Rights and Limitations of Series A
Convertible Preferred Stock (the “Certificate of Designation”), to purchase 1,095,682 shares of our Common Stock (the “Ten Percent
Warrants”). The Ten Percent Warrants are exercisable for our Common Stock at an exercise price of $5.00. The Ten Percent Warrants are
exercisable any time on or after the 180 day anniversary of the completion of our IPO, have a five year term, and provide for cashless
exercise. Certain related parties received Ten Percent Warrants, see “Part III—Item 13—Certain Relationships and Related Transactions,
and Director Independence—Ten Percent Warrants – Related Party Participation.” Certain related parties purchased shares of our Common
Stock in our IPO, see “Part III—Item 13—Certain Relationships and Related Transactions, and Director Independence—Participation in
Initial Public Offering.”
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On March 12, 2018, we completed the sale of an additional 56,000 shares of our Common Stock at a price of $5.00 per share,
pursuant to a partial exercise of the underwriters 30-day option to purchase up to an additional 525,000 shares of our Common Stock in
connection with the IPO (the “Partial IPO Over-Allotment Exercise”), with gross proceeds of $280,000.
Competition
We do not believe that there are currently any direct competitors in the market, nor any known competing medical device under
development, using similar technology to our technology. Currently the major colonoscope manufacturers (i.e., Olympus, Pentax, Fuji) sell
an irrigation pump that can pump fluid through the working channel of a colonoscope. The only intra-procedural device in the market,
Cantel Medical’s Jet Prep, and another product in development similar to Cantel Medical’s Jet Prep, Medjet Ltd.’s MedJet, go through the
working channel of a scope and are used mostly for spot cleaning a small amount of debris and do not have the capability to fully clean the
colon of large amounts of fecal matter. The Jet Prep and MedJet products also require the physician to remove it from the working channel
during the procedure if they need to remove polyps or take a biopsy, impacting the workflow of the procedure. The competitive products
mentioned are not currently reimbursed by private or government payors. There are over ten different preparation regimens used prior to
colonoscopy today. Some are prescription medications and others are over-the-counter. Typically, the over-the-counter regimens are not
indicated for colonoscopy prep but for issues of motility, such as constipation, but are still widely prescribed by physicians for colonoscopy
prep. Depending on the insurance a patient has, the prescription prep may be covered in part but many of them require the patient to pay
out-of-pocket.
The medical device and pharmaceutical industries are intensely competitive and subject to rapid and significant technological
change. We have indirect competitors in a number of jurisdictions, many of which have substantially greater name recognition, commercial
infrastructures and financial, technical and personnel resources than we have. Currently, the colonoscopy market is dominated by Olympus,
who controls a majority of the market, with Pentax and FujiFilm taking most of the rest of the U.S. colonoscope market. Boston Scientific,
Medtronic US Endoscopy, Medivators and other smaller players sell ancillary devices and accessories into the marketplace as well. These
established competitors may invest heavily to quickly discover and develop novel devices that could make our Pure-Vu system obsolete or
uneconomical. There are also capsule endoscopy systems such as the PillCamTM from Medtronic and the Endocapsule 10 from Olympus,
These systems, however, require at least the same level of prep as conventional colonoscopies, cannot remove polyps, and therefore, cannot
be used to obtain biopsies to detect cancer, so may be less useful for colonoscopy as compared to visualization of the small bowel. Another
visualization technique is the virtual colonoscopy, where a radiologist uses a CT scan to obtain 2D and 3D images of the colon. Virtual
colonoscopies may require the same level of prep as conventional colonoscopies and if a polyp or abnormality is detected, the patient may
still need to undergo a colonoscopy. Other screening tests for colon cancer specifically include fecal occult blood tests and DNA stool tests
such as the Cologuard test from Exact Sciences. However, Cologuard is not a replacement for diagnostic colonoscopies or surveillance
colonoscopies in high risk individuals and has a lower specificity than standard colonoscopies. While none of these testing alternatives may
ever fully replace the colonoscopy, over time, they may take market share away from conventional colonoscopies for specific purposes and
may lower the potential market opportunity for us.
Any new product that competes with an approved product may need to demonstrate compelling advantages in efficacy, cost,
convenience, tolerability and safety to be commercially successful. Other competitive factors, including new competitive entrants, could
force us to lower prices or could result in reduced sales. In addition, new products developed by others could emerge as competitors to the
Pure-Vu system. If we are not able to compete effectively against our current and future competitors, our business will not grow and our
financial condition and operations will suffer.
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Research and Development
We incurred expenses of approximately $4.3 million and $3.1 million, respectively, during the years ended December 31, 2017
and 2016 for research and development activities. These expenses include cash and non-cash expenses relating to the development of our
development and clinical programs for the Pure-Vu system. We have research and development capabilities in electrical and mechanical
engineering with laboratories in our facility in Israel for development and prototyping, and electronics design and testing. We also use
consultants and third party design houses to complement our internal capabilities.
We have received, and may receive in the future, grants from the Government of the State of Israel through the Israel Innovation
Authority of the Ministry of Economy and Industry (the “IIA”) (formerly known as the Office of the Chief Scientist of the Ministry of
Economy and Industry (the “OCS”)), for the financing of a portion of our research and development expenditures pursuant to the
Encouragement of Research, Development and Technological Innovation in the Industry Law 5744-1984 (formerly known as the
Encouragement of Industrial Research and Development Law, 5744-1984), referred to as the Research Law, and related regulations.
As of December 31, 2017, we had received grants from the IIA in the aggregate amount of $1.33 million, and had a contingent
obligation to the IIA up to an aggregate amount of approximately $1.37 million. As of December 31, 2017, we paid a minimal amount to
the IIA. We may apply for additional IIA grants in the future. However, as the funds available for IIA grants out of the annual budget of
the State of Israel have been reduced in the past and may be further reduced in the future, we cannot predict whether we will be entitled to
any future grants, or the amounts of any such grants.
In exchange for these grants, we are required to pay royalties to the IIA of 3% to 3.5% from our revenues on sales of products and
services based on technology developed using IIA grants, up to an aggregate of 100% (which may be increased under certain
circumstances) of the U.S. dollar-linked value of the grant, plus interest at the rate of 12-month LIBOR.
The terms of the Israeli government participation also require that products developed with IIA grants be manufactured in Israel
and that the technology developed thereunder may not be transferred outside of Israel (including by way of certain licenses), unless prior
approval is received from the IIA, which we intend to apply for but may not be granted. Even if such approval is granted, the transfer
outside of Israel of manufacturing which is connected with the IIA-funded know-how may result in increased royalties (up to three times
the aggregate amount of the IIA grants plus interest thereon), as well as in a higher royalty repayment rate. In addition, the transfer outside
of Israel of IIA-funded know-how may trigger additional payments to the IIA (up to six times the aggregate amount of the IIA grants plus
interest thereon). Even following the full repayment of any IIA grants, we must nevertheless continue to comply with the requirements of
the Research Law. The foregoing restrictions and requirements for payment may impair our ability to sell our technology assets outside of
Israel or to outsource or transfer development or manufacturing activities with respect to any IIA-funded product or technology outside of
Israel.
If we fail to comply with any of the conditions and restrictions imposed by the Research Law, or by the specific terms under which
we received the grants, we may be required to refund any grants previously received together with interest and penalties, and, in certain
circumstances, may be subject to criminal charges.
A significant amendment to the Research Law entered into effect on January 1, 2016 (the “Amendment”), under which the IIA, a
statutory government corporation, was established, which replaced the OCS. Under the Amendment, the IIA is authorized to establish rules
concerning the ownership and exploitation of IIA/OCS-funded know-how (including with respect to restrictions on transfer of
manufacturing activities and IIA-funded know-how outside of Israel), which may differ from the restrictive laws, regulations and
guidelines as currently in effect (and which shall remain in effect until such rules have been established by the IIA). Recently published
rules of the IIA have generally adopted the principal provisions and restrictions specified in the Research Law prior to the Amendment. It is
anticipated that additional rules will be published by the IIA and we cannot predict or estimate the changes (if any) that may be made to this
legislation (including with respect to the acquisition of an IIA-funded entity or the transfer of manufacturing or ownership of IIA-funded
technology outside of Israel).
For additional information, see “Part I—Item 1A—Risk Factors—Risks Related to Our Operations in Israel.”
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Manufacturing and Supply
We have established relationships with research facilities, contract manufacturing organizations, or CMO’s, and our collaborators
to manufacture and supply our product for our limited pilot launch and for commercialization. Currently, the workstation component of our
Pure-Vu system is manufactured by Sanmina Corporation at their facilities in Israel. We may enter into a formal supply agreement for the
manufacture of the workstation component of our Pure-Vu system as we continue to establish higher volume capabilities and our
commercialization efforts grow. The disposable portion of our Pure-Vu system is manufactured by Polyzen, Inc., at their facilities in North
Carolina, U.S., pursuant to a supply agreement we entered into with Polyzen, Inc. in September 2017. These manufacturing suppliers have
extensive experience in medical devices and dealing with regulatory bodies. These suppliers have ISO 13485 approved quality systems. We
have an agreement in place with a third party logistics provider in the U.S. who is ISO 13485 certified and specializes in medical devices
and equipment. They will provide warehousing, shipping and back office support to meet our commercial needs.
For additional information, see “Part I—Item 1—Business—Research and Development” above, and “Part I—Item 1A—Risk
Factors—Risks Related to Our Operations in Israel.”
U.S. Market Entry Strategy
We have initiated a limited pilot launch in the U.S. market. Initial evaluation cases have been performed at eight centers showing
cleansing capabilities similar to our clinical trial experience. This pilot phase is expected to run through 2018 with the primary objectives of
expanding our clinical evidence, developing a practice integration model and creating key reference centers in both the AEC and hospital
in-patient settings. We intend to work with the initial accounts to perform clinical studies to gather data for seeking expanded indications
for use (such as from the FDA) and to optimize the prep for various populations including patients that have problems tolerating the prep
and in-patients. For example, we expect to initiate post-market in-patient studies in the first half of 2018 to examine the ability to improve
outcomes and address lower GI bleeds using the Pure-Vu system, and expect results for these trials in the fourth quarter of 2018 and second
quarter of 2019, respectively. We also expect to initiate an in-patient study for the veteran population, and expect results from this trial in
the second half of 2019. For out-patients, we expect to initiate trials to support reimbursement later this year with results from these trials
anticipated in the second half of 2019.
We are working with a third party logistics provider specializing in medical devices to provide front and back office support to
successfully fulfill customer orders. Additionally our commercial organization is putting in place the infrastructure to track account
progress and help provide accurate forecasting for operations. We anticipate the sales cycle to be in the range of six to twelve months.
During our limited pilot market entry, we will refine our commercialization strategy and tactics prior to our full market launch which is
expected in 2019. Our full market launch will focus on launching our second generation Pure-Vu system platform (lower cost of goods,
added features, and additional size for “slim” scopes), growing the top line revenues, scaling the commercial organization and expanding
our clinical indications for use. We expect to develop strategic relationships to pursue OUS marketing opportunities and to initiate sales in
the EU in 2019 and Japan, China and other Asian markets in 2020.
Employees
As of December 31, 2017, we had 39 full time employees. All of our employees are engaged in administration, finance, clinical,
R&D, engineering, regulatory or sales and marketing functions. We believe our relations with our employees are good. We anticipate that
the number of employees will grow as we scale our commercial capabilities. In addition, we utilize and will continue to utilize consultants,
clinical research organizations and third parties to perform our pre-clinical studies, clinical studies, manufacturing and regulatory functions.
Under Israeli law, we and our employees in Israel are subject to Israeli protective labor provisions, including the length of the
workday, minimum wages for employees, annual leave, sick pay, determination of severance pay and advance notice of termination of
employment, as well as procedures for hiring and dismissing employees and equal opportunity and anti-discrimination laws. While none of
our employees in Israel is party to any collective bargaining agreements, orders issued by the Israeli Ministry of Economy and Industry
may make certain industry-wide collective bargaining agreements applicable to us. These agreements affect matters such as the length of
the workday and week, recuperation pay, travel expenses and pension rights. We have never experienced labor-related work stoppages and
believe that our relationships with our employees are a significant part of our operations and that we maintain a good and positive
relationship with our employees.
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Israeli law generally requires the payment of severance compensation by employers upon the retirement, death or dismissal of an
employee. We fund our ongoing Israeli severance obligations by making monthly payments to insurance policies. All of our current
employees in Israel have agreed that upon termination of their employment, they will be entitled to receive only the amounts accrued in the
insurance policies with respect to severance pay.
Furthermore, Israeli employees and employers are required to pay predetermined sums to the National Insurance Institute, which is
similar to the U.S. Social Security Administration. These amounts also include payments for national health insurance.
Regulatory Matters
Government Regulation
Our business is subject to extensive federal, state, local and foreign laws and regulations, including those relating to the protection
of the environment, health and safety. 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 subjective interpretations. In addition, these laws and their interpretations are subject to
change, or new laws may be enacted.
Both federal and state governmental agencies continue to subject the healthcare industry to intense regulatory scrutiny, including
heightened civil and criminal enforcement efforts. 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. We discuss below the statutes and regulations that are most relevant to our business.
U.S. Food and Drug Administration regulation of medical devices.
The FDCA and FDA regulations establish a comprehensive system for the regulation of medical devices intended for human use.
Our products include medical devices that are subject to these, as well as other federal, state, local and foreign, laws and regulations. The
FDA is responsible for enforcing the laws and regulations governing medical devices in the United States.
The FDA classifies medical devices into one of three classes (Class I, Class II, or Class III) depending on their level of risk and the
types of controls that are necessary to ensure device safety and effectiveness. The class assignment is a factor in determining the type of
premarketing submission or application, if any, that will be required before marketing in the United States.
● Class I devices present a low risk and are not life-sustaining or life-supporting. The majority of Class I devices are subject only
to “general controls” (e.g., prohibition against adulteration and misbranding, registration and listing, good manufacturing
practices, labeling, and adverse event reporting. General controls are baseline requirements that apply to all classes of medical
devices.)
● Class II devices present a moderate risk and are devices for which general controls alone are not sufficient to provide a
reasonable assurance of safety and effectiveness. Devices in Class II are subject to both general controls and “special controls”
(e.g., special labeling, compliance with performance standards, and post market surveillance. Unless exempted, Class II devices
typically require FDA clearance before marketing, through the premarket notification (510(k)) process.)
● Class III devices present the highest risk. These devices generally are life-sustaining, life-supporting, or for a use that is of
substantial importance in preventing impairment of human health, or present a potential unreasonable risk of illness or injury.
Class III devices are devices for which general controls, by themselves, are insufficient and for which there is insufficient
information to determine that application of special controls would provide a reasonable assurance of safety and effectiveness.
Class III devices are subject to general controls and typically require FDA approval of a premarket approval (“PMA”)
application before marketing.
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Unless it is exempt from premarket review requirements, a medical device must receive marketing authorization from the FDA
prior to being commercially marketed, distributed or sold in the United States. The most common pathways for obtaining marketing
authorization are 510(k) clearance and PMA.
510(k) pathway
The 510(k) review process compares a new device to a legally marketed device. Through the 510(k) process, the FDA determines
whether a new medical device is “substantially equivalent” to a legally marketed device (i.e., predicate device) that is not subject to PMA
requirements. “Substantial equivalence” means that the proposed device has the same intended use as the predicate device, and the same or
similar technological characteristics, or if there are differences in technological characteristics, the differences do not raise different
questions of safety and effectiveness as compared to the predicate, and the information submitted in the 510(k) demonstrates that the
proposed device is as safe and effective as the predicate device.
To obtain 510(k) clearance, a company must submit a 510(k) application containing sufficient information and data to demonstrate
that its proposed device is substantially equivalent to a legally marketed predicate device. These data generally include non-clinical
performance testing (e.g., software validation, animal testing electrical safety testing), but may also include clinical data. Typically, it takes
three to twelve months for the FDA to complete its review of a 510(k) submission; however, it can take significantly longer and clearance is
never assured. During its review of a 510(k), the FDA may request additional information, including clinical data, which may significantly
prolong the review process. After completing its review of a 510(k), the FDA may issue an order, in the form of a letter, that finds the
device to be either (i) substantially equivalent and states that the device can be marketed in the United States, or (ii) not substantially
equivalent and states that device cannot be marketed in the United States. Depending upon the reasons for the not substantially equivalent
finding, the device may need to be approved through the PMA pathway (discussed below) prior to commercialization.
After a device receives 510(k) clearance, any modification that could significantly affect the safety or effectiveness of the device,
or that would constitute a major change in its intended use, including significant modifications to any of our products or procedures,
requires submission and clearance of a new 510(k) or approval of a PMA. The FDA relies on each manufacturer to make and document this
determination initially, but the FDA can review any such decision and can disagree with a manufacturer’s determination. Modifications
meeting certain conditions may be candidates for a streamlined FDA review known as Special 510(k) review, which the FDA intends to
process within 30 days of receipt. If a device modification requires the submission of a 510(k), but the modification does not affect the
intended use of the device or alter the fundamental technology of the device, then summary information that results from the design control
process associated with the cleared device can serve as the basis for clearing the application. A Special 510(k) allows a manufacturer to
declare conformance to design controls without providing new data. When a modification involves a change in material, the nature of the
“new” material will determine whether a traditional or Special 510(k) is necessary. An Abbreviated 510(k) is another type of 510(k) that is
intended to streamline the review of data through the reliance on one or more FDA-recognized consensus standards, special controls
established by regulation, or FDA guidance documents. In most cases, an Abbreviated 510(k) includes one or more declarations of
conformity to an FDA-recognized consensus standard. We may also make minor product enhancements that we believe do not require new
510(k) clearances. If the FDA disagrees with our determination regarding whether a new 510(k) clearance was required for these
modifications, we may need to cease marketing and/or recall the modified device. The FDA may also subject us to other enforcement
actions, including, but not limited to, issuing a warning letter or untitled letter to us, seizing our products, imposing civil penalties, or
initiating criminal prosecution.
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Premarket approval pathway
Unlike the comparative standard of the 510(k) pathway, the PMA approval process requires an independent demonstration of the
safety and effectiveness of a device. PMA is the most stringent type of device marketing application required by the FDA. PMA approval is
based on a determination by the FDA that the PMA contains sufficient valid scientific evidence to ensure that the device is safe and
effective for its intended use(s). A PMA application generally includes extensive information about the device including the results of
clinical testing conducted on the device and a detailed description of the manufacturing process.
After a PMA application is accepted for review, the FDA begins an in-depth review of the submitted information. FDA regulations
provide 180 days to review the PMA and make a determination; however, in reality, the review time is normally longer (e.g., 1-3 years).
During this review period, the FDA may request additional information or clarification of information already provided. Also during the
review period, an advisory panel of experts from outside the FDA may be convened to review and evaluate the data supporting the
application and provide recommendations to the FDA as to whether the data provide a reasonable assurance that the device is safe and
effective for its intended use. In addition, the FDA generally will conduct a preapproval inspection of the manufacturing facility to ensure
compliance with QSR, which imposes comprehensive development, testing, control, documentation and other quality assurance
requirements for the design and manufacturing of a medical device.
Based on its review, the FDA may (i) issue an order approving the PMA, (ii) issue a letter stating the PMA is “approvable” (e.g.,
minor additional information is needed), (iii) issue a letter stating the PMA is “not approvable,” or (iv) issue an order denying PMA. A
company may not market a device subject to PMA review until the FDA issues an order approving the PMA. As part of a PMA approval,
the FDA may impose post-approval conditions intended to ensure the continued safety and effectiveness of the device including, among
other things, restrictions on labeling, promotion, sale and distribution, and requiring the collection of additional clinical data. Failure to
comply with the conditions of approval can result in materially adverse enforcement action, including withdrawal of the approval.
Most modifications to a PMA approved device, including changes to the design, labeling, or manufacturing process, require prior
approval before being implemented. Prior approval is obtained through submission of a PMA supplement. The type of information required
to support a PMA supplement and the FDA’s time for review of a PMA supplement vary depending on the nature of the modification.
Clinical trials
Clinical trials of medical devices in the United States are governed by the FDA’s Investigational Device Exemption (“IDE”)
regulation. This regulation places significant responsibility on the sponsor of the clinical study including, but not limited to, choosing
qualified investigators, monitoring the trial, submitting required reports, maintaining required records, and assuring investigators obtain
informed consent, comply with the study protocol, control the disposition of the investigational device, submit required reports, etc.
Clinical trials of significant risk devices (e.g., implants, devices used in supporting or sustaining human life, devices of substantial
importance in diagnosing, curing, mitigating or treating disease or otherwise preventing impairment of human health) require FDA and
Institutional Review Board (“IRB”) approval prior to starting the trial. FDA approval is obtained through submission of an IDE application.
Clinical trials of non-significant risk (“NSR”), devices (i.e., devices that do not meet the regulatory definition of a significant risk device)
only require IRB approval before starting. The clinical trial sponsor is responsible for making the initial determination of whether a clinical
study is significant risk or NSR; however, a reviewing IRB and/or FDA may review this decision and disagree with the determination.
An IDE application must be supported by appropriate data, such as performance data, animal and laboratory testing results,
showing that it is safe to evaluate the device in humans and that the clinical study protocol is scientifically sound. There is no assurance that
submission of an IDE will result in the ability to commence clinical trials. Additionally, after a trial begins, the FDA may place it on hold
or terminate it if, among other reasons, it concludes that the clinical subjects are exposed to an unacceptable health risk.
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As noted above, the FDA may require a company to collect clinical data on a device in the post-market setting.
The collection of such data may be required as a condition of PMA approval. The FDA also has the authority to order, via a letter,
a post-market surveillance study for certain devices at any time after they have been cleared or approved.
Pervasive and continuing FDA regulation
After a device is placed on the market, regardless of its classification or premarket pathway, numerous additional FDA
requirements generally apply. These include, but are not limited to:
● Establishment registration and device listing requirements;
● Quality System Regulation (“QSR”), which governs the methods used in, and the facilities and controls used for, the design,
manufacture, packaging, labeling, storage, installation, and servicing of finished devices;
● Labeling requirements, which mandate the inclusion of certain content in device labels and labeling, and generally require the
label and package of medical devices to include a unique device identifier (“UDI”), and which also prohibit the promotion of
products for uncleared or unapproved, i.e., “off-label,” uses;
● Medical Device Reporting (“MDR”) regulation, which requires that manufacturers and importers report to the FDA if their
device may have caused or contributed to a death or serious injury or malfunctioned in a way that would likely cause or
contribute to a death or serious injury if it were to recur; and
● Reports of Corrections and Removals regulation, which requires that manufacturers and importers report to the FDA recalls
(i.e., corrections or removals) if undertaken to reduce a risk to health posed by the device or to remedy a violation of the FDCA
that may present a risk to health; manufacturers and importers must keep records of recalls that they determine to be not
reportable.
The FDA enforces these requirements by inspection and market surveillance. Failure to comply with applicable regulatory
requirements can result in enforcement action by the FDA, which may include, but is not limited to, the following sanctions:
● Untitled letters or warning letters;
● Fines, injunctions and civil penalties;
● Recall or seizure of our products;
● Operating restrictions, partial suspension or total shutdown of production;
● Refusing our request for 510(k) clearance or premarket approval of new products;
● Withdrawing 510(k) clearance or premarket approvals that are already granted; and
● Criminal prosecution.
We are subject to unannounced device inspections by the FDA, as well as other regulatory agencies overseeing the
implementation of and compliance with applicable state public health regulations. These inspections may include our suppliers’ facilities.
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International
International sales of medical devices are subject to foreign government regulations, which vary substantially from country to
country. In order to market our products in other countries, we must obtain regulatory approvals and comply with extensive safety and
quality regulations in other countries. 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/European Economic Area (the “EU/EEA”), requires
a CE conformity mark in order to market medical devices. Many other countries, such as Australia, India, New Zealand, Pakistan and Sri
Lanka, accept CE or FDA clearance or approval, although others, such as Brazil, Canada and Japan require separate regulatory filings.
In the EU and the EEA, devices are required to comply with the essential requirements of the EU Medical Devices Directive.
Compliance with these requirements would entitle us to affix the CE conformity mark to our medical devices, without which they cannot
be commercialized in the EU and EEA. To demonstrate compliance with the essential requirements and obtain the right to affix the CE
conformity mark we must undergo a conformity assessment procedure, which varies according to the type of medical device and its
classification. Except for low risk medical devices (Class I), where the manufacturer can issue a CE Declaration of Conformity based on a
self-assessment of the conformity of its products with the essential requirements of the Medical Devices Directive, a conformity assessment
procedure requires the intervention of a Notified Body, which is an organization accredited at the European Commission to conduct
conformity assessments. The Notified Body would typically audit and examine the quality system for the manufacture, design and final
inspection of our devices before issuing a certification demonstrating compliance with the essential requirements. Based on this
certification we can draw up a CE Declaration of Conformity which allows us to affix the CE Mark to our products.
Further, the advertising and promotion of our products in the EU and the EEA is subject to the laws of individual EU and EEA
Member States implementing the EU Medical Devices Directive, Directive 2006/114/EC concerning misleading and comparative
advertising, and Directive 2005/29/EC on unfair commercial practices, as well as other EU and EEA Member State laws governing the
advertising and promotion of medical devices. These laws may limit or restrict the advertising and promotion of our products to the general
public and may impose limitations on our promotional activities with healthcare professionals.
Other Regulatory Matters
Manufacturing, sales, promotion and other activities following product approval are also subject to regulation by numerous
regulatory authorities in addition to the FDA, including, in the United States, the Centers for Medicare & Medicaid Services (“CMS”),
other divisions of the Department of Health and Human Services, the Department of Justice, the Consumer Product Safety Commission,
the Federal Trade Commission, the Occupational Safety & Health Administration, the Environmental Protection Agency, and state and
local governments. If products are made available to authorized users of the Federal Supply Schedule of the General Services
Administration, additional laws and requirements apply. Manufacturing, sales, promotion and other activities are also potentially subject to
federal and state consumer protection and unfair completion laws.
The distribution of medical device products is subject to additional requirements and regulations, including extensive record-
keeping, licensing, storage and security requirements intended to prevent the unauthorized sale of medical device products.
Third-Party Payor Coverage and Reimbursement
Our Pure-Vu system and the procedure to cleanse the colon in preparation for colonoscopy are not currently reimbursable through
private or governmental third-party payors in any country. Significant uncertainty exists as to whether coverage and reimbursement of the
Pure-Vu system will develop; but we intend to seek reimbursement through private or governmental third-party payors in the future. In both
the United States and foreign markets, our ability to commercialize the Pure-Vu system successfully, and to attract commercialization
partners for the Pure-Vu system, depends in part on the availability of adequate financial coverage and reimbursement from third-party
payors, including, in the United States, governmental payors such as the Medicare and Medicaid programs, managed care organizations,
and private health insurers. Medicare is a federally funded program managed by the CMS, through local contractors that administer
coverage and reimbursement for certain healthcare items and services furnished to the elderly and disabled. Medicaid is an insurance
program for certain categories of patients whose income and assets fall below state defined levels and who are otherwise uninsured that is
both federally and state funded and managed by each state. The federal government sets general guidelines for Medicaid and each state
creates specific regulations or other guidelines that govern its individual program. Each payor, whether governmental or private, has its own
process and standards for determining whether it will cover and reimburse a procedure or particular product. Private payors often rely on
the lead of the governmental payors in rendering coverage and reimbursement determinations. Therefore, achieving favorable CMS
coverage and reimbursement is usually a significant gating issue for successful introduction of a new product. The competitive position of
the Pure-Vu system will depend, in part, upon the extent of coverage and adequate reimbursement for such product and for the procedures
in which such product is used. Prices at which we or our customers seek reimbursement for the Pure-Vu system can be subject to challenge,
reduction or denial by the government and other payors.
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In the event we do receive approval for third-party or government reimbursement for our product, the marketability of such
product may suffer if the government and commercial third-party payors fail to provide adequate coverage and reimbursement. An
emphasis on cost containment measures in the United States has increased and we expect it will continue. Coverage policies and third-party
reimbursement rates may change at any time. Even if favorable coverage and reimbursement status is attained for one or more products for
which we receive regulatory approval, less favorable coverage policies and reimbursement rates may be implemented in the future.
State and federal healthcare reform measures may be adopted in the future, any of which may result in additional reductions in
Medicare and other healthcare funding and otherwise affect the prices we may obtain for any of our product candidates for which we may
obtain regulatory approval or the frequency with which any such product candidate is prescribed or used.
In addition, in some foreign countries, the proposed pricing for a medical device must be approved before it may be lawfully
marketed. The requirements governing medical device pricing vary widely from country to country. For example, the European Union
provides options for its member states to restrict the range of medicinal products for which their national health insurance systems provide
reimbursement and to control the prices of medicinal products for human use. Reference pricing used by various European Union member
states and parallel distribution, or arbitrage between low-priced and high-priced member states, can further reduce prices. A member state
may approve a specific price for the medicinal product or it may instead adopt a system of direct or indirect controls on the profitability of
the company placing the medicinal product on the market. In some countries, we may be required to conduct a clinical study or other
studies that compare the cost-effectiveness of any of our product candidates to other available therapies in order to obtain or maintain
reimbursement or pricing approval. Historically, products launched in the European Union do not follow price structures of the United
States and generally tend to be significantly lower. Publication of discounts by third-party payors or authorities may lead to further pressure
on the prices or reimbursement levels within the country of publication and other countries. If pricing is set at unsatisfactory levels or if
reimbursement of our products is unavailable or limited in scope or amount, our revenues from sales by us or our strategic partners and the
potential profitability of any of our product candidates in those countries would be negatively affected.
Other Healthcare Laws and Compliance Requirements
Healthcare providers, physicians, and third party payors will play a primary role in the recommendation and use of any products
for which we obtain marketing approval. Our future arrangements with third party payors, healthcare providers and physicians may expose
us to broadly applicable fraud and abuse and other healthcare laws and regulations that may constrain the business or financial
arrangements and relationships through which we market, sell and distribute any device for which we obtain marketing approval. In the
United States, our activities are potentially subject to regulation by various federal, state and local authorities in addition to the FDA,
including the CMS, other divisions of the United States Department of Health and Human Services (e.g., the Office of Inspector General),
the United States Department of Justice and individual United States Attorney offices within the Department of Justice, and state and local
governments. The applicable laws and regulations include the federal Anti-Kickback Statute, the False Claims Act, and the Health
Insurance Portability and Accountability Act of 1996 (“HIPAA”).
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● The Anti-Kickback Statute (“AKS”) makes it illegal for any person, including a device manufacturer (or a party acting on its
behalf), to knowingly and willfully solicit, receive, offer or pay any remuneration, directly or indirectly, in cash or in kind, that is
intended to induce or reward referrals, including the purchase, recommendation, or order of a particular device, for which payment
may be made under a federal healthcare program, such as Medicare or Medicaid. Violations of this law are punishable by up to five
years in prison, criminal fines, administrative civil money penalties and exclusion from participation in federal healthcare programs.
In addition, a person or entity does not need to have actual knowledge of the statute or specific intent to violate it.
● The Federal False Claims Act imposes civil penalties, including through civil whistleblower or qui tam actions, against individuals
or entities (including manufacturers) for, among other things, knowingly presenting, or causing to be presented false or fraudulent
claims for payment by a federal healthcare program or making a false statement or record material to payment of a false claim or
avoiding, decreasing or concealing an obligation to pay money to the federal government. Penalties for a False Claims Act violation
include three times the actual damages sustained by the government, plus mandatory civil penalties of between $10,957 and $21,916
for each separate false claim and the potential for exclusion from participation in federal healthcare programs. Conduct that violates
the False Claims Act also may implicate various federal criminal statutes. The government may deem manufacturers to have
“caused” the submission of false or fraudulent claims by, for example, providing inaccurate billing or coding information to
customers or promoting a product off-label. Claims which include items or services resulting from a violation of the federal Anti-
Kickback Statute also are deemed false or fraudulent claims for purposes of the False Claims Act. Our future marketing and
activities relating to the reporting of wholesaler or estimated retail prices for our products and other information affecting federal,
state and third-party reimbursement for our products, and the sale and marketing of our product and any future product candidates,
are subject to scrutiny under this law.
● HIPAA which imposes criminal and civil liability for executing a scheme to defraud any healthcare benefit program or making
false statements relating to healthcare matters and, as amended by the Health Information Technology for Economic and Clinical
Health Act (“HITECH”) and its implementing regulations, also imposes certain obligations, including contractual terms and
technical safeguards, with respect to maintaining the privacy, security and transmission of individually identifiable health
information.
● HITECH also created new tiers of civil monetary penalties, amended HIPAA to make civil and criminal penalties directly
applicable to business associates, and gave state attorneys general new authority to file civil actions for damages or injunctions in
federal courts to enforce the federal HIPAA laws and seek attorneys’ fees and costs associated with pursuing federal civil actions.
● The Federal Physician Payments Sunshine Act within the Affordable Care Act, and its implementing regulations, which requires
that certain manufacturers of devices and medical supplies for which payment is available under Medicare, Medicaid or the
Children’s Health Insurance Program (with certain exceptions) to report information related to certain payments or other transfers
of value made or distributed to physicians and teaching hospitals, or to entities or individuals at the request of, or designated on
behalf of, physicians and teaching hospitals and to report annually certain ownership and investment interests held by physicians
and their immediate family members; and
● Analogous state and foreign fraud and abuse laws and regulations, such as anti-kickback and false claims laws, which may apply to
sales and marketing arrangements and claims involving healthcare items or services reimbursed by any third party payor, including
commercial insurers, and state laws governing the privacy and security of health information in certain circumstances, many of
which differ from each other in significant ways and often are not preempted by federal laws, thus complicating compliance
efforts. Such laws are generally broad and are enforced by various state agencies and private actions.
In addition, we may be subject to data privacy and security regulation by both the federal government and the states in which we
conduct our business. HIPAA imposes certain requirements relating to the privacy, security and transmission of individually identifiable
health information, which are applicable to “business associates”—independent contractors or agents of HIPAA covered entities that
receive or obtain protected health information in connection with providing a service on behalf of a covered entity.
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Current and future legislation
In the United States and foreign jurisdictions, there have been a number of legislative and regulatory changes and proposed
changes regarding the healthcare system that could prevent or delay marketing approval of our product candidates, restrict or regulate post-
approval activities and affect our ability to profitably sell any product candidates for which we obtain marketing approval. We expect that
current laws, as well as other healthcare reform measures that may be adopted in the future, may result in more rigorous coverage criteria
and in additional downward pressure on the price that we, or any collaborators, may receive for any approved products.
With the new Administration and Congress, there will likely be additional administrative or legislative changes, including
modification, repeal, or replacement of all, or certain provisions of, the Affordable Care Act, which may impact reimbursement for medical
devices. On January 20, 2017, President Trump signed an Executive Order directing federal agencies with authorities and responsibilities
under the Affordable Care Act to waive, defer, grant exemptions from, or delay the implementation of any provision of the Affordable Care
Act that would impose a fiscal or regulatory burden on states, individuals, healthcare providers, health insurers, or manufacturers of
pharmaceuticals or medical devices. Congress has attempted several times to repeal and replace the Affordable Care Act, yet to date no
complete repeal has occurred. On October 13, 2017, President Trump signed an Executive Order terminating the cost-sharing subsidies that
reimburse insurers under the Affordable Care Act. Several state Attorneys General filed suit to stop the administration from terminating the
subsidies, but their request for a restraining order was denied by a federal judge in California on October 25, 2017. Litigation and
legislation over the Affordable Care Act are likely to continue, with unpredictable and uncertain results.
Additional laws and regulations governing international operations
If we further expand our operations outside of the United States, we must dedicate additional resources to comply with numerous
laws and regulations in each jurisdiction in which we plan to operate. The Foreign Corrupt Practices Act, or FCPA, prohibits any U.S.
individual or business from paying, offering, authorizing payment or offering of anything of value, directly or indirectly, to any foreign
official, political party or candidate for the purpose of influencing any act or decision of the foreign entity in order to assist the individual
or business in obtaining or retaining business. The FCPA also obligates companies whose securities are listed in the United States to
comply with certain accounting provisions requiring the company to maintain books and records that accurately and fairly reflect all
transactions of the corporation, including international subsidiaries, and to devise and maintain an adequate system of internal accounting
controls for international operations.
Compliance with the FCPA is expensive and difficult, particularly in countries in which corruption is a recognized problem. In
addition, the FCPA presents particular challenges in the pharmaceutical industry, because, in many countries, hospitals are operated by the
government, and doctors and other hospital employees are considered foreign officials. Certain payments to hospitals in connection with
clinical trials and other work have been deemed to be improper payments to government officials and have led to FCPA enforcement
actions.
Various laws, regulations and executive orders also restrict the use and dissemination outside of the United States, or the sharing
with certain non-U.S. nationals, of information classified for national security purposes, as well as certain products and technical data
relating to those products. If we expand our presence outside of the United States, it will require us to dedicate additional resources to
comply with these laws, and these laws may preclude us from developing, manufacturing, or selling certain products and product
candidates outside of the United States, which could limit our growth potential and increase our development costs.
The failure to comply with laws governing international business practices may result in substantial civil and criminal penalties
and suspension or debarment from government contracting. The Securities and Exchange Commission, or SEC, also may suspend or bar
issuers from trading securities on U.S. exchanges for violations of the FCPA’s accounting provisions.
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Post-Marketing Regulations
Following clearance or approval of a new product, a company and the product are subject to continuing regulation by the FDA and
other federal and state regulatory authorities, including, among other things, monitoring and recordkeeping activities, reporting to
applicable regulatory authorities of adverse experiences with the product, providing the regulatory authorities with updated safety and
efficacy information, product sampling and distribution requirements, and complying with promotion and advertising requirements, which
include, among others, standards for direct-to-consumer advertising, restrictions on promoting for uses or in patient populations not
described in the product’s approved labeling (known as “off-label use”), limitations on industry-sponsored scientific and educational
activities, and requirements for promotional activities involving the internet. Although physicians may prescribe legally available products
for off-label uses, manufacturers may not market or promote such off-label uses. Modifications or enhancements to the products or labeling
or changes of site of manufacture are often subject to the approval of the FDA and other regulators, which may or may not be received or
may result in a lengthy review process.
Implications of Being an Emerging Growth Company
We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”), and, for
as long as we continue to be an “emerging growth company,” we may choose to take advantage of exemptions from various reporting
requirements applicable to other public companies but not to “emerging growth companies,” including, but not limited to, not being
required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, as amended, (the
“Sarbanes-Oxley Act”), reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and
exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any
golden parachute payments not previously approved. We could be an “emerging growth company” for up to five years, or until the earliest
of (i) the last day of the first fiscal year in which our annual gross revenues exceed $1.07 billion, (ii) the date that we become a “large
accelerated filer” as defined in Rule 12b-2 under the Exchange Act, which would occur if the market value of our Common Stock that is
held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter, or (iii) the date
on which we have issued more than $1 billion in non-convertible debt during the preceding three-year period. We intend to take advantage
of these reporting exemptions described above until we are no longer an “emerging growth company.” Under the JOBS Act, “emerging
growth companies” can also delay adopting new or revised accounting standards until such time as those standards apply to private
companies. We have irrevocably elected not to avail ourselves of this exemption from new or revised accounting standards and, therefore,
we will be subject to the same new or revised accounting standards as other public companies that are not “emerging growth companies.”
Corporate and Available Information
We are a Delaware corporation formed in September 2016 under the name Eight-Ten Merger Corp. In November 2016, we
changed our name to Motus GI Holdings, Inc. We are the parent company of Motus GI Medical Technologies Ltd., an Israeli corporation,
and Motus GI, Inc. a Delaware corporation.
Our principal executive offices are located at 1301 East Broward Boulevard, 3rd Floor, Ft. Lauderdale, FL 33301. Our web
address is www.motusgi.com. Our website and the information contained on, or that can be accessed through, our website will not be
deemed to be incorporated by reference into this Annual Report on Form 10-K or any other report we file with or furnish to the SEC.
We will make available on our website, free of charge, our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q,
Current Reports on Form 8-K and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange
Act, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. Our SEC reports can be
accessed through the Investors section of our internet website. Further, a copy of this Annual Report on Form 10-K is located at the SEC’s
Public Reference Rooms at 100 F Street, N.E., Washington, D. C. 20549. Information on the operation of the Public Reference Room can
be obtained by calling the SEC at 1-800-SEC-0330. The SEC maintains a website that contains reports, proxy and information statements
and other information regarding our filings at http://www.sec.gov.
“Motus GI,” “Pure-Vu,” and our other registered or common law trademarks, service marks or trade names appearing herein are
the property of Motus GI Holdings, Inc. Some trademarks referred to in this report are referred to without the ® and ™ symbols, but such
references should not be construed as any indicator that their respective owners will not assert, to the fullest extent under applicable law,
their rights thereto. We do not intend the use or display of other companies’ trademarks and trade names to imply a relationship with, or
endorsement or sponsorship of us by, any other companies.
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ITEM 1A. RISK FACTORS
Risks Related to Our Financial Position and Need for Capital
There is substantial doubt about our ability to continue as a going concern, which will affect our ability to obtain future financing and
may require us to curtail our operations.
Our financial statements as of December 31, 2017 were prepared under the assumption that we will continue as a going concern.
The independent registered public accounting firm that audited our 2017 financial statements, in their report, included an explanatory
paragraph referring to our recurring losses since inception and expressing substantial doubt in our ability to continue as a going concern.
Our financial statements do not include any adjustments that might result from the outcome of this uncertainty. Our ability to continue as a
going concern depends on our ability to obtain additional equity or debt financing, attain further operating efficiencies, reduce expenditures,
and, ultimately, to generate revenue. We cannot assure you, however, that we will be able to achieve any of the foregoing.
We have incurred operating losses in each year since our inception and expect to continue to incur substantial losses for the foreseeable
future. We may never become profitable or, if achieved, be able to sustain profitability.
We expect to incur substantial expenses without corresponding revenues unless and until we expand our commercialization
efforts. To date, as part of our limited launch, we have generated limited revenue from our Pure-Vu system, but we do not expect to
generate significant revenue from product sales unless and until we expand our commercialization efforts, which we expect will take a
number of years and is subject to significant uncertainty. We expect to incur significant marketing expenses in the United States, Europe
and elsewhere, and there can be no assurance that we will generate significant revenues or ever achieve profitability. Our net loss for the
years ended December 31, 2017 and December 31, 2016 was approximately $13.2 million and $8.0 million, respectively. As of December
31, 2017, we had an accumulated deficit of approximately $39.1 million.
Our cash or cash equivalents will only fund our operations for a limited time and we will need to raise additional capital to support our
development and commercialization efforts.
We are currently operating at a loss and expect our operating costs will increase significantly as we incur costs associated with
commercialization activities related to our Pure-Vu system. Our independent registered public accounting firm has expressed substantial
doubt about our ability to continue as a going concern in their report on our financial statements. At December 31, 2017, we had a cash and
cash equivalents balance of approximately $6.9 million. Based on our current business plan, we believe the net proceeds of approximately
$15.2 million from our IPO completed in February 2018, and additional net proceeds of approximately $250,000 from the Partial IPO Over-
Allotment Exercise completed in March 2018, together with our cash and cash equivalents balance as of December 31, 2017, will be
sufficient to meet our anticipated cash requirements through approximately the second quarter of 2019.
If our available cash balances are insufficient to satisfy our liquidity requirements, including due to risks described herein, we may
seek to raise additional capital through equity offerings, debt financings, collaborations or licensing arrangements. We will need to raise
additional capital, and we may also consider raising additional capital in the future to expand our business, to pursue strategic investments,
to take advantage of financing opportunities, or for other reasons, including to:
● fund development and efforts of any future products;
● acquire, license or invest in technologies;
● acquire or invest in complementary businesses or assets; and
● finance capital expenditures and general and administrative expenses.
Our present and future funding requirements will depend on many factors, including:
’
● our revenue growth rate and ability to generate cash flows from operating activities;
● our sales and marketing and research and development activities;
● costs of and potential delays in product development;
● changes in regulatory oversight applicable to our products; and
● costs related to international expansion.
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We do not currently have any arrangements or credit facilities in place as a source of funds, and there can be no assurance that we
will be able to raise sufficient additional capital on acceptable terms, or at all, and if we are not successful in raising additional capital, we
may not be able to continue as a going concern. We may seek additional capital through a combination of private and public equity
offerings, debt financings and strategic collaborations. Debt financing, if obtained, may involve agreements that include covenants limiting
or restricting our ability to take specific actions, such as incurring additional debt, that could increase our expenses and require that our
assets secure such debt. Equity financing, if obtained, could result in dilution to our then existing stockholders and/or require such
stockholders to waive certain rights and preferences. If such financing is not available on satisfactory terms, or is not available at all, we
may be required to delay, scale back or eliminate the development of business opportunities and our operations and financial condition may
be materially adversely affected. We can provide no assurances that any additional sources of financing will be available to us on favorable
terms, if at all. In addition, if we are unable to secure sufficient capital to fund our operations, we might have to enter into strategic
collaborations that could require us to share commercial rights to the Pure-Vu system with third parties in ways that we currently do not
intend or on terms that may not be favorable to us. If we choose to pursue additional indications and/or geographies for the Pure-Vu system
or otherwise expand more rapidly than we presently anticipate, we may also need to raise additional capital sooner than expected.
Future capital raises may dilute our existing stockholders’ ownership and/or have other adverse effects on our operations.
If we raise additional capital by issuing equity securities, our existing stockholders’ percentage ownership will be reduced and
these stockholders may experience substantial dilution. If we raise additional funds by issuing debt securities, these debt securities would
have rights senior to those of our Common Stock and the terms of the debt securities issued could impose significant restrictions on our
operations, including liens on our assets. If we raise additional funds through collaborations and licensing arrangements, we may be
required to relinquish some rights to our technologies or products, or to grant licenses on terms that are not favorable to us.
Our ability to use our net operating loss carryforwards and certain other tax attributes may be limited.
As a result of the Share Exchange Transaction, our ability to utilize our federal net operating loss, carryforwards and federal tax
credit may be limited under Sections 382 of the Internal Revenue Code of 1986, as amended (the “Code”). The limitations apply if an
“ownership change,” as defined by Section 382, occurs. Generally, an ownership change occurs if the percentage of the value of the stock
that is owned by one or more direct or indirect “five percent shareholders” increases by more than 50 percentage points over their lowest
ownership percentage at any time during the applicable testing period (typically three years). In addition, future changes in our stock
ownership, which may be outside of our control, may trigger an “ownership change” and, consequently, Section 382 limitations. As a result,
if we earn net taxable income, our ability to use our pre-change net operating loss carryforwards and other tax attributes to offset United
States federal taxable income may be subject to limitations, which could potentially result in increased future tax liability to us.
U.S. federal income tax reform could adversely affect us.
On December 22, 2017, President Trump signed into law the statute originally named the “Tax Cuts and Jobs Act” (the “2017 Tax
Act”) which enacts a broad range of changes to the Code. The 2017 Tax Act, among other things, includes changes to U.S. federal tax
rates, imposes significant additional limitations on the deductibility of interest and net operating losses, allows for the expensing of certain
capital expenditures, and puts into effect a number of changes impacting operations outside of the United States including, but not limited
to, the imposition of a one-time tax on accumulated post-1986 deferred foreign income that has not previously been subject to tax, and
modifications to the treatment of certain intercompany transactions. Our net deferred tax assets and liabilities will be revalued at the newly
enacted U.S. corporate rate, and the impact will be recognized in our tax expense in 2017, the year of enactment. We continue to examine
the impact this tax legislation may have on our business. The impact of this tax legislation on holders of our Common Stock is uncertain
and could be adverse. We urge our stockholders to consult with their legal and tax advisors with respect to such legislation and the potential
tax consequences of investing in our Common Stock.
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Risks Related to Government Regulation and Third-Party Reimbursement
We are subject to complex and costly regulation.
Our product, and any products we may develop in the future, are subject to regulation by the FDA and other national,
supranational, federal and state governmental authorities. It can be costly and time-consuming to obtain regulatory clearance and/or
approval to market a new or modified medical device or other product. Clearance and/or approval might not be granted on a timely basis, if
at all. Regulations are subject to change as a result of legislative, administrative or judicial action, which may further increase our costs or
reduce sales. Unless an exception applies, the FDA requires that the manufacturer of a new medical device or a new indication for use of,
or other significant change in, an existing medical device obtain either FDA 510(k) pre-market clearance or pre-market approval before that
product can be marketed or sold in the United States. Modifications or enhancements to a product that could significantly affect its safety
or effectiveness, or that would constitute a major change in the intended use of the device, technology, materials, labeling, packaging, or
manufacturing process may also require a new 510(k) clearance or possibly premarket approval. The FDA has indicated that it intends to
continue to enhance its pre-market requirements for medical devices. Although we cannot predict with certainty the future impact of these
initiatives, it appears that the time and cost to get medical devices to market could increase significantly.
In addition, we are subject to regulations that govern manufacturing practices, product labeling and advertising, and adverse-event
reporting that apply after we have obtained clearance or approval to sell a product. Our failure to maintain clearance for our Pure-Vu
system, to obtain clearance or approval for new or modified products, or to adhere to regulations for manufacturing, labeling, advertising or
adverse event reporting could adversely affect our results of operations and financial condition. Further, if we determine a product
manufactured or marketed by us does not meet our specifications, published standards or regulatory requirements, we may seek to correct
the product or withdraw the product from the market, which could have an adverse effect on our business. Many of our facilities and
procedures, and those of our suppliers are subject to ongoing oversight, including periodic inspection by governmental authorities.
Compliance with production, safety, quality control and quality assurance regulations can be costly and time-consuming.
The sales and marketing of medical devices is under increased scrutiny by the FDA and other enforcement bodies. If our sales and
marketing activities fail to comply with FDA regulations or guidelines, or other applicable laws, we may be subject to warnings or
enforcement actions from the FDA or other enforcement bodies.
We may be unable to obtain or maintain governmental approvals to market our Pure-Vu system outside the United States and the
European Union countries.
To be able to market and sell our Pure-Vu system in 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. Many non-European markets, including major markets in South America and Asia Pacific, have allowed for
expedited regulatory review and approval based on an existing CE Mark. We received CE Mark approval in Europe in February 2018, and
intend to target countries with a regulatory approval process with similar requirements to CE Mark. However, obtaining and maintaining
foreign regulatory approvals are complex and expensive and subject to delays, and management cannot be certain that we will receive and
be able to maintain regulatory approvals in any foreign country in which we plan to market our Pure-Vu system or in the time frame in
which we expect.
Modifications to our product may require new 510(k) clearance or may require us to cease marketing or recall the modified products
until approvals are obtained.
After a device receives 510(k) clearance, any modification that could significantly affect its safety or effectiveness, or that would
constitute a major change in its intended use, will require a new clearance or possibly premarket approval. Changes that do not rise to this
level of significance, including certain manufacturing changes, may be made without FDA clearance upon documentation in the
manufacturer’s files of the determination of the significance of the change. The FDA requires each manufacturer to make this
determination initially, but the FDA can review any such decision and can disagree with the manufacturer’s determination. If the FDA
disagrees with any determination that we may make in the future and requires us to seek new 510(k) clearance for modifications to any
previously approved or cleared products for which we have concluded that new approvals are unnecessary, we may be required to cease
marketing or distribution of our products or to recall the modified product until we obtain approval, and we may be subject to significant
regulatory fines or penalties. We intend in the future to expand the indication for which the Pure-Vu system is cleared or approved to allow
us to actively promote the product and a less-prep regimen to patients. We plan to perform a clinical trial that should facilitate approval of
expanded labeling, however, if this trial is unsuccessful or the FDA denies our expanded labeling, our revenues will be adversely affected.
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In the European Union/European Economic Area (the “EU/EEA”), we will be required to inform the Notified Body that carried
out the conformity assessment of the medical devices we market or sell in the EEA of any planned changes to our quality system or changes
to our devices which could affect compliance with the essential requirements set forth in the EU Medical Devices Directive or the devices’
intended purpose. The Notified Body will then assess the changes and verify whether they affect the products’ conformity with the
essential requirements set forth in the EU Medical Devices Directive or the conditions for the use of the device. If the assessment is
favorable, the Notified Body will issue a new CE Certificate of Conformity or an addendum to the existing CE Certificate of Conformity
attesting compliance with the essential requirements set forth in the EU Medical Devices Directive. If it is not, we may not be able to
market and sell the product in the EEA.
If our product malfunctions, or causes or contributes to a death or a serious injury, we will be subject to medical device reporting
regulations, which can result in voluntary corrective actions or agency enforcement actions.
Under the FDA medical device reporting regulations, medical device manufacturers are required to report to the FDA information
that a device has or may have caused or contributed to a death or serious injury or has malfunctioned in a way that would likely cause or
contribute to death or serious injury if the malfunction of the device or one of our similar devices were to recur. If we fail to report these
events to the FDA within the required timeframes, or at all, the FDA could take enforcement action against us. Any such adverse event
involving our product also could result in future voluntary corrective actions, such as recalls or customer notifications, or agency action,
such as inspection or enforcement action. 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 harm our reputation
and financial results.
Our Pure-Vu system may in the future be subject to product recalls. A recall of our products, either voluntarily or at the direction of the
FDA or another governmental authority, including a third-country authority, or the discovery of serious safety issues with our products,
could have a significant adverse impact on us.
The FDA and similar foreign governmental authorities have the authority to require the recall of commercialized products in the
event of material deficiencies or defects in design or manufacture. In the case of the FDA, the authority to require a recall must be based on
an FDA finding that there is reasonable probability that the device would cause serious injury or death. In addition, foreign governmental
bodies have the authority to require the recall of our products in the event of material deficiencies or defects in design or manufacture.
Manufacturers may, under their own initiative, recall a product if any material deficiency in a device is found. The FDA requires that
certain classifications of recalls be reported to the FDA within ten working days after the recall is initiated. A government-mandated or
voluntary recall by us or a distributor could occur as a result of an unacceptable risk to health, component failures, malfunctions,
manufacturing errors, design or labeling defects or other deficiencies and issues. A recall of our products would divert managerial and
financial resources and have an adverse effect on our reputation, results of operations and financial condition, which could impair our
ability to produce our product in a cost-effective and timely manner in order to meet our customers’ demands. We may also be subject to
liability claims, 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. Companies are required to maintain certain records of recalls, even if they are not reportable to the FDA or another third-
country competent authority. We may initiate voluntary recalls that we determine do not require notification of the FDA or another third-
country competent authority. If the FDA disagrees with our determinations, they could require us to report those actions as recalls. A future
recall announcement could harm our reputation with customers and negatively affect our sales. In addition, the FDA could take
enforcement action for failing to report the recalls.
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We are also required to follow detailed recordkeeping requirements for all firm-initiated medical device corrections and removals.
In addition, in October 2014, the FDA issued guidance intended to assist the FDA and industry in distinguishing medical device recalls
from product enhancements. Per the guidance, if any change or group of changes to a device addresses a violation of the Federal Food,
Drug and Cosmetic Act (the “FDCA”), that change would generally constitute a medical device recall and require submission of a recall
report to the FDA.
Our Pure-Vu system is not currently reimbursable through private or governmental third-party payors, which could limit market
acceptance.
Our Pure-Vu system and the procedure to cleanse the colon in preparation for colonoscopy are not currently reimbursable through
private or governmental third-party payors in any country. We intend to seek reimbursement through private or governmental third-party
payors in the future, however coverage and reimbursement may not be available for any product that we commercialize and, even if
available, the level of reimbursement may not be satisfactory. The commercialization of our Pure-Vu system depends on prospective
patients’ ability to cover the costs of the procedure, and/or physician willingness to subsidize all or some of the costs of the procedure. We
believe that a substantial portion of individuals who are candidates for the use of the Pure-Vu system worldwide do not have the financial
means to cover its cost. Moreover, healthcare providers may be reluctant to make the initial investment in the system. A general regional or
worldwide economic downturn could negatively impact demand for our Pure-Vu system. In the event that medically eligible patients deem
the costs of our procedure to be prohibitively high or consider alternative treatment options to be more affordable, or healthcare providers
deem the cost of the system to be too high, our business, results of operations and financial condition would be negatively impacted.
If we or our sales personnel or distributors do not comply with fraud and abuse laws, including anti-kickback laws for any products
approved in the U.S., or with similar foreign laws where we market our products, we could face significant liability.
There are numerous federal and state laws pertaining to healthcare fraud and abuse, including anti-kickback laws, false claims, and
physician transparency laws. Our relationships with physicians and surgeons, hospitals and our independent distributors are subject to
scrutiny under these laws. Violations of these laws are punishable by criminal and civil sanctions, including significant fines, damages and
monetary penalties and in some instances, imprisonment and exclusion from participation in federal and state healthcare programs,
including the Medicare, Medicaid and Veterans Administration health programs.
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.
We may become liable for significant damages or be restricted from selling our products if we engage in inappropriate promotion of our
Pure-Vu system.
Our promotional materials and training methods for our Pure-Vu system must comply with FDA and other applicable laws and
regulations, including the prohibition of the promotion of the “off-label” use of our Pure-Vu system, including by using our Pure-Vu
system in a way not approved by the FDA. The Pure-Vu system is currently indicated to connect to standard colonoscopes to facilitate
intra-procedural cleaning of a poorly prepared colon by irrigating or cleaning the colon and evacuating the irrigated fluid, feces and other
bodily fluids and matter. We do not currently promote a particular prep regimen as this is left up to the discretion of the physician since our
current indication does not reference any preparation protocol. Healthcare providers may use our products off-label, as the FDA does not
restrict or regulate a physician’s choice of treatment within the practice of medicine. However, if the FDA determines that our promotional
materials, training or marketing efforts constitute promotion of an off-label use, it could request that we modify our training or promotional
materials or marketing efforts or subject us to regulatory or enforcement actions, including the issuance of an untitled letter, a warning
letter, injunction, seizure, civil fine and criminal penalties. It is also possible that other federal, state or foreign enforcement authorities
might take action if they consider our promotional or training materials to constitute promotion of an unapproved use, which could result in
significant fines or penalties. Although we do not intend to engage in any activities that may be considered off-label promotion of our
products, the FDA or another regulatory agency could disagree and conclude that we have engaged, directly or indirectly, in off-label
promotion. In addition, the off-label use of our products may increase the risk of product liability claims. Product liability claims are
expensive to defend and could result in substantial damage awards against us and harm our reputation.
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Our financial performance may be adversely affected by medical device tax provisions in the healthcare reform laws.
The Patient Protection and Affordable Care Act (the “Affordable Care Act”) imposes, among other things, an excise tax of 2.3%
on any entity that manufactures or imports medical devices offered for sale in the United States, although this tax has been suspended for
calendar years 2016, 2017, 2018 and 2019. It is unclear at this time if the moratorium will be further extended. We anticipate that primarily
all of our sales of our Pure-Vu system in the United States will be subject to this 2.3% excise tax after December 31, 2019. Additionally,
Congress could terminate the moratorium or further change the law related to the medical device tax in a manner that could adversely
affect us.
Risks Related to Our Business Operations
Our Pure-Vu system is currently our sole product and we are completely dependent on the successful marketing and sale of this
product. There is no assurance that we will be able to develop any additional products.
Our Pure-Vu system is currently our sole product and we are completely dependent on the success of this product. We may fail to
successfully commercialize our product. Successfully commercializing medical devices such as ours is a complex and uncertain process,
dependent on the efforts of management, distributors, outside consultants, physicians and general economic conditions, among other
factors. Any factors that adversely impact the commercialization of our Pure-Vu system, including, but not limited to, competition or
acceptance in the marketplace, will have a negative impact on our business, results of operations and financial condition. We cannot assure
you that we will be successful in developing or commercializing any potential enhancements to our Pure-Vu system or any other products.
Our inability to successfully commercialize our Pure-Vu system and/or successfully develop and commercialize additional products or any
enhancements to our Pure-Vu system which we may develop would have a material adverse effect on our business, results of operations
and financial condition.
We are a medical technology company with a limited operating history.
We are a medical technology company with a limited operating history. We received clearance from the FDA, and CE Mark
approval in Europe, for our Pure-Vu system and have recently initiated a limited pilot launch that will run through 2018. We plan to then
move into a full market launch during 2019. We expect that sales of our Pure-Vu system will account for substantially all of our revenue
for the foreseeable future. However, we have limited experience in selling our products and we may be unable to successfully
commercialize our Pure-Vu system for a number of reasons, including:
● market acceptance of our Pure-Vu system by physicians and patients will largely depend on our ability to demonstrate its
relative safety, efficacy, cost-effectiveness and ease of use;
● our inexperience in marketing, selling and distributing our products;
● we may not have adequate financial or other resources to successfully commercialize our Pure-Vu system;
● we may not be able to manufacture our Pure-Vu system in commercial quantities or at an acceptable cost;
● the uncertainties associated with establishing and qualifying a manufacturing facility;
● patients will not generally receive reimbursement from third-party payors for the use of our Pure-Vu system for colon
cleansing, which may reduce widespread use of our Pure-Vu system;
● the introduction and market acceptance of competing products and technologies; and
● rapid technological change may make our Pure-Vu system obsolete.
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Potential investors should carefully consider the risks and uncertainties that a company with a limited operating history will face.
In particular, potential investors should consider that we cannot assure you that we will be able to:
● successfully execute our current business plan for the commercialization of our Pure-Vu system, or that our business plan is
sound;
● successfully contract for and establish a commercial supply of our product;
● achieve market acceptance of our Pure-Vu system; and
● attract and retain an experienced management and advisory team.
If we cannot successfully execute any one of the foregoing, our business may not succeed and your investment will be adversely
affected.
The Pure-Vu system may not be accepted by physicians and patients.
Our Pure-Vu system for use during colonoscopy screenings to clean the colon through irrigation and evacuation of bowel contents
is a new technology and may be perceived as more invasive than current colonoscopy screening procedures, and patients may be unwilling
to undergo the procedure. Moreover, patients may be unwilling to depart from the current standard of care. In addition, physicians tend to
be slow to change their medical treatment practices because of perceived liability risks arising from the use of new products. Physicians
may not recommend or prescribe our Pure-Vu system until there is long-term clinical evidence to convince them to alter their existing
treatment methods, there are recommendations from prominent physicians that our Pure-Vu system is safe and efficient and reimbursement
or insurance coverage is available. We cannot predict when, if ever, physicians and patients may adopt the use of our Pure-Vu system. If
our Pure-Vu system does not achieve an adequate level of acceptance by patients, physicians and healthcare payors, we may not generate
significant product revenue and we may not become profitable.
If we are not able to successfully commercialize our Pure-Vu system, the revenue that we generate from its sales, if any, may be limited.
The commercial success of our Pure-Vu system will depend upon its acceptance by the medical community, including physicians,
patients and health care payors. The degree of market acceptance of our Pure-Vu system will depend on a number of factors, including:
● demonstration of clinical safety and efficacy;
● relative convenience, burden and ease of administration;
● the prevalence and severity of any adverse effects;
● the willingness of physicians to prescribe the Pure-Vu system and of the target patient population to try new procedures;
● efficacy of our Pure-Vu system compared to competing procedures;
● the introduction of any new products and procedures that may in the future become available for colonoscopy preparation may
be approved;
● pricing and cost-effectiveness;
● the inclusion or omission of our Pure-Vu system in applicable treatment guidelines;
● the effectiveness of our or any future collaborators’ sales and marketing strategies;
● limitations or warnings contained in FDA-approved labeling;
● our ability to obtain and maintain sufficient third-party coverage or reimbursement from government health care programs,
including Medicare and Medicaid, private health insurers and other third-party payors; and
● the willingness of patients to pay out-of-pocket in the absence of third-party coverage or reimbursement.
If our Pure-Vu system does not achieve an adequate level of acceptance by physicians, health care payors and patients, we may not
generate sufficient revenue and we may not be able to achieve or sustain profitability. Our efforts to educate the medical community and
third-party payors on the benefits of our Pure-Vu system may require significant resources and may never be successful.
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We currently have a limited sales and marketing organization. If we are unable to secure a sales and marketing partner and/or
establish satisfactory sales and marketing capabilities, we may not successfully commercialize our Pure-Vu system.
At present, we have limited sales or marketing personnel. In order to commercialize devices that are approved for commercial
sales, we must either collaborate with third parties that have such commercial infrastructure and/or continue to develop our own sales and
marketing infrastructure. If we are not successful entering into appropriate collaboration arrangements, recruiting sales and marketing
personnel or in building a sales and marketing infrastructure, we will have difficulty successfully commercializing our Pure-Vu system,
which would adversely affect our business, operating results and financial condition.
We may not be able to enter into collaboration agreements on terms acceptable to us or at all. In addition, even if we enter into
such relationships, we may have limited or no control over the sales, marketing and distribution activities of these third parties. Our future
revenues may depend heavily on the success of the efforts of these third parties. If we elect to establish a sales and marketing infrastructure
we may not realize a positive return on this investment. In addition, we will have to compete with established and well-funded medical
device companies to recruit, hire, train and retain sales and marketing personnel. Factors that may inhibit our efforts to commercialize our
Pure-Vu system without strategic partners or licensees include:
● our inability to recruit and retain adequate numbers of effective sales and marketing personnel;
● the inability of sales personnel to obtain access to or persuade adequate numbers of physicians to use our Pure-Vu system;
● the lack of complementary products to be offered by sales personnel, which may put us at a competitive disadvantage relative
to companies with more extensive product lines; and
● unforeseen costs and expenses associated with creating an independent sales and marketing organization.
Our Pure-Vu system may cause adverse side effects that prevent its widespread adoption or that may necessitate its withdrawal from the
market.
Our Pure-Vu system is currently believed to have the same side effects as a standard colonoscopy, such as inducing trauma to the
colon’s mucosa or, in rare cases, perforation of the colon. With more extensive use the Pure-Vu system may be found to cause additional
undesirable and unintended side effects or show a higher rate of side effects than a standard colonoscopy that may prevent or limit its
commercial adoption and use. Even upon receiving clearance from the FDA and other regulatory authorities, our products may later exhibit
adverse side effects that prevent widespread use or necessitate withdrawal from the market. The manifestation of such side effects could
cause our business to suffer.
If we do not convince gastroenterologists that our products are attractive alternatives to the currently marketed medical devices and
suitable for use in addressing bowel preparation or cleansing, we will not be commercially successful.
If we are not successful in convincing gastroenterologists of the merits of our products or educating them on the use of our
products, they may not use our products and we will be unable to fully commercialize our products or reach profitability.
Gastroenterologists may be hesitant to change their medical treatment practices for the following reasons, among others:
● lack of experience with our products and concerns regarding potential side effects;
● lack of clinical data currently available to support the safety and effectiveness of our products;
● lack or perceived lack of evidence supporting additional patient benefits;
● perceived liability risks generally associated with the use of new products and procedures; and
● the time commitment that may be required for training.
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In addition, we believe recommendations and support of our products by influential gastroenterologists are important for market
acceptance and adoption. If we do not receive support from such gastroenterologists or long term data does not show the benefits of using
our products, gastroenterologists may not use our products. In such circumstances, we may not be able to grow our revenues or achieve
profitability.
If we are unable to train gastroenterologists and their clinical staff on the safe and appropriate use of our products, we may be unable
to achieve revenue growth or profitability.
An important part of our sales process includes the ability to train gastroenterologists and their clinical staff on the safe and
appropriate use of our products. We have very limited experience in training and retaining qualified independent gastroenterologists to
perform the colon cleansing procedure using our Pure-Vu system. If we are unable to attract gastroenterologists to our training programs, it
may lead to a higher rate of injury, negative publicity and an increased risk of product liability, which would adversely affect our growth or
profitability.
There is a learning process involved in gastroenterologists and their clinical staff becoming proficient in the use of our products. It
is critical to the success of our commercialization efforts to train a sufficient number of gastroenterologists and to provide them with
adequate instruction in the use of our Pure-Vu system. This training process may take longer than expected and may therefore affect our
ability to increase sales. Following completion of training, we expect to rely on the trained gastroenterologists to advocate the benefits of
our products in the broader marketplace. Convincing gastroenterologists to dedicate the time and energy necessary for adequate training is
challenging, and we cannot assure you we will be successful in these efforts. If gastroenterologists and their clinical staff are not properly
trained, they may misuse or ineffectively use our products. Such uses may result in unsatisfactory patient outcomes, patient injury, negative
publicity or lawsuits against us, any of which would have a material adverse effect on our business, results of operations and financial
condition.
We may face competition from other medical device companies in the future and our operating results will suffer if we fail to compete
effectively.
The medical device industries are intensely competitive and subject to rapidly evolving technology and intense research and
development efforts. We have competitors in a number of jurisdictions that have substantially greater name recognition, commercial
infrastructures and financial, technical and personnel resources than we have. Established competitors may invest heavily to quickly
discover and develop novel devices or procedures that could make our Pure-Vu system obsolete or uneconomical. Any new product that
competes with a cleared medical device may need to demonstrate compelling advantages in efficacy, cost, convenience, tolerability and
safety to be commercially successful. Other competitive factors could force us to lower prices or could result in reduced sales, including
increased use of alternatives to colonoscopies such as capsule endoscopy systems, virtual colonoscopies using a CT scan, and other similar
screening tests for colon cancer. While none of these testing alternatives may ever fully replace the colonoscopy, over time, they may take
market share away from conventional colonoscopies for specific purposes and may lower the potential market opportunity for us. In
addition, new devices developed by others could emerge as competitors to our Pure-Vu system. If we are not able to compete effectively
against our current and future competitors, our business will not grow and our financial condition and operations will suffer.
Our products face the risk of technological obsolescence, which, if realized, could have a material adverse effect on our business.
The medical device industry is characterized by rapid and significant technological change. There can be no assurance that third
parties will not succeed in developing or marketing technologies and products that are more effective than ours or that would render our
technology and products obsolete or noncompetitive. Additionally, new, less invasive surgical procedures and medications could be
developed that replace or reduce the importance of current procedures that use or could use our products. Accordingly, our success will
depend in part upon our ability to respond quickly to medical and technological changes through the development of new products. Product
development involves a high degree of risk, and we cannot assure you that our new product development efforts will result in any
commercially successful products.
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If defects are discovered in our products, we may incur additional unforeseen costs, hospitals may not purchase our products and our
reputation may suffer.
Our products incorporate mechanical parts, any of which can contain errors or failures, especially when first introduced. In
addition, new products or enhancements may contain undetected errors or performance problems that, despite testing, are discovered only
after commercial shipment. Because our products are designed to be used to perform medical procedures, we expect that our customers will
have an increased sensitivity to such defects. We cannot provide any assurances that our products will not experience component aging,
errors or performance problems in the future. If we experience flaws or performance problems, any of the following could occur:
● delays in product shipments;
● loss of revenue;
● delay in market acceptance;
● diversion of our resources;
● damage to our reputation;
● product recalls;
● regulatory actions;
● increased service or warranty costs; or
● product liability claims.
Our future growth depends, in part, on our ability to penetrate foreign markets, where we would be subject to additional regulatory
burdens and other risks and uncertainties.
Our future profitability will depend, in part, on our ability to commercialize our Pure-Vu system in foreign markets for which we
intend to rely on collaborations with third parties. If we commercialize our Pure-Vu system in foreign markets, we would be subject to
additional risks and uncertainties, including:
● our customers’ ability to obtain reimbursement for our Pure-Vu system in foreign markets;
● our inability to directly control commercial activities because we are relying on third parties;
● the burden of complying with complex and changing foreign regulatory, tax, accounting and legal requirements;
● different medical practices and customs in foreign countries affecting acceptance in the marketplace;
● import or export licensing requirements;
● longer accounts receivable collection times;
● longer lead times for shipping;
● language barriers for technical training;
● reduced protection of intellectual property rights in some foreign countries;
● foreign currency exchange rate fluctuations; and
● the interpretation of contractual provisions governed by foreign laws in the event of a contract dispute.
Foreign sales of our Pure-Vu system could also be adversely affected by the imposition of governmental controls, political and
economic instability, trade restrictions and changes in tariffs, any of which may adversely affect our results of operations.
We are, and will be, completely dependent on third parties to manufacture our Pure-Vu system, and our commercialization of our Pure-
Vu system could be halted, delayed or made less profitable if those third parties fail to obtain or maintain manufacturing approval from
the FDA or comparable foreign regulatory authorities, fail to provide us with sufficient quantities of our Pure-Vu system device
components or fail to do so at acceptable quality levels or prices.
We do not currently have, nor do we plan to acquire, the capability or infrastructure to manufacture our Pure-Vu system, as well as
the other related device components for high volume commercial purposes. We do have capability to produce limited units for use in our
clinical trials, if required. As a result, we are obligated to rely on contract manufacturers for the commercial supply of our product. We
currently rely on two manufacturers, however we anticipate engaging additional manufacturers for the production of the components of our
Pure-Vu system as we expand our commercialization efforts.
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The facilities used by our contract manufacturers to manufacture the Pure-Vu system must be compliant with FDA Quality System
Regulation requirements and registered with the FDA. We do not control the manufacturing process of, and are completely dependent on,
our contract manufacturing partners for compliance with current Good Manufacturing Practices (“cGMPs”) for manufacture of medical
devices, as issued in the Quality System Regulation (21 CFR Part 820). These cGMPs regulations cover all aspects of the manufacturing,
testing, quality control and record keeping relating to the Pure-Vu system. If our contract manufacturers cannot successfully manufacture
products that conform to our specifications and the strict regulatory requirements of the FDA or others, they will not be able to secure
and/or maintain regulatory approval for their manufacturing facilities. If the FDA or a comparable foreign regulatory authority does not
approve these facilities for the manufacture of our products or if it withdraws any such approval in the future, we may need to find
alternative manufacturing facilities, which would significantly impact our ability to maintain regulatory approval for or market the Pure-Vu
system.
Our contract manufacturers are subject to ongoing periodic unannounced inspections by the FDA and corresponding state and
foreign agencies for compliance with cGMPs and similar regulatory requirements. We will not have control over our contract
manufacturers’ compliance with these regulations and standards. Failure by any of our contract manufacturers to comply with applicable
regulations could result in sanctions being imposed on us, including fines, injunctions, civil penalties, failure to market the Pure-Vu system,
delays, suspensions or withdrawals of approvals, operating restrictions and criminal prosecutions, any of which could significantly and
adversely affect our business. In addition, we will not have control over the ability of our contract manufacturers to maintain adequate
quality control, quality assurance and qualified personnel. Failure by our contract manufacturers to comply with or maintain any of these
standards could adversely affect our ability to maintain regulatory approval for or market our Pure-Vu system.
If, for any reason, these third parties are unable or unwilling to perform, we may not be able to terminate our agreements with
them, and we may not be able to locate alternative manufacturers or enter into favorable agreements with them and we cannot be certain
that any such third parties will have the manufacturing capacity to meet future requirements. If these manufacturers, or any alternate
manufacturers, experience any significant difficulties in their respective manufacturing processes for our product or should cease doing
business with us, we could experience significant interruptions in supply or may not be able to create or maintain a commercial supply.
Were we to encounter manufacturing issues, our ability to produce sufficient commercial supply might be negatively affected. Our inability
to coordinate the efforts of our third party manufacturing partners or the lack of capacity available at our third party manufacturing
partners, could impair our ability to supply our Pure-Vu system at required levels. If we face these or other difficulties with our
manufacturing partners we could experience significant interruptions in the supply of our products if we decided to transfer the
manufacture to one or more alternative manufacturers in an effort to deal with the difficulties.
Any manufacturing problem or the loss of a contract manufacturer could be disruptive to our operations and result in lost sales.
Any reliance on suppliers may involve several risks, including a potential inability to obtain critical components and reduced control over
production costs, delivery schedules, reliability and quality. Any unanticipated disruption to a future contract manufacturer caused by
problems at suppliers could delay shipment of our Pure-Vu system, increase our cost of goods sold and result in lost sales.
The manufacture of our Pure-Vu system, and the technology developed thereunder, is subject to certain Israeli government regulations
which may impair our ability to outsource or transfer development or manufacturing activities with respect to any product or
technology outside of Israel.
We have received, and may receive in the future, grants from the Government of the State of Israel through the IIA for the
financing of a portion of our research and development expenditures pursuant to the Research Law, and related regulations.
The terms of the Israeli government participation also require that products developed with IIA grants be manufactured in Israel
and that the technology developed thereunder may not be transferred outside of Israel (including by way of certain licenses), unless prior
approval is received from the IIA, which we intend to apply for but may not be granted. Even if such approval is granted, the transfer
outside of Israel of manufacturing which is connected with the IIA-funded know-how may result in increased royalties (up to three times
the aggregate amount of the IIA grants plus interest thereon), as well as in a higher royalty repayment rate. In addition, the transfer outside
of Israel of IIA-funded know-how may trigger additional payments to the IIA (up to six times the aggregate amount of the IIA grants plus
interest thereon). Even following the full repayment of any IIA grants, we must nevertheless continue to comply with the requirements of
the Research Law. The foregoing restrictions and requirements for payment may impair our ability to sell our technology assets outside of
Israel or to outsource or transfer development or manufacturing activities with respect to any IIA-funded product or technology outside of
Israel.
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If we fail to comply with any of the conditions and restrictions imposed by the Research Law, or by the specific terms under which
we received the grants, we may be required to refund any grants previously received together with interest and penalties, and, in certain
circumstances, may be subject to criminal charges.
For additional information, see “Part I—Item 1A—Risk Factors—Risks Related to Our Operations in Israel.”
Risks Relating to Our Intellectual Property Rights
We may be unable to protect our intellectual property rights or may infringe on the intellectual property rights of others.
We rely on a combination of patents, trademarks, copyrights, trade secrets and nondisclosure agreements to protect our proprietary
intellectual property. Our efforts to protect our intellectual property and proprietary rights may not be sufficient. We cannot be sure that our
pending patent applications will result in the issuance of patents to us, that patents issued to or licensed by us in the past or in the future
will not be challenged or circumvented by competitors or that these patents will remain valid or sufficiently broad to preclude our
competitors from introducing technologies similar to those covered by our patents and patent applications. In addition, our ability to enforce
and protect our intellectual property rights may be limited in certain countries outside the United States, which could make it easier for
competitors to capture market position in such countries by utilizing technologies that are similar to those developed or licensed by us.
Competitors also may harm our sales by designing products that mirror the capabilities of our products or technology without
infringing our intellectual property rights. If we do not obtain sufficient protection for our intellectual property, or if we are unable to
effectively enforce our intellectual property rights, our competitiveness could be impaired, which would limit our growth and future
revenue.
We may in the future be a party to patent litigation and administrative proceedings that could be costly and could interfere with our
ability to sell our Pure-Vu system.
Litigation related to infringement and other intellectual property claims, with or without merit, is unpredictable, can be expensive
and time consuming and can divert management’s attention from our core business. If we lose this kind of litigation, a court could require
us to pay substantial damages, and prohibit us from using technologies essential to our Pure-Vu system, any of which would have a material
adverse effect on our business, results of operations and financial condition. If relevant patents are upheld as valid and enforceable and we
are found to infringe, we could be prevented from selling our Pure-Vu system unless we can obtain a license to use technology or ideas
covered by such patents or are able to redesign our Pure-Vu system to avoid infringement. We do not know whether any necessary licenses
would be available to us on satisfactory terms, if at all, or whether we could redesign our Pure-Vu system or processes to avoid
infringement.
Competing products may also appear in other countries in which our patent coverage might not exist or be as strong. If we lose a
foreign patent lawsuit, we could be prevented from marketing our Pure-Vu system in one or more foreign countries.
We may be subject to claims that we have wrongfully hired an employee from a competitor or that we or our employees have wrongfully
used or disclosed alleged confidential information or trade secrets of their former employers.
As is commonplace in our industry, we employ and plan to employ individuals who were previously employed at other medical
device companies, including our competitors or potential competitors. Although no claims against us are currently pending, we may be
subject in the future to claims that our employees or prospective employees are subject to a continuing obligation to their former employers
(such as non-competition or non-solicitation obligations) or claims that our employees or we have inadvertently or otherwise used or
disclosed trade secrets or other proprietary information of their former employers. Litigation may be necessary to defend against these
claims. Even if we are successful in defending against these claims, litigation could result in substantial costs and be a distraction to
management.
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General Company-Related Risks
We will need to grow the size of our organization, and we may experience difficulties in managing this growth.
As of December 31, 2017, we had 39 full time employees. As our marketing and commercialization plans and strategies develop,
we will need to expand the size of our employee and consultant base for managerial, operational, sales, marketing, financial and other
resources. Future growth would impose significant added responsibilities on members of management, including the need to identify,
recruit, maintain, motivate and integrate additional employees. In addition, our management may have to divert a disproportionate amount
of its attention away from our day-to-day activities and devote a substantial amount of time to managing these growth activities. Our future
financial performance and our ability to commercialize the Pure-Vu system and any other future product candidates and our ability to
compete effectively will depend, in part, on our ability to effectively manage our future growth.
Our success will depend in part on our ability to manage our operations as we advance our product candidates through clinical
trials and to expand our development or regulatory capabilities or contract with third parties to provide these capabilities for us. Failure to
achieve any of these goals could have a material adverse effect on our business, financial condition or results of operations.
If we are not successful in attracting and retaining highly qualified personnel, we may not be able to successfully implement our
business strategy. In addition, the loss of the services of certain key employees would adversely impact our business prospects.
We depend on key members of our management team. The loss of the services of Mark Pomeranz, our Chief Executive Officer,
Andrew Taylor, our Chief Financial Officer or any member of our senior management team, could harm our ability to execute our
commercial strategy for our Pure-Vu system and the strategic objectives for our company. In connection with the Share Exchange
Transaction, we entered into an employment agreement with our Chief Executive Officer, but this agreement is terminable by Mr.
Pomeranz on short or no notice at any time without penalty. We also entered into an employment agreement with our Chief Financial
Officer, and this agreement is also terminable by Mr. Taylor on short or no notice at any time without penalty. In addition, we do not
maintain, and have no current intention of obtaining, “key man” life insurance on any member of our management team.
Recruiting and retaining qualified scientific and commercial personnel, including sales and marketing executives and field
personnel, is also critical to our success. We may not be able to attract and retain these personnel on acceptable terms given the competition
among numerous medical device and pharmaceutical companies for similar personnel and based on our company profile. We also
experience competition for the hiring of scientific personnel from universities and research institutions. If we fail to recruit and then retain
these personnel, we may not be able to effectively execute our commercial strategy for the Pure-Vu system.
If product liability lawsuits are brought against us, we may incur substantial liabilities and may be required to limit commercialization
of the Pure-Vu system.
We are, and may be in the future, subject to product liability claims and lawsuits, including potential class actions, alleging that
our products have resulted or could result in an unsafe condition or injury. Any product liability claim brought against us, with or without
merit, could be costly to defend and could result in settlement payments and adjustments not covered by or in excess of insurance. In
addition, we may not be able to obtain insurance on terms acceptable to us or at all because insurance varies in cost and can be difficult to
obtain. Our failure to successfully defend against product liability claims or maintain adequate insurance coverage could have an adverse
effect on our results of operations and financial condition.
37
Exchange rate fluctuations between the U.S. dollar and the Israeli New Shekel (the “NIS”) and inflation may negatively affect our
earnings and we may not be able to hedge our currency exchange risks successfully.
The U.S. dollar is our functional and reporting currency. However, a significant portion of our operating expenses, including
personnel and facilities related expenses, are incurred in NIS. As a result, we are exposed to the risks that the NIS may appreciate relative to
the U.S. dollar, or, if the NIS instead devalues relative to the U.S. dollar, that the inflation rate in Israel may exceed such rate of devaluation
of the NIS, or that the timing of such devaluation may lag behind inflation in Israel. In any such event, the dollar cost of our operations in
Israel would increase and our dollar-denominated results of operations would be adversely affected. Given our general lack of currency
hedging arrangements to protect us from fluctuations in the exchange rates of the NIS and other foreign currencies in relation to the U.S.
dollar (and/or from inflation of such foreign currencies), we may be exposed to material adverse effects from such movements. We cannot
predict any future trends in the rate of inflation in Israel or the rate of devaluation (if any) of the NIS against the U.S. dollar.
We may acquire other businesses or form joint ventures or make investments in other companies or technologies that could negatively
affect our operating results, dilute our stockholders’ ownership, increase our debt or cause us to incur significant expense.
We may pursue acquisitions of businesses and assets. We also may pursue strategic alliances and joint ventures that leverage our
intellectual property and industry experience to expand our offerings or distribution. We have no history of acquiring other companies or
with forming strategic partnerships. We may not be able to find suitable partners or acquisition candidates, and we may not be able to
complete such transactions on favorable terms, if at all. If we make any acquisitions, we may not be able to integrate these acquisitions
successfully into our existing business, and we could assume unknown or contingent liabilities. Any future acquisitions also could result in
the issuance of equity securities, incurrence of debt, contingent liabilities or future write-offs of intangible assets or goodwill, any of which
could have a material adverse effect on our financial condition, results of operations, and cash flows. Integration of an acquired company
also may disrupt ongoing operations and require management resources that we would otherwise focus on developing our existing business.
We may experience losses related to investments in other companies, which could have a material negative effect on our results of
operations and financial condition. We may not realize the anticipated benefits of any acquisition, technology license, strategic alliance, or
joint venture.
To finance any acquisitions or joint ventures, we may choose to issue shares of our Common Stock as consideration, which would
dilute the ownership of our stockholders. Additional funds may not be available on terms that are favorable to us, or at all. If the price of
our Common Stock is low or volatile, we may not be able to acquire other companies or fund a joint venture project using our stock as
consideration.
Risks Related to our Capital Stock
Our officers, directors, and principal stockholders exercise significant control over our Company, and will control our company for the
foreseeable future, including the outcome of matters requiring stockholder approval.
Our officers, directors, entities controlled by our officers and directors, and principal stockholders who beneficially own more
than 5% of our Common Stock, in the aggregate, beneficially own shares representing approximately 55.95% of our outstanding capital
stock as of March 1, 2018. As a result, such entities and individuals have the ability, acting together, to control the election of our directors
and the outcome of corporate actions requiring stockholder approval, such as: (i) a merger or a sale of our company, (ii) a sale of all or
substantially all of our assets, and (iii) amendments to our certificate of incorporation and bylaws. This concentration of voting power and
control could have a significant effect in delaying, deferring or preventing an action that might otherwise be beneficial to our other
stockholders and be disadvantageous to our stockholders with interests different from those entities and individuals. These individuals also
have significant control over our business, policies and affairs as officers and directors of our company.
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Our quarterly operating results may be subject to significant fluctuations.
To date, as part of our limited launch, we have generated limited revenue from our Pure-Vu system, but we do not expect to
generate significant revenue from product sales unless and until we expand our commercialization efforts, which we expect will take a
number of years and are subject to significant uncertainty, and accordingly we may experience significant fluctuations in our quarterly
operating results in the future. The rate of market acceptance of our Pure-Vu system could contribute to this quarterly variability. Our
limited operating history complicates our ability to project quarterly revenue and any future revenue generated from sales of our Pure-Vu
system may fluctuate from time to time. In addition, our expense levels are based, in part, on expectation of future revenue levels. A
shortfall in expected revenue, if any, could, therefore, result in a disproportionate decrease in our net income. As a result, our quarterly
operating results may be subject to significant fluctuations.
An active trading market for our Common Stock may not be sustained.
Prior to the closing of our IPO on February 16, 2018, there had been no public market for our Common Stock. Although our
Common Stock is listed on the NASDAQ Capital Market, the market for our shares has demonstrated varying levels of trading activity.
Furthermore, the current level of trading may not be sustained in the future. The lack of an active market for our Common Stock may
impair investors’ ability to sell their shares at the time they wish to sell them or at a price that they consider reasonable, may reduce the fair
market value of their shares and may impair our ability to raise capital to continue to fund operations by selling shares and may impair our
ability to acquire additional intellectual property assets by using our shares as consideration.
A sale of a substantial number of shares of our Common Stock in the public market could cause the market price of our Common Stock
to drop significantly, even if our business is doing well.
Our stock price could decline as a result of sales of a large number of shares of our Common Stock or the perception that these
sales could occur. These sales, or the possibility that these sales may occur, also might make it more difficult for us to sell equity securities
in the future at a time and at a price that we deem appropriate.
In addition, in the future, we may issue additional shares of Common Stock or other equity or debt securities convertible into
Common Stock in connection with a financing, acquisition, litigation settlement, employee arrangements or otherwise. Any such issuance
could result in substantial dilution to our existing stockholders and could cause our stock price to decline.
If equity research analysts do not publish research or reports about our business or if they issue unfavorable commentary or
downgrade our Common Stock, the price of our Common Stock could decline.
The trading market for our Common Stock relies in part on the research and reports that equity research analysts publish about us
and our business. We do not control these analysts. The price of our Common Stock could decline if one or more equity analysts
downgrade our Common Stock or if analysts issue other unfavorable commentary or cease publishing reports about us or our business.
Our share price may be volatile, which could subject us to securities class action litigation and our stockholders could incur substantial
losses.
The market price for our Common Stock may be volatile and subject to wide fluctuations in response to factors including the
following:
● actual or anticipated fluctuations in our quarterly or annual operating results;
● actual or anticipated changes in our growth rate relative to our competitors;
● failure to meet or exceed financial estimates and projections of the investment community or that we provide to the public;
● issuance of new or updated research or reports by securities analysts;
● share price and volume fluctuations attributable to inconsistent trading volume levels of our shares;
additions or departures of key management or other personnel;
● disputes or other developments related to proprietary rights, including patents, litigation matters, and our ability to obtain patent
protection for our technologies;
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● announcement or expectation of additional debt or equity financing efforts;
● sales of our Common Stock by us, our insiders or our other stockholders; and
● general economic, market or political conditions in the United States or elsewhere.
In particular, the market prices of early commercial-stage companies like ours have been highly volatile due to factors, including,
but not limited to:
● any delay or failure to conduct a clinical trial for our product or receive approval from the FDA and other regulatory agents;
● developments or disputes concerning our product’s intellectual property rights;
● our or our competitors’ technological innovations;
● fluctuations in the valuation of companies perceived by investors to be comparable to us;
● announcements by us or our competitors of significant contracts, acquisitions, strategic partnerships, joint ventures, capital
commitments, new technologies or patents;
● failure to complete significant transactions or collaborate with vendors in manufacturing our product; and
● proposals for legislation that would place restrictions on the price of medical therapies.
These and other market and industry factors may cause the market price and demand for our Common Stock to fluctuate
substantially, regardless of our actual operating performance, which may limit or prevent investors from readily selling their shares of
Common Stock and may otherwise negatively affect the liquidity of our Common Stock. In addition, the stock market in general, and
NASDAQ Capital Markets and emerging growth companies in particular, have experienced extreme price and volume fluctuations that
have often been unrelated or disproportionate to the operating performance of these companies. In the past, when the market price of a
stock has been volatile, holders of that stock have instituted securities class action litigation against the company that issued the stock. If
any of our stockholders brought a lawsuit against us, we could incur substantial costs defending the lawsuit. Such a lawsuit could also
divert the time and attention of our management.
Pursuant to the terms of our outstanding Royalty Payment Rights Certificates and our outstanding Placement Agent Royalty Payment
Rights Certificates, we may be obligated to pay significant royalties.
Pursuant to the terms of the Royalty Payment Rights Certificates (as defined in “Part II—Item 5—Market for Registrant’s
Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities—Recent Sales of Unregistered Securities—2017
Private Placement”) which were issued in connection with the conversion of all of our outstanding shares of Series A Convertible Preferred
Stock upon the consummation of our IPO, we may be required to make certain royalty payments. After we generate sales of the current and
potential future versions of the Pure-Vu system, including disposables, parts, and services, in excess of $20 million since our inception,
then we will be required to pay to the holders of our Royalty Payment Rights Certificates a royalty equal to (i) three percent (3%) of our net
sales, if any, in any calendar year, not in excess of $30 million per year. Additionally, after we receive any proceeds from the licensing of
the current and potential future versions of the Pure-Vu system in excess of $3.5 million since our inception, then we will be required to
pay to the holders of the Royalty Payment Rights Certificates a royalty equal to 5% of our licensing proceeds, if any, in any calendar year,
not in excess of $30 million per year. The royalties will be payable up to the later of (i) the latest expiration date for our current patents
(which is currently October 2026), or (ii) the latest expiration date of any pending patents as of the date of the Initial Closing that may be
issued in the future.
Additionally, pursuant to the terms of the Placement Agent Royalty Payment Rights Certificates (as defined in “Part II—Item 5—
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities—Recent Sales of
Unregistered Securities—2017 Private Placement”) issued in connection with the 2017 Private Placement, we will be required to pay the
holders of the Placement Agent Royalty Payment Rights Certificates, in the aggregate, 10% of the amount of payments paid to the holders
of the Royalty Payment Rights Certificates.
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We are an “emerging growth company,” and will be able take advantage of reduced disclosure requirements applicable to “emerging
growth companies,” which could make our Common Stock less attractive to investors.
We are an “emerging growth company,” as defined in the JOBS Act and, for as long as we continue to be an “emerging growth
company,” we intend to take advantage of certain exemptions from various reporting requirements applicable to other public companies but
not to “emerging growth companies,” including, but not limited to, not being required to comply with the auditor attestation requirements of
Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy
statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder
approval of any golden parachute payments not previously approved. We could be an “emerging growth company” for up to five years, or
until the earliest of (i) the last day of the first fiscal year in which our annual gross revenues exceed $1.07 billion, (ii) the date that we
become a “large accelerated filer” as defined in Rule 12b-2 under the Exchange Act, which would occur if the market value of our Common
Stock that is held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter, or
(iii) the date on which we have issued more than $1 billion in non-convertible debt during the preceding three year period.
We intend to take advantage of these reporting exemptions described above until we are no longer an “emerging growth
company.” Under the JOBS Act, “emerging growth companies” can also delay adopting new or revised accounting standards until such
time as those standards apply to private companies. We have irrevocably elected not to avail ourselves of this exemption from new or
revised accounting standards and, therefore, we will be subject to the same new or revised accounting standards as other public companies
that are not “emerging growth companies.”
We cannot predict if investors will find our Common Stock less attractive if we choose to rely on these exemptions. If some
investors find our Common Stock less attractive as a result of any choices to reduce future disclosure, there may be a less active trading
market for our Common Stock and our stock price may be more volatile.
We will incur significantly increased costs and devote substantial management time as a result of operating as a public company
particularly after we are no longer an “emerging growth company.”
As a newly public company, we will incur significant legal, accounting and other expenses that we did not incur as a private
company. For example, we are required to comply with certain of the requirements of the Sarbanes-Oxley Act and the Dodd-Frank Wall
Street Reform and Consumer Protection Act, as amended, as well as rules and regulations subsequently implemented by the SEC, including
the establishment and maintenance of effective disclosure and financial controls and changes in corporate governance practices. We expect
that compliance with these requirements will increase our legal and financial compliance costs and will make some activities more time
consuming and costly. In addition, we expect that our management and other personnel will need to divert attention from operational and
other business matters to devote substantial time to these public company requirements. In particular, we expect to incur significant
expenses and devote substantial management effort toward ensuring compliance with the requirements of Section 404 of the Sarbanes-
Oxley Act. In addition, after we no longer qualify as an “emerging growth company,” as defined under the JOBS ACT we expect to incur
additional management time and cost to comply with the more stringent reporting requirements applicable to companies that are deemed
accelerated filers or large accelerated filers, including complying with the auditor attestation requirements of Section 404 of the Sarbanes-
Oxley Act. We have not yet completed the process of compiling the system and processing documentation needed to comply with such
requirements. We may not be able to complete our evaluation, testing and any required remediation in a timely fashion. In that regard, we
currently do not have an internal audit function, and we will need to hire or contract for additional accounting and financial staff with
appropriate public company experience and technical accounting knowledge.
We cannot predict or estimate the amount of additional costs we may incur as a result of becoming a public company or the timing
of such costs.
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There may be limitations on the effectiveness of our internal controls, and a failure of our control systems to prevent error or fraud may
materially harm our company.
Proper systems of internal controls over financial accounting and disclosure controls and procedures are critical to the operation of
a public company. As we have a limited operating history, we only have 5 employees, and 3 contractors in our finance and accounting
functions, which may result in a lack of segregation of duties and are at the very early stages of establishing, and we may be unable to
effectively establish such systems, especially in light of the fact that we expect to operate as a publicly reporting company. This would leave
us without the ability to reliably assimilate and compile financial information about our company and significantly impair our ability to
prevent error and detect fraud, all of which would have a negative impact on our company from many perspectives.
Moreover, we do not expect that disclosure controls or internal control over financial reporting, even if established, will prevent all
error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that
the control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints
and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. Failure of
our control systems to prevent error or fraud could materially adversely impact us.
We may have a material weakness in our internal control over financial reporting. In addition, because of our status as an emerging
growth company, our independent registered public accountants are not required to provide an attestation report as to our internal
control over financial reporting for the foreseeable future.
We may be required, pursuant to Section 404 of the Sarbanes-Oxley Act, to furnish a report by our management on, among other
things, the effectiveness of our internal control over financial reporting for the first fiscal year beginning after the effective date of our
registration statement on Form S-1 (Registration Number 333-222441, declared effective in February 2018). This assessment will need to
include disclosure of any material weaknesses identified by our management in our internal control over financial reporting, as well as a
statement that our independent registered public accounting firm has issued an opinion on our internal control over financial reporting. We
are in the very early stages of the costly and challenging process of compiling the system and processing documentation necessary to
perform the evaluation needed to comply with Section 404.
We may not be able to complete our evaluation, testing and any required remediation in a timely fashion. During the evaluation
and testing process, if we identify one or more material weaknesses in our internal control over financial reporting, we will be unable to
assert that our internal controls are effective.
If we are unable to assert that our internal control over financial reporting is effective, or, if applicable, our independent registered
public accounting firm is unable to express an opinion on the effectiveness of our internal controls, we could lose investor confidence in
the accuracy and completeness of our financial reports, which would cause the price of our Common Stock to decline, and we may be
subject to investigation or sanctions by the SEC. We will also be required to disclose changes made in our internal control and procedures
on a quarterly basis.
However, our independent registered public accounting firm will not be required to formally attest to the effectiveness of our
internal control over financial reporting pursuant to Section 404 until the later of the year following our first annual report required to be
filed with the SEC, or the date we are no longer an “emerging growth company” as defined in the recently enacted JOBS Act, if we take
advantage (as we expect to do) of the exemptions contained in the JOBS Act. We will remain an “emerging growth company” for up to five
years, although if the market value of our Common Stock that is held by non-affiliates exceeds $700 million as of any June 30th before that
time, we would cease to be an “emerging growth company” as of the following December 31st. At such time, our independent registered
public accounting firm may issue a report that is adverse in the event it is not satisfied with the level at which our controls are documented,
designed or operating. Our remediation efforts may not enable us to avoid a material weakness in our internal control over financial
reporting in the future.
Any of the foregoing occurrences, should they come to pass, could negatively impact the public perception of our company,
which could have a negative impact on our stock price.
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We do not currently intend to pay dividends on our Common Stock in the foreseeable future, and consequently, any gains from an
investment in our Common Stock will likely depend on appreciation in the price of our Common Stock.
We have never declared or paid cash dividends on our Common Stock and do not anticipate paying any cash dividends to holders
of our Common Stock in the foreseeable future. Consequently, investors must rely on sales of their Common Stock after price appreciation,
which may never occur, as the only way to realize any future gains on their investments. There is no guarantee that shares of our Common
Stock will appreciate in value or even maintain the price at which our stockholders have purchased their shares.
Upon dissolution of our company, our stockholders may not recoup all or any portion of their investment.
In the event of a liquidation, dissolution or winding-up of our company, whether voluntary or involuntary, the proceeds and/or
assets of our company remaining after giving effect to such transaction, and the payment of all of our debts and liabilities and distributions
required to be made to holders of any outstanding preferred stock will then be distributed to the stockholders of our Common Stock on a pro
rata basis. There can be no assurance that we will have available assets to pay to the holders of our Common Stock, or any amounts, upon
such a liquidation, dissolution or winding-up of our Company.
Our certificate of incorporation allows for our board to create new series of preferred stock without further approval by our
stockholders, which could adversely affect the rights of the holders of our Common Stock.
Our board of directors has the authority to fix and determine the relative rights and preferences of preferred stock. Our board of
directors has the authority to issue up to 10 million shares of our preferred stock without further stockholder approval. As a result, our
board of directors could authorize the issuance of a series of preferred stock that would grant to holders the preferred right to our assets
upon liquidation and the right to receive dividend payments before dividends are distributed to the holders of our Common Stock. In
addition, our board of directors could authorize the issuance of a series of preferred stock that has greater voting power than our Common
Stock or that is convertible into our Common Stock, which could decrease the relative voting power of our Common Stock or result in
dilution to our existing stockholders.
Our certificate of incorporation, as amended, designates the Court of Chancery of the State of Delaware as the sole and exclusive forum
for certain types of actions and proceedings that may be initiated by our stockholders, which could discourage lawsuits against us, and
our directors and officers.
Our certificate of incorporation, as amended, provides that unless we consent in writing to the selection of an alternative forum,
the Court of Chancery of the State of Delaware will be the sole and exclusive forum for (i) any derivative action or proceeding brought on
our behalf; (ii) any action asserting a claim of breach of a fiduciary duty; (iii) any action asserting a claim against us, or any of our officers
or directors, arising pursuant to, or a claim against us, or any of our officers or directors, with respect to the interpretation or application of
any provision of the Delaware General Corporation Law, our certificate of incorporation, as amended, or our bylaws; or (iv) any action
asserting a claim governed by the internal affairs doctrine. However, if the Court of Chancery of the State of Delaware dismisses any such
action for lack of subject matter jurisdiction, the action may be brought in another state court sitting in the State of Delaware.
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Risks Related to Our Operations in Israel
Our principal offices, research and development facilities and some of our suppliers are located in Israel and, therefore, our business,
financial condition and results of operation may be adversely affected by political, economic and military instability in Israel.
Our principal offices, research and development facilities are located in northern Israel. In addition, most of our employees are
residents of Israel. Accordingly, political, economic and military conditions in Israel may directly affect our business. Since the State of
Israel was established in 1948, the State of Israel and its economy has experienced significant growth and expansion, coupled with an
increase in the standard of living, and has developed one of the most advanced high-tech industries in the world. However, it continues to
face many geo-political and other challenges that may affect companies located in Israel, such as ours. For example, a number of armed
conflicts have occurred between Israel and its Arab neighbors. Although Israel has entered into various peace agreements with Egypt and
Jordan as well as comprehensive agreements with the Palestinian Authority, there continues to be unrest and terrorist activity in Israel with
varying levels of severity, as well as ongoing hostilities and armed conflicts between Israel and the Palestinian Authority and other groups
in the West Bank and Gaza Strip. The effects of these hostilities and violence on the Israeli economy and our operations are unclear, and
we cannot predict the effect on us of a further increase in these hostilities or any future armed conflict, political instability or violence in the
region. We could be harmed by any major hostilities involving Israel, the interruption or curtailment of trade between Israel and its trading
partners, boycotts or a significant downturn in the economic or financial condition of Israel. The impact of Israel’s relations with its Arab
neighbors in general, or on our operations in the region in particular, remains uncertain. The establishment of new fundamentalist Islamic
regimes or governments more hostile to Israel could have serious consequences for the stability in the region, place additional political,
economic and military confines upon Israel, materially adversely affect our operations and limit our ability to sell our products to countries
in the region.
Additionally, several countries, principally in the Middle East, still restrict doing business with Israel and Israeli companies, and
additional countries and groups have imposed or may impose restrictions on doing business with Israel and Israeli companies if hostilities
in Israel or political instability in the region continues or increases. These restrictions may limit our ability to sell our products to
companies in these countries. Furthermore, the Boycott, Divestment and Sanctions Movement, a global campaign attempting to increase
economic and political pressure on Israel to comply with the stated goals of the movement, may gain increased traction and result in a
boycott of Israeli products and services. Any hostilities involving Israel or the interruption or curtailment of trade between Israel and its
present trading partners, or significant downturn in the economic or financial condition of Israel, could adversely affect our business,
results of operations and financial condition.
Our commercial insurance policy does not cover losses associated with armed conflicts and terrorist attacks. Although the Israeli
government in the past covered the reinstatement value of certain damages that were caused by terrorist attacks or acts of war, we cannot
assure you 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.
Our operations could also be disrupted by the obligations of personnel to perform military service. Some of our employees in
Israel may be called upon to perform up to 54 days in each three year period (and in the case of military officers, up to 84 days in each
three year period) of military reserve duty until they reach the age of 40 (and in some cases, depending on their specific military profession
up to 45 or even 49 years of age) and, in certain emergency circumstances, may be called to immediate and unlimited active duty. In
response to increases in terrorist activity, there have been periods of significant call-ups of military reservists and it is possible that there
will be similar large-scale military reserve duty call-ups in the future. Our operations could be disrupted by the absence of a significant
number of employees related to military service, which could materially adversely affect our business and results of operations.
Pursuant to the terms of the Israeli government grants we received for research and development expenditures, we are obligated to pay
certain royalties on our revenues to the Israeli government. The terms of the grants require us to satisfy specified conditions and to
make additional payments in addition to repayment of the grants upon certain events.
We have received, and may receive in the future, grants from the IIA for the financing of a portion of our research and
development expenditures pursuant to the Research Law, and related regulations.
As of December 31, 2017, we had received grants from the IIA in the aggregate amount of $1.33 million, and had a contingent
obligation to the IIA up to an aggregate amount of approximately $1.37 million. As of December 31, 2017, we paid a minimal amount to
the IIA. We may apply for additional IIA grants in the future. However, as the funds available for IIA grants out of the annual budget of
the State of Israel have been reduced in the past and may be further reduced in the future, we cannot predict whether we will be entitled to
any future grants, or the amounts of any such grants.
In exchange for these grants, we are required to pay royalties to the IIA of 3% to 3.5% from our revenues on sales of products and
services based on technology developed using IIA grants, up to an aggregate of 100% (which may be increased under certain
circumstances) of the U.S. dollar-linked value of the grant, plus interest at the rate of 12-month LIBOR.
44
The terms of the Israeli government participation also require that products developed with IIA grants be manufactured in Israel
and that the technology developed thereunder may not be transferred outside of Israel (including by way of certain licenses), unless prior
approval is received from the IIA, which we intend to apply for but may not be granted. Even if such approval is granted, the transfer
outside of Israel of manufacturing which is connected with the IIA-funded know-how may result in increased royalties (up to three times
the aggregate amount of the IIA grants plus interest thereon), as well as in a higher royalty repayment rate. In addition, the transfer outside
of Israel of IIA-funded know-how may trigger additional payments to the IIA (up to six times the aggregate amount of the IIA grants plus
interest thereon). Even following the full repayment of any IIA grants, we must nevertheless continue to comply with the requirements of
the Research Law. The foregoing restrictions and requirements for payment may impair our ability to sell our technology assets outside of
Israel or to outsource or transfer development or manufacturing activities with respect to any IIA-funded product or technology outside of
Israel.
If we fail to comply with any of the conditions and restrictions imposed by the Research Law, or by the specific terms under which
we received the grants, we may be required to refund any grants previously received together with interest and penalties, and, in certain
circumstances, may be subject to criminal charges.
A significant amendment to the Research Law entered into effect on January 1, 2016 (the “Amendment”), under which the IIA, a
statutory government corporation, was established, which replaced the OCS. Under the Amendment, the IIA is authorized to establish rules
concerning the ownership and exploitation of IIA/OCS-funded know-how (including with respect to restrictions on transfer of
manufacturing activities and IIA-funded know-how outside of Israel), which may differ from the restrictive laws, regulations and
guidelines as currently in effect (and which shall remain in effect until such rules have been established by the IIA). Recently published
rules of the IIA have generally adopted the principal provisions and restrictions specified in the Research Law prior to the Amendment. It is
anticipated that additional rules will be published by the IIA and we cannot predict or estimate the changes (if any) that may be made to this
legislation (including with respect to the acquisition of an IIA-funded entity or the transfer of manufacturing or ownership of IIA-funded
technology outside of Israel).
It may be difficult to enforce a judgment of a U.S. court against us in Israel or the United States, to assert U.S. securities laws claims in
Israel or to serve process on these experts.
Opco is incorporated in Israel. Our Israeli experts reside in Israel, and substantially all of our assets are located in Israel.
Therefore, a judgment obtained against us, or any of such persons may not be collectible in the United States and may not be enforced by an
Israeli court. It also may be difficult for you to effect service of process on such persons in the United States or to assert U.S. securities law
claims in original actions instituted in Israel. Israeli courts may refuse to hear a claim based on an alleged violation of U.S. securities laws
on the grounds that Israel is not the most appropriate forum in which to bring such a claim. In addition, even if an Israeli court agrees to
hear a claim, it may determine that Israeli law and not U.S. law is applicable to the claim. If U.S. law is found to be applicable, 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. Certain matters of
procedure would also be governed by Israeli law. There is little binding case law in Israel that addresses the matters described above. As a
result of the difficulty associated with enforcing a judgment against us in Israel, you may not be able to collect any damages awarded by
either a U.S. or foreign court.
We may become subject to claims for payment of compensation for assigned service inventions by our current or former employees,
which could result in litigation and adversely affect our business.
Under the Israeli Patents Law, 5727-1967, or the Patents Law, inventions conceived by an employee during the scope of his or her
employment are regarded as “service inventions” and are owned by the employer, absent a specific agreement between the employee and
employer giving the employee service invention rights. The Patents Law also provides that if no such agreement between an employer and
an employee exists, which prescribes whether, to what extent, and on what conditions the employee is entitled to remuneration for his or her
service inventions, then such matters may, upon application by the employee, be decided by a government-appointed compensation and
royalties committee established under the Patents Law. A significant portion of our intellectual property has been developed by our
employees in Israel in the course of their employment. Such employees have agreed to waive and assign to us all rights to any intellectual
property created in the scope of their employment with us, and most of our current employees, including all those involved in the
development of our intellectual property, have agreed to waive economic rights they may have with respect to service inventions.
However, despite such contractual obligations, we cannot assure you that claims will not be brought against us by current or
former employees demanding remuneration in consideration for assigned alleged service inventions or any other intellectual property
rights. If any such claims were filed, we could potentially be required to pay remuneration to our current or former employees for such
assigned service inventions or any other intellectual property rights, or be forced to litigate such claims, which could negatively affect our
business.
45
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2.
PROPERTIES
We currently rent 7,732 square feet of space in Tirat Carmel, Israel. This facility is used for office space as well as laboratories for
product development. We entered the lease on January 1, 2015, and the lease is for a period of five-years. Annual rent is $82,000 per year.
On April 13, 2017, we entered into a lease for a facility in Fort Lauderdale, Florida, which we began occupying in October 2017.
The facility currently consists of 4,554 square feet, which will increase to 6,390 square feet by the second year of the lease. The term will
run for seven years and two months from October 2017. Annual base rent is initially $156,555 per year, subject to annual increases of
2.75%. This facility will be used for office space as well as laboratories for both quality assurance and product development.
We believe our facilities are adequate for our foreseeable needs.
ITEM 3.
LEGAL PROCEEDINGS
We are not currently subject to any material legal proceedings; however, we may from time to time become a party to various legal
proceedings arising in the ordinary course of our business. Although the results of litigation and claims cannot be predicted with certainty,
as of the date of this report, we do not believe we are party to any claim or litigation the outcome of which, if determined adversely to us,
would individually or in the aggregate be reasonably expected to have a material adverse effect on our business. Regardless of the outcome,
litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
46
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
Market Information
Our Common Stock trades on the NASDAQ Capital Market under the symbol “MOTS”. Trading of our Common Stock
commenced on February 14, 2018 in connection with our IPO. Prior to that time, there was no established public trading market for our
Common Stock. As a result, we have not set forth quarterly information with respect to the high and low prices for our Common Stock for
the two most recent fiscal years.
Holders of Record
As of March 1, 2018, we had approximately 320 holders of record of our Common Stock. This number does not include beneficial
owners whose shares were held in street name. The actual number of holders of our Common Stock is greater than this number of record
holders and includes stockholders who are beneficial owners, but whose shares are held in street name by brokers or held by other
nominees.
Dividend Policy
We have never declared or paid cash dividends on our Common Stock. We currently intend to retain all available funds and any
future earnings, if any, to fund the development and expansion of our business and we do not anticipate paying any cash dividends to
holders of our Common Stock in the foreseeable future. Any future determination to pay dividends will be made at the discretion of our
board of directors and will depend on various factors, including applicable laws, our results of operations, financial condition, future
prospects, then applicable contractual restrictions and any other factors deemed relevant by our board of directors.
Recent Sales of Unregistered Securities
During the period covered by this Form 10-K, or such period as described below, we made sales of the following unregistered
securities:
2017 Private Placement
From December 2016 through February 2017, we sold an aggregate of 4,743,311 shares of our Common Stock and 1,581,128
shares of Series A Convertible Preferred Stock at a price of $5.00 per Unit, inclusive of 2,432,808 shares of our Common Stock and
810,960 shares of Series A Convertible Preferred Stock issued pursuant to the Exchange of Convertible Notes, to 229 accredited investors
(the “2017 Private Placement”).
In connection with the 2017 Private Placement, we issued (i) the Placement Agent Warrants (the “Placement Agent Warrants”) to
the placement agent (the “Placement Agent”) for our 2017 Private Placement to purchase 403,632 shares of our Common Stock with an
exercise price of $5.00 per share and (ii) the Placement Agent Royalty Payment Rights Certificates (the “Placement Agent Royalty Payment
Rights Certificates”) to receive, in the aggregate, 10% of the amount of payments paid to the holders of the Series A Convertible Preferred
Stock, or the holders of the Royalty Payment Rights Certificates (the “Royalty Payment Rights Certificates”), upon the conversion of the
Series A Convertible Preferred Stock into shares of our Common Stock, which conversion occurred simultaneously with the closing of our
IPO in February 2018.
Service Provider Stock and Warrants
In May 2017, we issued a service provider (a) 90,000 shares of our Common Stock, subject to a lock-up agreement, and (b) five
(5) year warrants to purchase 30,000 shares of our Common Stock with an exercise price of $8.00 per share, as partial payment for services
pursuant to a consulting agreement between the service provider and us.
47
During August, September, and October 2017, we issued a service provider an aggregate of 4,167 shares, pursuant to the terms of
the agreement with such service provider.
Issuance Pursuant to Exercise of Stock Option
In May 2017, we issued 754 shares of our Common Stock pursuant to the exercise of a stock option.
Stock Options
During the period covered by this Form 10-K, we have granted stock options under our 2016 Equity Incentive Plan to purchase an
aggregate of 2,020,769 shares of our Common Stock with a weighted average exercise price of $4.51.
Unrestricted Stock Awards
We have granted unrestricted stock awards under our 2016 Equity Incentive Plan for an aggregate of 5,000 shares of our Common
Stock.
Securities Act Exemptions
We deemed the offers, sales and issuances of the securities described above under “Part II—Item 5—Market for Registrant’s
Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities—Recent Sales of Unregistered Securities” to be
exempt from registration under the Securities Act of 1933, as amended (the “Securities Act”), in reliance on Section 4(a)(2) of the
Securities Act, including Regulation D and Rule 506 promulgated thereunder, relative to transactions by an issuer not involving a public
offering. All purchasers of securities in transactions exempt from registration pursuant to Regulation D represented to us that they were
accredited investors and were acquiring the shares for investment purposes only and not with a view to, or for sale in connection with, any
distribution thereof and that they could bear the risks of the investment and could hold the securities for an indefinite period of time. The
purchasers received written disclosures that the securities had not been registered under the Securities Act and that any resale must be made
pursuant to a registration statement or an available exemption from such registration.
We deemed the grants of stock options and issuances of our Common Stock upon exercise of such options, and the share awards,
described above under “Part II—Item 5—Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities—Recent Sales of Unregistered Securities” to be exempt from registration under the Securities Act in reliance on Section
4(a)(2) of the Securities Act, including Regulation D and Rule 506 promulgated thereunder and Rule 701 of the Securities Act as offers and
sales of securities under compensatory benefit plans and contracts relating to compensation in compliance with Rule 701. Each of the
recipients of securities in any transaction exempt from registration either received or had adequate access, through employment, business or
other relationships, to information about us.
All certificates representing the securities issued in the transactions described in “Part II—Item 5—Market for Registrant’s
Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities—Recent Sales of Unregistered Securities”
included appropriate legends setting forth that the securities had not been offered or sold pursuant to a registration statement and describing
the applicable restrictions on transfer of the securities. There were no underwriters employed in connection with any of the transactions set
forth in “Part II—Item 5—Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
—Recent Sales of Unregistered Securities”. All recipients had adequate access, through their relationships with us, to information about us.
The sales of these securities were made without any general solicitation or advertising.
Use of Proceeds from Registered Securities
On February 13, 2018, our registration statement on Form S-1 (Registration No. 333-222441) was declared effective by the SEC
for our IPO pursuant to which we sold an aggregate of 3,500,000 shares of our Common Stock at a price to the public of $5.00 per share,
for an aggregate offering of approximately $17.5 million. Piper Jaffray & Co. acted as the sole book-running manager and Oppenheimer &
Co. acted as lead manager for the offering. On February 16, 2018, we closed the sale of 3,500,000 shares, resulting in net proceeds to us of
$15.2 million after deducting underwriting discounts and commissions and other offering expenses. On March 12, 2018 we closed the sale
of an additional 56,000 shares pursuant to the Partial IPO Over-Allotment Exercise, resulting in net proceeds to us of approximately
$250,000 after deducting underwriting discounts and commissions. No payments were made by us to directors, officers or persons owning
ten percent or more of our Common Stock or to their associates, or to our affiliates. There has been no material change in the planned use
of proceeds from our IPO as described in our final prospectus filed with the SEC on February 15, 2018 pursuant to Rule 424(b).
48
ITEM 6.
SELECTED FINANCIAL DATA
Not applicable.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION.
The following discussion and analysis of our financial condition and results of operations should be read together with our
financial statements and the related notes and the other financial information included elsewhere in this report. This discussion contains
forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these
forward-looking statements as a result of various factors, including those discussed below and elsewhere in this report, particularly those
under “Risk Factors.”
Overview
We have developed a single-use medical device system (the “Pure-Vu system”), cleared by the United States Food and Drug
Administration (the “FDA”), that is intended to connect to standard colonoscopes to help facilitate intraprocedural cleaning of a poorly
prepared colon by irrigating or cleaning the colon and evacuating the irrigation fluid (water), feces and other bodily fluids and matter. The
Pure-Vu system has been designed to integrate with standard colonoscopes to enable cleaning during the procedure while preserving
standard procedural workflow and techniques. Our Pure-Vu system and the procedure to cleanse the colon in preparation for colonoscopy
are not currently reimbursable through private or governmental third-party payors in any country, but we intend to seek reimbursement
through private or governmental third-party payors in the future. We do not currently promote a particular prep regimen as this is left up to
the discretion of the physician since our current indication does not reference any preparation protocol. We will look to expand the Pure-
Vu system indication to allow us to actively promote minimal prep capabilities directly to patients. We plan to initiate a clinical trial in
2018 that should facilitate approval of expanded labeling in 2019. To date, as part of our limited pilot launch, we have focused on
collecting clinical data on the use of the Pure-Vu system. We do not expect to generate significant revenue from product sales unless and
until we expand our commercialization efforts.
Our business was spun out from the New Generation Technology (“NGT”) incubator based in Nazareth, Israel in 2011 to focus
exclusively on the development of the Pure-Vu system. We initiated preclinical testing in 2011 and started clinical testing of the first
prototype version of the Pure-Vu system in Europe in late 2012. In clinical studies performed in Europe and Israel from 2012 through the
second quarter of 2017, the Pure-Vu system and earlier prototype versions have demonstrated effective cleaning in over 175 patients that
followed a significantly reduced pre-procedural colonoscopy preparation regimen, as compared to current prep regimens.
Financial Operations Overview
We are a development stage company and have not generated any significant revenues from the sale of products. We have never
been profitable and our accumulated deficit as of December 31, 2017 was approximately $39.1 million. Our net loss for the years ended
December 31, 2017 and 2016 was approximately $13.2 million and $8.0 million, respectively. We expect to incur significant expenses and
increasing operating losses for the foreseeable future. We expect our expenses to increase significantly in connection with our ongoing
activities to commercialize and market the Pure-Vu system. Furthermore, we expect to incur additional costs associated with operating as a
public company. Accordingly, we will need additional financing to support our continuing operations. We will seek to fund our operations
through public or private equity or debt financings or other sources, which may include collaborations with third parties. Adequate
additional financing may not be available to us on acceptable terms, or at all. Our failure to raise capital as and when needed would have a
negative impact on our financial condition and our ability to pursue our business strategy. We will need to generate significant revenues to
achieve profitability, and we may never do so.
We expect to continue to incur significant expenses and increasing operating losses for at least the next several years. We expect
our expenses will increase substantially in connection with our ongoing activities, as we:
49
● conduct a limited pilot launch through 2018 to refine how the Pure-Vu system integrates into the workflow of both the out-
patient and in-patient settings;
● contract with third parties to scale up the manufacture of the workstation and the disposable portion of Pure-Vu system;
● develop a second generation system to improve user interface, optimize ease of use and reduce the cost structure;
● raise sufficient funds in the capital market to effectuate our business plan, including commercialization activities related to our
Pure-Vu system and our research and development activities, including clinical and regulatory development and the continued
development and enhancement of our Pure-Vu system; and
● operate as a public company.
Critical Accounting Policies and Estimates
Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reporting period.
On an ongoing basis, we evaluate our estimates and judgments for all assets and liabilities, including those related to fair value
calculations for equity securities, assessing contingent liabilities, establishing valuation allowances for deferred taxes, and the recovery of
deferred costs. We base our estimates and judgments on historical experience, current economic and industry conditions and on various
other factors that are believed to be reasonable under the circumstances. This forms the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under
different assumptions or conditions.
We believe that full consideration has been given to all relevant circumstances that we may be subject to, and the consolidated
financial statements accurately reflect our best estimate of the results of operations, financial position and cash flows for the periods
presented.
Revenue
To date, as part of our limited launch, we have generated limited revenue from the sales of products. We do not expect to generate
significant revenue from product sales unless and until we expand our commercialization efforts for the Pure-Vu system, which we expect
will take a number of years and is subject to significant uncertainty.
Research and Development
We incurred expenses of approximately $4.3 million and $3.1 million, respectively, during the years ended December 31, 2017
and 2016 for research and development activities. These expenses include cash and non-cash expenses relating to the advancement of our
development and clinical programs for the Pure-Vu system. We have research and development capabilities in electrical and mechanical
engineering with laboratories in our facility in Israel for development and prototyping, and electronics design and testing. We also use
consultants and third-party design houses to complement our internal capabilities.
Sales and Marketing
We incurred expenses of approximately $2.4 million and $1.0 million, respectively, during the years ended December 31, 2017
and 2016 for sales and marketing activities. These expenses include cash and non-cash expenses relating to the development of our sales
and marketing infrastructure for the Pure-Vu system. We have hired limited sales and marketing personnel in the U.S. as part of our pilot
launch to develop our policies and procedures, as well as to spearhead the pilot phase of the company’s market penetration.
50
General and Administrative Expenses
We incurred expenses of approximately $6.3 million and $1.9 million, respectively, during the years ended December 31, 2017
and 2016 for general and administrative activities. General and administrative expenses consist primarily of payroll and professional
services. Other general and administrative expenses include accounting and legal services and expenses associated with obtaining and
maintaining patents. We anticipate that our general and administrative expenses will increase significantly during 2018 and in the future as
we increase our headcount to support our continued development and commercialization activities related to our Pure-Vu system. We also
anticipate increased expenses related to audit, legal, regulatory, and tax-related services associated with maintaining compliance with
exchange listing and SEC requirements, director and officer insurance premiums, and investor relations and communication costs
associated with being a public company. Additionally, commencing in 2017, we began to compensate our outside directors.
Stock-Based Compensation
Stock options are granted with an exercise price at no less than fair market value at the date of the grant. The stock options
normally expire ten years from the date of grant. Stock option awards vest upon terms determined by our board of directors.
We recognize compensation costs resulting from the issuance of stock-based awards to employees, members of our Board of
directors and consultants. The fair value of each option grant was estimated as of the date of grant using the Black-Scholes option-pricing
model. The fair value is amortized as compensation cost on a straight-line basis over the requisite service period of the awards, which is
generally the vesting period. Due to our limited operating history and limited volume of sales of our common stock, we estimated our
volatility in consideration of a number of factors, including the volatility of comparable public companies. The expected term of options
granted to employees under our stock plans is based on the average of the contractual term (generally 10 years) and the vesting period
(generally 36 months). The expected term of options granted under the 2016 Plan, all of which qualify as “plain vanilla” per SEC Staff
Accounting Bulletin 107, is based on the average of the 5.81 years. For non-employee options, the expected term is the contractual term
and stock options granted to non-employee consultants are revalued at the end of each reporting period until vested and changes in their fair
value are recorded as adjustments to expense over the related vesting period. The risk-free rate is based on the yield of a U.S. Treasury
security with a term consistent with the expected term of the option. We have never paid dividends on our common stock and do not
anticipate paying dividends on our common stock in the foreseeable future. Accordingly, we have assumed no dividend yield for purposes
of estimating the fair value of our share-based compensation.
The following assumptions were used to estimate the fair value of stock options granted using the Black-Scholes option pricing
model:
Fair value of common stock
Expected volatility
Dividend Yield
Risk-free interest
Expected life of up to (years)
$
4.50 - $5.00
60%
0%
1.92% - 2.36%
5.81
Emerging Growth Company Status
Under Section 107(b) of the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards until
such time as those standards apply to private companies. We have irrevocably elected not to avail ourselves of this exemption from new or
revised accounting standards and, therefore, we will be subject to the same new or revised accounting standards as other public companies
that are not emerging growth companies.
51
Results of Operations
Comparison of Year Ended December 31, 2017 and 2016
To date, as part of our limited launch, we have generated limited revenue from the sales of products. We do not expect to generate
significant revenue from product sales unless and until we expand our commercialization efforts for the Pure-Vu system, which we expect
will take a number of years and is subject to significant uncertainty.
Research and Development
Research and development expenses for the year ended December 31, 2017 totaled approximately $4.3 million, an increase of $1.2
million over the $3.1 million recorded for the year ended December 31, 2016. The increase in fiscal 2017 compared to fiscal 2016 was
primarily attributable to increases of $1.1 million in salaries and wages, $0.6 million in materials, $0.5 million in clinical and related, $0.5
million in stock-based compensation, and $0.03 million in other costs, partially offset by a decrease in subcontractor costs of $1.1 million.
Sales and Marketing
Sales and marketing expenses for the year ended December 31, 2017 totaled approximately $2.4 million, an increase of $1.4
million over the $1.0 million recorded for the year ended December 31, 2016. The increase in fiscal 2017 compared to fiscal 2016 was
primarily attributable to increases of $0.7 million in salaries and wages, $0.2 million in marketing and training product units, $0.2 million
in subcontractor costs, $0.1 million in travel costs, $0.1 million in other costs, and $0.1 million in stock-based compensation.
General and Administrative
General and administrative expenses for the year ended December 31, 2017 totaled approximately $6.3 million, an increase of
$4.4 million over the $1.9 million recorded for the year ended December 31, 2016. The increase in fiscal 2017 compared to fiscal 2016 was
primarily attributable to increases of $1.9 million in legal and professional fees, $1.3 million in stock-based compensation, $0.6 million in
salaries and wages, $0.5 million in public relations and investor communications fees, and $0.2 million in other expenses.
Liquidity and Capital Resources
Since inception, we have experienced negative cash flows from operations. We have financed our operations primarily through
sales of equity-related securities. At December 31, 2017, our accumulated deficit since inception was approximately $39.1 million.
At December 31, 2017, we had total current assets of approximately $8.3 million and current liabilities of approximately $2.0
million resulting in working capital of $6.3 million. Net cash used in operating activities for the year ended December 31, 2017 was
approximately $10.4 million, which includes a net loss of approximately $13.2 million, offset by non-cash expenses of approximately $2.6
million principally related to the increase in stock-based compensation expense of $2.2 million and revaluation of contingent royalty
obligation of $0.3 million, approximately $1.0 million of cash provided from a change in net working capital items principally related to
the increase in accounts payable and accrued expenses, and approximately $0.5 million of cash used from a change in net working capital
items principally related to the increase in prepaid expenses, other current and long-term assets.
Cash used in investing activities for the year ended December 31, 2017 totaled approximately $0.7 for the purchase of fixed
assets.
Cash provided by financing activities for the year ended December 31, 2017 totaled approximately $6.4 million. In January and
February of 2017 we sold 1,098,849 shares of our common stock and 366,283 shares of our Series A Convertible Preferred Stock in the
2017 Private Placement which resulted in net proceeds to us totaling approximately $6.5 million. In December 2017, we paid deferred
financing fees of $0.4 million in relation to our IPO.
52
At December 31, 2017, we had cash and cash equivalents of approximately $6.9 million. On February 16, 2018, we closed our IPO
in which we sold 3,500,000 shares of our Common Stock at a public offering price of $5.00 per share. In connection with the closing of the
IPO, we received net proceeds of approximately $15.2 million after deducting underwriting discounts and commissions of approximately
$1.4 million and other offering expenses of approximately $0.9 million. On March 12, 2018, we received net proceeds of approximately
$250,000 after deducting underwriting discounts and commissions of approximately $22,000 in relation to the sale of an additional 56,000
shares of our Common Stock at a price of $5.00 per share, pursuant to the Partial IPO Over-Allotment Exercise completed in March 2018.
Based on our current business plan, we believe the net proceeds from the IPO and the Partial IPO Over-Allotment described above,
together with our cash and cash equivalents balance as of December 31, 2017, will be sufficient to meet our anticipated cash requirements
through approximately the second quarter of 2019.
We will need to raise significant additional capital to continue to fund operations. We may seek to sell common or preferred
equity, convertible debt securities or seek other debt financing. In addition, we may seek to raise cash through collaborative agreements or
from government grants. The sale of equity and convertible debt securities may result in dilution to our stockholders and those securities
may have rights senior to those of our common shares. If we raise additional funds through the issuance of preferred stock, convertible debt
securities or other debt financing, these securities or other debt could contain covenants that would restrict our operations. Any other third-
party funding arrangement could require us to relinquish valuable rights.
The source, timing and availability of any future financing will depend principally upon market conditions, and, more specifically,
on the progress of our clinical development programs. Funding may not be available when needed, at all, or on terms acceptable to us. Lack
of necessary funds may require us, among other things, to delay, scale back or eliminate expenses including some or all of our planned
clinical trials.
Contractual Obligations and Commitments
We may enter into contracts in the normal course of business with suppliers and other vendors for operating purposes. These
contracts generally provide for termination on notice, and therefore we believe that our non-cancelable obligations under these agreements
are not material. As of December 31, 2017, we had no material contractual obligations or commitments that will affect our future liquidity
other than our leases for office space described below.
On January 1, 2015, we entered into a five year lease for a facility with 7,732 square feet of space in Tirat Carmel, Israel. Annual
rent is $82,000 per year.
On April 13, 2017, we entered into a lease for a facility in Fort Lauderdale, Florida, which we began occupying in October 2017.
The facility currently consists of 4,554 square feet, which will increase to 6,390 square feet by the second year of the lease. The term will
run for seven years and two months from October 2017. Annual base rent is initially $156,555 per year, subject to annual increases of
2.75%.
Off-Balance Sheet Arrangements
We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined under
SEC rules, such as relationships with unconsolidated entities or financial partnerships, which are often referred to as structured finance or
special purpose entities, established for the purpose of facilitating financing transactions that are not required to be reflected on our balance
sheets.
53
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See pages F-1 through F-25 following the signature page of this Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of
our disclosure controls and procedures as of December 31, 2017. The term “disclosure controls and procedures,” as defined in Rules 13a-
15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that
information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed,
summarized and reported, within the time periods 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 a company in the reports that it
files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive
and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any
controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives
and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on
the evaluation of our disclosure controls and procedures as of December 31, 2017, our Chief Executive Officer and Chief Financial Officer
concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.
Management’s Annual Report on Internal Control Over Financial Reporting
This Annual Report on Form 10-K does not include a report of management’s assessment regarding internal control over financial
reporting or an attestation report of our independent registered public accounting firm due to a transition period established by rules of the
SEC for “emerging growth companies”.
Changes in Internal Control over Financial Reporting
No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act)
occurred during the fiscal quarter ended December 31, 2017 that has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The following sets forth certain information with respect to our officers and directors.
PART III
Name
Mark Pomeranz
Andrew Taylor
David Hochman
Darren Sherman
Gary Jacobs
Samuel Nussbaum
Shervin Korangy
Gary J. Pruden
Age
56
47
42
46
60
69
43
56
Position(s)
Chief Executive Officer and Director
Chief Financial Officer
Chairman of the Board
Director
Director
Director
Director
Director
Management
Mark Pomeranz, Chief Executive Officer and Director
Mr. Pomeranz has been Chief Executive Officer of Opco since 2014 and has served as our CEO since December 2016. Prior to
joining Opco, from 2007 to 2014, Mr. Pomeranz was the founding CEO of Svelte Medical Systems, a start-up company that is currently
commercializing a unique drug eluting stent platform in the EU. From 1998 to 2007, Mr. Pomeranz served as Vice President at Cordis, a
Johnson & Johnson Company, where his responsibilities included developing new technologies, exploring new market opportunities and
leading major restructuring efforts to create cross-functional global commercialization teams. Prior to that, Mr. Pomeranz held a number of
senior leadership roles, including positions at Cardiac Pathways Corporations from 1991 to 1998, and Cardiovascular Imaging Systems
from 1989 to 1991, both of which were acquired by Boston Scientific Corporation. Mr. Pomeranz earned a M.Sc. in biomedical engineering
from the University of Miami. Mr. Pomeranz was selected as a director due to his history as a director of Opco and his business and
leadership experience in the medical technology sector; his broad scientific background is also seen as an asset to us.
Andrew Taylor, Chief Financial Officer
Mr. Taylor has served as our Chief Financial Officer since August 2017. Prior to joining us, Mr. Taylor served as the CFO and
President of Angel Medical Systems from 2007 until 2017. Angel Medical Systems is a medical device company that develops and
manufactures ischemia monitoring and alerting systems. While at Angel Medical Systems, Mr. Taylor supervised the operations of more
than fifty (50) employees in the United States and Brazil, while also overseeing the financial planning and analysis activities, capital raise
efforts, and implementation of capital and operating budgets. From 2005 to 2007, Mr. Taylor was a Practice Leader for AC Lordi
Consulting, where he oversaw staff providing CFO and Controller consulting services. Prior to that, Mr. Taylor was the CFO of Safe3w,
Inc. from 2001 to 2005 until its acquisition by iPass, Inc. (NASDAQ: IPAS), where he led all accounting and finance functions as well as
the fundraising efforts, and negotiated the sale of the company. From 1999 to 2001, Mr. Taylor served as the Vice President of Finance and
Administration of Abridge, Inc., where he developed and managed processes for budgeting, forecasting and cash management. Prior to that,
Mr. Taylor was a Senior Finance Associate at Delta Air Lines (NYSE: DAL), from 1998 to 1999. Mr. Taylor is a CFA Program Level II
Candidate and earned a B.A. in Political Science and Economics at McGill University and his MBA in Finance at Northeastern University.
Directors
Mark Pomeranz, Chief Executive Officer and Director
See description under Management.
55
David P. Hochman, Chairman of the Board
Mr. Hochman has been Chairman of the Board of Opco since 2011 and has served on our board of directors as Chairman since
December 2016. Since June 2006, Mr. Hochman has been Managing Partner of Orchestra Medical Ventures, LLC, an investment firm that
employs a strategy to create, build and invest in medical technology companies intended to generate substantial clinical value and investor
returns. He is also President of Accelerated Technologies, Inc., a medical device accelerator company managed by Orchestra. He has over
twenty years of venture capital and investment banking experience. He is Chairman of Caliber Therapeutics and a director of BackBeat
Medical, Inc. (where he is also President), and FreeHold Surgical, Inc., all of which are Orchestra portfolio companies. Mr. Hochman
currently serves as a board member of Corbus Pharmaceuticals Holdings, Inc. (NASDAQ: CRBP), a clinical stage biopharmaceutical
company focused on the development and commercialization of novel therapeutics to treat rare, life-threating inflammatory-fibrotic
diseases with clear unmet medical needs. Mr. Hochman currently serves as a director of Adgero Biopharmaceuticals Holdings, Inc. Prior to
joining Orchestra, Mr. Hochman was Chief Executive Officer of Spencer Trask Edison Partners, LLC, an investment partnership focused
on early stage healthcare companies. He was also Managing Director of Spencer Trask Ventures, Inc. during which time he led financing
transactions for over twenty early-stage companies. Mr. Hochman was a board advisor of Health Dialog Services Corporation, a leader in
collaborative healthcare management that was acquired in 2008 by the British United Provident Association for $750 million. From 2005
to 2007, he was a co-founder and board member of PROLOR Biotech, Inc., a biopharmaceutical company developing longer-lasting
versions of approved therapeutic proteins, which was purchased by Opko Health (NASDAQ: OPK) in 2013 for over $600 million. He
currently serves on the board of two non-profit organizations: the Citizens Committee for New York City and the Mollie Parnis Livingston
Foundation, for which he also serves as President. He has a B.A. degree with honors from the University of Michigan. Mr. Hochman was
selected as a director due to his history as a director of Opco, his leadership experience at other public companies, including medical
technology companies, his financial experience and his expertise in governance matters.
Darren Sherman, Director
Mr. Sherman has been a director of Opco since 2015 and has served on our board of directors since December 2016. Since 2009,
Mr. Sherman has been a Managing Partner of Orchestra Medical Ventures, LLC, an investment firm that employs a strategy to create,
build and invest in medical technology companies intended to generate substantial clinical value and investor returns. He has also served as
Chief Technology Officer of Accelerated Technologies, Inc., a medical device accelerator company managed by Orchestra, since 2008. Mr.
Sherman has over 20 years of management and entrepreneurial experience in the medical technology industry spanning interventional
cardiology, cardiac electrophysiology, sudden cardiac death, stroke, surgery, GI, and neurovascular therapies. He is the CEO and a Director
of Caliber Therapeutics, Inc., CEO and a Director of FreeHold Surgical, Inc., and a Director of BackBeat Medical, Inc., all of which are
Orchestra portfolio companies. Prior to joining Orchestra, from February 2002 until March 2008, Mr. Sherman held positions in executive
management for Cordis Neurovascular (CNV), a Johnson & Johnson company, including Executive Director R&D and Director of Strategic
Marketing for stroke products. He had responsibility for all neurovascular R&D and global strategic marketing responsibilities for the
stroke franchise, including budgets, a portfolio of products and strategic planning. Mr. Sherman made contributions to the design and
commercialization of a series of products including the Enterprise Vascular Reconstruction Device and the Orbit Embolic Coil. From
January 1997 until February 2002, Mr. Sherman was involved in the formation and development of Revivant Corp (acquired by Zoll
Medical Corporation) while working at Fogarty Engineering. At Revivant, he managed the design, development, and testing of the
AutoPulse device from concept through market introduction. From January 1995 until January 1997, Mr. Sherman held positions in
research and development for Cardiac Pathways Corp., prior to its acquisition by Boston Scientific, and Baxter Healthcare. Mr. Sherman
has authored more than sixty-five U.S. patents and has over eighty additional published applications. He earned a BS degree in
Bioengineering from the University of California, San Diego. Mr. Sherman was selected as a director due to his history as a director of
Opco and his leadership experience at other companies, including medical technology companies.
56
Gary Jacobs, Director
Mr. Jacobs has been a director of Opco since 2011 and has served on our board of directors since December 2016. Mr. Jacobs is
the Founder and Managing Director at Jacobs Investment Company, LLC, and served as Chief Executive Officer of DermTech, Inc. He has
served as Chairman of DermTech International since 2006, NGT New Generation Technologies Ltd., Galilee Tech Management Ltd.,
Remedor Biomed Ltd., Sebana Medical Ltd. and ParaSonic Ltd. He has been a Director of Fallbrook Technologies, Inc. since March 31,
2004. He serves as a Director of Bio2 Technologies, Inc., and Nutrinia Ltd. Mr. Jacobs served as a software engineer and senior education
specialist of QUALCOMM, Inc. and as a software programmer at Linkabit Incorporated. He owns and operates a professional minor league
baseball team, the Lake Elsinore Storm, affiliated with the San Diego Padres. In addition, Mr. Jacobs serves as Chair of the Dean’s
Advisory Council for Social Sciences at the University of California, San Diego and as Chairman of the Board of Trustees of High Tech
High in San Diego. He serves as Vice Chairman and Chair-Elect of the Jewish Community Center Association Continental Board. Mr.
Jacobs received his B.A. in Management Science from the University of California, San Diego in 1979. Mr. Jacobs was selected as a
director due to his history as a director of Opco, his extensive experience serving on the board of directors of other companies, including
medical technology companies, and his financial experience.
Samuel R. Nussbaum, M.D., Director
Dr. Nussbaum has served on our board of directors since December 2016. During 2016 Dr. Nussbaum began serving as a Strategic
Consultant for EBG Advisors, the consulting arm for Epstein Becker and Green, where he advises life science companies, health care
systems and provider organizations. Dr. Nussbaum also serves as a Senior Advisor to Sandbox Industries, a venture fund, and Ontario
Teachers Pension Fund. He is a member of the Scientific Advisory Board of Medidata (Nasdaq: MDSO), a publicly traded clinical
technology company serving life sciences clients, and the Healthcare Advisory Board of KPMG. From 2000 until 2016, Dr. Nussbaum
served as Executive Vice President, Clinical Health Policy, and Chief Medical Officer of Anthem, Inc. (NYSE: ANTM), where he was
responsible for annual health care expenditures through business units focused on care management, health improvement, and provider
network contracting. Prior to joining Anthem, Dr. Nussbaum served as executive vice president, Medical Affairs and System Integration of
BJC Health Care, where he led integrated clinical services and community health, served as President of its medical group and chairman of
its commercial (HealthPartners of the Midwest) and Medicaid (CarePartners) health plans. He currently serves on the Board of Directors of
The Network for Excellence in Health Innovation (NEHI) and PhyMed Healthcare Group, a physician-led and owned leader of anesthesia
and pain management services. Dr. Nussbaum has also served on the Board of Directors of CareNex Health Services, National Quality
Forum, America’s Health Insurance Plans (AHIP), Regenstrief Institute, National Committee for Quality Health Care, the OASIS Institute,
VHA Foundation, BioCrossroads (an Indiana-based public-private collaboration that advances and invests in the life sciences), and
America’s Agenda, Board, Barnes-Jewish West County Hospital Board, Barnes-Jewish St. Peters Hospital Board, United Way of Greater
St. Louis, and the Battelle Advisory Board. Dr. Nussbaum is a Professor of Clinical Medicine at Washington University School of
Medicine,as adjunct professor at the Olin School of Business, Washington University and as Senior Fellow, University of Southern
California Schaeffer Center for Health Policy and Economics. Dr. Nussbaum earned his BA from New York University and his MD from
Mount Sinai School of Medicine. He trained in internal medicine at Stanford University and Massachusetts General Hospital and in
endocrinology at Harvard Medical School and Massachusetts General Hospital. Dr. Nussbaum was selected as a director because of his
medical and business experience in the healthcare and life sciences industries.
Shervin J. Korangy, Director
Mr. Korangy has served on our board of directors since March 2017. Mr. Korangy also serves as the Chief Financial Officer and
Head of Strategy of Beaver-Visitec International (“BVI”), a leading global developer, manufacturer and marketer of specialized surgical
devices for the ophthalmic marketplace. From 2012 to 2017, Mr. Korangy served in various country General Manager roles for the Alcon
division of Novartis Group AG (NYSE: NVS), a global healthcare company, where he worked with medical device, pharmaceutical and
consumer health product segments. Prior to that, while part of Novartis Group AG from 2010 to 2012, Mr. Korangy was the Global Head
of Corporate Finance, where he was responsible for global M&A, strategy, integrations and portfolio planning. He served on the Novartis
Finance Leadership Team and the Global Deal Committee. From 1996 to 2010, Mr. Korangy worked in the Private Equity and
Restructuring Advisory divisions of the Blackstone Group (NYSE: BX), where he most recently was a Managing Director. Mr. Korangy is
a current member of the Board of Directors (and member of the audit committee) of The Hain Celestial Group (NASDAQ: HAIN), a
leading organic and natural products company, and a senior advisor to Sight Sciences LLC, a medical device growth stage business. Mr.
Korangy is a former member of the Board of Directors of Pelican Rouge, a consumer coffee manufacturer and vending business, Ultra
Music, an electronic and dance music record label, Graham Packaging, a manufacturer and distributer of custom plastic containers for
consumer product companies, Pinnacle Foods (NYSE: PF), a consumer packaged foods manufacturer and distributer and Bayview
Financial, an asset manager and loan servicer. Mr. Korangy received his B.S. degree in economics at the Wharton School of the University
of Pennsylvania. Mr. Korangy was selected as a director due to his management experience with medical device, pharmaceutical and
consumer health products, and his financial and accounting experience.
57
Gary J. Pruden, Director
Mr. Pruden has served on our board of directors since December 2017. Prior to joining us, from 1985 until 2017, Mr. Pruden held
a number of senior commercial leadership positions across both the medical devices and pharmaceutical sectors of Johnson & Johnson
(NYSE: JNJ). In April 2004, he became President of the Johnson & Johnson subsidiary, Janssen-Ortho Inc. in Canada. In January 2006,
Mr. Pruden was appointed Worldwide President of Ethicon, Inc., a Johnson & Johnson subsidiary, and in 2009 became the Company Group
Chairman of Ethicon, Inc. In 2012, he was named Worldwide Chairman of Johnson & Johnson’s Global Surgery Group and in 2015 he
became Worldwide Chairman in the Medical Devices division. In April 2016, Mr. Pruden became a member of the Executive Committee at
Johnson & Johnson where his official title was Executive Vice President, Worldwide Chairman, Medical Devices. Mr. Pruden also served
in several capacities with the Advanced Medical Technology Association (AdvaMed), a medical device trade association, where he
participated in negotiations with the Federal Drug Administration. While at AdvaMed Mr. Pruden served as a member of the Board of
Directors, as Chair of the AdvaMed Regulatory Committee, and as a member of the AdvaMed Executive Committee. Mr. Pruden received
his B.S. degree in finance at Rider University, where he later served on the Board of Trustees from 2011 until 2015. Mr. Pruden was
selected as a director due to his management and regulatory experience with medical device and pharmaceutical products and his financial
experience.
Family Relationships
There are no family relationships among any of our directors or executive officers.
Code of Business Conduct and Ethics
We have adopted a written code of business conduct and ethics that applies to our employees, officers and directors. A current
copy of our code is posted on the Corporate Governance section of our website, which is located at www.motusgi.com. We intend to
disclose future amendments to certain provisions of our code of business conduct and ethics, or waivers of such provisions applicable to
any principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar
functions, and our directors, on our website identified above or in filings with the SEC.
Committees of the Board of Directors
Our board of directors has established an Audit Committee, a Compensation Committee, and a Nominating and Corporate
Governance Committee. Our board of directors may establish other committees to facilitate the management of our business. The
composition and functions of each committee are described below. Members serve on these committees until their resignation or until
otherwise determined by our board of directors. Each of these committees operates under a charter that has been approved by our board of
directors, which are available on our website.
Audit Committee. Our Audit Committee consists of Mr. Korangy, Mr. Pruden and Mr. Sherman, with Mr. Korangy serving as
the Chairman of the Audit Committee. Our board of directors has determined that the three directors currently serving on our Audit
Committee are independent within the meaning of the NASDAQ Marketplace Rules and Rule 10A-3 under the Exchange Act. In addition,
our board of directors has determined that Mr. Korangy qualifies as an audit committee financial expert within the meaning of SEC
regulations and The NASDAQ Marketplace Rules.
58
The Audit Committee oversees and monitors our financial reporting process and internal control system, reviews and evaluates the
audit performed by our registered independent public accountants and reports to the board of directors any substantive issues found during
the audit. The Audit Committee is directly responsible for the appointment, compensation and oversight of the work of our registered
independent public accountants. The Audit Committee reviews and approves all transactions with affiliated parties.
Compensation Committee. Our Compensation Committee consists of Mr. Hochman, Mr. Jacobs, Mr. Pruden and Mr.
Nussbaum, with Mr. Hochman serving as the Chairman of the Compensation Committee. Our board of directors has determined that the
three directors currently serving on our Compensation Committee are independent under the listing standards, are “non-employee directors”
as defined in rule 16b-3 promulgated under the Exchange Act and are “outside directors” as that term is defined in Section 162(m) of the
Internal Revenue Code of 1986, as amended.
The Compensation Committee provides advice and makes recommendations to the board of directors in the areas of employee
salaries, benefit programs and director compensation. The Compensation Committee also reviews and approves corporate goals and
objectives relevant to the compensation of our President, Chief Executive Officer, and other officers and makes recommendations in that
regard to the board of directors as a whole.
Nominating and Corporate Governance Committee. Our Nominating and Corporate Governance Committee consists of Mr.
Sherman, Mr. Jacobs and Mr. Nussbaum, with Mr. Sherman serving as the Chairman of the Nominating and Corporate Governance
Committee. The Nominating and Corporate Governance Committee nominates individuals to be elected to the board of directors by our
stockholders. The Nominating and Corporate Governance Committee considers recommendations from stockholders if submitted in a
timely manner in accordance with the procedures set forth in our bylaws and will apply the same criteria to all persons being considered.
All members of the Nominating and Corporate Governance Committee are independent directors as defined under the NASDAQ listing
standards.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act, requires our directors and executive, officers, and persons who are beneficial owners of more
than 10% of a registered class of our equity securities, to file reports of ownership and changes in ownership with the SEC. These persons
are required by SEC regulations to furnish us with copies of all Section 16(a) forms they file.
Our officers, directors and ten percent stockholders did not become subject to the reporting requirements of Section 16(a) until
February 14, 2018 and, therefore, there were no reports required during the fiscal year ended December 31, 2017.
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ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation Table
The following table shows the compensation awarded to or earned by our principal executive officer during the fiscal year ended
December 31, 2017, our two other most highly compensated executive officers who were serving as executive officers as of December 31,
2017, and up to two additional individuals for whom disclosure would have been provided but for the fact that the individual was not
serving as an executive officer as of December 31, 2017. The persons listed in the following table are referred to herein as the “named
executive officers”.
Name and Principal Position Year
Mark Pomeranz
Chief Executive Officer
Salary
($)
2017 350,000 87,500
2016 350,000 70,000
Bonus
($)
Stock
Awards
($)
Option
Awards
($) (1)
All Other
Compensation
($)
Total
($)
639 1,122,788
-
-
30,712 1,591,639
477,382
57,382
Andrew Taylor (3)
Chief Financial Officer
2017 110,625 27,000
-
2016
-
-
-
601,050
-
9,492
-
748,167
-
James Martin (5)
2017
Former Chief Financial Officer 2016
93,154
31,818
-
-
639
-
289,934
-
7,182
690
390,909
32,508
(1) Amounts reflect the grant date fair value of option awards granted in 2017 and, to the extent applicable, the incremental fair value of
stock options repriced in September 2017, in accordance with Accounting Standards Codification Topic 718. For information regarding
assumptions underlying the valuation of equity awards, see Note 9 to our Consolidated Financial Statements and the discussion under “Part
II—Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operation” included in this report. These
amounts do not correspond to the actual value that may be received by the named executive officers if the stock options are exercised.
(2) Andrew Taylor began serving as our Chief Financial Officer on August 16, 2017.
(3) James Martin began serving as our Chief Financial Officer on November 6, 2016, and ceased serving as our Chief Financial Officer
effective June 9, 2017.
Narrative Disclosure to Summary Compensation Table
Employment Agreements with Our Named Executive Officers
In connection with the Share Exchange Transaction, we entered into an employment agreement with Mr. Pomeranz, which became
effective on December 22, 2016 for a period of three years, which contains non-disclosure and invention assignment provisions. Under the
terms of Mr. Pomeranz’s employment agreement, he holds the position of Chief Executive Officer, and is a member of the board of
directors, and receives a base salary of $350,000 annually, subject to adjustments in the discretion of the board of directors; and he received
a signing bonus of $70,000 upon the closing of the Share Exchange Transaction. In addition, Mr. Pomeranz is also eligible to receive an
annual bonus, which is targeted at up to 25% of his base salary but which may be adjusted by our board of directors based on his individual
performance and our performance as a whole. In connection with the final closing of the 2017 Private Placement, in May 2017 Mr.
Pomeranz received a grant of options to purchase up to 511,113 shares of our Common Stock pursuant to our Equity Incentive Plan with an
exercise price of $5.00 per share, of which fifty-three percent (53%) were fully vested when issued, forty percent (40%) will vest in a series
of twelve (12) successive equal quarterly installments upon the completion of each successive calendar quarter of active service over the
three (3) year period measured from the date of grant, as was determined by the Compensation Committee of the board of directors, and
seven percent (7%) will not become fully vested until three years from the date of his employment agreement. This option was repriced to
$4.50 per share in September 2017. In addition, pursuant to the terms of his employment agreement, Mr. Pomeranz is eligible to receive,
from time to time, equity awards under our existing equity incentive plan, or any other equity incentive plan we may adopt in the future,
and the terms and conditions of such awards, if any, will be determined by our Board of Directors or Compensation Committee, in their
discretion. Mr. Pomeranz is also eligible to participate in any executive benefit plan or program we adopt.
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In the event of termination by us for cause, or if Mr. Pomeranz terminates voluntarily, Mr. Pomeranz is entitled to: (i) his unpaid
salary through and including the date of termination; (ii) any vested amount or benefit; and, (iii) reimbursement of business expenses. In
the event of termination by us without cause, or if Mr. Pomeranz terminates for good reason, Mr. Pomeranz will be entitled to: (i) his
unpaid salary through and including the date of termination; (ii) any vested amount or benefit; (iii) payment as severance twelve months of
his base salary; (iv) reimbursement of business expenses; and (v) 25% of any unvested options will vest upon termination.
On August 16, 2017, we entered into an employment agreement with Mr. Taylor, which became effective on August 16, 2017 (the
“Commencement Date”) for a period of two years, which contains non-disclosure and invention assignment provisions. Under the terms of
Mr. Taylor’s employment agreement, he holds the position of Chief Financial Officer and receives a base salary of $295,000 annually,
subject to adjustments in the discretion of the board of directors; and he will be eligible to receive a signing bonus of $15,000 upon the date
that is six (6) months following the Commencement Date. Mr. Taylor is also eligible to receive a relocation bonus of up to $35,000 if Mr.
Taylor elects to relocate to Florida. In addition, Mr. Taylor is also eligible to receive a first year bonus payable following the one year
anniversary of the Commencement Date, which is targeted at $30,000, and a second year bonus payable following the two year anniversary
of the Commencement Date, which is targeted at $35,000, both of which may be adjusted by our board of directors based on his individual
performance and our performance as a whole. In connection with his employment agreement, in September 2017 Mr. Taylor received a
grant of options to purchase up to 240,000 shares of our Common Stock pursuant to our Equity Incentive Plan with an exercise price of
$4.50 per share, which vests in a series of twelve (12) successive equal quarterly installments upon the completion of each successive
calendar quarter of active service over the three (3) year period measured from the date of grant, as determined by the Compensation
Committee of the board of directors. In addition, pursuant to the terms of his employment agreement, Mr. Taylor is eligible to receive, from
time to time, equity awards under our existing equity incentive plan, or any other equity incentive plan we may adopt in the future, and the
terms and conditions of such awards, if any, will be determined by our Board of Directors or Compensation Committee, in their discretion.
Mr. Taylor is also eligible to participate in any executive benefit plan or program we adopt.
In the event of termination by us for cause or by Mr. Taylor without good reason, Mr. Taylor will be entitled to: (i) the amount of
his earned, but unpaid salary, prior to the effective date of termination; (ii) reimbursement for any expenses incurred through the effective
date of termination; (iii) any vested amount or benefit. In the event of termination by us without cause or by Mr. Taylor for good reason,
Mr. Taylor will be entitled to receive: (i) the amount of his earned, but unpaid salary, prior to the effective date of termination; (ii)
reimbursement for any expenses incurred through the effective date of termination; (iii) any vested amount or benefit; (iv) payment as
severance six months of his base salary if Mr. Taylor has been actively employed in good standing by us for at least 91 days, or if Mr.
Taylor has been actively employed in good standing with us for at least eighteen months, payment as severance nine months of his base
salary; (v) payment of our portion of the cost of COBRA coverage for twelve months; and , (vi) accelerated vesting of any options that
otherwise would have vested on the last day of the calendar quarter during which the termination date occurred.
The employment agreements with Israeli employees of Opco contain standard provisions for a company in our industry regarding
non-competition, confidentiality of information and assignment of inventions. The enforceability of covenants not to compete in Israel is
subject to limitations. For example, Israeli courts have recently required employers seeking to enforce non-compete undertakings of a
former employee to demonstrate that the competitive activities of the former employee will harm one of a limited number of material
interests of the employer which have been recognized by the courts, such as the secrecy of a company’s confidential commercial
information or its intellectual property.
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Outstanding Equity Awards at Fiscal Year-End Table – 2017
The following table summarizes, for each of the named executive officers, the number of shares of our Common Stock underlying
outstanding stock options held as of December 31, 2017.
Name
Mark Pomeranz (CEO)
Number of securities underlying
unexercised options (#)
Exercisable
Unexercisable
41,076(1)
304,964(2)
26,162
206,149(2)
Option Exercise
Price ($)
Option
Expiration Date
2.38
4.50(2)
March 26, 2024
May 3, 2027
Andrew Taylor (CFO)
20,000(3)
220,000(3)
4.50
September 28, 2027
James Martin (Former CFO) (4)
-
-
-
-
(1) Represents options to purchase shares of our Common Stock granted on March 26, 2014, under the Motus G.I. Medical Technologies
LTD Employee Share Option Plan that were outstanding as of the Share Exchange Transaction, which were assumed by the 2016 Equity
Incentive Plan (the “2016 Plan”) and continue in effect in accordance with their terms, on an adjusted basis to reflect the Share Exchange
Transaction (see “Part III—Item 11—Executive Compensation—2016 Equity Incentive Plan—Description of the 2016 Equity Incentive
Plan—Administration” below). 61% of the option was vested as of December 31, 2017, with the remaining 39% of the option vesting in
full in November 2018.
(2) Represents options to purchase shares of our Common Stock granted on May 4, 2017, with an exercise price of $5.00 per share. Fifty-
three percent (53%) of the option vested immediately upon grant, forty percent (40%) of the option vests in a series of twelve (12)
successive equal quarterly installments commencing on May 4, 2017 and continuing on the first day of each third month thereafter, and the
remaining seven percent (7%) of the option vests on December 22, 2019. This option was repriced to $4.50 per share in September 2017.
(3) Represents options to purchase shares of our Common Stock granted on September 29, 2017, with an exercise price of $4.50 per share.
The shares underlying the option vest in a series of twelve (12) successive equal quarterly installments commencing on December 1, 2017
and continuing on the first day of each third month thereafter.
(4) Mr. Martin ceased serving as our Chief Financial Officer effective June 9, 2017. Pursuant to the terms of the option to purchase shares
of our Common Stock granted on May 4, 2017, and the 2016 Equity Incentive Plan, Mr. Martin’s options terminated and were canceled as
of September 7, 2017, the date which was 90 days after Mr. Martin’s continuous service ended. Mr. Martin had no vested or unvested
equity awards outstanding as of December 31, 2017.
2016 Equity Incentive Plan
General
On December 14, 2016, our board of directors adopted the 2016 Plan having substantially the terms described herein.
The general purpose of the 2016 Plan is to provide a means whereby eligible employees, officers, non-employee directors and
other individual service providers develop a sense of proprietorship and personal involvement in our development and financial success,
and to encourage them to devote their best efforts to our business, thereby advancing our interests and the interests of our stockholders. By
means of the 2016 Plan, we seek to retain the services of such eligible persons and to provide incentives for such persons to exert
maximum efforts for our success and the success of our subsidiaries.
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Description of the 2016 Equity Incentive Plan
The following is a summary description of the principal terms of the 2016 Plan and is qualified in its entirety by the full text of the
2016 Plan.
Administration. The 2016 Plan is administered by the Compensation Committee of our board of directors. The Compensation
Committee is authorized to grant options to purchase shares of our Common Stock, stock appreciation rights, restricted stock, stock units,
performance shares, performance units, incentive bonus awards, other cash-based awards and other stock-based awards. Stock options
granted under the Motus G.I. Medical Technologies LTD Employee Share Option Plan that were outstanding as of the Share Exchange
Transaction were assumed by the 2016 Plan and continue in effect in accordance with their terms, subject to appropriate adjustments to
reflect the Share Exchange Transaction (the “Assumed Options”). The Compensation Committee also has authority to determine the terms
and conditions of each award, prescribe, amend and rescind rules and regulations relating to the 2016 Plan, and amend the terms of awards
in any manner not inconsistent with the 2016 Plan (provided that no amendment may adversely affect the rights of a participant without his
or her consent), including authority to reduce or reprice the exercise price of outstanding options or stock appreciation rights. The
Compensation Committee is permitted to delegate to officers and employees authority to grant options and other awards to employees
(other than themselves), subject to applicable law and restrictions in the 2016 Plan. No award will be granted under the 2016 Plan on or
after the ten year anniversary of the adoption of the 2016 Plan by our board of directors, but awards granted prior to the ten year
anniversary may extend beyond that date.
Eligibility. Persons who are eligible to receive awards under the 2016 Plan include any person who is an employee, officer,
director, consultant, advisor or other individual service provider of the Company or any subsidiary, or any person who is determined by the
Compensation Committee to be a prospective employee, officer, director, consultant, advisor or other individual service provider of the
Company or any subsidiary.
Shares Subject to the 2016 Plan. As of January 1, 2018, the aggregate number of shares of our Common Stock that are available
for issuance in connection with options and awards granted under the 2016 Plan and Assumed Options is 2,641,250. Incentive stock options
may, but need not be, granted with respect to all of the shares available for issuance under the 2016 Plan. If any award granted under the
2016 Plan payable in shares of our Common Stock is forfeited, cancelled, returned for failure to satisfy vesting requirements, is otherwise
forfeited, otherwise terminates without payment being made, or if shares of our Common Stock are surrendered in full or partial payment
of the exercise price or withheld to cover withholding taxes on options or other awards, the number of shares of our Common Stock as to
which such option or award was forfeited, or which were surrendered or withheld, will be available for future grants under the 2016 Plan.
In addition, the 2016 Plan contains an “evergreen” provision allowing for an annual increase, on January 1 of each year during the
term of the 2016 Plan, in the number of shares of our Common Stock available for issuance under the 2016 Plan. The annual increase in the
number of shares shall be equal to six percent (6%) of the total number of shares of our Common Stock outstanding on December 31st of
the preceding calendar year; provided, however, that our board of directors may act prior to the first day of any calendar year to provide
that there shall be no increase such calendar year, or that the increase shall be a lesser number of shares of our Common Stock than would
otherwise occur.
Terms and Conditions of Options. Options granted under the 2016 Plan may be either “incentive stock options” that are intended
to meet the requirements of Section 422 of the Code or “nonqualified stock options” that do not meet the requirements of Section 422 of
the Code. The Compensation Committee will determine the exercise price of options granted under the 2016 Plan. The exercise price of
stock options may not be less than the fair market value per share of our Common Stock on the date of grant (or 110% of fair market value
in the case of incentive stock options granted to a ten-percent stockholder).
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If on the date of grant our Common Stock is listed on a stock exchange or national market system, the fair market value will
generally be the closing sale price on the date of grant. If our Common Stock is not traded on a stock exchange or national market system
on the date of grant, the fair market value will generally be the average of the closing bid and asked prices for our Common Stock on the
date of grant. If no such prices are available, the fair market value shall be determined in good faith by the Compensation Committee based
on the reasonable application of a reasonable valuation method. Notwithstanding the foregoing, if the date for which fair market value is
determined is the date on which the final prospectus relating to an initial public offering of the Company is filed, the fair market value for
such date will be the “Price to the Public” (or equivalent) set forth on the cover page for the final prospectus.
No option will be exercisable for more than ten years from the date of grant (five years in the case of an incentive stock option
granted to a ten-percent stockholder). Options granted under the 2016 Plan will be exercisable at such time or times as the Compensation
Committee prescribes at the time of grant. No employee may receive incentive stock options that first become exercisable in any calendar
year in an amount exceeding $100,000. The Compensation Committee has authority, in its discretion, to permit a holder of a nonqualified
stock option to exercise the option before it has otherwise become exercisable, in which case the shares of our Common Stock issued to the
recipient will be restricted stock subject to vesting requirements analogous to those that applied to the option before exercise.
Generally, the exercise price of an option is payable (a) in cash or by certified bank check, (b) through delivery of shares of our
Common Stock having a fair market value equal to the purchase price, or (c) such other method as approved by the Compensation
Committee and set forth in an award agreement. The Compensation Committee is also authorized to establish a cashless exercise program
and to permit the exercise price to be satisfied by reducing from the shares otherwise issuable upon exercise a number of shares having a
fair market value equal to the exercise price.
No option will be transferrable other than by will or by the laws of descent and distribution, and during a recipient’s lifetime an
option will be exercisable only by the recipient. However, the Compensation Committee is authorized to permit the holder of nonqualified
stock options, share-settled stock appreciation rights, restricted stock, performance shares or other share-settled stock based awards to
transfer the option, right or other award to immediate family members, to a trust for estate planning purposes, or by gift to charitable
institutions. The Compensation Committee has the authority to determine the extent to which a holder of a stock option may exercise the
option following termination of service with us.
Stock Appreciation Rights. The Compensation Committee is authorized to grant stock appreciation rights (“SARs”) independent
of or in connection with an option. The Compensation Committee is also authorized to determine the other terms applicable to SARs. The
base price of a SAR will be determined by the Compensation Committee, but will not be less than 100% of the fair market value of a share
of our Common Stock on the date of grant. The maximum term of any SAR granted under the 2016 Plan will be ten years from the date of
grant. Generally, each SAR will entitle a participant upon exercise to an amount equal to:
● the excess of the fair market value on the exercise date of one share of our Common Stock over the base price, multiplied by
● the number of shares of our Common Stock as to which the SAR is exercised.
Payment may be made in shares of our Common Stock, in cash, or partly in shares of our Common Stock and partly in cash, all as
determined by the Compensation Committee.
Restricted Stock and Stock Units. The Compensation Committee is authorized to award restricted Common Stock and/or stock
units under the 2016 Plan. Restricted stock awards consist of shares of stock that are transferred to a participant subject to restrictions that
may result in forfeiture if specified conditions are not satisfied. Stock units confer the right to receive shares of our Common Stock, cash, or
a combination of shares and cash, at a future date upon or following the attainment of such conditions as may be specified by the
Compensation Committee. The Compensation Committee is authorized to determine the restrictions and conditions applicable to each
award of restricted stock or stock units, which may include performance-based conditions. The 2016 Plan provides that dividends with
respect to restricted stock may be paid to the holder of the shares as and when dividends are paid to stockholders or at the time that the
restricted stock vests, as determined by the Compensation Committee. Dividend equivalent amounts under the 2016 Plan may also be paid
with respect to stock units, and are subject to the same restrictions on transferability as the stock units with respect to which they were paid.
Unless the Compensation Committee determines otherwise, holders of restricted stock have the right to vote the shares.
64
Performance Shares and Performance Units . The Compensation Committee is authorized to award performance shares and/or
performance units under the 2016 Plan. Performance shares and performance units are awards, denominated in either shares or U.S. dollars,
which are earned during a specified performance period subject to the attainment of performance criteria, as established by the
Compensation Committee. The Compensation Committee has the authority to determine the restrictions and conditions applicable to each
award of performance shares and performance units.
Incentive Bonus Awards. The Compensation Committee is authorized to award incentive bonus awards payable in cash or shares
of our Common Stock, as set forth in an award agreement. The Compensation Committee has the authority to determine the terms and
conditions applicable to each incentive bonus award.
Other Stock-Based and Cash-Based Awards. The Compensation Committee is authorized to award other types of equity-based or
cash-based awards under the 2016 Plan, including the grant or offer for sale of shares of our Common Stock that do not have vesting
requirements and the right to receive one or more cash payments subject to satisfaction of such conditions as the Compensation Committee
may impose.
Section 162(m) Compliance. Section 162(m) of the Code, as amended by the 2017 Tax Act, generally limits the deductibility of
compensation paid by a publicly-held company to a “covered employee” for a taxable year to $1 million. “Covered employees” include our
Chief Executive Officer, Chief Financial Officer and our next three highest compensated named executive officers. Effective for taxable
years beginning prior to January 1, 2018, an exception to this deduction limit applied to “performance-based compensation”, such as stock
options and other equity awards, that satisfies certain criteria. The exception for “performance-based compensation” continues to apply to
certain written binding contracts which were in effect on November 2, 2017 and that are not modified in any material respect on or after that
date.
Unless materially modified, stock options and other equity awards made under the Plan prior to January 1, 2018 should be exempt
from the Section 162(m) deductibility limit because they were granted before the completion of our IPO. However, in light of the
elimination of the exception to the Section 162(m) deduction limit for performance-based compensation, we will not be able to deduct
amounts with respect to stock options and other equity awards made under the Plan on or after January 1, 2018 in excess of the Section
162(m) limit.
The Plan includes certain terms that were intended to allow awards to be made that would meet the Section 162(m) exception for
performance-based compensation. In light of the elimination of the exception for performance-based compensation by the 2017 Tax Act
effective for taxable years beginning on and after January 1, 2018, those provisions are no longer relevant. However, a Plan limitation
intended to satisfy the Section 162(m) exception for performance-based compensation will continue to apply. Under that limitation, the
maximum number of shares of our Common Stock with respect to which any one participant may be granted stock options or stock
appreciation rights under the Plan during any calendar year is 1,500,000 shares.
Effect of Certain Corporate Transactions. The Compensation Committee has the authority to provide, at the time of the grant of
an award, for the effect of a change in control (as defined in the 2016 Plan) on any award, including (i) accelerating or extending the time
periods for exercising, vesting in, or realizing gain from any award, (ii) eliminating or modifying the performance or other conditions of an
award, (iii) providing for the cash settlement of an award for an equivalent cash value, as determined by the Compensation Committee, or
(iv) such other modification or adjustment to an award as the Compensation Committee deems appropriate to maintain and protect the
rights and interests of participants following a change in control. The Compensation Committee has the authority, in its discretion and
without the need for the consent of any recipient of an award, to also take one or more of the following actions contingent upon the
occurrence of a change in control: (a) cause any or all outstanding options and stock appreciation rights to become immediately exercisable,
in whole or in part; (b) cause any other awards to become non-forfeitable, in whole or in part; (c) cancel any option or stock appreciation
right in exchange for a substitute option; (d) cancel any award of restricted stock, stock units, performance shares or performance units in
exchange for a similar award of the capital stock of any successor corporation; (e) redeem any restricted stock for cash and/or other
substitute consideration with a value equal to the fair market value of an unrestricted share of our Common Stock on the date of the change
in control; (f) cancel any option or stock appreciation right in exchange for cash and/or other substitute consideration based on the value of
our Common Stock on the date of the change in control, and cancel any option or stock appreciation right without any payment if its
exercise price exceeds the value of our Common Stock on the date of the change in control; or (g) make such other modifications,
adjustments or amendments to outstanding awards as the Compensation Committee deems necessary or appropriate.
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Amendment, Termination. The Compensation Committee has the authority to amend the terms of awards in any manner not
inconsistent with the 2016 Plan, provided that no amendment shall adversely affect the rights of a participant with respect to an outstanding
award without the participant’s consent. In addition, our board of directors has the authority, at any time, to amend, suspend, or terminate
the 2016 Plan, provided that (i) no such amendment, suspension or termination materially and adversely affects the rights of any participant
under any outstanding award without the consent of such participant and (ii) to the extent necessary to comply with any applicable law,
regulation, or stock exchange rule, the 2016 Plan requires us to obtain stockholder consent. Stockholder approval is required for any plan
amendment that increases the number of shares of our Common Stock available for issuance under the 2016 Plan or changes the persons or
classes of persons eligible to receive awards.
Tax Withholding
As and when appropriate, we shall have the right to require each optionee purchasing shares of our Common Stock and each
grantee receiving an award of shares of our Common Stock under the 2016 Plan to pay any federal, state or local taxes required by law to be
withheld.
Option Grants and Stock Awards
The grant of options and other awards under the 2016 Plan is discretionary and we cannot determine now the specific number or
type of options or awards to be granted in the future to any particular person or group.
Israeli Aspects of the 2016 Plan
The 2016 Israeli Sub-Plan (the “Sub-Plan”) provides for the grant of awards pursuant to the Israeli Income Tax Ordinance (New
Version), 1960, as amended (the “Israeli Tax Ordinance”): awards granted pursuant to (i) Section 102 of the Israeli Tax Ordinance
(“Section 102 Awards”) and (ii) Section 3(i) of the Israeli Tax Ordinance (“Section 3(i) Awards”). The 2016 Plan and the Sub-Plan
provide, subject to applicable law, that Section 102 Awards may be granted only to Israeli employees, officers and directors (excluding
Controlling Shareholders as defined by the Israeli Tax Ordinance1) and Section 3(i) Awards (which does not provide for similar tax
benefits) may be granted to Israeli non-employees including consultants, service providers and Controlling Shareholders (as defined by the
Israeli Tax Ordinance), in each case, of our company or any subsidiary. The 2016 Plan and the Sub-Plan were submitted for the approval of
the Israeli Tax Authority (the “ITA”), as required by applicable law.
Section 102 of the Israeli Tax Ordinance includes two alternatives for tax treatment involving the issuance of options or shares to a
trustee for the benefit of the grantees, which are referred to as the capital gains track and the ordinary income track, and also includes an
additional alternative for the issuance of options or shares issued directly to the grantee. Under the Sub-Plan, each Section 102 Award
designates that such award be granted under the capital gains track or the ordinary income track. We cannot select both tracks
simultaneously for Section 102 Awards and the election of the type of track shall apply to all Section 102 Awards awarded under the Sub-
Plan (unless the election is changed pursuant to the provisions of the Israeli Tax Ordinance).
In order to comply with the terms of the “capital gains track”, all options granted under a specific plan and subject to the provisions
of Section 102 of the Israeli Tax Ordinance, as well as the shares issued upon exercise of such options and other shares received
subsequently following any realization of rights with respect to such options, such as share dividends and share splits, must be registered in
the name of a trustee selected by the board of directors and held in trust for the benefit of the relevant employee, director or officer for a
period of two years from the date of grant and deposit with such trustee. However, under this track, the “employing company” (within the
meaning of Section 102(a) of the Israeli Tax Ordinance) is not allowed to deduct an expense with respect to the issuance of the options or
shares.
66
Director Compensation
The following table sets forth information concerning the compensation paid to certain of our non-employee directors during
2017.
Name
David Hochman
Darren Sherman
Gary Jacobs
Samuel Nussbaum
Shervin Korangy
Gary Pruden
Fees earned or
paid in cash ($)
Option awards
($) (1)
Total
($)
34,000
16,000
14,500
13,000
18,000
2,167
126,000(2)(7)
72,000(3)(7)
66,600(4)(7)
36,000(5)(7)
46,800(6)(7)
-
160,000
88,000
81,100
49,000
64,800
2,167
(1) Amounts reflect the aggregate grant date fair value of each stock option granted in 2017 and the incremental fair value of stock options
repriced in September 2017, in accordance with the Accounting Standards Codification Topic 718. For information regarding assumptions
underlying the valuation of equity awards, see Note 9 to our Consolidated Financial Statements and the discussion under “Part II—Item 7
—Management’s Discussion and Analysis of Financial Condition and Results of Operation” included in this report. These amounts do not
correspond to the actual value that may be received by the directors if the stock options are exercised.
(2) The aggregate number of shares of Common Stock underlying stock options outstanding as of December 31, 2017 held by Mr.
Hochman was 175,000.
(3) The aggregate number of shares of Common Stock underlying stock options outstanding as of December 31, 2017 held by Mr. Sherman
was 100,000.
(4) The aggregate number of shares of Common Stock underlying stock options outstanding as of December 31, 2017 held by Mr. Jacobs
was 92,500.
(5) The aggregate number of shares of Common Stock underlying stock options outstanding as of December 31, 2017 held by Mr.
Nussbaum was 50,000.
(6) The aggregate number of shares of Common Stock underlying stock options outstanding as of December 31, 2017 held by Mr. Korangy
was 65,000.
(7) This stock option was granted in May 2017 with an exercise price of $5.00 per share, which stock option was repriced to have an
exercise price of $4.50 per share in September 2017.
Non-Employee Director Compensation and Advisory Board Compensation
Our board of directors approved a director compensation policy for our directors, effective beginning July 1, 2017. This policy
provides for the following cash compensation:
● each director is entitled to receive a quarterly fee from us of $6,500;
● the chairman of the Board will receive a quarterly fee from us of $9,000;
● the chair of the Audit Committee will receive a quarterly fee from us of $2,500;
● each chair of any other board of director committee will receive a quarterly fee from us of $1,500; and
● each non-employee director sitting on more than two Board committees will receive an additional quarterly fee of $750.
All fees under the director compensation policy will be paid on a quarterly basis in arrears and no per meeting fees will be paid.
We will also reimburse non-employee directors for reasonable expenses incurred in connection with attending board of director and
committee meetings.
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
Securities Authorized for Issuance Under Equity Compensation Plans
The following table provides information with respect to our compensation plans under which equity compensation was
authorized as of December 31, 2017.
Number of securities to be
issued upon exercise of
outstanding options,
warrants and rights
(a)
Weighted average exercise
price of outstanding
options, warrants and rights
(b)
Number of securities
remaining available for
future issuance under
equity compensation plans
(excluding securities
reflected in column a)
(c)(2)
1,803,096 $
— $
1,803,096 $
4.40
—
4.40
202,122
—
202,122
Plan category
Equity compensation plans approved by
security holders(1)
Equity compensation plans not approved by
security holders
Total
(1) The amounts shown in this row include securities under the Motus GI Holdings, Inc. 2016 Equity Incentive Plan and 2016
Israeli Sub-Plan to the Motus GI Holdings, Inc. 2016 Equity Incentive Plan (the “2016 Plan”).
(2) In accordance with the “evergreen” provision in our 2016 Plan, an additional 629,594 shares were automatically made
available for issuance on the first day of 2018, which represents 6% of the number of shares outstanding on December 31,
2017; these shares are excluded from this calculation.
Security Ownership of Certain Beneficial Owners and Management
The following table sets forth information regarding the beneficial ownership of our Common Stock as of the date of this report
by:
● each of our stockholders who is known by us to beneficially own 5% or more of our Common Stock;
● each of our named executive officers;
● each of our directors; and
● all of our directors and current officers as a group.
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Beneficial ownership is determined based on the rules and regulations of the SEC. A person has beneficial ownership of shares if
such individual has the power to vote and/or dispose of shares. This power may be sole or shared and direct or indirect. In computing the
number of shares beneficially owned by a person and the percentage ownership of that person, shares of our Common Stock that are
subject to options or warrants held by that person and exercisable as of, or within 60 days of, March 1, 2018 are counted as outstanding.
These shares, however, are not counted as outstanding for the purposes of computing the percentage ownership of any other person(s).
Except as otherwise noted in the footnotes to the table, we believe that each person or entity named in the table has sole voting and
investment power with respect to all shares of the Company’s Common Stock shown as beneficially owned by that person or entity (or
shares such power with his or her spouse). Unless indicated below, the address of each individual listed below is c/o Motus GI Holdings,
Inc., 1301 East Broward Boulevard, 3rd Floor, Ft. Lauderdale, FL 33301.
The percentage of the Common Stock beneficially owned by each person or entity named in the following table is based on
15,574,752 shares of Common Stock issued and outstanding as of March 1, 2018 plus any shares issuable upon exercise of options or
warrants that are exercisable on or within 60 days after March 1, 2018 held by such person or entity.
Beneficial ownership representing less than 1% is denoted with an asterisk (*).
Name of Beneficial Owner
Officers and Directors
Mark Pomeranz (1)
David Hochman (2)(4)(5)(6)(7)
Darren Sherman (3)(4)(5)(6)(7)
Gary Jacobs (8)(9)
Samuel Nussbaum (10)
Shervin Korangy (11)
Andrew Taylor (12)
Gary Pruden
Number of Shares
Beneficially Owned
Percentage of Shares
Beneficially Owned
371,218
2,660,584
2,590,584
801,862
10,000
20,000
42,000
50,000
2.33%
16.89%
16.45%
5.13%
*
*
*
*
Directors and Officers as a Group (8 persons)
3,963,664
24.43%
5% Stockholders
Ascent Biomedical Ventures II, L.P. (13)
ABV, LLC (13)(14)
Orchestra Medical Ventures II, L.P. (4)
Orchestra MOTUS Co-Investment Partners, LLC (5)
Orchestra Medical Ventures II GP, LLC (4)(6)
Jacobs Investment Company LLC (9)
Perceptive Life Sciences Master Fund Ltd. (15)
Perceptive Advisors LLC (15)
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1,748,215
2,386,889
1,218,630
1,229,104
1,301,982
792,762
2,866,541
2,866,541
11.11%
15.15%
7.77%
7.86%
8.30%
5.07%
18.33%
18.33%
* Less than 1%
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
Includes 363,077 shares of our Common Stock issuable upon the exercise of stock options that are exercisable within sixty days of
March 1, 2018. Does not include 215,274 shares of our Common Stock issuable upon the exercise of stock options that are not
exercisable within sixty days of March 1, 2018.
Does not include (i) 175,000 shares of our Common Stock issuable upon the exercise of stock options and (ii) 300 shares of
Common Stock issuable upon exercise of Ten Percent Warrants, that are not exercisable within sixty days of March 1, 2018.
Does not include (i) 100,000 shares of our Common Stock issuable upon the exercise of stock options and (ii) 300 shares of
Common Stock issuable upon exercise of Ten Percent Warrants, that are not exercisable within sixty days of March 1, 2018.
Includes 108,838 shares of Common Stock issuable upon exercise of Exchange Warrants, held by Orchestra Medical Ventures II,
L.P. Does not include 106,980 shares of Common Stock issuable upon exercise of Ten Percent Warrants that are not exercisable
within sixty days of March 1, 2018.The managing members of Orchestra Medical Ventures II GP, LLC, David Hochman and
Darren Sherman, exercise sole dispositive and voting power over the shares owned by Orchestra Medical Ventures II, L.P.
Includes 69,136 shares of Common Stock issuable upon exercise of Exchange Warrants, held by Orchestra MOTUS Co-Investment
Partners, LLC. Does not include 115,997 shares of Common Stock issuable upon exercise of Ten Percent Warrants that are not
exercisable within sixty days of March 1, 2018.The managing partners of Orchestra Medical Ventures, LLC, David Hochman and
Darren Sherman, exercise sole dispositive and voting power over the shares owned by Orchestra MOTUS Co-Investment Partners,
LLC.
Includes (i) 83,352 shares of Common Stock held by Orchestra Medical Ventures II Reserve, L.P. The managing members of
Orchestra Medical Ventures II GP, LLC, David Hochman and Darren Sherman, exercise sole dispositive and voting power over the
shares owned by Orchestra Medical Ventures II Reserve, L.P.
Includes 51,498 shares of Common Stock held by Accelerated Technologies, Inc. David Hochman and Darren Sherman share
dispositive and voting power over the shares owned by Accelerated Technologies, Inc.
Does not include 92,500 shares of our Common Stock issuable upon the exercise of stock options that are not exercisable within
sixty days of March 1, 2018.
Includes 68,906 shares of Common Stock issuable upon exercise of Exchange Warrants, held by Jacobs Investment Company LLC.
Does not include 72,386 shares of Common Stock issuable upon exercise of Ten Percent Warrants that are not exercisable within
sixty days of March 1, 2018. The managing member of Jacobs Investment Company LLC, Gary Jacobs, exercises sole dispositive
and voting power over the shares owned by Jacobs Investment Company LLC.
Does not include 50,000 shares of our Common Stock issuable upon the exercise of stock options that are not exercisable within
sixty days of March 1, 2018.
Does not include 65,000 shares of our Common Stock issuable upon the exercise of stock options that are not exercisable within
sixty days of March 1, 2018.
Includes 40,000 shares of our Common Stock issuable upon the exercise of stock options that are exercisable within sixty days of
March 1, 2018. Does not include 200,000 shares of our Common Stock issuable upon the exercise of stock options that are not
exercisable within sixty days of March 1, 2018.
70
13.
14.
15.
Includes 156,734 shares of Common Stock issuable upon exercise of Exchange Warrants, held by Ascent Biomedical Ventures II,
L.P. Does not include 159,149 shares of Common Stock issuable upon exercise of Ten Percent Warrants that are not exercisable
within sixty days of March 1, 2018. The managing members of ABV, LLC, Geoffrey W. Smith and Steve Hochberg, exercise sole
dispositive and voting power over the shares owned by Ascent Biomedical Ventures II, L.P. The principal address for the entities
affiliated with ABV, LLC is 60 East 42nd Street, New York, NY 10165.
Includes 27,433 shares of Common Stock issuable upon exercise of Exchange Warrants, held by Ascent Biomedical Ventures
Synecor, L.P. Does not include 61,125 shares of Common Stock issuable upon exercise of Ten Percent Warrants that are not
exercisable within sixty days of March 1, 2018, held by Ascent Biomedical Ventures Synecor, L.P. The managing members of
ABV, LLC, Geoffrey W. Smith and Steve Hochberg, exercise sole dispositive and voting power over the shares owned by Ascent
Biomedical Ventures Synecor, L.P. The principal address for the entities affiliated with ABV, LLC is 60 East 42nd Street, New
York, NY 10165. Ascent Biomedical Ventures II, L.P. and Ascent Biomedical Ventures Synecor, L.P. are collectively referred to
herein as the “Ascent Entities.”
Includes 66,000 shares of Common Stock issuable upon exercise of Exchange Warrants, held by Perceptive Life Sciences Master
Fund Ltd. Does not include 180,055 shares of Common Stock issuable upon exercise of Ten Percent Warrants that are not
exercisable within sixty days of March 1, 2018. The managing member of Perceptive Advisors LLC, Mr. Joseph Edelman,
exercises sole dispositive and voting power over the shares owned by Perceptive Life Sciences Master Fund Ltd. The principal
address for the entities affiliated with Perceptive Advisors LLC is 51 Astor Place, 10th floor New York, NY 10003.
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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDECE
Other than compensation arrangements for our named executive officers and directors, we describe below each transaction or
series of similar transactions, since January 1, 2017, to which we were a party or will be a party, in which:
● the amounts involved exceeded or will exceed the lesser of (i) $120,000 or (ii) 1% of the average total assets of the Company at
year end for the last two completed fiscal years; and
● any of our directors, executive officers, promoters or holders of more than 5% of our capital stock, or any member of the
immediate family of the foregoing persons, had or will have a direct or indirect material interest.
Compensation arrangements for our named executive officers and directors are described in the section entitled “Executive
Compensation.”
2017 Private Placement - Related Party Participation
In January 2017, Perceptive Life Sciences Master Fund Ltd., a beneficial owner of 5% or more of our Common Stock, purchased
20,960 Units sold in the 2017 Private Placement at a price of $5.00 per Unit, for an aggregate purchase price of $104,800, resulting in the
issuance of (i) 15,720 shares of our Common Stock and (ii) 5,240 shares of our Series A Convertible Preferred Stock.
In February 2017, David Hochman, Chairman of the Board, purchased 3,000 Units sold in the 2017 Private Placement at a price of
$5.00 per Unit, for an aggregate purchase price of $15,000, resulting in the issuance of (i) 2,250 shares of our Common Stock and (ii) 750
shares of our Series A Convertible Preferred Stock.
In February 2017, Darren Sherman, Chairman of the Board, purchased 3,000 Units sold in the 2017 Private Placement at a price of
$5.00 per Unit, for an aggregate purchase price of $15,000, resulting in the issuance of (i) 2,250 shares of our Common Stock and (ii) 750
shares of our Series A Convertible Preferred Stock.
See “Part I—Item 1—Business—2017 Private Placement” for a description of the 2017 Private Placement. See “Part I—Item 1—
Business— Initial Public Offering” for a description of the conversion of all Series A Convertible Preferred Stock, on a one-to-one basis,
into shares of our Common Stock in February 2018.
Sales and Marketing Services Arrangement with FreeHold Surgical, Inc.
In August, 2017, we began paying a monthly fee to FreeHold Surgical, Inc., or FreeHold, an entity in which Darren Sherman, one
of our Directors, serves as a Director and President. Pursuant to the fee arrangement, we pay FreeHold a monthly amount of approximately
$25,000 as all-in compensation for sales and marketing services performed for us, on a part time basis, by two Freehold sales
representatives.
Ten Percent Warrants - Related Party Participation
Upon the completion of our IPO in February 2018, we issued warrants to certain of our former Series A Convertible Preferred
Stock holders, pursuant to an amendment to our Registration Rights Agreement and an amendment to our Certificate of Designation k, to
purchase an aggregate of 1,095,682 shares of our Common Stock (the “Ten Percent Warrants”), including (i) Ten Percent Warrants to
purchase 300 shares of our Common Stock to David Hochman, the Chairman of our Board, (ii) Ten Percent Warrants to purchase 300
shares of our Common Stock to Darren Sherman, one of our directors, (iii) Ten Percent Warrants to purchase an aggregate of 220,274
shares of our Common Stock to the Ascent Entities, beneficial owners of more than five percent of our Common Stock, (iv) Ten Percent
Warrants to purchase 106,980 shares of our Common Stock to Orchestra Medical Ventures II, L.P., a beneficial owner of more than five
percent of our Common Stock, (v) Ten Percent Warrants to purchase 115,997 shares of our Common Stock to Orchestra MOTUS Co-
Investment Partners, LLC, a beneficial owner of more than five percent of our Common Stock, (vi) Ten Percent Warrants to purchase
72,386 shares of our Common Stock to Jacobs Investment Company, an investment firm in which Gary Jacobs, one of our Directors, serves
as Founder and Managing Director, and (vii) Ten Percent Warrants to purchase 180,055 shares of our Common Stock to Perceptive Life
Sciences Master Fund Ltd., a beneficial owner of more than five percent of our Common Stock. The Ten Percent Warrants are exercisable
for shares of our Common Stock at an exercise price equal to $5.00. The Ten Percent Warrants are exercisable any time on or after August
15, 2018, the 180 day anniversary of the completion of our IPO, have a five year term, and provide for cashless exercise. No fractional
shares will be issued upon the exercise of the Ten Percent Warrants.
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Royalty Payment Rights Certificates - Related Party Participation
Simultaneously with the closing of our IPO in February 2018, all 1,581,128 previously outstanding shares of our Series A
Convertible Preferred Stock were converted, on a one-to-one basis, into an aggregate of 1,581,128 shares of our Common Stock. In
connection with the conversion of the Series A Convertible Preferred Stock we issued the Royalty Payment Rights Certificates to each
former holder of our Series A Convertible Preferred Stock, including certain of our directors and executive officers, and certain of our
existing stockholders, including stockholders affiliated with certain of our directors including (i) a Royalty Payment Rights Certificate for
0.05% of the aggregate royalty amount payable to the holders of the Royalty Payment Rights Certificates to David Hochman, the Chairman
of our Board, (ii) a Royalty Payment Rights Certificate for 0.05% of the aggregate royalty amount payable to the holders of the Royalty
Payment Rights Certificates to Darren Sherman, one of our directors, (iii) Royalty Payment Rights Certificate for an aggregate of 10.79%
of the aggregate royalty amount payable to the holders of the Royalty Payment Rights Certificates to the Ascent Entities, beneficial owners
of more than five percent of our Common Stock, (iv) a Royalty Payment Rights Certificate for 6.31% of the aggregate royalty amount
payable to the holders of the Royalty Payment Rights Certificates to Orchestra Medical Ventures II, L.P., a beneficial owner of more than
five percent of our Common Stock, (v) a Royalty Payment Rights Certificate for 4.11% of the aggregate royalty amount payable to the
holders of the Royalty Payment Rights Certificates to Orchestra MOTUS Co-Investment Partners, LLC, a beneficial owner of more than
five percent of our Common Stock, (vi) a Royalty Payment Rights Certificate for 4.00% of the aggregate royalty amount payable to the
holders of the Royalty Payment Rights Certificates to Jacobs Investment Company, an investment firm in which Gary Jacobs, one of our
Directors, serves as Founder and Managing Director, and (vii) a Royalty Payment Rights Certificate for 16.22% of the aggregate royalty
amount payable to the holders of the Royalty Payment Rights Certificates to Perceptive Life Sciences Master Fund Ltd., a beneficial owner
of more than five percent of our Common Stock. Pursuant to the terms of the Royalty Payment Rights Certificates, if and when the
Company generates sales of the Pure-Vu system, or if the Company receives any proceeds from the licensing of the Pure-Vu system, then
the Company will pay to the holders of the Royalty Payment Rights Certificates (the “Holders”) the allocation of such royalty payment
rights as listed on such Holders Royalty Payment Rights Certificate, a royalty (the “Royalty Amount”) equal to, in the aggregate, in royalty
payments in any calendar year for all products:
The Company Commercializes Product
Directly
3% of Net Sales*
The Rights to Commercialize the Product is
Sublicensed by the Company to a third-party
5% of any Licensing Proceeds**
* Notwithstanding the foregoing, with respect to Net Sales based Royalty Amounts, (a) no Net Sales based Royalty Amount shall begin to
accrue or become payable until the Company has first generated, in the aggregate, since its inception, Net Sales equal to $20 million (the
“Initial Net Sales Milestone”), and royalties shall only be computed on, and due with respect to, Net Sales generated in excess of the Initial
Net Sales Milestone, and (b) the total Net Sales based Royalty Amount due and payable in any calendar year shall be subject to a cap per
calendar year of $30 million. Net Sales is defined in the Certificate of Designations.
** Notwithstanding the foregoing, with respect to Licensing Proceeds based Royalty Amounts, (a) no Licensing Proceeds based Royalty
Amount shall begin to accrue or become payable until the Company has first generated, in the aggregate, since its inception, Licensing
Proceeds equal to $3.5 million (the “Initial Licensing Proceeds Milestone”), and royalties shall only be computed on, and due with respect
to, Licensing Proceeds in excess of the Initial Licensing Proceeds Milestone and (b) the total Licensing Proceeds based Royalty Amount due
and payable in any calendar year shall be subject to a cap per calendar year of $30 million. Licensing Proceeds is defined in the Certificate
of Designations.
73
The royalty will be payable up to the later of (i) the latest expiration date for the Company’s current patents (which is currently
October 2026), or (ii) the latest expiration date of any pending patents as of the date of the Initial Closing that may be issued in the future.
Following the expiration of all such patents, the Holders of the Royalty Payment Rights Certificates will no longer be entitled to any further
royalties for any period following the latest to occur of such patent expiration.
Participation in Initial Public Offering
In addition to the shares issued pursuant to the directed share program described below, all of our directors and executive officers,
and certain of our existing stockholders, including stockholders affiliated with certain of our directors, purchased 1,435,000 shares of our
Common Stock in our IPO, completed February 2018, at the IPO price of $5.00 per share, including (i) Perceptive Life Sciences Master
Fund Ltd., which purchased 1,000,000 shares of our Common Stock at the IPO price, (ii) Orchestra Medical Ventures II, L.P., which
purchased 40,000 shares of our Common Stock at the IPO price, (iii) Gary Pruden, who purchased 50,000 shares of our Common Stock at
the IPO price, (iv) David Hochman, who purchased 75,000 shares of our Common Stock at the IPO price, (v) Shervin Korangy, who
purchased 20,000 shares of our Common Stock at the IPO price, (vi) Mark Pomeranz, who purchased 8,000 shares of our Common Stock
at the IPO price, (vii) Samuel Nussbaum, who purchased 10,000 shares of our Common Stock at the IPO price, (viii) Darren Sherman, who
purchased 5,000 shares of our Common Stock at the initial offering price and (ix) Andrew Taylor, who purchased 2,000 shares of our
Common Stock at the IPO price.
Directed Share Program
At our request, the underwriters sold at the IPO price 175,000 shares of Common Stock, or five percent (5%) of the shares offered
in our IPO, to our employees and other persons associated with us, including Gary Jacobs, one of our Directors, who purchased 5,000
shares of our Common Stock at the IPO price. The directed share program was arranged through Piper Jaffray & Co.
Indemnification Agreements
In 2017, we entered into indemnification agreements with all of our directors and named executive officers. These agreements
require us to indemnify these individuals to the fullest extent permitted under Delaware law against liabilities that may arise by reason of
their service to us, and to advance expenses incurred as a result of any proceeding against them as to which they could be indemnified. We
also intend to enter into indemnification agreements with our future directors and executive officers.
Policies and Procedures for Related Party Transactions
Our board of directors has adopted a policy that our executive officers, directors, nominees for election as a director, beneficial
owners of more than 5% of any class of our Common Stock, any members of the immediate family of any of the foregoing persons and any
firms, corporations or other entities in which any of the foregoing persons is employed or is a partner or principal or in a similar position or
in which such person has a 5% or greater beneficial ownership interest (collectively “related parties”), are not permitted to enter into a
transaction with us without the prior consent of our board of directors acting through the Audit Committee or, in certain circumstances, the
chairman of the Audit Committee. Any request for us to enter into a transaction with a related party, in which the amount involved exceeds
$100,000 and such related party would have a direct or indirect interest must first be presented to our Audit Committee, or in certain
circumstances the chairman of our Audit Committee, for review, consideration and approval. In approving or rejecting any such proposal,
our Audit Committee, or the chairman of our Audit Committee, is to consider the material facts of the transaction, including, but not limited
to, whether the transaction is on terms no less favorable than terms generally available to an unaffiliated third party under the same or
similar circumstances, the extent of the benefits to us, the availability of other sources of comparable products or services and the extent of
the related party’s interest in the transaction.
Director Independence
Our board of directors undertook a review of its composition, the composition of its committees and the independence of each
director. Based upon information requested from and provided by each director concerning his or her background, employment and
affiliations, including family relationships, our board of directors has determined that Mr. Hochman, Mr. Sherman, Mr. Jacobs, Dr.
Nussbaum, Mr. Korangy and Mr. Pruden do not have a relationship that would interfere with the exercise of independent judgment in
carrying out the responsibilities of a director and that each of these directors is “independent” as that term is defined under the Rules of the
NASDAQ Market and the SEC.
74
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Principal Accountant Fees and Services
The following table summarizes the fees paid for professional services rendered by Brightman Almagor Zohar & Co., a member
firm of Deloitte Touche Tohmatsu Limited, our independent registered public accounting firm, for each of the last two fiscal years:
Fee Category
Audit Fees
Audit-Related Fees
Tax Fees
All Other Fees
Total Fees
2017
2016
(In thousands)
$
$
$
$
$
120,000 $
- $
11,200 $
- $
131,200 $
30,000
-
5,000
-
35,000
Audit Fees
Represents fees, including out of pocket expenses, for professional services provided in connection with the audit of our annual
audited financial statements and of our internal control over financial reporting, the review of our quarterly financial statements, accounting
consultations or advice on accounting matters necessary for the rendering of an opinion on our financial statements, services provided in
connection with the offerings of our Common Stock and audit services provided in connection with other statutory or regulatory filings.
Tax Fees
Tax fees were principally for services related to tax compliance and reporting and analysis services.
Procedures for Approval of Fees
The Audit Committee is responsible for appointing, setting compensation and overseeing the work of the independent auditors.
The Audit Committee has established a policy regarding pre-approval of all auditing services and the terms thereof and non-audit services
(other than non-audit services prohibited under Section 10A(g) of the Exchange Act or the applicable rules of the SEC or the Public
Company Accounting Oversight Board) to be provided to us by the independent auditor. However, the pre-approval requirement may be
waived with respect to the provision of non-audit services for us if the “de minimus” provisions of Section 10A(i)(1)(B) of the Exchange
Act are satisfied.
The Audit Committee has considered whether the provision of Audit-Related Fees, Tax Fees, and all other fees as described above
is compatible with maintaining Brightman Almagor Zohar & Co.’s independence and has determined that such services for fiscal year 2017
were compatible. All such services were approved by the Audit Committee pursuant to Rule 2-01 of Regulation S-X under the Exchange
Act to the extent that rule was applicable.
The Audit Committee is responsible for reviewing and discussing the audited financial statements with management, discussing
with the independent registered public accountants the matters required in Auditing Standards No. 16, receiving written disclosures from
the independent registered public accountants required by the applicable requirements of the Public Company Accounting Oversight Board
regarding the independent registered public accountants’ communications with the Audit Committee concerning independence and
discussing with the independent registered public accountants their independence, and recommending to the Board of Directors that the
audited financial statements be included in our annual report on Form 10-K.
75
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
PART IV
(a) List of Documents filed as part of this Report
(1) Consolidated Financial Statements
The financial statements and related notes, together with the report of Brightman Almagor Zohar & Co., a member firm of
Deloitte Touche Tohmatsu Limited appear at pages F-1 through F-25 following the Exhibit List as required by “Part II—Item 8—Financial
Statements and Supplementary Data” of this Form 10-K.
(2) Financial Statement Schedules.
Schedules are omitted because they are either not required, not applicable, or the information is otherwise included.
(3) Exhibits
The Company has filed with this report or incorporated by reference herein certain exhibits as specified below pursuant to Rule
12b-32 under the Exchange Act.
Exhibit
Number
Exhibit Description
Form
EXHIBIT INDEX
Incorporated by Reference
File No.
Exhibit
Filed
Filing Date Herewith
2.1 +
Share Exchange Agreement, dated December 1, 2016
S-1
333-222441
3.1
3.2
3.3
3.4
3.5
Certificate of Incorporation
S-1
333-222441
Certificate of Amendment to the Certificate of
S-1
333-222441
Incorporation
Bylaws
S-1
333-222441
Certificate of Designations of Series A Convertible
S-1
333-222441
Preferred Stock
2.1
3.1
3.2
3.3
3.4
1/5/2018
1/5/2018
1/5/2018
1/5/2018
1/5/2018
Certificate of Amendment of Certificate of Designations
of Series A Convertible Preferred Stock, to be effective
upon the consummation of this offering
76
S-1
333-222441
3.5
1/5/2018
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9
4.10
10.1
10.2
10.3
Form of Common Stock Certificate
S-1 333-222441
Form of Series A Convertible Preferred Stock Certificate
S-1
333-222441
Form of Exchange Warrant
S-1
333-222441
Form of Placement Agent Warrant
S-1
333-222441
Form of Registration Rights Agreement
S-1
333-222441
Form of Consultant Warrant
Form of Placement Agent Royalty Payment Rights
Certificate
S-1
333-222441
S-1
333-222441
Form of Amendment to Registration Rights Agreement
S-1
333-222441
Form of Ten Percent Warrant
S-1
333-222441
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9
1/5/2018
1/5/2018
1/5/2018
1/5/2018
1/5/2018
1/5/2018
1/5/2018
1/5/2018
1/5/2018
Form of Royalty Payment Rights Certificate
S-1/A
333-222441
4.10
1/31/2018
Placement Agency Agreement, dated December 1, 2016,
between the Company and Aegis Capital Corp.
S-1
333-222441
10.1
1/5/2018
Form of Subscription Agreement
S-1
333-222441
10.2
1/5/2018
Form of Voting Agreement, dated December 1, 2016, by
and among the Company and the stockholders named
therein
S-1
333-222441
10.3
1/5/2018
10.4 †
2016 Equity Incentive Plan and 2016 Israel Sub-Plan
S-1
333-222441
10.4
1/5/2018
10.5 †
Form of Incentive Stock Option Agreement
S-1
333-222441
10.5
1/5/2018
77
10.6 †
Form of Non-Qualified Stock Option Agreement
S-1
333-222441
10.6
1/5/2018
10.7 †
Form of Restricted Stock Agreement
S-1
333-222441
10.7
1/5/2018
10.8 †
10.9
10.10 †
Form of Assumed Options to Israeli Employees and
Directors Agreement
S-1
333-222441
10.8
1/5/2018
Form of Assumed Options to Israeli Non-Employees and
Controlling Shareholders Agreement
S-1
333-222441
10.9
1/5/2018
Form of Israeli Option Grant to Israeli Employees and
Directors Agreement
S-1
333-222441
10.10
1/5/2018
10.11
Form of Israeli Option Grant to Israeli Non-Employees
and Controlling Shareholders Agreement
S-1
333-222441
10.11
1/5/2018
10.12 †
Employment Agreement, dated December 22, 2016,
between the Company and Mark Pomeranz
S-1
333-222441
10.12
1/5/2018
10.13
10.14
10.15
10.16
Lease, dated April 13, 2017, between Company and
Victoriana Building, LLC
S-1
333-222441
10.13
1/5/2018
Form of Subscription Agreement for Convertible Notes
Offering
S-1
333-222441
10.14
1/5/2018
Finders Agreement, dated October 14, 2016, between the
Company and Aegis Capital Corporation
S-1
333-222441
10.15
1/5/2018
Finders Agreement, dated December 22, 2016, between
the Company and Aegis Capital Corporation
S-1
333-222441
10.16
1/5/2018
10.17 †
Form of Indemnification Agreement
S-1
333-222441
10.17
1/5/2018
78
10.18 †
Employment Agreement, dated August 16, 2017, between
the Company and Andrew Taylor
S-1
333-222441
10.18
1/5/2018
10.19 #
Supply Agreement, dated September 1, 2017, between
Motus GI Technologies Ltd. and Polyzen, Inc.
S-1/A
333-222441
10.19
2/7/2018
21.1
31.1
31.2
32.1
+
†
#
List of Subsidiaries of the Company
S-1
333-222441
21.1
1/5/2018
Certification of Chief Executive Officer pursuant to Rule
13a-14(a) or Rule 15d-14(a)
Certification of Chief Financial Officer pursuant to Rule
13a-14(a) or Rule 15d-14(a)
Certification of Chief Executive Officer and Chief
Financial Officer pursuant to 18 U.S.C. Section 1350
X
X
X
As permitted by Item 601(b)(2) of Regulation S-K, certain schedules to this agreement have not been filed herewith. The
company will furnish supplementally a copy of any omitted schedule to the SEC upon request.
Indicates management contract or compensatory plan.
Confidential treatment has been granted with respect to certain portions of this exhibit. Omitted portions have been submitted
separately to the SEC.
79
ITEM 16. FORM 10-K SUMMARY
None.
80
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on
its behalf on the date set forth below by the undersigned thereunto duly authorized.
SIGNATURES
Date: March 28, 2018
Date: March 28, 2018
MOTUS GI HOLDINGS, INC.
By: /s/ Mark Pomeranz
Mark Pomeranz
President and Chief Executive Officer
(Principal Executive Officer)
By: /s/ Andrew Taylor
Andrew Taylor
Chief Financial Officer
(Principal Financial and Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Report has been signed below by the following
persons on behalf of the Registrant and in the capacities on March 28, 2018.
Signature
/s/ Mark Pomeranz
Mark Pomeranz
/s/ Andrew Taylor
Andrew Taylor
/s/ David Hochman
David Hochman
/s/ Darren Sherman
Darren Sherman
/s/ Gary Jacobs
Gary Jacobs
/s/ Samuel Nussbaum
Samuel Nussbaum
/s/ Shervin Korangy
Shervin Korangy
/s/ Gary Pruden
Gary Pruden
Title
President, Chief Executive Officer and Director (Principal Executive Officer)
Date
March 28, 2018
Chief Financial Officer (Principal Financial and Accounting Officer)
March 28, 2018
Chairman of the Board
Director
Director
Director
Director
Director
81
March 28, 2018
March 28, 2018
March 28, 2018
March 28, 2018
March 28, 2018
March 28, 2018
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
Contents
Consolidated Financial Statements – December 31, 2017 and 2016:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2017 and 2016
Consolidated Statements of Comprehensive Loss for the years ended December 31, 2017 and 2016
Consolidated Statement of Changes in Shareholders’ Equity for the years ended December 31, 2017 and 2016
Consolidated Statements of Cash Flows for the years ended December 31, 2017 and 2016
Page
F-2
F-3
F-4
F-5
F-6
Notes to the Consolidated Financial Statements
F-7 - F-25
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
MOTUS GI HOLDINGS, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Motus GI Holdings, Inc. and subsidiaries (the “Company”) as of
December 31, 2017 and 2016 and the related consolidated statements comprehensive loss, stockholders’ equity and cash flows for each of
the two years in the period ended December 31, 2017, and the related notes (collectively referred to as the “financial statements”). In our
opinion, the 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 its operations and its cash flows for each of the two years in the period ended December 31, 2017, in conformity
with accounting principles generally accepted in the United States of America.
Going Concern
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As
discussed in Note 1 to the consolidated financial statements, the Company’s minimal revenues and substantial operating losses raise
substantial doubt about its ability to continue as a going concern. Management’s plans concerning these matters are also described in Note 1
to the consolidated financial statements. The consolidated financial statements do not include any adjustments that might result from the
outcome of these uncertainties.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the
Company’s financial statements based on our audit. 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 audit 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 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
audit, 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 audit included performing procedures to assess the risks of material misstatement of the 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 financial statements. Our audit also included evaluating the accounting principles used and significant
estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit
provides a reasonable basis for our opinion.
/s/ Brightman Almagor Zohar & Co.
Certified Public Accountants
Member of Deloitte Touche Tohmatsu Limited
Tel Aviv, Israel
March 28, 2018
We have served as the Company’s auditor since 2009.
F-2
Motus GI Holdings, Inc.
Consolidated Balance Sheets
(In thousands, except share and per share amounts)
ASSETS
Current assets
Cash and cash equivalents
Short-Term Deposits
Inventory
Prepaid expenses and other
Deferred financing fees
Total current assets
Fixed assets, net
Long-term deposits
Total assets
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Accounts payable
Other current liabilities
Total current liabilities
Contingent royalty obligation
Commitments and contingent liabilities
Shareholders’ equity
Common Stock $0.0001 par value; 50,000,000 authorized; 10,493,233 and 9,294,463 issued
and outstanding as of December 31, 2017 and 2016, respectively
Preferred Series A stock $0.0001 par value; 2,000,000 authorized; 1,581,128 and 1,214,845
issued and outstanding as of December 31, 2017 and 2016, respectively
Preferred stock $0.0001 par value; 8,000,000 authorized; zero issued and outstanding as of
December 31, 2017 and 2016, respectively
Additional paid-in capital
Accumulated deficit
Total shareholders’ equity
December 31,
2017
2016
$
6,939 $
76
6
663
602
8,286
783
99
11,644
-
81
263
-
11,988
141
62
$
9,168 $
12,191
$
882 $
1,101
1,983
1,662
1
-
-
44,643
(39,121)
5,523
107
645
752
1,410
1
-
-
35,949
(25,921)
10,029
Total liabilities and shareholders’ equity
$
9,168 $
12,191
The accompanying notes are an integral part of these consolidated financial statements
F-3
Motus GI Holdings, Inc.
Consolidated Statements of Comprehensive Loss
(In thousands, except share and per share amounts)
Years Ended December 31
2016
2017
$
7 $
3
4
4,266
2,415
6,287
12,968
(12,964)
236
(13,200)
-
-
-
-
3,079
1,034
1,894
6,007
(6,007)
1,966
(7,973)
50
Revenue
Cost of revenue
Gross loss
Operating expenses:
Research and development, net
Sales and marketing
General and administrative
Total operating expenses
Operating loss
Finance expense, net
Loss before income taxes
Income tax expense
Net loss
Net loss per common share, basic and diluted
Weighted average number of common shares outstanding, basic and diluted
$
$
(13,200) $
(1.28) $
10,332,554
(8,023)
(7.00)
1,146,028
The accompanying notes are an integral part of these consolidated financial statements
F-4
Motus GI Holdings, Inc.
Consolidated Statement of Changes in Shareholders’ Equity
(In thousands, except share and per share amounts)
Preferred Stock - Motus LTD.
(pre-merger)
Preferred Series A Stock
Common Stock
Shares
Amount
Shares
Amount
Shares
Amount
Additional paid- Accumulated Total shareholders’
deficit
in capital
equity
2,971,224 $
-
- $
-
940,028 $
- $
14,175 $
(17,898) $
(3,723)
3,243,768
-
-
-
-
-
-
-
-
88,748
(6,214,992)
-
1,214,845
- 8,265,687
-
-
-
-
-
-
-
-
-
-
1
-
-
16,253
-
5,467
-
-
-
54
-
-
(8,023)
16,253
-
5,468
54
(8,023)
-
1,214,845
- 9,294,463
1
35,949
(25,921)
10,029
-
366,283
- 1,098,849
-
-
-
-
-
-
-
99,167
-
-
754
-
-
-
-
-
6,474
2,220
-
-
-
-
-
(13,200)
6,474
2,220
-
(13,200)
Balance at
January 1, 2016
Conversion of
convertible
notes
Exercise of
warrants
Effect of reverse
recapitalization
transaction
Share-based
compensation
Net loss
Balance at
December 31 ,
2016
Issuance of
shares
Share-based
compensation
Exercise of
options
Net loss
Balance at
December 31 ,
2017
-
-
-
-
-
-
-
- $
-
1,581,128 $
- 10,493,233 $
1 $
44,643 $
(39,121) $
5,523
(*) Number of shares prior to the reverse capitalization has been retroactively adjusted based on the equivalent number of shares
received by the accounting acquirer in the transaction.
The accompanying notes are an integral part of these consolidated financial statements
F-5
Motus GI Holdings, Inc.
Consolidated Statements of Cash Flows
(In thousands, except share and per share amounts)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization
Revaluation of contingent royalty obligation
Interest and revaluation of convertible notes
Share based compensation
Changes in operating assets and liabilities:
Inventory
Prepaid expenses
Short-term deposits
Trade accounts payable
Other current liabilities
Net cash used in operating activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets
(Repayment) Proceeds from long term deposits
Proceeds (Repayment) in restricted cash
Net cash used in investing activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of shares, net of financing cost of $850,670
Cash acquired in connection with the reverse recapitalization, net
Proceeds from issuance of convertible notes
Deferred financing fees
Net cash provided by financing activities
NET (DECREASE) INCREASE IN CASH
CASH AT BEGINNING OF PERIOD
CASH AT END OF PERIOD
SUPPLEMENTAL CASH FLOW INFORMATION:
CASH PAID FOR:
Interest
Income taxes
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES:
Convertible notes exchanged for common and preferred stock
Exercise of options
* Represents amounts less than $1,000
For the year ended December 31,
2017
2016
$
(13,200) $
(8,023)
65
252
-
2,220
75
(400)
(76)
210
456
(10,398)
(707)
(44)
7
(744)
6,474
-
-
(37)
6,437
(4,705)
11,644
6,939 $
- $
- $
- $
* $
46
-
1,907
54
(81)
(83)
-
(355)
409
(6,126)
(30)
31
(7)
(6)
-
6,878
9,606
-
16,484
10,352
1,292
11,644
-
-
16,253
-
$
$
$
$
$
The accompanying notes are an integral part of these consolidated financial statements
F-6
Motus GI Holdings, Inc.
Notes to the Consolidated Financial Statements
(in thousands, except share per share amounts)
NOTE 1 - GENERAL
A.
Organization and Business
Organization
Motus GI Holdings, Inc. (the “Company”) was incorporated in Delaware, U.S.A. in September 2016. The Company
was established for the purpose of raising capital for the recapitalization of Motus GI Medical Technologies, Ltd.
(“Motus, Ltd.”), a company incorporated in Israel and its then wholly owned subsidiary Motus GI, Inc (“Motus,
Inc.”), a company incorporated in Delaware, U.S.A.
On December 22, 2016, the Company acquired (the “Recapitalization Transaction”) 100% of the outstanding shares
of Motus, Ltd. pursuant to a capital stock exchange agreement dated December 1, 2016, between the Company and
the shareholders of Motus, Ltd. (the “Exchange Agreement”). In exchange for the outstanding shares of Motus, Ltd.,
the Company issued to the shareholders of Motus, Ltd. a total of 4,000,000 shares of the Company’s common stock
representing approximately 69% of the total shares then issued and outstanding after giving effect to the
Recapitalization Transaction. As a result of the Recapitalization Transaction, Motus, Ltd. became a wholly owned
subsidiary of the Company. As the shareholders of Motus, Ltd. received the largest ownership interest in the
Company, Motus, Ltd. was determined to be the “accounting acquirer” in the reverse recapitalization. As a result, the
historical financial statements of the Company were replaced with the historical financial statements of Motus, Ltd.
On December 31, 2016, the Company executed a stock purchase agreement to acquire Motus, Inc. from Motus, Ltd
resulting in Motus, Inc. becoming a wholly owned subsidiary of the Company.
The Company and its subsidiaries, Motus, Ltd. and Motus, Inc., are collectively referred to as the “Company”.
Business
The Company has developed a single-use medical device system, the Pure-Vu system, cleared by the United States
Food and Drug Administration, which is intended to connect to standard colonoscopes to help facilitate
intraprocedural cleaning of a poorly prepared colon by irrigating or cleaning the colon and evacuating the irrigation
fluid (water), feces and other bodily fluids and matter, e.g. blood. The Pure-Vu system has been designed to integrate
with standard colonoscopes to enable cleaning during the procedure while preserving standard procedural workflow
and techniques. The Pure-Vu system and the procedure to cleanse the colon in preparation for colonoscopy are not
currently reimbursable through private or governmental third-party payors in any country, but the Company does
intend to seek reimbursement through private or governmental third-party payors in the future. To date, as part of the
Company’s limited pilot launch, the Company has focused on collecting clinical data on the use of the Pure-Vu
system.
F-7
Motus GI Holdings, Inc.
Notes to the Consolidated Financial Statements
(in thousands, except share per share amounts)
B.
Going concern
To date the Company has generated minimal revenues from its activities and has incurred substantial operating losses.
Management expects the Company to continue to generate substantial operating losses and to continue to fund its
operations primarily through utilization of its current financial resources, future product sales, and through additional
raises of capital.
Such conditions raise substantial doubts about the Company’s ability to continue as a going concern. Management’s
plan includes revenue generation through the sale of products and raising funds from outside investors. However,
there is no assurance that such sale of products will occur or that outside funding will be available to the Company,
will be obtained on favorable terms or will provide the Company with sufficient capital to meet its objectives. These
financial statements do not include any adjustments relating to the recoverability and classification of assets, carrying
amounts or the amount and classification of liabilities that may be required should the Company be unable to continue
as a going concern.
NOTE 2 -
SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies used in the preparation of the financial statements are as follows:
Basis of presentation
The financial statements have been prepared in conformity with accounting principles generally accepted in the
United States of America.
Use of estimates
The preparation of consolidated financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of
the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Functional currency and foreign currency translation
The functional currency of the Company is the U.S dollar (“dollar”) since the dollar is the currency of the primary
economic environment in which the Company has operated and expects to continue to operate in the foreseeable
future.
Transactions and balances denominated in dollars are presented at their original amounts. Transactions and balances
denominated in foreign currencies have been re-measured to dollars in accordance with the provisions of ASC 830-10,
“Foreign Currency Translation”.
All transaction gains and losses from re-measurement of monetary balance sheet items denominated in non-dollar
currencies are reflected in the statement of operations as financial income or expenses, as appropriate.
F-8
Motus GI Holdings, Inc.
Notes to the Consolidated Financial Statements
(in thousands, except share per share amounts)
Consolidation
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, Motus
Ltd., an Israel corporation, which has operations in Tirat Carmel, Israel, and Motus Inc., a Delaware corporation,
which has operations in the U.S. All inter-company accounts and transactions have been eliminated in consolidation.
Cash and cash equivalents
The Company considers all highly liquid short-term investments purchased with an original maturity date of three
months or less to be cash equivalents. The Company had approximately $6,939 and $11,644, on deposit in bank
operating accounts at December 31, 2017 and 2016, respectively.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable are recorded and carried at the original invoiced amount less an allowance for any potential
uncollectible amounts. The Company makes estimates for the allowance for doubtful accounts based upon its
assessment of various factors, including historical experience, the age of the accounts receivable balances, credit
quality of our customers, current economic conditions, and other factors that may affect customers’ ability to pay. As
of December 31, 2017 and 2016, the allowance for doubtful accounts was $0.
Fair value of financial instruments
The carrying values of cash and cash equivalents, restricted cash, short-term deposits, accounts receivable, prepaid
expenses, other receivables, deferred financing fees, accounts payable, and other current liabilities approximate their
fair value due to the short-term maturity of these instruments.
The Company measures the fair value of certain of its financial instruments such as the Contingent royalty obligation
on a recurring basis. The method of determining the fair value of other long-term liabilities is discussed in Note 10.
A fair value hierarchy is used to rank the quality and reliability of the information used to determine fair values.
Financial assets and liabilities carried at fair value will be classified and disclosed in one of the following three
categories:
Level 1 - Quoted prices (unadjusted) in active markets for identical assets and liabilities.
Level 2 - Inputs other than Level 1 that are observable, either directly or indirectly, such as unadjusted quoted prices
for similar assets and liabilities, unadjusted quoted prices in the markets that are not active, or other inputs that are
observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair
value of the assets or liabilities.
F-9
Motus GI Holdings, Inc.
Notes to the Consolidated Financial Statements
(in thousands, except share per share amounts)
Inventory
Inventories are stated at lower of cost or net realizable value using the weighted average cost method and are
evaluated at least annually for impairment. Inventories at December 31, 2017 and 2016 consisted of finished goods.
Write-downs for potentially obsolete or excess inventory are made based on management’s analysis of inventory
levels, historical obsolescence and future sales forecasts. For the year ended December 31, 2017, an impairment
charge of $72 was recorded based on management determination to use the inventory for clinical trials, training and
demonstration purposes.
Deferred Financing Fees
Initial public offering (“IPO”) fees and expenses reflect costs directly attributable to the Company’s IPO process,
which closed on February 16, 2018. The Company accounted for such costs in accordance with ASC 340-10, Other
Assets and Deferred Costs. ASC 340 states that costs directly attributable to a successfully completed offering of
equity securities may be deferred and charged against the gross proceeds of the offering as a reduction of additional
paid-in capital. As of December 31, 2017, the Company recorded deferred financing fees in the amount of $602.
Fixed assets, net
Fixed assets are stated at cost less accumulated depreciation. Depreciation is calculated based on the straight-line
method, at annual rates reflecting the estimate useful lives of the related assets, as follows:
Office equipment
Computers and software
Machinery
Lab and medical equipment
Leasehold improvements
Stock-based compensation
5-15 years
3-5 years
5-10 years
5-7 years
Shorter of lease term or useful life
The Company applies ASC 718-10, “Share-Based Payment,” which requires the measurement and recognition of
compensation expenses for all share-based payment awards made to employees and directors including employee
stock options under the Company’s stock plans based on estimated fair values.
ASC 718-10 requires companies to estimate the fair value of equity-based payment awards on the date of grant using
an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as an
expense over the requisite service periods in the Company’s statement of operations.
The Company accounts for stock-based compensation awards to non-employees in accordance with FASB ASC 505-
50, “Equity-Based Payments to Non-Employees” (“FASB ASC 505-50”). Under FASB ASC 505-50, the Company
determines the fair value of the warrants or stock-based compensation awards granted as either the fair value of the
consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable.
All issuances of stock options or other equity instruments to non-employees as consideration for goods or services
received by the Company are accounted for based on the fair value of the equity instruments issued. Non-employee
equity based payments are recorded as an expense over the service period, as if the Company had paid cash for the
services. At the end of each financial reporting period, prior to vesting or prior to the completion of the services, the
fair value of the equity based payments will be re-measured and the non-cash expense recognized during the period
will be adjusted accordingly. Since the fair value of equity based payments granted to non-employees is subject to
change in the future, the amount of the future expense will include fair value re-measurements until the equity based
payments are fully vested or the service completed.
F-10
Motus GI Holdings, Inc.
Notes to the Consolidated Financial Statements
(in thousands, except share per share amounts)
The Company recognizes compensation expenses for the value of non-employee awards, which have graded vesting,
based on the straight-line method over the requisite service period of each award.
The Company estimates the fair value of stock options granted as equity awards using a Black-Scholes options pricing
model. The option-pricing model requires a number of assumptions, of which the most significant are share price,
expected volatility and the expected option term (the time from the grant date until the options are exercised or
expire). Expected volatility is estimated based on volatility of similar companies in the technology sector. The
Company has historically not paid dividends and has no foreseeable plans to issue dividends. The risk-free interest
rate is based on the yield from governmental zero-coupon bonds with an equivalent term. The expected option term is
calculated for options granted to employees and directors using the “simplified” method. Grants to non-employees are
based on the contractual term. Changes in the determination of each of the inputs can affect the fair value of the
options granted and the results of operations of the Company.
Basic and diluted net loss per share
Basic loss per share is computed by dividing the net loss by the weighted average number of ordinary shares
outstanding during the year.
Diluted loss per share is computed by dividing the net loss by the weighted average number of ordinary shares
outstanding during the year, plus the number of ordinary shares that would have been outstanding if all potentially
dilutive ordinary shares had been issued, using the treasury stock method, in accordance with ASC 260-10 “Earnings
per Share”.
Potentially dilutive common shares were excluded from the calculation of diluted loss per share for all periods
presented due to their anti-dilutive effect.
Research and development costs, net
Research and development expenses are charged to the statement of comprehensive loss as incurred. Grants received
for funding of approved research and development projects are recognized at the time the Company is entitled to such
grants, on the basis of the costs incurred and applied as a deduction from the research and development expenses.
Patent costs
Costs incurred in connection with acquiring patent rights and the protection of proprietary technologies are charged to
expense as incurred.
Liabilities due to termination of employment agreements
Under Israeli employment laws, employees of Motus Ltd. are included under Article 14 of the Severance
Compensation Act, 1963 (“Article 14”) for a portion of their salaries. According to Article 14, these employees are
entitled to monthly deposits made by Motus Ltd. on their behalf with insurance companies.
F-11
Motus GI Holdings, Inc.
Notes to the Consolidated Financial Statements
(in thousands, except share per share amounts)
Payments in accordance with Article 14 release Motus Ltd. from any future severance payments (under the Israeli
Severance Compensation Act, 1963) with respect of those employees. The aforementioned deposits are not recorded
as an asset in the Company’s balance sheet, and there is no liability recorded as the Company does not have a future
obligation to make any additional payments.
Income Taxes
The Company provides for income taxes using the asset and liability approach. Deferred tax assets and liabilities are
recorded based on the differences between the financial statement and tax bases of assets and liabilities and the tax
rates in effect when these differences are expected to reverse. Deferred tax assets are reduced by a valuation
allowance if, based on the weight of available evidence, it is more likely than not that some or all of the deferred tax
assets will not be realized. As of December 31, 2017 and 2016, the Company had a full valuation allowance against
deferred tax assets.
The Tax Cuts and Jobs Act (the “Tax Act”), enacted on December 22, 2017, among other things, permanently
lowered the U.S. statutory federal corporate tax rate from 35% to 21%, effective for tax years including or beginning
January 1, 2018. Under the guidance of ASC 740, “Income Taxes” (“ASC 740”), the Company revalued its net
deferred tax assets on the date of enactment based on the reduction in the overall future tax benefit expected to be
realized at the lower tax rate implemented by the new legislation. Although in the normal course of business the
Company is required to make estimates and assumptions for certain tax items which cannot be fully determined at
period end, the Company did not identify items for which the income tax effects of the Tax Act have not been
completed as of December 31, 2017 and, therefore, considers its accounting for the tax effects of the Tax Act on its
deferred tax assets and liabilities to be complete as of December 31, 2017.
Reclassification
Certain prior year amounts have been reclassified to conform to the current year presentation.
Transaction Costs
Transaction costs incurred in the Merger were charged directly to equity to the extent of cash and net other current
assets acquired.
Recent accounting standards
In May 2014, the FASB issued ASC 606, “Revenue From Contracts With Customers” a new revenue recognition
standard that will supersede current revenue recognition guidance. The core principle of the guidance is that an entity
should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects
the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard is
effective for the Company on January 1, 2018, and the Company intends on applying the standard retrospectively to
each prior reporting period presented as of the date of adoption. As the Company has generated minimal revenues to
date, the adoption of this standard is not expected to have a material impact on the Company’s financial position or
results of operations.
In February 2016, the FASB issued ASU 2016-02 “Leases” to increase transparency and comparability among
organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information
about leasing arrangements. For operating leases, the ASU requires a lessee to recognize a right-of-use asset and a
lease liability, initially measured at the present value of the lease payments, on its balance sheet. The ASU retains the
current accounting for lessors and does not make significant changes to the recognition, measurement, and
presentation of expenses and cash flows by a lessee.
F-12
Motus GI Holdings, Inc.
Notes to the Consolidated Financial Statements
(in thousands, except share per share amounts)
The ASU is effective for the Company in the first quarter of 2019, with early adoption permitted. The Company
continues to evaluate the effect of the adoption of this ASU and expects the adoption will result in an increase in the
assets and liabilities on the consolidated balance sheets for operating leases and will likely have an insignificant
impact on the consolidated statements of comprehensive loss.
In June 2016, the FASB issued ASU 2016-13 “Financial Instruments – Credit Losses” to improve information on
credit losses for financial assets and net investment in leases that are not accounted for at fair value through net
income. The ASU replaces the current incurred loss impairment methodology with a methodology that reflects
expected credit losses. The ASU is effective for the Company in the first quarter of 2020, with early adoption
permitted. The Company is currently evaluating the effect the adoption of this ASU will have on its consolidated
financial statements.
In November 2016, the FASB issued ASU 2016-18 “Restricted Cash” to provide guidance on the presentation of
restricted cash in the statement of cash flows. Currently, the statement of cash flows explained the change in cash and
cash equivalents for the period. The ASU requires that the statement of cash flows explain the change in cash, cash
equivalents and restricted cash for the period. The ASU will be adopted by the Company on January 1, 2018, on a
prospective basis. The Company does not expect the adoption to have a material effect on the statements of cash flows
as the Company’s restricted cash is not expected to be material.
In May 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
No. 2017-09, “Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting,” which clarifies
when a change to terms or conditions of a share-based payment award must be accounted for as a modification. The
new guidance requires modification accounting if the vesting condition, fair value or the award classification is not
the same both before and after a change to the terms and conditions of the award. The new guidance will be adopted
by the Company on January 1, 2018, on a prospective basis. The Company does not expect the adoption of this
standard to have an impact on its consolidated financial statements.
NOTE 3 - PREPAID EXPENSES AND OTHER
In 2017, the Company contracted with vendors to produce components and inventory for the Company’s clinical
studies, training, and future sales. As of December 31, 2017 and 2016, the Company advanced payments totaling $408
and $222 respectively, with two of these suppliers which was recorded as vendor deposits against future purchases. As
of December 31, 2017, and 2016, $663 and $263 were recorded as prepaid expenses and other, respectively.
F-13
Motus GI Holdings, Inc.
Notes to the Consolidated Financial Statements
(in thousands, except share per share amounts)
NOTE 4 - FIXED ASSETS, NET
As of December 31, 2017 and 2016, fixed assets, net consisted of the following:
Office
equipment
Computer
and
Leasehold
software
improvements Machinery
Laboratory
& Medical
equipment Total
Cost:
Balance - January 1, 2017
Additions
Balance - December 31, 2017
Accumulated depreciation:
Balance - January 1, 2017
Additions
Balance - December 31, 2017
Net book value:
December 31, 2017
December 31, 2016
45
89
134
7
5
12
112
80
192
105
18
123
83
22
105
21
8
29
-
328
328
91
188
279
331
707
1,038
-
-
-
57
34
91
122
69
76
328
188
38
7
62
-
34
190
65
255
783
141
NOTE 5 - OTHER CURRENT LIABILITIES
As of December 31, 2017 and 2016, other current liabilities consisted of the following
Wage-related liabilities
Deferred financing fees
Accrued expenses
F-14
As of December 31,
2017
2016
536
250
315
1,101
421
-
224
645
Motus GI Holdings, Inc.
Notes to the Consolidated Financial Statements
(in thousands, except share per share amounts)
NOTE 6 - COMMITMENTS AND CONTINGENCIES
Royalties to the IIA
The Company has received grants from the Government of the State of Israel through the Israel Innovation Authority of the
Ministry of Economy and Industry (the “IIA”) (formerly known as the Office of the Chief Scientist of the Ministry of Economy
and Industry (the “OCS”)) for the financing of a portion of its research and development expenditures pursuant to the
Encouragement of Research, Development and Technological Innovation in the Industry Law 5744-1984 (formerly known as
the Encouragement of Industrial Research and Development Law, 5744-1984), referred to as the Research Law, and related
regulations. As of December 31, 2017, we had received funding from the IIA in the aggregate amount of $1,330 and had a
contingent obligation to the IIA in the amount of approximately $1,370, which is generally repaid in the form of royalties
ranging from 3% to 3.5% of revenues on sales of products and services based on technology developed using IIA grants, up to
an aggregate of 100% (which may be increased under certain circumstances) of the U.S. dollar-linked value of the grant, plus
interest at the rate of 12-month LIBOR
Repayment of the grants is contingent upon the successful completion of the Company’s R&D programs and generating sales.
The Company has no obligation to repay these grants, if the R&D program fails, is unsuccessful or aborted or if no sales are
generated. The Company had not yet generated significant sales revenue as of December 31, 2017; therefore, no liability was
recorded in these consolidated financial statements.
Lease Agreements
On April 13, 2017, the Company entered into a lease for a facility in Fort Lauderdale, Florida, which the Company began
occupying in October 2017. The facility currently consists of 4.6 square feet, which will increase to 6.5 square feet by the
second year of the lease. The term runs for seven years and two months from October 2017. Annual base rent is initially $159
per year, subject to annual increases of 2.75%, which is recognized on a straight-line basis.
On January 1, 2015, the Company entered into a five year lease agreement for its facilities in Israel through December 31,
2019. The annual lease fees are $82. The Company has an option to renew the lease agreement for three more years after the
initial term period ends. The annual lease fees will increase by 4% beginning on the renewal option date.
Certain vehicles are leased by the Company under agreements that expire at various dates through 2021.
Many of these leases provide for payment by us, as the lessee, of taxes, insurance premiums, costs of maintenance and other
costs. At December 31, 2017, the Company had the following future minimum lease commitments:
Twelve Months Ended December 31,
2018
2019
2020
2021
2022
Thereafter
Total
F-15
Amount
$
366
332
235
176
179
341
1,629
$
Motus GI Holdings, Inc.
Notes to the Consolidated Financial Statements
(in thousands, except share per share amounts)
Contingent Royalty Obligation
During 2016, the Company entered into a Contingent Royalty Obligation (as defined in Note 8) which was recorded as a
liability in the amount of $1,662 and $1,410 as of December 31, 2017 and 2016, respectively.
Other Commitments
The Company has a severance liability to its CEO and CFO of approximately $600 in the event that they are terminated or leave
due to good cause, as outlined in their employee agreements. Management estimates that the likelihood of payment is remote;
therefore, no liability was reflected in these consolidated financial statements.
NOTE 7 - RELATED PARTY TRANSACTIONS
Other than transactions and balances related to cash and share-based compensation to officers and directors, the Company did
not have any transactions and balances with related parties and executive officers during 2017 and 2016 except for the
following:
Sales and Marketing Services Arrangement with FreeHold Surgical, Inc.
In August, 2017, the Company began paying a monthly fee to FreeHold Surgical, Inc (“FreeHold”), an entity in which one of
our Directors serves as a Director and President. Pursuant to the fee arrangement, the Company pays FreeHold a monthly
amount of approximately $25 as all-in compensation for sales and marketing services performed for the Company, on a part
time basis, by two Freehold sales representatives. As of December 31, 2017, and 2016, the Company had $50 and $0 recorded
as trade accounts payable to FreeHold.
NOTE 8 -
SHARE CAPITAL
Formation Shares
During October and November 2016, the Company issued 1,650,000 common shares pursuant to the formation of the
Company.
Share Exchange
As detailed in Note 1, during the Recapitalization Transaction in December 2016 the Company issued 4,000,000 common
shares in exchange for 100% of the issued and outstanding and preferred shares of Motus Ltd.
Registration Rights
In connection with the 2017 Private Placement (as defined below), the Company entered into a registration rights agreement
(the “Registration Rights Agreement”) with the 2017 Private Placement investors, (the “Investors”). On November 9, 2017, the
Company entered into an amendment to the Registration Rights Agreement (the “Registration Rights Amendment”) to waive
Investors’ rights to receive penalties under the Registration Rights Agreement if the Company is successful in consummating an
IPO by June 30, 2018. On February 16, 2018, the Company closed its IPO. Accordingly, all penalties or other amounts due to
the Investors under the Registration Rights Agreement have been forever waived and discharged, and the Company may be
required to file a registration statement in accordance with the Registration Rights Agreement, as amended, within 225 days
after the IPO date (see Note 14).
F-16
Motus GI Holdings, Inc.
Notes to the Consolidated Financial Statements
(in thousands, except share per share amounts)
Private Placement
On December 22, 2016, prior to the consummation of the Recapitalization Transaction, the Company consummated a private
placement transaction (the “2017 Private Placement”) as part of the Recapitalization Transaction. The 2017 Private Placement
consisted of units (“Units”) each consisting of three-quarter of a share of common stock, par value $0.0001 and one-quarter a
share of Series A Convertible Preferred Stock, par value $0.0001.
On December 22, 2016, the Company completed the first closing of the Private Placement (the “Initial Closing”). The
Company raised approximately $8,077 for 1,615,540 Units.
On January 30, 2017, the Company completed the second closing of the private placement. The Company raised approximately
$2,937 for 587,460 Units.
On February 24, 2017, the Company completed the third and final closing of the private placement. The Company raised
approximately $4,388 for 877,671 Units.
Exchange of Convertible Notes
From June 2015 through November 2016, pursuant to the terms of a convertible note agreement, as amended (the “CNA”),
Motus Ltd. issued convertible notes (the “Convertible Notes”) in an aggregate amount of approximately $14,597 (inclusive of
accrued interest through December 22, 2016, the date of the Initial Closing) to certain investors, including related parties of the
Company and Motus Ltd. As part of the 2017 Private Placement, at the Initial Closing, the holders of the Convertible Notes
(the “Convertible Holders”) exchanged their Convertible Notes (the “Exchange of Convertible Notes”), together with accrued
and unpaid interest thereon at a rate of 10% per annum, for Units of the 2017 Private Placement, at a conversion price of $4.50
per Unit. As a result, upon consummation of the Initial Closing, the Convertible Notes were exchanged for an aggregate of
3,243,768 Units representing (i) 2,432,808 shares of the Company’s common stock (inclusive of shares of the Company’s
common stock resulting from the accrued and unpaid interest of the Convertible Notes through the date of the Initial Closing)
and (ii) 810,960 shares of the Company’s Series A Convertible Preferred Stock (inclusive of shares of the Company’s Series A
Convertible Preferred Stock resulting from the accrued and unpaid interest of the Convertible Notes through the date of the
Initial Closing).
Convertible Notes Warrants
In connection with, and pursuant to the terms of the CNA, at the Initial Closing the Company issued warrants to purchase an
aggregate of 907,237 shares of the Company’s common stock (the “CNA Warrants”) to replace the warrants previously issued
to the Convertible Holders. The five-year CNA Warrants are exercisable for the Company’s common stock at an exercise price
of $5.00 per share.
Royalty Payment Rights on Series A Convertible Preferred Stock
On December 20, 2016, the Company filed its Certificate of Designation of Preferences, Rights and Limitations (the
“Certificate of Designation”), establishing the rights and preferences of the holders of the Series A Convertible Preferred Stock.
As set forth in the in the Certificate of Designation, the Royalty Payment Rights initially entitled the holders in aggregate, to a
royalty in an amount of:
● 3% of net sales subject to a maximum in any calendar year equal to the total dollar amount of Units closed on in the 2017
Private Placement; and
● 5% of licensing proceeds subject to a maximum in any calendar year equal to the total dollar amount of Units closed on in
the 2017 Private Placement.
F-17
Motus GI Holdings, Inc.
Notes to the Consolidated Financial Statements
(in thousands, except share per share amounts)
On February 16, 2018, each share of Series A Convertible Preferred Stock converted into one share of common stock pursuant
to the Mandatory Conversion. As provided for in the Certificate of Designation, if a holder had elected to convert all of their
Series A Convertible Preferred Stock into shares of the Company’s common stock prior to the Mandatory Conversion, the
holder would have forfeited any and all rights to future royalty payments, if any. If a holder had elected to convert any portion
of their Series A Convertible Preferred Stock to common stock at any time prior to the Mandatory Conversion, such holder
would have forfeited any rights to future royalty payments, if any, with respect to such converted shares. No such conversion
elections were received by the Company prior to the Mandatory Conversion.
In addition, in connection with completion of the 2017 Private Placement, the Company issued the placement agent royalty
payment rights certificates (the “Placement Agent Royalty Payment Rights Certificates”) which grants the placement agent, and
its designees the right to receive, in the aggregate, 10% of the amount of payments paid to the holders of the Series A
Convertible Preferred Stock, or the holders of the Royalty Payment Rights Certificates, upon the conversion of the Series A
Convertible Preferred Stock into shares of the Company’s common stock. The Placement Agent Royalty Payment Rights
Certificates are on substantially similar terms as the Royalty Payment Rights of the Series A Convertible Preferred Stock.
The Royalty Payment Rights Certificate obligation and Placement Agent Royalty Payment Rights Certificate obligation (the
“Contingent Royalty Obligation”) was recorded as a liability at fair value as “Contingent royalty obligation in the consolidated
balance sheets at December 31, 2017 and 2016 (see Note 10 – Contingent Royalty Obligation). The fair value at inception was
allocated to the royalty rights and the residual value was allocated to the preferred shares and recorded as equity.
On November 9, 2017, the Company entered into an agreement to amend the Certificate of Designation to modify the Royalty
Payment Rights if the Company is successful in consummating an IPO by June 30, 2018. Pursuant to the amended terms, if and
when the Company generates sales of the Pure-Vu system, including disposables, parts, and services, or if the Company
receives any proceeds from the licensing of the Pure-Vu system, then the Company will pay to the holders of the Series A
Convertible Preferred Stock a royalty (the “Royalty Amount”) equal to, in the aggregate, in royalty payments in any calendar
year for all products:
● 3% of net sales* for commercialized product directly;
● 5% of any licensing proceeds** for rights to commercialize the product if sublicensed by the Company to a third-
party.
* Notwithstanding the foregoing, with respect to Net Sales based Royalty Amounts, (a) no Net Sales based Royalty Amount
shall begin to accrue or become payable until the Company has first generated, in the aggregate, since its inception, Net Sales
equal to $20,000 (the “Initial Net Sales Milestone”), and royalties shall only be computed on, and due with respect to, Net Sales
generated in excess of the Initial Net Sales Milestone, and (b) the total Net Sales based Royalty Amount due and payable in any
calendar year shall be subject to a cap per calendar year of $30,000. Net Sales is defined in the Certificate of Designations.
** Notwithstanding the foregoing, with respect to Licensing Proceeds based Royalty Amounts, (a) no Licensing Proceeds based
Royalty Amount shall begin to accrue or become payable until the Company has first generated, in the aggregate, since its
inception, Licensing Proceeds equal to $3,500 (the “Initial Licensing Proceeds Milestone”), and royalties shall only be
computed on, and due with respect to, Licensing Proceeds in excess of the Initial Licensing Proceeds Milestone and (b) the total
Licensing Proceeds based Royalty Amount due and payable in any calendar year shall be subject to a cap per calendar year of
$30,000. Licensing Proceeds is defined in the Certificate of Designations.
The royalty will be payable up to the later of (i) the latest expiration date for the Company’s current patents (which is currently
October 2026), or (ii) the latest expiration date of any pending patents as of the date of the Initial Closing that may be issued in
the future. Following the expiration of all such patents, the holders of the Royalty Payment Rights will no longer be entitled to
any further royalties for any period following the latest to occur of such patent expiration.
On February 16, 2018, the date of the closing of the IPO, (1) the amendment to the Certificate of Designation became effective,
(2) all outstanding shares of Series A Convertible Preferred Stock were converted into shares of the Company’s common stock
pursuant to a Mandatory Conversion, and (3) the Royalty Payment Rights Certificates were issued to the former holders of the
Series A Convertible Preferred Stock.
F-18
Motus GI Holdings, Inc.
Notes to the Consolidated Financial Statements
(in thousands, except share per share amounts)
NOTE 9 -
SHARE-BASED COMPENSATION
Employee stock grant
On May 4, 2017, the Company’s Board of Directors approved unrestricted stock awards for the issuance of 5,000 shares of its
common stock to employees of the Company, under the 2016 Equity Incentive Plan. As of December 31, 2017, the Company
recorded an expense in the amount of $23 with respect to this grant as general and administrative expense.
Employee stock option grants
The Company has one option plan that was approved in 2009. This plan was adjusted in 2016 following the reverse
recapitalization transaction on December 22, 2016.
On January 1, 2018, 629,594 additional shares of the Company’s common stock were replenished to the Company’s reserve for
future issuance under its 2016 Equity Incentive Plan.
On May 4, 2017, the Company’s Board of Directors approved the issuance of 1,595,769 options to directors and employees.
The options that were granted have an exercise price of $4.50 and vest in accordance with the terms of the option agreements.
As part of the 1,595,769 options granted on May 4, 2017, the Company’s CEO received options to purchase 511,113 shares of
the Company’s common stock. Fifty-three percent (53%) of the options were fully vested immediately upon grant, forty percent
(40%) of the options will vest in a series of twelve (12) successive equal quarterly installments upon the CEO’s completion of
each successive calendar quarter of active service over the three (3) year period measured from the date of grant, and seven
percent (7%) of the options will vest on December 22, 2019, provided that the CEO remains an employee of the Company
through each applicable vesting date. Additionally, the Company’s former CFO as of the grant date, received options to
purchase 154,227 shares of the Company’s common stock. A portion of the options vested on the grant date and the remaining
options were to vest over a period of 3 years. Following the former CFO’s resignation, the non-vested options were forfeited in
accordance with the terms of the option agreement as the CFO was no longer employed by the Company.
As part of the 1,595,769 options granted on May 4, 2017, Directors of the Company received options to purchase 482,500
shares of the Company’s common stock. The options will vest on the first and second anniversary of the grant date contingent
upon continued services as director of the Company.
On August 16, 2017, the Company hired a new CFO. Pursuant to the terms of the employment agreement, the CFO was
granted options to purchase 240,000 common shares of the Company. The options will vest over a three-year period on a
quarterly basis and the exercise price will be equal to the fair market value on the grant date of $4.50 per share as determined by
the Board of Directors.
On September 29, 2017, the Company’s Board of Directors approved the issuance of 7,000 options to two employees. The
additional options that were granted have an exercise price of $4.50 and vest quarterly over a three-year period.
On September 29, 2017, the Board of Directors approved the repricing of the May 4, 2017 options awarded from an exercise
price of $5.00 to $4.50 per share. This repricing was accounted for as a modification of a share-based payment award and
increased the fair value of each option award from $2.34 per share to $2.45 per share. The incremental compensation expense
recognized as a result of the modification during the period ended December 31, 2017 was approximately $203.
On November 9, 2017, the Company’s Board of Directors approved the issuance of 47,000 options to eight employees. The
options that were granted have an exercise price of $5.00 and vest quarterly over a three-year period.
On November 9, 2017, the Company’s Board of Directors approved the accelerated vesting of 29,863 options issued prior to
January 1, 2016 from milestone-based vesting to instead vest in full on November 8, 2018. This accelerated vesting was
accounted for as a modification of a share-based payment award and increased the fair value of each option award from $0 up to
$3.34 per share. The incremental compensation expense recognized as a result of the modification during the period ended
December 31, 2017 was approximately $14.
F-19
Motus GI Holdings, Inc.
Notes to the Consolidated Financial Statements
(in thousands, except share per share amounts)
The following table summarizes stock option activity related to employees during the years ended December 31, 2017 and
2016:
Outstanding at January 1, 2016
Granted
Exercised
Forfeited/canceled
Outstanding at December 31, 2016
Granted
Exercised
Forfeited/canceled
Outstanding at December 31, 2017
Shares
Underlying
Options
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Life (years)
Aggregate
Intrinsic Value
119,293 $
-
-
(8,582)
110,711 $
1,889,769
(1,438)
(341,967)
1,657,075 $
2.42
-
-
2.38
2.42
4.51
5.00
4.32
4.42
9 $
-
-
-
8 $
10.00
-
-
9.27 $
175
335
At December 31, 2017, unamortized stock compensation for employee stock options was $2,131, with a weighted-average
recognition period of 1.97 years.
At December 31, 2017 and 2016, outstanding employee options to purchase 478,372 and 67,908 shares of common stock were
exercisable, respectively.
The following table summarizes total non-cash employee stock-based compensation for stock option grants by operating
statement classification:
General administrative
Sales and marketing
Research and development
Total
Stock, options and warrants to service providers
Year ended December 31,
2017
2016
$
$
1,238 $
139
182
1,559 $
20
-
-
20
The Company accounts for options to purchase common stock issued to non-employees using the guidance of ASC 505-50,
“Equity-Based Payments to Non-Employees”, whereby the fair value of such options is determined at the earlier of the date at
which the non-employee’s performance is completed or a performance commitment is reached.
In January 2017, the Company signed an agreement by which it granted a service provider an option to purchase 100,000 shares
of the Company’s common stock as compensation for past services, and therefore, the option was fully vested as of the signing
date of the agreement. The option may be exercised during a period of 5 years from issuance at an exercise price of $5.00 per
share.
F-20
Motus GI Holdings, Inc.
Notes to the Consolidated Financial Statements
(in thousands, except share per share amounts)
In March 2017, the Company signed a consulting service agreement by which it granted the service provider 90,000 shares of
the Company’s common stock as compensation for past services provided. As such, the share award was fully vested as of the
signing date of the agreement. The shares are subject to a lock-up agreement that will end, (i) with respect to 22,500 of the
shares upon the nine month anniversary of the signing of the consulting agreement, (ii) with respect to 22,500 of the shares
upon the 6 month anniversary the SEC declares the S-1 registration agreement effective (the “Effective Date”), and (iii) with
respect to the remaining 45,000 upon the year anniversary of the Effective Date. The measurement date was reached on the
signing date of the agreement. As of December 31, 2017, the Company recorded an expense in the amount of $434 with respect
to this grant as general and administrative expense.
Additionally, within the framework of the agreement, the Company granted the service provider a warrant to purchase 30,000
shares of the Company’s common stock at an exercise price of $8.00 per share, as compensation for services to be provided.
The warrant will vest and become exercisable as follows: (i) 7,500 warrant shares will become exercisable on December 27,
2017, (ii) 7,500 warrant shares will become exercisable on August 14, 2018, and (iii) 15,000 warrant shares will become
exercisable on the twelve month anniversary of the Registration Statement Effectiveness Date. The warrants are exercisable for
a period of 5 years from the signing date of the agreement.
On May 4, 2017, the Company granted options to purchase 31,000 common shares of the Company to two services providers
as consideration for consulting services. 250 of the options underlying the common shares vested on the grant date and the
remaining options will vest in a series of twelve equal, quarterly installments contingent upon providing continued service as of
each quarter over a three-year period from the grant date. The exercise price of the options is $4.50 and will expire 10 years
from the grant date.
In August, September and October 2017, the Company granted 4,167 shares of common stock in connection with a consulting
agreement. As of December 31, 2017, the Company recorded an expense in the amount of $19 with respect to this grant as
general and administrative expense.
In connection with the 2017 Private Placement, the Company issued 403,632 warrants to purchase 403,632 shares of the
Company’s common stock to the placement agent at an exercise price of $5. These warrants are exercisable for a period of 5
years from the grant date and provide for a cashless exercise.
F-21
Motus GI Holdings, Inc.
Notes to the Consolidated Financial Statements
(in thousands, except share per share amounts)
The following table summarizes stock option activity related to non-employees during the years ended December 31, 2017 and
2016:
Outstanding at January 1, 2016
Granted
Exercised
Forfeited/canceled
Outstanding at December 31, 2016
Granted
Exercised
Forfeited/canceled
Outstanding at December 31, 2017
Shares
Underlying
Options
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Life (years)
Aggregate
Intrinsic Value
15,019 $
-
-
-
15,019 $
131,000
-
-
146,019 $
2.42
-
-
-
2.42
4.50
-
-
4.42
9.34
-
-
-
6.94 $
10.00
-
-
9.27 $
29
86
At December 31, 2017, unamortized stock compensation for non-employee stock options was $53, with a weighted-average
recognition period of 2.34 years.
At December 31, 2017 and 2016, outstanding non-employee options to purchase 118,218 and 11,392 shares of common stock
were exercisable, respectively.
The following table summarizes total non-cash stock-based compensation for stock option grants to service providers by
operating statement classification:
General administrative
Sales and marketing
Research and development
Total
Stock option pricing model
Year ended December 31,
2017
2016
$
$
185 $
-
-
185 $
4
6
24
34
The fair value of the stock options and warrants granted to employees and service providers during the period was estimated at
the date of grant using the Black-Scholes options pricing model with the following assumptions. Given the absence of an active
market for the Company’s stock at the time of grant, the fair value of common stock at the time of grant of each share award
was based upon several factors, including consideration of input from management.
Fair value of common stock
Expected volatility
Dividend Yield
Risk-free interest
Expected life of up to (years)
$4.50 - $5.00
60%
0%
1.92% - 2.36%
5.81
NOTE 10 - CONTINGENT ROYALTY OBLIGATION
On December 20, 2016, the Company filed its Certificate of Designation which sets forth the Contingent Royalty Obligation, as
defined in (Note 8, “Royalty Payment Rights on Series A Convertible Preferred Stock”), which was recorded as a liability at
fair value as “other-long-term liabilities” in the consolidated balance sheets at December 31, 2017 and 2016 in the amount of
1,662 and 1,410, respectively. The Company records changes in the fair value of the Contingent Royalty Obligation in the
consolidated statements of comprehensive loss as “financing” income or expense. For the years ending December 31, 2017 and
2016, the Company recorded financing expense in the amount of $252 and $0 in connection with the Contingent Royalty
Obligation.
F-22
Motus GI Holdings, Inc.
Notes to the Consolidated Financial Statements
(in thousands, except share per share amounts)
The Company measured the fair value according to the discounted cash flow method. The following assumptions (level 3
measurements) were used:
Discount rate
Rate of royalty payment
Year ended December 31,
2017
2016
20%
3%
20%
3%
The following table summarizes the contingent royalty obligation during the years ended December 31, 2017 and 2016:
As of December 22, 2016
Revaluation of liabilities
As of December 31, 2016
Revaluation of liabilities
As of December 31, 2017
Contingent
Royalty
Obligation
$
$
1,410
-
1,410
252
1,662
In accordance with ASC-820-10-50-2(g), the Company performed a sensitivity analysis of the liability, which was classified as
a level 3 financial instrument. The Company recalculated the fair value of the liability by applying a +/- 2% change to the input
variable in the discounted cash flow model; the discount rate. A 2% decrease in the discount rate would increase the liability by
approximately $159; a 2% increase in the discount rate would decrease the liability by approximately $182.
NOTE 11 - FINANCE EXPENSES, NET
The following table summarizes finance expenses for the years ended December 31, 2017 and 2016,
Bank fees and interest
Change in fair value of Contingent Royalty Obligation
Change in fair value and interest on convertible notes
Exchange rate differences
Total finance expenses, net
NOTE 12 - INCOME TAXES
Year ended December 31,
2017
2016
6
252
-
(22)
236
86
-
1,907
(27)
1,966
Deferred income taxes reflect the net effects of temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes. The Company’s deferred tax assets relate primarily
to its net operating loss carryforwards and other balance sheet basis differences. In accordance with ASC 740, “Income Taxes,”
the Company recorded a valuation allowance to fully offset the gross deferred tax asset, because it is not more likely than not
that the Company will realize future benefits associated with these deferred tax assets at December 31, 2017 and 2016.
F-23
Motus GI Holdings, Inc.
Notes to the Consolidated Financial Statements
(in thousands, except share per share amounts)
At December 31, 2017 and 2016, the Company had deferred tax assets of $7,900 and $4,800, respectively, against which a full
valuation allowance of $7,900 and $4,800 , respectively, had been recorded. The change in the valuation allowance for the year
ended December 31, 2017 was an increase of $3,100. The increase in the valuation allowance for the year ended December 31,
2017 was mainly attributable to increases in net operating losses and accrued liabilities, which resulted in an increase in the
deferred tax assets with a corresponding valuation allowance. Significant components of the Company’s deferred tax assets at
December 31, 2017 and 2016 were as follows:
Deferred taxes assets:
Net operating loss carryforwards – U.S.
Net operating loss carryforwards – Israel
Accrued liabilities
Gross deferred tax assets
Valuation allowance
Gross deferred tax assets after valuation allowance
December 31,
2017
2016
$
291 $
6,295
1,269
7,855
(7,855)
$
- $
160
4,113
525
4,798
(4,798)
-
A reconciliation of the federal statutory tax rate and the effective tax rates for the years ended December 31, 2017 and 2016 is
as follows:
U.S. federal statutory tax rate
State income taxes, net of federal benefit
U.S. vs. foreign tax law change
Impact of tax law change
Other
Change in valuation allowance
Effective tax rate
For the Year Ended December 31,
2017
2016
34.0%
1.1
(8.8)
(3.0)
(0.1)
(23.2)
-%
34.0%
-
(11.0)
-
(0.7)
(22.9)
(0.6)%
The Company had approximately $29,500 and $18,700 of gross net operating loss (“NOL”) carryforwards (federal, state and
Israel) as of December 31, 2017 and 2016, respectively. Sections 382 and 383 of the Internal Revenue Code, and similar state
regulations, contain provisions that may limit the U.S. and State NOL carryforwards available to be used to offset income in any
given year upon the occurrence of certain events, including changes in the ownership interests of significant stockholders. In
the event of a cumulative change in ownership in excess of 50% over a three-year period, the amount of the NOL carryforwards
that the Company may utilize in any one year may be limited.
A reconciliation of the Company’s U.S. and State NOLs for the years ended December 31, 2017 and 2016 is as follows:
U.S. Federal NOL’s
U.S. State NOL’s
Israel NOL’s
Total NOL’s
December 31,
2017
2016
$
$
1,074 $
1,074
27,371
29,519 $
411
411
17,885
18,707
F-24
Motus GI Holdings, Inc.
Notes to the Consolidated Financial Statements
(in thousands, except share per share amounts)
The Company’s federal and state NOL’s of $1,100 each begin to expire after 2036 through 2037. The Company’s Israel NOL
of $27,400 does not expire.
The Tax Cuts and Jobs Act (the “Act”) was enacted in December 2017. Among other things, the Act reduces the U.S. federal
corporate tax rate from 35 percent to 21 percent, eliminates the alternative minimum tax (“AMT”) for corporations, and
provides that AMT credit carryforwards are refundable over a period of time beginning with the Company’s 2018 tax year
through 2021. The reduction of the corporate tax rate resulted in a write-down of the Company’s gross deferred tax assets of
approximately $0.4 million, and a corresponding write-down of the valuation allowance.
NOTE 13 - SUBSEQUENT EVENTS
The Company has analyzed its operations subsequent to December 31, 2017 through March 28, 2018, the issuance date of the
financial statements, and noted the following subsequent events:
On January 1, 2018, 629,594 additional shares of the Company’s common stock were replenished to the Company’s reserve for
future issuance under its 2016 Equity Incentive Plan (see Note 9).
On February 16, 2018, the Company closed its IPO in which it sold 3,500,000 shares if the Company’s common stock at a
public offering price of $5.00 per share. In connection with the closing of the IPO, (1) the Company received net proceeds of
$15,200 after deducting underwriting discounts and commissions of $1,400 and other offering expenses of approximately $900
, (2) the amendment to the Registration Rights Agreement described above in Note 8, “Registration rights” became effective,
(3) the amendment to the Certificate of Designation described above in Note 8, “Royalty Payment Rights on Series A
Convertible Preferred Stock” became effective, (4) all outstanding shares of Series A Convertible Preferred Stock converted,
on a one-to-one basis, into shares of the Company’s common stock, (5) the Company issued the Royalty Payment Rights
Certificates as described in Note 8, “Royalty Payment Rights on Series A Convertible Preferred Stock”, and (6) the Company
issued warrants to certain of the former Series A Convertible Preferred Stock holders, pursuant to the amendment to the
Registration Rights Agreement and the amendment to the Certificate of Designation, to purchase an aggregate of 1,095,682
shares of the Company’s common stock (the “Ten Percent Warrants”). The Ten Percent Warrants are exercisable any time on
or after the 180 day anniversary of the completion of the IPO, have a five year term, and provide for cashless exercise. No
fractional shares will be issued upon the exercise of the Ten Percent Warrants. In addition, the Company granted the
representative of the several underwriters in the IPO (the “Representative”) a 30-day option (the “Over-Allotment Option”) to
purchase up to an aggregate 525,000 additional shares of the Company’s common stock at an exercise price of $5.00 per share.
On February 21, 2018, a consultant exercised 896 options on a cashless basis which resulted in the issuance of 394 shares of the
Company’s common stock.
On February 27, 2018, the Company announced that it received CE mark approval for the Pure-Vu System, which enables
continued work with expert clinical thought leaders in Europe and lays the foundation for future commercial expansion into
Europe.
On March 12, 2018, the Company closed the sale of an additional 56,000 shares of its common stock at a price of $5.00 per
share, pursuant to the Representative’s partial exercise of the Over-Allotment Option. In connection with the closing of the
partial exercise of the Over-Allotment Option, the Company received net proceeds of $258 after deducting underwriting
discounts and commissions of $22.
On March 27, 2018, the Company’s Board of Directors approved the issuance of 44,000 options to six employees which vest
over a three-year period on a quarterly basis and 50,000 options to one board member which vests over a two-year period on an
annual basis to purchase shares of the Company’s common stock at $4.58, the closing share price of the Company’s common
stock on the Nasdaq Capital Market on March 27, 2018.
On March 27, 2018, the Company’s Board of Directors approved the issuance of 15,000 shares of the Company’s common
stock to a third party for services to be provided. The stock vests immediately and is subject to a lock-up through February 14,
2019.
F-25
CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT
TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Mark Pomeranz, certify that:
Exhibit 31.1
1.
I have reviewed this annual report on Form 10-K for the period ended December 31, 2017 of Motus GI Holdings, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to
the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in
this report;
4. The registrant’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)) for the registrant 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 registrant, 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)
(Paragraph omitted pursuant to SEC Release Nos. 33-8238/34-47986 and 33-8392/34-49313);
c) Evaluated the effectiveness of the registrant’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 registrant’s internal control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in
the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal
control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of the registrant’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 registrant’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 registrant’s
internal control over financial reporting.
Date: March 28, 2018
/s/ Mark Pomeranz
Mark Pomeranz
Chief Executive Officer
(Principal Executive Officer)
CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT
TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Andrew Taylor, certify that:
Exhibit 31.2
1.
I have reviewed this annual report on Form 10-K for the period ended December 31, 2017 of Motus GI Holdings, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to
the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in
this report;
4. The registrant’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)) for the registrant 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 registrant, 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)
(Paragraph omitted pursuant to SEC Release Nos. 33-8238/34-47986 and 33-8392/34-49313);
c) Evaluated the effectiveness of the registrant’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 registrant’s internal control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in
the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal
control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of the registrant’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 registrant’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 registrant’s
internal control over financial reporting.
Date: March 28, 2018
/s/ Andrew Taylor
Andrew Taylor
Chief Financial Officer
(Principal Financial Officer)
Certification Pursuant to
18 U.S.C. Section 1350,
as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 32.1
This Certification is being filed pursuant to 18 U.S.C. Section 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002. This
Certification is included solely for the purposes of complying with the provisions of Section 906 of the Sarbanes-Oxley Act and is not
intended to be used for any other purpose. In connection with the accompanying Annual Report on Form 10-K of Motus GI Holdings, Inc.
for the year ended December 31, 2017 (the “Annual Report”), each of the undersigned hereby certifies in his capacity as an officer of
Motus GI Holdings, Inc. (the “Company”) that to such officer’s knowledge:
(1) The Annual Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Annual Report fairly presents, in all material respects, the financial condition and results of
operations of the Company.
Dated: March 28, 2018
Dated: March 28, 2018
By:
By:
/s/ Mark Pomeranz
Mark Pomeranz
Chief Executive Officer
(Principal Executive Officer)
/s/ Andrew Taylor
Andrew Taylor
Chief Executive Officer
(Principal Executive Officer)