MBody AI Ltd 20-F for FY2021
MBody AI Ltd. (MBAI)
20-F
2022-04-06
For: 2021-12-31
View Original
Added on
April 11, 2026
About this 20-F
MBody AI Ltd filed this 20-F on April 6, 2022, covering the fiscal year ended December 31, 2021 (FY2021).
Headline figures
Fiscal year ended December 31, 2021, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Net loss
- $17.2M
- compared with a net loss of $13.85M a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
|
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934 |
OR
|
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended |
OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
OR
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SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
for the transition period from __________ to ___________ |
Commission file number 001-36848
(Exact name of the Registrant as specified in its charter)
(Jurisdiction of incorporation or organization)
(Address of principal executive offices)
Chief Executive Officer
Telephone: +
Email:
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
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Title of each class
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Trading Symbol(s)
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Name of each exchange on which registered
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Warrants to purchase Ordinary Shares
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CHEKZ
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Nasdaq Capital Market
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Securities registered or to be registered pursuant to Section 12(g) of the Act:
None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None
As of December 31, 2021, the registrant had 96,411,949 ordinary shares outstanding, NIS 2.40 par value per share.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes ☐ No ☒
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company.
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☐ Large Accelerated filer
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☒
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☐ Non-accelerated filer
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If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
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☒
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☐ International Financial Reporting
Standards as issued by the International Accounting Standards Board
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☐ Other
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If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.
☐ Item 17 ☐ Item 18
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☒
(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of the securities under a plan confirmed by a court.
Yes ☐ No ☐
TABLE OF CONTENTS
| Page | ||
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Part I |
||
| 3 | ||
|
A. |
Directors and Senior Management |
3 |
|
B. |
Advisers |
3 |
|
C. |
Auditors |
3 |
| 3 | ||
| 3 | ||
|
A. |
[Reserved.] |
3 |
|
B. |
Capitalization and Indebtedness |
3 |
|
C. |
Reasons for the Offer and Use of Proceeds
|
3 |
|
D. |
Risk factors |
3 |
| 44 | ||
|
A. |
History and Development of the Company
|
44 |
|
B. |
Business Overview |
44 |
|
C. |
Organizational Structure |
77 |
|
D. |
Property, Plants and Equipment |
77 |
| 77 | ||
| 77 | ||
|
A. |
Operating Results |
79 |
|
B. |
Liquidity and Capital Resources |
84 |
|
C. |
Research and development, patents and licenses,
etc. |
90 |
|
D. |
Trend Information |
90 |
|
E. |
Critical Accounting Estimates |
90 |
| 92 | ||
|
A. |
Directors and senior management |
92 |
|
B. |
Compensation of Directors and Executive
Officers |
96 |
|
C. |
Board Practices |
100 |
|
D. |
Employees |
111 |
|
E. |
Share Ownership |
111 |
| 116 | ||
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A. |
Major shareholders |
116 |
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B. |
Related Party Transactions |
118 |
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C. |
Interests of Experts and Counsel
|
118 |
| 119 | ||
|
A. |
Consolidated Statements and Other Financial
Information |
119 |
|
B. |
Significant Changes |
119 |
CERTAIN INFORMATION
Unless otherwise stated, all of our financial information presented
in this annual report has been prepared in accordance with generally accepted accounting principles in the United States of America, or
U.S. GAAP.
In this Annual Report on Form 20-F, or the Annual Report, unless
the context indicates otherwise, references to “NIS” are to the legal currency of Israel, “U.S. dollars,” “$”
or “dollars” are to United States dollars, and the terms “we,” “us,” “our company,” “our,”
and “Check-Cap” refer to Check-Cap Ltd. Unless otherwise indicated, U.S. dollar translation of NIS amounts presented in this
Annual Report are translated using the rate of $1.00 = NIS 3.110, the exchange rate published by the Bank of Israel on December 31, 2021,
and U.S. dollar translation of Euro amounts presented in this Annual Report are translated using the rate of $1.00 = Euro 0.884, based
on the exchange rates published by the Bank of Israel on December 31, 2021.
USE OF TRADE NAMES AND TRADEMARKS
Throughout this Annual Report, we refer to various trademarks,
service marks and trade names that we use in our business. The “CHECK-CAP” and “C-Scan” trademarks and design
logos are the property of Check-Cap Ltd. Other trademarks and service marks appearing in this Annual Report are the property of their
respective holders. We do not intend our use or display of other companies’ tradenames, trademarks or service marks to imply a relationship
with, or endorsement or sponsorship of us by these other companies. Solely for convenience, trademarks and trade names referred to in
this Annual Report appear without the ® or TM symbols, but such references are not intended to indicate, in any way, that we will
not assert, to the fullest extent under applicable law, our rights or the rights of the applicable licensor to these trademarks and trade
names.
FORWARD-LOOKING STATEMENTS
This Annual Report contains forward-looking statements, about our
expectations, beliefs or intentions regarding, among other things, our ongoing and planned product development and clinical trials; the
timing of, and our ability to make, regulatory filings and obtain and maintain regulatory approvals for our product candidates; our intellectual
property position; the degree of clinical utility of our products, particularly in specific patient populations; our ability to develop
commercial functions; expectations regarding product launch and revenue; our results of operations, cash needs; financial condition, liquidity,
prospects, growth and strategies; the industry in which we operate; and the trends that may affect the industry or us. In addition, from
time to time, we or our representatives have made or may make forward-looking statements, orally or in writing. Forward-looking statements
can be identified by the use of forward-looking words such as “believe,” “expect,” “intend,” “plan,”
“may,” “should” or “anticipate” or their negatives or other variations of these words or other comparable
words or by the fact that these statements do not relate strictly to historical or current matters. These forward-looking statements may
be included in, but are not limited to, various filings made by us with the U.S. Securities and Exchange Commission, or the SEC, press
releases or oral statements made by or with the approval of one of our authorized executive officers. Forward-looking statements relate
to anticipated or expected events, activities, trends or results as of the date they are made. Because forward-looking statements relate
to matters that have not yet occurred, these statements are inherently subject to risks and uncertainties that could cause our actual
results to differ materially from any future results expressed or implied by the forward-looking statements. Many factors could cause
our actual activities or results to differ materially from the activities and results anticipated in forward-looking statements, including,
but not limited to, the factors summarized below.
This Annual Report identifies important factors which could cause
our actual results to differ materially from those indicated by the forward-looking statements, particularly those set forth under the
heading “Risk Factors.” The risk factors included in this Annual Report are not necessarily all of the important factors that
could cause actual results to differ materially from those expressed in any of our forward-looking statements. Given these uncertainties,
readers are cautioned not to place undue reliance on such forward-looking statements. Factors that could cause our actual results to differ
materially from those expressed or implied in such forward-looking statements include, but are not limited to:
| • |
our history of losses; |
| • |
our needs for additional capital to fund our operations and our inability to obtain additional capital on acceptable terms, or at
all; |
| • |
the impact of the COVID-19 pandemic; |
| • |
the initiation, timing, progress and results of our clinical trials and other product development efforts; |
| • |
our reliance on one product; |
| • |
the clinical development, commercialization and market acceptance of C-Scan; |
| • |
our ability to receive de novo classification and other regulatory approvals for C-Scan; |
| • |
our ability to successfully complete clinical trials; |
| • |
our reliance on single-source suppliers; |
| • |
our reliance on third parties, such as for purposes of our clinical trials and clinical development and the manufacturing, marketing
and distribution of C-Scan; |
| • |
our ability to establish and maintain strategic partnerships and other corporate collaborations; |
| • |
our ability to achieve reimbursement and coverage from government and private third-party payors; |
| • |
the implementation of our business model and strategic plans for our business; |
| • |
the scope of protection we are able to establish and maintain for intellectual property rights covering C-Scan and our ability to
operate our business without infringing the intellectual property rights of others; |
| • |
competitive companies, technologies and our industry; |
| • |
statements as to the impact of the political and security situation
in Israel or the ongoing conflict in Ukraine on our business; and |
| • |
those factors referred to in “Item 3. Key Information – D. Risk Factors,” “Item 4. Information on the Company,”
and “Item 5. Operating and Financial Review and Prospects”, as well as in this Annual Report generally. |
All forward-looking statements attributable to us or persons acting
on our behalf speak only as of the date of this Annual Report and are expressly qualified in their entirety by the cautionary statements
included in this Annual Report. We undertake no obligations to update or revise forward-looking statements to reflect events or circumstances
that arise after the date made or to reflect the occurrence of unanticipated events. In evaluating forward-looking statements, you should
consider these risks and uncertainties.
2
EXPLANATORY NOTE
Market data and certain industry data and forecasts used throughout
this Annual Report were obtained from internal company surveys, market research, consultant surveys commissioned by the Company, publicly
available information, reports of governmental agencies and industry publications and surveys. Industry surveys, publications, consultant
surveys commissioned by the Company and forecasts generally state that the information contained therein has been obtained from sources
believed to be reliable. However, this information may prove to be inaccurate because of the method by which some of the data for the
estimates is obtained or because this information cannot always be verified with complete certainty due to the limits on the availability
and reliability of raw data, the voluntary nature of the data gathering process and other limitations and uncertainties. As a result,
the market and industry data and forecasts included or incorporated by reference in this Annual Report, and estimates and beliefs based
on that data, may not be reliable. We have relied on certain data from third-party sources, including internal surveys, industry forecasts
and market research, which we believe to be reliable based on our management’s knowledge of the industry. However, we have not ascertained
the underlying economic assumptions relied upon therein. Forecasts are particularly likely to be inaccurate, especially over long periods
of time. In addition, we do not necessarily know what assumptions regarding general economic growth were used in preparing the forecasts
we cite. Statements as to our market position are based to the best of our knowledge on the most currently available data. While we are
not aware of any misstatements regarding the industry data presented in this Annual Report, our estimates involve risks and uncertainties
and are subject to change based on various factors, including those discussed under the heading “Risk Factors” in this Annual
Report.
PART I
ITEM 1. IDENTITY
OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
| A. |
Directors and Senior Management |
Not required.
| B. |
Advisers |
Not required.
| C. |
Auditors |
Not required.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not required.
ITEM 3. KEY INFORMATION
| A. |
[Reserved.] |
| B. |
Capitalization and Indebtedness |
Not required.
| C. |
Reasons for the Offer and Use of Proceeds |
Not required.
| D. |
Risk factors |
In conducting our business, we face many risks
that may interfere with our business objectives. Some of these risks could materially and adversely affect our business, financial condition
and results of operations. In particular, we are subject to various risks resulting from changing economic, political, industry, business
and financial conditions. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties
not currently known to us or that we currently deem to be immaterial may also materially adversely affect our business operations.
You should carefully consider the following
factors and other information in this Annual Report before you decide to invest in our ordinary shares. If any of the risks referred to
below occur, our business, financial condition and results of operations could suffer. In any such case, the trading price of our ordinary
shares could decline, and you may lose all or part of your investment.
3
Summary Risk Factors
Our business is subject to numerous risks and uncertainties, including
those highlighted in the section titled “Risk Factors” immediately following this summary. The principal factors and uncertainties
that make investing in our ordinary shares risky, include, among others:
Risks Related to Our Financial Position
| • |
We have a history of losses, may incur future losses and may not achieve profitability; |
| • |
We will require additional funding in order to complete the development and commercialization of C-Scan, which may cause dilution
to our existing shareholders, restrict our operations or require us to relinquish rights to C-Scan or intellectual property. If additional
capital is not available, we may have to delay, reduce or cease the development or commercialization of C-Scan; |
Risks Related to Our Business
| • |
We may not succeed in completing the development of our product, achieve manufacturing stability and capacity, demonstrate sufficient
clinical evidence or commercialize our product or generate significant revenues; |
| • |
Although we received FDA approval of our IDE (including our amended IDE application) for our U.S. pivotal study, the outcome of the
study is inherently uncertain, even if the study is commenced and completed; |
| • |
Clinical failure can occur at any stage of clinical development. Our clinical experience to date does not necessarily predict future
results and may not have revealed certain potential limitations of the technology and potential complications from C-Scan and may require
further clinical validation. Any product version we advance through clinical trials may not have favorable results in later clinical trials
or receive regulatory approval; |
| • |
We expect to derive most of our revenues from sales of one product or product line. Our inability to successfully commercialize this
product, could severely harm our ability to generate revenues. |
| • |
If healthcare professionals do not recommend our product to their patients, C-Scan may not achieve market acceptance and we may not
become profitable; |
| • |
We expect to face competition from large, well-established manufacturers of traditional technologies for CRC screening and detection
of gastrointestinal disorders, as well as from new competitive technologies, especially within the field of biomarkers; |
| • |
We may rely on local distributors and/or strategic partners to market and distribute C-Scan in those countries where we intend to
market and distribute C-Scan; |
| • |
We have limited manufacturing capabilities and we rely on single source suppliers and if we are unable to find new suppliers or scale
up our manufacturing operations to meet the necessary quantities for our upcoming clinical studies or anticipated market demand, our growth
could be limited and our business, financial condition and results of operations could be materially adversely affected; |
| • |
Our reliance on single source suppliers could harm our ability to conduct clinical trials and meet demand for our product in a timely
manner or within budget. |
| • |
A health epidemic, pandemic or other outbreak, including the current COVID-19 pandemic, may materially and adversely affect our business,
financial condition and results of operations. |
| • |
We may not be successful in establishing and maintaining strategic partnerships, which could adversely affect our ability to develop
and commercialize C-Scan; |
4
Risks Related to Regulations
| • |
If we are unable to obtain, or experience significant delays in obtaining, FDA clearances or approvals, or equivalent third country
approvals for C-Scan or future products or product enhancements, our ability to commercially distribute and market our products could
suffer; |
| • |
There is no guarantee that the FDA will grant de novo reclassification or PMA approval of C-Scan and failure to obtain necessary
clearances or approvals for our future products would adversely affect our ability to grow our business; |
| • |
If we or our future distributors do not obtain and maintain the necessary regulatory clearances or approvals, or equivalent third
country approvals in a specific country or region, we will not be able to market and sell C-Scan or future products in that country or
region; |
| • |
The results of our current or future clinical trials may not support our product candidate requirements or intended use claims or
may result in the discovery of adverse side effects; |
| • |
If we fail to obtain or maintain necessary regulatory clearances or CE Certificates for C-Scan or if there are regulatory changes
in our existing or future target markets, our ability to sell C-Scan and generate revenues could be harmed; |
| • |
Our failure to comply with radiation safety or radio
frequency regulations in a specific countries or regions could impair our ability to commercially distribute and market C-Scan in that
country or region; |
| • |
Our business is subject to complex environmental
and health legislation in various jurisdictions that may increase our costs and our risk of noncompliance; and |
| • |
If we are unable to achieve reimbursement and coverage from government and private third-party payors for procedures using C-Scan,
or if reimbursement is insufficient to create an economic benefit for purchasing or using C-Scan when compared to alternative procedures,
demand for our products may not grow at the rate we expect. |
Risks Related to Our Intellectual Property
| • |
If we are unable to protect our intellectual property rights, our competitive position could be harmed. |
| • |
Third-party claims of infringement or other claims against us could require us to redesign C-Scan, seek licenses, or engage in future
costly intellectual property litigation, which could negatively affect our future business and financial performance. |
5
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.
|
| • |
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. In addition, the terms of Israeli government grants we have received
require us to satisfy specified conditions and to make additional payments in addition to repayment of the grants upon certain events.
|
Risks Related to Ownership of our Ordinary Shares
| • |
Our ordinary shares could be delisted from the Nasdaq Capital Market. |
| • |
Our stock price has and may be subject to fluctuation, and purchasers of our securities could incur substantial losses. |
| • |
We are currently operating in a period of economic uncertainty and capital markets disruption,
which has been significantly impacted by geopolitical instability due to the ongoing military conflict between Russia and Ukraine.
|
Risks Related to Our Financial Position
We have a history of losses, may incur future
losses and may not achieve profitability.
We are a clinical and development-stage medical diagnostics company
with a limited operating history. We have incurred net losses in each fiscal year since we commenced operations in 2009. We incurred net
losses of $17.2 million in 2021 and $13.8 million in 2020. As of December 31, 2021, our accumulated deficit was $108.2 million. We expect
our losses to continue for the foreseeable future as we continue our investment in research and development and clinical trials to complete
the development of our technology and to attain regulatory approvals, manufacturing scale up, begin the commercialization efforts for
C-Scan, increase our marketing and selling expenses, and incur additional costs as a result of being a public company in the United States.
Successful completion of our development program and, ultimately, the attainment of profitable operations is dependent upon future events,
including obtaining adequate financing to fulfill our development activities and our ability to manufacture commercial quantities of C-Scan
at an acceptable cost and generate significant revenues. The extent of our future operating losses and the timing of becoming profitable
are highly uncertain, and we may never achieve or sustain profitability.
We will require additional funding in order
to complete the development and commercialization of C-Scan, which may cause dilution to our existing shareholders, restrict our operations
or require us to relinquish rights to C-Scan or intellectual property. If additional capital is not available, we may have to delay, reduce
or cease the development or commercialization of C- Scan.
Our operations have consumed substantial amounts of cash. We expect that we will need
to continue to raise and spend substantial amounts in order to complete the clinical development, regulatory approval and commercialization
of C-Scan. We intend to use our cash resources, including the proceeds of our July 2021 and March 2022 registered direct offerings and
the proceeds received from the warrants exercise by certain warrants holders during the first quarter of 2021, to finance these efforts
and believe that we have sufficient capital to fund our ongoing operations and plans including the U.S. pivotal study, into the first
quarter of 2024. We will therefore need to raise additional funds to obtain the required capital prior to completing the development and
commercialization of C-Scan (see Item 5B “Operating and Financial Review and Prospects — Liquidity and Capital Resources —
Sources of Liquidity”). We may seek additional funding through equity offerings, debt financings, collaborations, licensing arrangements
or any other means to conduct clinical trials and develop, manufacture and market C-Scan or for our general corporate purposes. Securing
additional financing may divert our management’s attention from its day-to-day activities, which may adversely affect our ability
to develop and commercialize C-Scan. Additional financing may not be available to us on a timely basis on terms acceptable to us, or at
all. In addition, if we raise additional funds by issuing equity securities, you may experience significant dilution of your ownership
interest and the newly issued securities may have rights senior to those of the holders of our ordinary shares. In addition, the issuance
of additional equity securities by us, or the possibility of such issuance, may cause the market price of our ordinary shares to decline.
Alternatively, if we raise funds by obtaining loans from third parties, the terms of those financing arrangements may include negative
covenants, may require us to grant a lender a security interest in our assets or may include other restrictions on our business that could
impair our operational flexibility, and could also result in interest expense. If we raise additional funds through collaborations, licensing
arrangements or other structured financing transactions, we may relinquish rights to certain of our technologies or products, grant security
interests in our assets or grant licenses to third parties on terms that are unfavorable to us. If adequate additional financing on acceptable
terms is not available, we may not be able to develop C-Scan at the rate or to the stage we desire, and we may have to delay or abandon
the commercialization of C-Scan. Any of these factors could materially adversely affect our business, financial condition and results
of operations.
6
Risks Related to Our Business
We may not succeed in completing the development
of our product, achieve manufacturing stability and capacity, demonstrate sufficient clinical evidence or commercialize our product and
generate significant revenues.
Since commencing our operations, we have focused on the research and development and limited clinical trials
of C-Scan. Although we have received a CE-certificate from our notified body (DEKRA - 0344) according to the EU Regulation 2017/745 on
Medical Devices for the marketing and sale of C-Scan in the European Union, valid until December 1, 2026, we have not commenced marketing
and sales in the European Union and may require additional regulatory approval in Member States of the European Union, for instance from
the German Federal Office for Radiation Protection (Bundesamt für Strahlenschutz, BfS) before we can commence marketing and sale
of C-Scan such states. Furthermore, we may require additional regulatory certifications, registrations and/or approvals from regulatory
authorities in European jurisdictions outside the European Union, including with the UK Medicines and Healthcare Products Regulatory Agency
and the Swiss National Cooperative for the Disposal of Radioactive Waste (Nagra). In Israel, we received approval from the Medical Devices
and Accessories Division of the Israeli Ministry of Health, or AMAR, for the marketing and sale of C-Scan in Israel. Following the approval
we received from our notified body according to the EU Regulation 2017/745, the AMAR approval was renewed and is valid until December
31, 2022. We have not received approvals in other jurisdictions, including the United States, and there can be no assurance that we will
be able to receive regulatory approvals to commence marketing and sales for C-Scan in the foreseeable future or ever. Our ability to generate
revenues and achieve profitability depends on our ability to successfully complete the development of our C-Scan product, demonstrate
sufficient clinical evidence, obtain required regulatory approvals and commercial licenses, manufacture commercial quantities of C-Scan
at an acceptable cost to enable us to generate significant revenues.
The future success of our business cannot be determined at this
time, and we do not anticipate generating significant revenues from product sales for the foreseeable future. In addition, we have no
experience in commercializing C-Scan and may face a number of challenges with respect to our commercialization efforts, including, among
others, that:
| • |
we may not have adequate financial or other resources to complete the development of our product, demonstrate adequate clinical results,
attain required regulatory approvals and licensures, obtain adequate manufacturing and capacity and begin the commercialization efforts
for C-Scan; |
| • |
we may fail to obtain or maintain required regulatory approvals and licensures for C-Scan in our target markets or may face adverse
regulatory or legal actions relating to our system even if regulatory approval is obtained; |
| • |
we may not demonstrate adequate clinical safety and clinical effectiveness results from our current or future versions of C-Scan,
to support regulatory body approval or market acceptance and adoption; |
| • |
we may face ongoing limitations imposed by the Nuclear Regulatory Commission, or NRC, or other nuclear regulatory commissions in
jurisdictions in which we intend to commercialize C-Scan in relation to the disposal of our C-Scan Cap in the sanitary system, such as
requiring patients to retrieve our C-Scan Cap after use, which could impact enrollment pace in our clinical studies and make C-Scan less
attractive; |
7
| • |
we may not be able to maintain an adequate supply chain due to reliance on single or sole suppliers for critical components and scale
up the manufacture of C-Scan to commercial quantities at an adequate quality or at an acceptable cost; |
| • |
we may not be able to establish adequate sales, marketing and distribution channels; |
| • |
healthcare professionals and patients may not accept C-Scan; |
| • |
we may not be aware of possible complications from the continued use of C-Scan because we have limited clinical experience with respect
to the actual use of C-Scan; |
| • |
other technological breakthroughs in colorectal cancer, or CRC, screening, treatment and prevention may reduce the demand for C-Scan;
|
| • |
changes in the market for CRC screening, new alliances between existing market participants and the entrance of new market participants
may interfere with our market penetration efforts; |
| • |
government and private third-party payors may not agree to provide coding, coverage and payment adequate to reimburse healthcare
providers and patients for any or all of the purchase price in conjunction with clinical effectiveness of C-Scan, which may adversely
affect healthcare providers’ and patients’ willingness to purchase C-Scan; |
| • |
uncertainty as to market demand may result in inefficient pricing of C-Scan; |
| • |
we may not be able to adequately protect our intellectual property or may face third-party claims of intellectual property infringement;
and |
| • |
we are dependent upon the results of ongoing clinical studies relating to C-Scan which may impact its perceived value as against
competing products. |
If we are unable to meet any one or more of these challenges successfully,
our ability to effectively commercialize C-Scan could be limited, which in turn could have a material adverse effect on our business,
financial condition and results of operations.
Although we received FDA approval of our investigational
device exemption, or IDE (including our IDE amended application) for our U.S. pivotal study, the outcome of the study is inherently uncertain,
even if the study is commenced and completed .
We received FDA approval of our IDE and our IDE amended application
for our planned U.S. pivotal study. The commencement of any other clinical trials that we may initiate, subject to sufficient available
funds, is subject to acceptance by the FDA of an IDE and acceptance by other regulatory authorities of the foreign equivalent of an IDE,
and finalizing the planned trial design based on discussions with the FDA and other applicable regulatory authorities. In the event that
the FDA or any other regulatory authority requires us to complete additional preclinical studies or we are required to satisfy other FDA
or other regulatory requests, the start of the U.S. pivotal study may be delayed. Even after we receive and incorporate guidance from
these regulatory authorities, the FDA or other regulatory authorities could disagree that we have satisfied their requirements to commence
our clinical trial or change their position on the acceptability of our planned trial design or the clinical endpoints selected, which
may require us to complete additional preclinical studies or clinical trials or impose stricter approval conditions than we currently
expect. As a result of the foregoing, the research and development, preclinical studies and clinical testing is expensive and can take
years to complete, and its outcome is inherently uncertain. Failure can occur at any time during the development process. (see “Risk
Factors – Risks Related to Our Business – Clinical failure can occur at any stage of clinical development. Our clinical experience
to date does not necessarily predict future results and may not have revealed certain potential limitations of the technology and potential
complications from C-Scan and may require further clinical validation. Any product version we advance through clinical trials may not
have favorable results in later clinical trials or receive regulatory approval.”).
8
Clinical failure can occur at any stage of
clinical development. Our clinical experience to date does not necessarily predict future results and may not have revealed certain potential
limitations of the technology and potential complications from C-Scan and may require further clinical validation. Any product version
we advance through clinical trials may not have favorable results in later clinical trials or receive regulatory approval.
Clinical failure can occur at any stage of clinical development. To
date, we have performed clinical studies with iterative versions of both scanning and non-scanning capsules, in conjunction with iterative
versions of the C-Scan Track systems and the C-Scan View application and we are continuing to develop further iterative versions of our
C-Scan Cap and C-Scan Track. Our clinical trials have been conducted under differing protocols, while using specific inclusion criteria
and enriched patient enrolment. Therefore, we have a limited ability to identify potential problems and/or inefficiencies concerning current
and future versions of C-Scan in advance of its use in general and expanded groups of patients and we cannot assure you that its actual
clinical performances will be satisfactory to support proposed indications and regulatory approvals and clinical acceptance and adoption,
or that its use will not result in unanticipated complications. For example, in previous studies we have experienced technical failures
of the C-Scan Cap and are continuously engaged in implementing a plan to ensure improved reliability in later versions. To this end, we
have finalized a clinical trial protocol for a study in Israel and identified over 10 clinical trial sites to enroll up to 400 patients
(both average risk and high-risk patients) and intend to shift to enrollment of average risk patients in parallel to the first stage of
the pivotal study in the U.S., however, if the results of such study are not satisfactory, the commencement of our U.S. pivotal study
could be delayed. In addition, as part of the amended IDE we have designed the pivotal study to include 2 stages: the first stage, aimed
to support our C-Scan calibration among the average risk population, which will include up to 200 additional patients in the US. Subject
to the success of this first stage study, we shall proceed to the second stage that will include up to 800 subjects and is aimed to demonstrate
C-Scan performance in a statistically significant manner.
However, there can be no assurance that the implementation of our
plan will be successful. Furthermore, the results from laboratory, non-clinical and completed clinical studies, as well as results from
our ongoing clinical trials may not be indicative of final clinical results obtained from our current C-Scan version or future versions
of C-Scan on expanded screening populations. In addition, the results of our clinical trials are subject to human analyses and interpretation
of the data accumulated, which could be affected by various errors due to, among others, lack of sufficient clinical experience with C-Scan,
assumptions used in the statistical analysis of results, interpretation errors in the analysis of the clinical trials results, including
the reconstructed images by C-Scan, or due to uncertainty in the actual efficacy of C-Scan in its current clinical stage. Therefore, the
safety and efficacy of C-Scan and the clinical results to date will require further independent professional validation and require further
clinical study. If C-Scan does not function as expected over time, we may not be able to develop C-Scan at the rate or to the stage we
desire, we could be subject to liability claims, our reputation may be harmed, C-Scan may not achieve regulatory clearances, and C-Scan
may not be widely adopted by healthcare providers and patients.
We expect to derive most of our revenues from
sales of one product. Our inability to successfully commercialize this product, or any subsequent decline in demand for this product,
could severely harm our ability to generate revenues.
We are currently dependent on the successful commercialization
of C-Scan to generate revenues. As a result, factors adversely affecting our ability to successfully commercialize, or the pricing of
or demand for, this product could have a material adverse effect on our financial condition and results of operations. If we are unable
to successfully commercialize or create market demand for C-Scan, we will have limited ability to generate revenues.
Furthermore, we may be vulnerable to fluctuations in demand for
C-Scan. Such fluctuations in demand may be due to many factors, many of which are beyond our control, including, among others:
| • |
market acceptance of a new product, including healthcare professionals’ and patients’ preferences; |
| • |
market acceptance of the clinical safety and performance of C-Scan; |
9
| • |
development of competitive or similarly cost-effective products by our competitors; |
| • |
development delays of C-Scan; |
| • |
technological innovations in CRC screening, treatment and prevention; |
| • |
adverse medical side effects suffered by patients using C-Scan, whether actually resulting from the use of C-Scan or not; |
| • |
changes in regulatory policies toward CRC screening or imaging technologies; |
| • |
changes in regulatory approval, clearance requirements and licensure for our product; |
| • |
third-party claims of intellectual property infringement; |
| • |
budget constraints and the availability of reimbursement or insurance coverage from third-party payors for C-Scan; |
| • |
increases in market acceptance of other technologies; |
| • |
adverse responses from certain of our competitors to the offering of C-Scan; |
| • |
licensure and perceived risk of manufacturing and using a product containing a radioactive source, including associated agencies
refusal to authorize capsule disposal; and |
| • |
the shelf life of our C-Scan Cap. |
If healthcare professionals do not recommend
our product to their patients, C-Scan may not achieve market acceptance and we may not become profitable.
CRC screening candidates are generally referred by their healthcare
professional to approved tests and screening technology options. If healthcare professionals, including physicians, do not recommend or
prescribe our product to their patients, C-Scan may not achieve market acceptance and we may not become profitable. In addition, physicians
have historically been slow to change their medical diagnostic and treatment practices because of perceived liability risks arising from
the use of new products. Delayed adoption of C-Scan by healthcare professionals could lead to a delayed adoption by patients and government
and private third-party payors. Healthcare professionals may not recommend or prescribe C-Scan until certain conditions have been satisfied
including, among others:
| • |
there is sufficient long-term clinical and health-economic evidence to convince them to alter their existing screening methods and
device recommendations; |
| • |
there are recommendations from prominent physicians, educators and/or associations that C-Scan is safe and effective; |
| • |
we obtain favorable data from clinical and health-economic studies for C-Scan; |
| • |
reimbursement or insurance coverage from government and private third-party payors is available; |
| • |
healthcare professionals obtain required approvals and licensures for the handling, storage, dispensing and disposal of C-Scan; and
|
| • |
healthcare professionals become familiar with the complexities of C-Scan. |
10
We cannot predict when, if ever, healthcare professionals and patients
may adopt the use of C-Scan. Even if favorable data is obtained from clinical and health-economic studies for the regulatory approval
of C-Scan, there can be no assurance that prominent physicians would endorse it or that future clinical studies will continue to produce
favorable data regarding C- Scan. In addition, prolonged market exposure may also be a pre-requisite to reimbursement or insurance coverage
from government and private third-party payors. If C-Scan does not achieve an adequate level of acceptance by patients, healthcare professionals
and government and private third-party payors, we may not generate significant product revenues and we may not become profitable.
We expect to face competition from large, well-established
manufacturers of traditional technologies for CRC screening and detection of gastrointestinal disorders, as well as from new competitive
technologies, especially within the field of biomarkers.
Competition for C-Scan comes from traditional well-entrenched manufacturers
of tests and equipment for CRC screening, such as colonoscopy, sigmoidoscopy, CT Colonography, or CTC, optical capsule endoscopy, fecal
occult blood tests, or FOBTs, and fecal immunochemical tests, or FITs. The principal manufacturers of equipment for optical colonoscopy
and sigmoidoscopy include Olympus, Pentax, Hoya and Fuji Film. The principal manufacturers of equipment for CTC include General Electric
Healthcare Systems, Siemens Medical Solutions, Philips Medical Systems Ltd. and Toshiba Corporation. The principal manufacturer of equipment
for optical capsule endoscopy includes Medtronic plc. All of these companies have substantially greater financial resources than we do,
and they have established reputations as well as worldwide distribution channels for providing medical instruments to physicians.
In addition, several companies have developed or are developing
non-invasive technologies based on stool, serum (from blood and other bodily fluids), or molecular diagnostics, or MDx, tests that are
used to indicate the presence of CRC and polyps in the colon. These companies include Exact Sciences, Polymedco, Epigenomics AG, Gene
News, EDP Biotech Corporation, Illumina, Inc., Quest Diagnostics, VolitionRx Nu.Q diagnostic, Freenome and Grail. Exact Sciences commenced
sales of its Cologuard ®, a non-invasive stool DNA screening test for colorectal cancer in 2015, and is constantly seeking performance
improvements through additional studies, alongside commercial expansion. During the past years, there has been an extensive effort on
the part of our competitors to utilize molecular biology and advanced computational techniques to develop methods capable of identifying
cell-free cancer biomarkers. These advancement efforts are assisted by large capital investments, supported in turn by claims that certain
products may promise the possibility of defeating certain cancers in their early stages.
In addition, procedures for bowel cleansing that are less onerous
are constantly being developed, which could make our entry into the market more difficult. For instance, bowel cleansing initiated by
the ingestion of pills or food-substitute diet regimes rather than through drinking large amounts of distasteful liquids may be viewed
as an improvement to the cleansing process, but other screening methods may be even more palatable to patients.
If we are unable to convince patients and physicians to adopt C-Scan
over the current technologies marketed by our competitors or future new technologies that may be marketed by our existing or potential
competitors, our business and results of operations may suffer.
We may rely on local distributors and/or strategic
partners to market and distribute C-Scan in those countries where we intend to market and distribute C-Scan.
We may rely on local distributors and/or strategic partners for
the marketing and distribution of C-Scan. Our success in generating sales in countries or regions where we will engage local distributors
and/or strategic partners will depend in large part on the efforts of these third parties over whom we have limited control. If we are
unable to identify and engage with suitable local distributors and/or strategic partners in the countries where we intend to market and
distribute C-Scan, our business, financial condition and results of operations could be negatively affected.
11
We have limited manufacturing capabilities
and if we are unable to scale up our manufacturing operations to meet the necessary quantities for our upcoming clinical studies or anticipated
market demand, our growth could be limited and our business, financial condition and results of operations could be materially adversely
affected.
We currently have limited resources, facilities and experience in manufacturing
sufficient quantities of C-Scan to meet the quantities we need for our upcoming clinical studies and the demand we may expect from commercialization
efforts, if we are able to obtain regulatory clearance in the United States for C-Scan. We do not have experience in manufacturing C-Scan
in the commercial quantities that we expect to require to meet demand for C-Scan, nor can we be certain of our manufacturing costs. We
have in the past, and we may in the future, face certain technical challenges as we increase manufacturing capacity, including, among
others, equipment design and automation, material procurement and lower than expected yields and increased scrap costs, as well as challenges
related to maintaining quality control and assurance standards, manufacturing commercial quantities of C- Scan capsules at an acceptable
cost and logistics associated with the handling of radioactive materials and the shelf life of our C-Scan Cap, which have resulted in
and could in the future result in delays in our clinical trial and commercialization plans and lost revenue. We may be unable to establish
or maintain reliable, high-volume manufacturing capacity. Even if we can establish and maintain this capacity, the cost of doing so may
increase the cost of C-Scan and reduce our ability to successfully compete the effort. In addition, while we have established our own
X-ray source production line in Israel to support our clinical needs and future sales in Israel and potentially in Europe, we intend to
expand our in house X-ray production line to support future commercial quantities demand and may not be successful in such efforts. Despite
our continuing cost-cutting efforts, including scaling-up of our manufacturing capabilities of our C-Scan capsule in commercial quantities,
we may not be able to achieve adequate quality at an acceptable cost. C-Scan includes several components that are based on new technologies
and are difficult to manufacture and some are being supplied to us by single source suppliers (see “Risk
Factors – Risks Related to Our Business – Our reliance on single source suppliers could harm our ability to conduct clinical
trials and meet demand for our product in a timely manner or within budget.”). Furthermore, we may encounter similar or unforeseen
challenges initiating and later expanding production of any new products. If we are unable to scale up our manufacturing capabilities
to meet market demand, our growth could be limited and our business, financial condition and results of operations could be materially
adversely affected.
In addition, we received and may receive in the future grants from
the Government of the State of Israel through the IIA (formerly the OCS) for the financing of a portion of our research and development
expenditures and to support the funding of our transition from research and development to manufacturing, 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), or the Innovation Law. The terms of the IIA grants subject us to certain restrictions relating
to (among other things) the transfer of the manufacturing of IIA-funded products outside Israel. See “Risk
Factors – Risks Related to Our Operations in Israel – 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. In addition,
the terms of Israeli government grants we received require us to satisfy specified conditions and to make additional payments in addition
to repayment of the grants upon certain events.” Such restrictions may impair our ability to outsource or transfer development
or manufacturing activities with respect to any product or technology outside of Israel.
12
Our reliance on sole or single source suppliers
could harm our ability to conduct clinical trials and meet demand for our product in a timely manner or within budget.
We currently depend on sole or single source suppliers for some
of the components necessary for the production of C-Scan. For example, we currently have a single supplier for the motor used to rotate
the collimated X-ray source in C-Scan, for the customized X-ray detectors and batteries used in C-Scan. There is a limited number of manufacturers
worldwide who are capable of manufacturing the motor, the customized X-ray detectors and the batteries that we currently use in C-Scan.
In addition, the application-specific integrated circuit, or ASIC, residing in C-Scan is currently manufactured for us by a single semiconductor
fabrication plant, or FAB. Furthermore, we do not currently have written contracts with all our sole or single suppliers. While our current
suppliers have been able to supply the required quantities of such components to date, if the supply of these components is disrupted
or terminated or if our current suppliers are unable to supply required quantities of components, we may not be able to find alternative
sources for these key components in a timely manner. Although we are planning to maintain strategic inventory of key components, the inventory
may not be sufficient to satisfy the demand for C-Scan if such supply is interrupted or may be subject to risk of loss due do catastrophic
events, such as a global political crisis or war, or a fire at our storage facility. In addition, to partially mitigate the risks of reliance
on sole and single source suppliers, we are seeking alternate manufacturers for some of our components which requires us to dedicate significant
resources and investment. There can be no assurance that we will be successful in seeking alternate suppliers or establish our own production
line. As a result of the foregoing, we may be unable to meet our clinical trials timelines and meet the demand for C-Scan, which could
harm our ability to generate revenues, lead to customer dissatisfaction and damage our reputation. If we are required to change the supplier
of any of these key components, there may be a significant delay in locating a suitable alternative manufacturer. In addition, we may
be required to verify that the new manufacturer maintains facilities and procedures that comply with FDA and other applicable quality
standards and with all applicable regulations and guidelines. Our agreement with the sole supplier of the X-ray source used in C-Scan
was scheduled to expire on December 31, 2021. As part of our mitigation plan, in December 2021, we signed an amendment to the agreement,
or the Amended Service Agreement, with the sole supplier of the X-ray source used in C-Scan and concurrently entered into a Sub-lease
Agreement, or the Sub-lease Agreement with the supplier, according to which we agreed to lease approximately 70 square meters of laboratory
space at the supplier premises. According to the Amended Service Agreement, we will independently produce the X-ray source using our own
production employees. The Amended Service Agreement extends the terms of the service agreement until the Sub-lease Agreement enters into
effect upon receipt of certain certificates including a business license from the Petach Tikva municipality, which has not yet been obtained.
We plan to continue to expand our in-house production line for our X-ray source in Israel, however we cannot assure you that we will successfully
complete this effort and we may be required to find an alternative supplier for the X-ray source, which we may not be able to do in a
timely manner. The delays associated with the introduction of a new manufacturer for certain key components, could delay our ability to
manufacture C-Scan in a timely manner or within budget. Furthermore, in the event that the manufacturer of a key component of C-Scan ceases
operations or otherwise ceases to do business with us, we may not have access to the information necessary to enable an alternative supplier
to manufacture the component. The occurrence of any of these events could harm our ability to meet demand for C-Scan in a timely manner
or within budget.
The use of any of our C-Scan Cap, C-Scan Track
or C-Scan View could result in product liability or similar claims that could be expensive, damage our reputation and harm our business.
Our business exposes us to an inherent risk of potential product
liability or similar claims related to the manufacturing, marketing and sale of medical devices. The medical device industry has historically
been litigious, and we face financial exposure to product liability or similar claims if the use of any of our C-Scan Cap, C-Scan Track
or C-Scan View were to cause or contribute to injury or death, including, without limitation, harm to the body caused by the procedure
or inaccurate diagnoses from the procedure that could affect treatment options. There is also the possibility that defects in the design
or manufacture of any of these products might necessitate a product recall. Although we plan to maintain product liability insurance,
the coverage limits of these policies may not be adequate to cover future claims. In the future, we may be unable to maintain product
liability insurance on acceptable terms or at reasonable costs and such insurance may not provide us with adequate coverage against potential
liabilities. A product liability claim, regardless of merit or ultimate outcome, or any product recall could result in substantial costs
to us, damage to our reputation, customer dissatisfaction and frustration, and a substantial diversion of management attention. A successful
claim brought against us in excess of, or outside of, our insurance coverage could have a material adverse effect on our business, financial
condition and results of operations.
C-Scan is a complex medical device that requires
training for qualified personal and care for data analysis.
C-Scan is a complex medical device that requires training for qualified
personal, including physicians, and care for data analysis. Although our distributors will be required to ensure that C-Scan is prescribed
only by trained clinicians, the potential for misuse of C-Scan still exists due to its complexity. Such misuse could result in adverse
medical consequences for patients that could damage our reputation, subject us to costly product liability litigation and otherwise have
a material adverse effect on our business, financial condition and results of operations.
13
We depend on third parties to manage our clinical
studies and trials, perform related data collection and analysis, and to enroll patients for our clinical trials, and, as a result, we
may face costs and delays that are beyond our control.
We rely on third parties, such as third-party clinical research
organizations, or CROs, clinical investigators, clinical research coordinators and clinical sites, to manage our clinical trials and perform
data collection and analysis, and to enroll patients for our clinical trials. Although we have and expect to continue to have contractual
arrangements with these third parties, we control only certain aspects of their activities. Nevertheless, we are responsible for ensuring
that each of our studies is conducted in accordance with the applicable protocol and legal, regulatory and scientific standards, and our
reliance on such third parties does not relieve us of our regulatory responsibilities. If such third parties fail to comply with applicable
regulatory requirements, the clinical data generated in our clinical trials may be deemed unreliable and regulatory authorities may require
us to perform additional clinical trials before approving our marketing applications, which would delay the regulatory approval process.
Furthermore, we may not be able to control the amount and timing of resources that these parties devote to our studies and trials or the
quality of these resources. If these third parties fail to properly manage our studies and trials or enroll patients for our clinical
trials, we will be unable to complete them at all or in a satisfactory or timely manner, which could delay or prevent us from obtaining
regulatory approvals for, or achieving market acceptance of, our product.
In addition, termination of relationships with third parties may
result in delays, inability to enter into arrangements with alternative third parties or do so on commercially reasonable terms. Switching
or adding additional clinical sites involves additional cost and requires management time and focus. In addition, there is a natural transition
period when a new clinical site commences work. As a result, delays occur, which can materially impact our ability to meet our desired
clinical development timelines.
We currently intend to sell our products mainly
in the United States, Europe, Israel and Japan and, if we are unable to manage our operations in these territories, our business, financial
condition and results of operations could be materially adversely affected.
Our headquarters and substantially all of our operations and employees
are presently located in Israel, but we currently intend to market our products mainly in the United States, Europe, Israel and Japan.
Accordingly, we are subject to risks associated with international operations, and our international sales and operations will require
significant management attention and financial resources. In addition, our international sales and operations will subject us to risks
inherent in international business activities, many of which are beyond our control and include, among others:
| • |
foreign certification, registration and other regulatory requirements; |
| • |
customs clearance and shipping delays; |
| • |
import and export controls; |
| • |
trade restrictions; |
| • |
multiple and possibly overlapping tax structures; |
| • |
difficulty forecasting the results of our international operations and managing our inventory due to our reliance on third-party
distributors; |
| • |
differing laws and regulations, business and clinical practices, licensures, government and private third-party payor reimbursement
policies and patient preferences; |
| • |
differing standards of intellectual property protection among countries; |
| • |
difficulties in staffing and managing our international operations; |
| • |
difficulties in penetrating markets in which our competitors’ products are more established and achieving a competitive sale
price for our product; |
| • |
currency exchange rate fluctuations and foreign currency exchange controls and tax rates; and |
| • |
political and economic instability, war or acts of terrorism or natural disasters, emergence of a pandemic, or other widespread health
emergencies (or concerns over the possibility of such an emergency, including for example, the COVID-19 pandemic). |
If we are unable to manage our international operations effectively,
our business, financial condition and results of operations could be materially adversely affected.
14
We may not be successful in establishing and
maintaining strategic partnerships, which could adversely affect our ability to develop and commercialize C-Scan.
A part of our strategy is to evaluate and, as deemed appropriate,
enter into partnerships in the future when strategically attractive, including potentially with major medical device companies. We face
significant competition in seeking appropriate partners for C-Scan, and the negotiation process is time-consuming and complex. In order
for us to successfully partner C- Scan, potential partners must view C-Scan as economically valuable in markets they determine to be attractive
in light of the terms that we are seeking and other available products for licensing by other companies. Even if we are successful in
our efforts to establish strategic partnerships, the terms that we agree upon may not be favorable to us, and we may not be able to maintain
such strategic partnerships if, for example, development or approval of a product is delayed or sales of an approved product are disappointing.
Any delay in entering into strategic partnership agreements related to C-Scan could delay the development and commercialization of our
product candidates and reduce their competitiveness even if they reach the market.
In addition, our strategic partners may breach any future agreement
with us, and we may not be able to adequately protect our rights under these agreements. Furthermore, our strategic partners will likely
negotiate for certain rights to control decisions regarding the development and commercialization of C-Scan, if approved, and may not
conduct those activities in the same manner as we would do so.
If we fail to establish and maintain strategic partnerships related
to C-Scan, we will bear all the risks and costs related to the development and commercialization of C-Scan, and we will need to seek additional
financing, hire additional employees and otherwise develop expertise which we do not have and for which we have not budgeted.
If we lose our key personnel or are unable
to attract and retain additional personnel, our business and ability to compete will be harmed.
Our success relies upon the continued service and performance of
the principal members of our management and research and development team, including Alex Ovadia and Yoav Kimchy. In order to implement
our business strategy, we will need to retain our key personnel with expertise in the areas of research and development, clinical testing,
government regulation, manufacturing, finance, marketing and sales. Our product development plans depend in part on our ability to retain
engineers with expertise in a variety of technical fields. Demand on the part of technology companies for the services of engineers is
currently very high in Israel, with the number of open positions at risk of exceeding the number of qualified applicants. Larger companies
may have a competitive advantage in hiring such engineers, due to the relatively high compensation they are able to offer. The loss of
a number of these persons or our inability to attract and retain qualified personnel could harm our business and our ability to compete.
We do not maintain key man insurance for Alex Ovadia or Yoav Kimchy.
Substantially all of our operations are currently
conducted at our facility in Haifa, Israel, and at our own X-ray source production line in Petach Tikva, Israel and any disruption at
our facilities could materially adversely affect our business, financial condition and results of operations.
Substantially all of our operations are currently conducted at
our facility in Haifa, Israel (other than certain production activities conducted by subcontractors) and at our own X-ray source production
line in Petach Tikvah, Israel. We take precautions to safeguard our facilities, including obtaining insurance coverage and implementing
health and safety protocols. However, a natural or other disaster, such as a fire, flood, earthquake, an armed conflict involving Israel
(as detailed further under “Risks Related to Our Operations in Israel”) or a terrorist
attack, could damage or destroy our facilities and our manufacturing equipment or inventory, cause substantial delays in our operations
and otherwise cause us to incur additional unanticipated expenses. In addition, the insurance we maintain against fires, floods and other
natural disasters and the war and terrorism insurance we maintain may not be adequate to cover our losses in any particular case. Damage
to our facilities or our other property or to any of our suppliers’ facilities and properties, whether located in Israel or elsewhere,
due to fire, a natural disaster or casualty event or an armed conflict or terrorist attack, could materially adversely affect our business,
financial condition and results of operations.
15
A security breach or disruption or failure
in a computer or communications systems could adversely affect us.
Despite the implementation of security measures, our internal computer
systems, and those of our CROs and other third parties on which we rely, are vulnerable to damage from computer viruses, unauthorized
access, cyber-attacks, natural disasters, fire, terrorism, war, and telecommunication and electrical failures. If such an event were to
occur and interrupt our operations, it could result in a material disruption of our clinical program. For example, the loss of clinical
trial data from ongoing or planned clinical trials could result in delays in our regulatory approval efforts and significantly increase
our costs to recover or reproduce the data. To the extent that any disruption or security breach results in a loss of or damage to our
data or applications, loss of trade secrets or inappropriate disclosure of confidential or proprietary information, including protected
health information or personal data of clinical trial participants or employees or former employees, access to our clinical data, or disruption
of the manufacturing process, we could incur liability and the further development of C-Scan could be delayed. We may also be vulnerable
to cyber-attacks by hackers or other malfeasance. This type of breach of our cybersecurity may compromise our confidential information
and/or our financial information and adversely affect our business or result in legal proceedings. Further, these cybersecurity breaches
may inflict reputational harm upon us that may result in decreased market value and erode public trust.
We or the third parties upon whom we depend
may be adversely affected by natural disasters and/or health epidemics or pandemics, such as the COVID-19 pandemic, and our business continuity
and disaster recovery plans may not adequately protect us from a serious disaster.
Natural disasters could severely disrupt our operations and have
a material adverse effect on our business, results of operations, financial condition and prospects. If a natural disaster, power outage
or other event occurred that prevented us from using all or a significant portion of our office, manufacturing and/or lab spaces, that
damaged critical infrastructure, such as the manufacturing facilities of our third-party contract manufacturers, subcontractors, suppliers,
CROs, clinical sites, clinical investigators, clinical coordinators, third parties ongoing activities and schedules or that otherwise
disrupted operations, it may be difficult or, in certain cases, impossible for us to continue our plans and business for a substantial
period of time.
In early 2020, the World Health Organization declared the rapidly
spreading coronavirus disease (COVID-19) outbreak a pandemic. We have experienced disruptions to our operations as a result of the
COVID-19 pandemic, including disruptions to the Company’s clinical studies and implemented several temporary cost reduction measures.
We have also implemented several measures according to the Israel Ministry of Health’s guidelines, including remote working whenever
possible, physical separation between employees and daily employee health monitoring. Infection rates in Israel have recently spiked upwards
and the extent to which the COVID-19 pandemic shall impact our operations will depend on future developments, which are highly uncertain
and cannot be predicted with confidence, including the duration and severity of the outbreak, the impact on the global economy, the impact
of any further waves of COVID-19, the efficacy of the vaccines and the other actions that may be required to contain COVID-19 or treat
its impact. In particular, the continued spread of COVID-19 globally could materially adversely impact our operations and workforce, including
our research and clinical trials and our ability to continue to raise capital, could affect the operations of key governmental agencies,
such as the FDA, which may delay our development plans, and could result in the inability of our suppliers to deliver components or raw
materials on a timely basis or at all, each of which in turn could have a material adverse impact on our business, financial condition
and results of operation.
The disaster recovery and business continuity plans we have in
place may prove inadequate in the event of a serious disaster or similar event. We may incur substantial expenses as a result of the limited
nature of our disaster recovery and business continuity plans, which could have a material adverse effect on our business.
16
Risks Related to Regulations
If we are unable to obtain, or experience significant
delays in obtaining, FDA clearances or approvals, or equivalent third country approvals for C-Scan or future products or product enhancements,
our ability to commercially distribute and market our products could suffer.
Our products are subject to rigorous regulation by the FDA and
numerous other federal, state and foreign governmental authorities and notified bodies. The process of obtaining regulatory clearances
or approvals, or equivalent third-country approvals to market a medical device can be costly and time consuming, and we may not be able
to obtain these clearances or approvals, or equivalent third-country approvals on a timely basis, if at all. In particular, we expect
to eventually generate a portion of our revenues from sales of C-Scan and future products in the United States, the European Union, or
third countries. Before a new medical device, or a new use of, or claim for, an existing product can be marketed in the United States,
it must first receive clearance under Section 510(k) of the Federal Food, Drug, and Cosmetic Act, or FDA approval of a premarket approval
application, or PMA, unless an exemption applies. The FDA will clear marketing of a low or moderate risk medical device through the 510(k)
process if sufficiently similar predicate devices have previously been cleared via this pathway. In the 510(k) clearance process, the
FDA must only determine that the proposed device is “substantially equivalent” to a device legally on the market, known as
a “predicate” device, with respect to intended use/indications for use, technological characteristics and principles of operation
in order to clear the proposed device for marketing. Clinical data is sometimes required to support substantial equivalence.
High risk devices deemed to pose the greatest risk, such as life-sustaining,
life-supporting, or implantable devices, or devices not deemed substantially equivalent to a previously cleared device, require approval
of a PMA. The PMA process is more costly, lengthy and uncertain than the 510(k) clearance process. The PMA pathway requires an applicant
to demonstrate the safety and effectiveness of the device based, in part, on the data obtained in clinical trials. A PMA application must
be supported by extensive data, including, but not limited to, technical, preclinical, clinical trial, manufacturing and labeling data,
to demonstrate to the FDA’s satisfaction the safety and efficacy of the device for its intended use.
In instances where a device is novel and there is no suitable predicate
device, but that device is deemed to be of low or moderate risk, the FDA can reclassify the device to class I or class II via de novo
reclassification. This process involves the submission of a reclassification petition, and the FDA accepting that “special controls”
are adequate to ensure the product’s performance and safety. The FDA now allows “direct” de novo reclassification petitions,
a mechanism by which a sponsor can directly submit a detailed de novo reclassification petition as the device’s initial submission
without having to first receive a not substantially equivalent, or NSE, decision on a 510(k) submission.
These processes can be expensive and lengthy. FDA’s 510(k)
clearance process may take 6 to 9 months, but it can last longer. Direct de novo reclassification typically takes at least 9 to 12 months
from filing to clearance if no comments or disapproval from the FDA. The PMA pathway is much more costly and uncertain than the 510(k)
clearance process or de novo reclassification, and generally takes at least 12 to 18 months, or even longer, from the time the application
is filed with FDA to ultimate approval if no comments or disapproval from the FDA.
We are not aware of any legally marketed predicate device upon
which FDA could base a determination of substantial equivalence under a 510(k) clearance process. Our proposed strategy, therefore, is
to submit a direct de novo reclassification petition for C-Scan. To support this petition, our objective is to demonstrate that the device
poses a low or moderate risk to patients. We cannot assure you that FDA will not demand that we obtain PMA approval of C-Scan.
17
FDA can delay, limit or deny clearance or approval of an application
for many reasons, including, among others:
| • |
we may not be able to demonstrate to FDA’s satisfaction that our products are safe and effective for their intended use;
|
| • |
the data from our non-clinical studies and clinical trials may be insufficient to support clearance or approval; |
| • |
in the case of a PMA submission, that the manufacturing process or facilities we use may not meet applicable requirements; and
|
| • |
changes in FDA’s 510(k) clearance, de novo reclassification, or PMA approval processes and policies, or the adoption of new
regulations may require additional data. |
We may not obtain the necessary regulatory clearances, approvals
or equivalent third country approvals to market C-Scan or future products in the United States or elsewhere. Any delay in, or failure
to receive or maintain, clearance, approval for C-Scan or other products under development could prevent us from generating revenue from
these products or achieving profitability.
There is no guarantee that the FDA will grant
de novo reclassification or PMA approval of C-Scan and failure to obtain necessary clearances or approvals for our future products would
adversely affect our ability to grow our business.
C-Scan and some of our future products will require FDA clearance
of a 510(k), de novo reclassification, or may require FDA approval of a PMA. The FDA may not approve or clear C- Scan or our future products
for the indications that are necessary or desirable for successful commercialization. Indeed, the FDA may refuse our requests for 510(k)
clearance, de novo reclassification or PMA approval for C-Scan or any other future product, new intended uses or modifications to these
products once they are cleared or approved for marketing.
Our strategy is to submit a direct de novo reclassification petition
for C-Scan following completion of a U.S. pivotal study. A de novo reclassification generally applies where there is no predicate device
and the FDA believes the device poses a low to moderate risk. De novo reclassifications can either be submitted in lieu of a 510(k) notice,
such as in our case, or after a 510(k) notice has been filed and found NSE (Not Substantial Equivalent). If a 510(k) notice is found NSE,
a de novo petition must be submitted within 30 days from the receipt of the NSE determination.
To support our direct de novo reclassification petition, our objective
is to demonstrate that the device poses a low to moderate risk to patients. If the FDA determines that C-Scan is not a candidate for de
novo reclassification, it will require approval of the device for market through the PMA process. A PMA application must be supported
by extensive data, including, but not limited to, technical, preclinical, clinical trial, manufacturing and labeling data, to demonstrate
to the FDA’s satisfaction the safety and efficacy of the device for its intended use. By statute, the FDA has 180 days to review
the “accepted application,” although, generally, review of the application can take between one and three years. During this
review period, the FDA may request additional information or clarification of information already provided or even request new data that
may require us to conduct additional tests. Also during the review period, an advisory panel of experts from outside the FDA may be convened
to review and evaluate the application and provide recommendations to the FDA as to the approvability of the device. In addition, the
FDA will conduct a preapproval inspection of the manufacturing facility to ensure compliance with quality system regulations. The FDA’s
review of a PMA could significantly delay our plans to get to market. There is also no guarantee that the FDA would approve a PMA. Failure
to receive clearance or approval for C-Scan or future products would have an adverse effect on our ability to expand our business.
Even if the FDA ultimately accepts our de novo reclassification
petition, to support our petition, we still may be required to conduct additional clinical trials before a petition can be filed.
Such studies or trials can be costly and the results uncertain.
If we are unable to successfully complete required clinical studies or trials, we will not receive FDA clearance or approval.
18
If we or our future distributors do not obtain
and maintain the necessary regulatory clearances or approvals, or equivalent third country approvals in a specific country or region,
we will not be able to market and sell C-Scan or future products in that country or region.
We intend to market C-Scan in a number of international markets.
To be able to market and sell C-Scan in a specific country or region, we and/or our distributors must comply with the regulations of that
country or region. While the regulations of some countries do not impose barriers to marketing and selling part or all of our products
or only require notification, others require that we and/or our distributors obtain the approval of a specified regulatory authorities
such as the Nuclear Regulatory Commission (NRC) in the U.S., the Swiss National Cooperative for the Disposal of Radioactive Waste (Nagra)
and the German Federal Office for Radiation Protection (Bundesamt für Strahlenschutz, BfS), in addition to the CE mark that is required
for medical devices throughout the EU. These regulations, and the time required for regulatory review, vary from country to country. Obtaining
regulatory approvals is expensive and time-consuming, and we cannot be certain that we or our distributors will receive regulatory approvals
required for C-Scan or any future products in each country or region in which we plan to market such products. As regards the CE-certification,
we are engaged with Dekra Certification as our Notified Body. If we modify C-Scan or any future products, we or our distributors may need
to apply for new regulatory approvals or our Notified Body may need to review the planned changes before we are permitted to sell the
respective products. We may not meet the quality and safety standards required to maintain the authorizations that we or our distributors
have received. If we or our distributors are unable to maintain our authorizations or CE Certificates in a particular country or region,
we will no longer be able to sell C-Scan and/or any potential future products in that country or region, and our ability to generate revenues
will be materially and adversely affected.
If the indications for use or instructions
for use for which the iodinated oral contrast medium is approved are not sufficiently broad to support its use prior to the ingestion
of our capsules, the FDA or the competent regulatory authorities in the European Union (EU) Member States and other foreign countries
may consider that contrast agent is being used off-label.
Ingestion of C-Scan requires the preparatory use of iodinated oral
contrast medium to provide a coating for colonic imaging. We cannot be sure that the indications for which iodinated oral contrast medium
are approved in the United States, or in other countries is sufficiently broad to cover such use. If the FDA or the competent regulatory
authorities in other countries consider that iodinated oral contrast medium is not approved for the purpose for which it is used with
the system, we may be considered to promote the off-label use of the iodinated oral contrast medium. Because the promotion of off-label
use of drugs or medicinal products is prohibited in the United States, and in other countries, we could face both related issues with
the FDA and/or the competent authorities of and/or other countries. In these circumstances, the FDA and/or the competent regulatory authorities
and/or other countries may require us to obtain appropriate regulatory approvals for the iodinated oral contrast medium prior to marketing
C-Scan with such substances. Under such circumstances, should we fail to obtain approval of the contrast agent for use with C-Scan, in
a timely fashion, or at all, this could delay or prevent regulatory clearance or approval of the C-Scan, and our business and financial
condition will be adversely affected.
If we are unable to successfully complete clinical
trials with respect to C-Scan, we may be unable to receive regulatory approvals or clearances for C-Scan and/or our ability to achieve
market acceptance of C-Scan will be harmed.
The development of the C-Scan system requires the submission of
data generated from clinical trials, which can be long, expensive and uncertain processes, subject to delays and failure at any stage.
The data obtained from the studies and trials may be inadequate to support regulatory clearances or approvals, or equivalent third-country
approval, or to allow market acceptance of the products being studied. C-Scan technology is currently undergoing clinical development
and clinical trials. To date, we have performed clinical studies with several versions of C-Scan including several versions of our non-scanning
capsules.
The development of sufficient and appropriate clinical protocols
to demonstrate safety, clinical performance and clinical effectiveness are required, and we may not adequately develop such protocols
to support clearance, approval, or equivalent third country approval. The clinical trials that were conducted using prior versions of
C-Scan, were conducted under differing protocols, used groups of patients different and/or smaller in size from those we intend to study
in future clinical trials with future versions of C-Scan, and the results from such clinical trials were subject to human interpretations
and based on statistical assumptions that could be affected by erroneous considerations. Further, the FDA, the competent regulatory authorities
of other countries, or our Notified Body in the EU may require us to submit data on a greater number of patients than we originally anticipated
and/or for a longer follow-up period or they may change the data collection requirements or data analysis applicable to our clinical trials.
19
The commencement or completion of any of our clinical studies or
trials may be delayed or halted, or be inadequate to support regulatory clearance, approval or product acceptance, or equivalent third
country approval, for numerous reasons, including, among others:
| • |
patients do not enroll in the clinical trial at the rate we expect; |
| • |
patients do not comply with trial protocols; |
| • |
patient follow-up is not at the rate we expect; |
| • |
patients experience severe adverse side effects, including damage to the colon wall or related to excessive radiation exposure as
a result of capsule malfunction or break down or retention and may require to undergo a surgical procedure; |
| • |
patient death during a clinical trial, even though their death may be unrelated to our product; |
| • |
FDA, institutional review boards, or IRBs, or other regulatory authorities do not approve a clinical trial protocol or a clinical
trial, or place a clinical trial on hold; |
| • |
IRBs, Ethics Committees and third-party clinical investigators may delay or reject our trial protocol and Informed Consent Form;
|
| • |
third-party clinical investigators decline to participate in a study or trial or do not perform a study or trial on our anticipated
schedule or consistent with the investigator agreements, study or trial protocol, good clinical practices, quality of clinical data or
other FDA or IRBs, Ethics Committees, or any other applicable requirements; |
| • |
third-party organizations do not perform data collection, monitoring and analysis in a timely or accurate manner or consistent with
the study or trial protocol or investigational or statistical plans; |
| • |
regulatory inspections of our studies, trials or manufacturing facilities may require us to, among other things, undertake corrective
action or suspend or terminate our studies or clinical trials; |
| • |
changes in governmental regulations or administrative actions; |
| • |
we may not be able to develop C-Scan at the rate or to the stage we desire; |
| • |
the interim or final results of the study or clinical trial are inconclusive or unfavorable as to safety or efficacy; |
| • |
a regulatory agency or our Notified Body concludes that our trial design is or was inadequate to demonstrate safety and efficacy;
and |
20
| • |
the capsule disposal was not authorized by regulatory agencies or patients failed to collect the capsule following procedure completion;
and |
| • |
loss of clinical data; and |
| • |
a health epidemic, pandemic or other outbreak, including the current COVID-19 pandemic. |
The results of non-clinical and clinical studies do not necessarily
predict future clinical trial results, and predecessor clinical trial results may not be repeated in subsequent clinical trials. Additionally,
the FDA and/or other third country regulatory entities may disagree with our interpretation of the data from our non-clinical studies
and clinical trials, or may find the clinical trial design, conduct or results inadequate to demonstrate safety or efficacy, and may require
us to pursue additional non-clinical studies or clinical trials, which could further delay the clearance, approval of our products. The
data we collect from our non-clinical testing, and other clinical trials may not be sufficient to support regulatory clearance and approval.
If the third parties on which we rely to conduct
our clinical trials and clinical development do not perform as contractually required or expected, we may not be able to obtain regulatory
clearance or approval, or equivalent third country approval for, or commercialize, C-Scan or future products.
We do not have the ability to independently conduct our clinical
trials for C-Scan and we must rely on third parties, such as contract research organizations, medical institutions, clinical investigators
and contract laboratories to conduct such trials. If these third parties do not successfully carry out their contractual duties or regulatory
obligations or meet expected deadlines, if these third parties need to be replaced, or if the quality or accuracy of the data they obtain
is compromised due to the failure to adhere to our clinical protocols or regulatory requirements or for other reasons, our non-clinical
development activities or clinical trials may be extended, delayed, suspended or terminated, and we may not be able to obtain regulatory
clearance, approval for, or successfully commercialize, C-Scan or future products on a timely basis, if at all, and our business, operating
results and prospects may be adversely affected. Furthermore, our third-party clinical trial investigators may be delayed in conducting
our clinical trials for reasons outside of their control.
The results of our current or future clinical
trials may not support our product candidate requirements or intended use claims or may result in the discovery of adverse side effects.
Even if our current or future clinical trials are completed as
planned, we cannot be certain that their results will support our product requirements or intended use claims, which could inhibit our
marketing strategies, or that the FDA, foreign authorities or our Notified Body will agree with our conclusions regarding them. Success
in non-clinical studies and early clinical trials does not ensure that later clinical trials will be successful, and we cannot be sure
that clinical trials will replicate the results of prior trials. The clinical trial process may fail to demonstrate that C- Scan, or any
future products, are safe and effective for the desired or proposed indicated uses, which could cause us to abandon a product and may
delay development of others. Any delay or termination of our clinical trials will delay the filing of our product submissions and, ultimately,
our ability to commercialize C-Scan, or any future products, and generate revenues. It is also possible that patients enrolled in clinical
trials will experience adverse side effects that are not currently part of the product candidate’s profile.
If we fail to obtain or maintain necessary
regulatory clearances or CE Certificates for C-Scan, or if there are regulatory changes in our existing or future target markets, our
ability to sell C-Scan and generate revenues could be harmed.
C-Scan is a medical device that is subject to extensive regulations
that are in particular intended to assure its safety, effectiveness and compliance with applicable consumer laws. These laws require medical
devices to obtain approval or other market clearance before being placed on the market. If we fail to obtain or maintain these regulatory
approvals or clearances, our ability to sell C-Scan and generate revenues will be materially harmed.
These laws and regulations relate inter
alia to the design, development, testing, manufacturing, storage, labeling, packaging, content and language of the instructions
for use of the device, sale, promotion, distribution, importing and exporting, shipping, post-sale surveillance and recall from C-Scan’s
markets, and all countries in which we intend to sell C-Scan apply some form of regulations of this kind. Most notably, we must comply
with the EU law on medical devices, in particular, Regulation MDR and EU Member States’ laws implementing and complementing it,
and other applicable EU and Member States’ law, and we are subject to extensive regulation in the United States by the FDA and other
federal, state and local authorities.
21
We are and will be subject to audits by our Notified Body under
the MDR. During this audit, the third-party assessor or Notified Body will examine the maintenance and implementation of our quality control
system, device post-marketing vigilance system and any changes or modifications made to our products.
On May 26, 2021, the MDR became formally applicable and replaced
the former regulatory framework for medical devices in the EU under the medical devices directives. The MDR strengthens the medical devices
rules in the EU. In particular, the MDR results in several medical devices being classified in higher risk classes and therefore face
elevated regulatory requirements. In addition, the MDR generally elevates regulatory requirements to medical devices. As a result, it
has become more difficult to market medical devices and costs incurred for clinical evaluation, conformity assessment and post marketing
surveillance have increased and will increase further; such regulatory changes may adversely affect our business, financial condition
and results of operations or restrict our operations.
Even if C-Scan or future products are cleared
or approved by regulatory authorities or after obtaining CE Certificates from our Notified Body, modifications to C-Scan or future products
may require new regulatory clearances or approvals, new CE Certificates, or may require us to recall or cease marketing it until the necessary
clearances, approvals or CE Certificates are obtained.
Once cleared, approved or marketed, modifications to C-Scan or
future products may require new regulatory approvals, clearances, including CE Certificates from our Notified Body, 510(k) clearances
or premarket approvals, or require us to recall or cease marketing the modified devices until these clearances or approvals are obtained.
Any modification to a 510(k)-cleared device that could significantly affect its safety or efficacy, or that would constitute a major change
in its intended use, requires a new 510(k) clearance or, possibly, a new de novo classification petition or PMA. The FDA requires device
manufacturers to initially make and document a determination of whether or not a modification requires a new approval, supplement or clearance.
A manufacturer may determine that a modification could not significantly affect safety or efficacy and does not represent a major change
in its intended use, so that no new 510(k) clearance is necessary. However, the FDA can review a manufacturer’s decision and may
disagree. The FDA may also on its own initiative determine that a new clearance or approval is required. Subject to compliance with FDA
guidance we may make modifications to C-Scan in the future that we believe do not or will not require additional clearances or approvals.
Further, our products could be subject to recall if the FDA determines, for any reason, that our products are not safe or effective. Any
recall or FDA requirement that we seek additional approvals or clearances could result in significant delays, fines, increased costs associated
with modification of a product, loss of revenue and potential operating restrictions imposed by the FDA.
If a manufacturer determines that a modification to an FDA-cleared
device could significantly affect its safety or efficacy, or would constitute a major change in its intended use, then the manufacturer
must file for a new 510(k) clearance or possibly a new de novo classification petition or premarket approval application. Where we determine
that modifications to our products require a new clearance or approval, we may not be able to obtain those additional clearances or approvals
for the modifications or additional indications in a timely manner, or at all.
Any modification to a PMA-approved device must either be approved
in a PMA Supplement, or if the modification does not impact the device’s safety or effectiveness, described in a 30-Day Notice or
in the device’s Annual Report. The FDA may not approve a modification described in a PMA Supplement, in which case the modified
device cannot be marketed. The FDA can also disagree that a change described in a 30-Day Notice or Annual Report is appropriately described
in either filing, and request that the company file a PMA Supplement and/or request that the company cease marketing the modified device
until the PMA Supplement is approved.
Similar rules also apply in foreign jurisdictions. In the EU, we
must inform the Notified Body that was involved in the conformity assessment of the medical devices we market or sell in the EU of any
planned substantial changes to our quality system with regard to C-Scan or other devices we may place on the market, if such changes could
affect compliance with the essential requirements laid down in the Annexes to the MDR (Essential Requirements), respectively, or changes
to the devices’ intended purpose. The Notified Body will then assess the changes and verify the products’ conformity with
the Essential Requirements. If the assessment is favorable, the Notified Body will issue a new CE Certificate or an addendum to the existing
CE Certificate attesting compliance with the Essential Requirements.
22
If the Notified Body or a relevant regulatory authority disagrees
with our assessments and repeals an authorization or an existing CE Certificate, we may be required to apply for a new CE Certificate
or other new regulatory clearances or approvals for modifications, and until such new CE-Certificate or other regulatory clearance or
change approval is obtained, we may be required to recall and/or to stop marketing the modified devices.
Obtaining clearances and approvals, or new or amended CE Certificates
for device modifications can be a time-consuming process, and delays in obtaining required future clearances, approvals, or CE Certificates
could adversely affect our ability to introduce new or enhanced products in a timely manner, which in turn could harm our future growth.
Even if C-Scan and future products are cleared
or approved by regulatory authorities or after obtaining CE Certificates from our Notified Body, if we or our suppliers fail to comply
with ongoing FDA or other foreign regulatory authority requirements, or if we experience unanticipated problems with our products, our
products could be subject to restrictions or withdrawal from the market.
The manufacturing processes, reporting requirements, post-approval
clinical data and promotional activities associated with any product for which we obtain clearance, approval or CE Certificates, or equivalent
third country approval will be subject to continuous regulatory review, oversight and periodic inspections by the FDA other domestic and
foreign regulatory authorities and our Notified Body. In particular, we and certain of our suppliers are required to comply with the FDA’s
Quality System Regulations, or QSR, as well as current good manufacturing practices, or cGMP. In the EU, we will also be subject to the
quality management system requirements laid down in the Annexes to the MDR. Such compliance can be facilitated by, a certificate of compliance
with the current version of the ISO 13485 (which, at this point, is ISO 13485:2016). Through compliance with the ISO 13485:2016 standard,
we will benefit from a presumption of conformity with the relevant quality management system requirements laid down in the Annexes to
the MDR. These regulations and standards govern inter alia the methods and documentation of the design, testing, production, control,
quality assurance, labeling, packaging, storage and shipping of any product for which we obtain clearance or approval, CE Certificates,
or equivalent third country approval. Regulatory authorities, such as the FDA, and our Notified Body enforce the QSR and other regulations
through periodic inspections. The failure by us or one of our suppliers to comply with applicable statutes and regulations falling within
the competence of the FDA and other regulatory authorities or our Notified Body, or the failure to timely and adequately respond to any
adverse inspectional observations or product safety issues, could result in, among other things, any of the following enforcement actions:
| • |
untitled letters, warning letters, fines, injunctions, corporate integrity agreements, consent decrees and civil penalties;
|
| • |
unanticipated expenditures to address or defend such actions; |
| • |
customer notifications for repair, replacement or refunds; |
| • |
recall, detention or seizure of our products; |
| • |
operating restrictions or partial suspension or total shutdown of production; |
23
| • |
refusing or delaying our requests for 510(k) clearance, de novo classification or premarket approval of new products or modified
products; |
| • |
operating restrictions; |
| • |
withdrawing 510(k) clearances, de novo classification, or PMA approvals that have already been granted; |
| • |
suspension or withdrawal of our CE Certificates; |
| • |
refusal to grant export approval for our products; or |
| • |
criminal prosecution. |
If any of these actions were to occur, our reputation would be
harmed, our product sales and profitability would suffer and we may not be able to generate revenue. Furthermore, our key suppliers may
not currently be or may not continue to be in compliance with all applicable regulatory requirements which could result in our failure
to produce our products on a timely basis and in the required quantities, if at all.
Even if regulatory clearance or approval of a product is granted,
or after obtaining CE Certificates, such clearance or approval, or CE Certificates may be subject to limitations on the intended uses
for which the product may be marketed and reduce our potential to successfully commercialize the product and generate revenue from the
product. If FDA or the competent regulatory authorities of foreign countries determines that our promotional materials, labeling, training
or other marketing or educational activities constitute the promotion of an unapproved use or the promotion of an intended purpose not
covered by our CE mark, they could request that we cease or modify our training or promotional materials or subject us to regulatory enforcement
actions. It is also possible that other federal, state or foreign enforcement authorities might take action if they consider our training
or other promotional materials to constitute promotion of an unapproved use, which could result in significant fines or penalties under
other statutory authorities, such as laws prohibiting false claims for reimbursement.
In addition, we may be required to conduct costly post-market testing
and surveillance to monitor the safety or effectiveness of our products, and we must comply with medical device reporting requirements,
including the reporting of adverse events and malfunctions related to our products. Later discovery of previously unknown problems with
our products, including unanticipated adverse side effects or adverse side effects of unanticipated severity or frequency, manufacturing
problems, or failure to comply with regulatory requirements such as QSR, may result in changes to labeling, restrictions on such products
or manufacturing processes, withdrawal of the products from the market, voluntary or mandatory recalls, a requirement to repair, replace
or refund the cost of any medical device we manufacture or distribute, fines, suspension or withdrawal of regulatory approvals or CE Certificates,
product seizures, injunctions or the imposition of civil or criminal penalties, all of which would adversely affect our business, financial
condition and operating results and prospects.
C-Scan may in the future be subject to product
recalls that could harm our reputation, business and financial results.
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 or a public
health/safety issue. In the case of the FDA, the authority to require a recall must be based on an FDA finding that there is a reasonable
probability that the device would cause 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. A government-mandated or voluntary recall by us or one of our distributors
could occur as a result of component failures, manufacturing errors, design or labeling defects or other deficiencies and issues. Once
marketed, recalls of any of our products, including C-Scan, would divert managerial and financial resources and have an adverse effect
on our business, financial condition and results of operations. FDA requires that certain classifications of recalls be reported to the
FDA within 10 working days after the recall is initiated. Companies are required to maintain certain records of recalls, even if they
are not reportable to FDA. We may initiate voluntary recalls involving our products in the future that we determine do not require us
to notify the FDA. 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
against us based on our failure to report the recalls when they were conducted.
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If C-Scan or future products cause or contribute
to a death or a serious injury, or malfunction in such a way that causes or contributes to a death or serious injury, we will be subject
to medical device reporting regulations, which can result in corrective actions or enforcement actions from regulatory authorities.
Under 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 a death or serious injury if the malfunction of our device
(or any similar future product) were to recur. If we fail to investigate and report these events to FDA within the required timeframes,
or at all, the FDA could take enforcement action against us. Any such adverse event involving our products also could result in future
corrective actions, such as recalls or customer notifications, or agency action, such as inspection or enforcement action. Any corrective
action, whether voluntary or involuntary, including any legal action taken against us, will require us to devote sufficient time and capital
to the matter, distract management from operating our business, and may harm our reputation and financial results.
Under the MDR we will now have to comply with the increased requirements
of medical devices vigilance provisions under the MDR. In particular, according to Art. 83 MDR, we are required to have a post-market
surveillance system in place in a manner that is proportionate to the risk class and appropriate for the type of device, as an integral
part of the quality management system. Depending on the devices’ risk class, either a post market surveillance report or a periodic
safety update report, or PSUR, must be created and provided to the competent authority upon request. The PSUR also has to be provided
to the Notified Body. Furthermore, requirements on vigilance and incident reporting are increased and market surveillance competencies
of the authorities are strengthened.
Our failure to comply with radiation safety
or radio frequency regulations in a specific country or region could impair our ability to commercially distribute and market C-Scan in
that country or region.
C-Scan includes a small X-ray source and wireless radio frequency
transmitter and receiver, and is therefore subject to equipment authorization requirements in a number of countries and regions. In the
United States, the EU and Japan, authorities often require advance clearance of all radiation and radio frequency devices before they
can be sold or marketed in these jurisdictions, subject to limited exceptions. Competent authorities for such additional approval requirements
include the Swiss National Cooperative for the Disposal of Radioactive Waste (Nagra) and the German Federal Office for Radiation Protection
(Bundesamt für Strahlenschutz, BfS). Modifications to the approved C-Scan version design and specifications may require new or further
regulatory clearances or approvals before we are permitted to market and sell a modified C-Scan version. If we are unable to obtain any
required clearances or approvals from the authorities responsible for the radiation as well as the radio frequency regulations in these
and other jurisdictions, the sale or use of C-Scan could be prevented in these countries. Any such action could negatively affect our
business, financial condition and results of operations.
Our business is subject to complex environmental
and health legislation in various jurisdictions that may increase our costs and our risk of noncompliance.
Our
research and development and manufacturing processes, including through our service providers, involve the handling of potentially harmful
radioactive and other hazardous materials. Therefore, we and our service providers may be subject to various environmental, health and
safety laws and regulations , including governing the use, shipping, handling, storage and disposal of these materials, and we incur expenses
related to compliance with these laws and regulations. If we are found to have violated applicable environmental, health and safety laws,
whether as a result of human error, equipment failure or other causes, we could be held liable for damages, penalties and costs of remedial
actions and could be subject to work stoppages or delays, which could materially adversely affect our business, financial condition and
results of operations. The risk of contamination or injury from these materials cannot be eliminated. If an accident or release of any
radioactive or other hazardous material occurs, we could be held liable for resulting damages, including for investigation, remediation
and monitoring of the contamination, including the costs of which could be substantial. In addition, we may be required to pay damages
or civil judgments in respect of third-party claims, including those relating to personal injury (including exposure to radioactive materials)
or contribution claims. In the future, we could be subject to additional environmental requirements or existing environmental laws could
become more stringent, which could lead to greater compliance costs and increasing risks and penalties associated with violations. For
example, changes to, or restrictions on, permitting requirements or processes, hazardous or radioactive material storage or handling might
require an unplanned capital investment or relocation. If we or our service providers fail to comply with existing or new environmental
laws or regulations, our business, financial condition and results of operations could be materially adversely affected.
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If we are unable to achieve reimbursement and
coverage from government and private third-party payors for procedures using C-Scan, or if reimbursement is insufficient to create an
economic benefit for purchasing or using C-Scan when compared to alternative procedures, demand for our products may not grow at the rate
we expect.
The demand for C-Scan will depend significantly on the eligibility
of the procedures performed using C-Scan for reimbursement through government-sponsored healthcare payment systems and private third-party
payors. Reimbursement practices vary significantly from country to country and within some countries, by region, and we must obtain reimbursement
approvals on a country-by-country and/or region-by-region basis. In general, the process of obtaining reimbursement and coverage approvals
has been longer outside of the United States. We may not be able to obtain reimbursement approvals in a timely manner or at all and existing
reimbursement and coverage policies may be revised from time to time by government and private third-party payors. If physicians, hospitals
and other healthcare providers are unable to obtain sufficient coverage and reimbursement from government and private third-party payors
for procedures using C-Scan, if reimbursement is, or is perceived by our customers to be, insufficient to create an economic incentive
for purchasing or using C-Scan, or if such reimbursement does not adequately compensate physicians and health care providers compared
to the other procedures they offer, demand for our products may not grow at the rate we expect.
Federal and state privacy laws, and equivalent
laws of third countries, may increase our costs of operation and expose us to civil and criminal sanctions.
The Health Insurance Portability and Accountability Act of 1996,
as amended, and the regulations that have been issued under it, to which we refer collectively as HIPAA, and similar laws outside the
United States, contain substantial restrictions and requirements with respect to the use and disclosure of individuals’ protected
health information. The HIPAA privacy rules prohibit “covered entities,” such as healthcare providers and health plans, from
using or disclosing an individual’s protected health information, unless the use or disclosure is authorized by the individual or
is specifically required or permitted under the privacy rules. Under the HIPAA security rules, covered entities must establish administrative,
physical and technical safeguards to protect the confidentiality, integrity and availability of electronic protected health information
maintained or transmitted by them or by others on their behalf. While we do not believe that we are a covered entity under HIPAA, many
of our customers are covered entities subject to HIPAA. Such customers may require us to enter into business associate agreements, which
will obligate us to safeguard certain health information we obtain in the course of our relationship with them, restrict the manner in
which we use and disclose such information and impose liability on us for failure to meet our contractual obligations.
In addition, under The Health Information Technology for Economic
and Clinical Health Act of 2009, or HITECH, which was signed into law as part of the U.S. stimulus package in February 2009, certain of
HIPAA’s privacy and security requirements are now also directly applicable to “business associates” of covered entities
and subject them to direct governmental enforcement for failure to comply with these requirements. We may be deemed as a “business
associate” of some of our customers. As a result, we may be subject as a “business associate” to civil and criminal
penalties for failure to comply with applicable privacy and security rule requirements. Moreover, HITECH created a new requirement obligating
“business associates” to report any breach of unsecured, individually identifiable health information to their covered entity
customers and imposes penalties for failing to do so.
In addition to HIPAA, most U.S. states have enacted patient confidentiality
laws that protect against the disclosure of confidential medical information, and many U.S. states have adopted or are considering adopting
further legislation in this area, including privacy safeguards, security standards, and data security breach notification requirements.
These U.S. state laws, which may be even more stringent than the HIPAA requirements, are not preempted by the federal requirements, and
we are therefore required to comply with them to the extent they are applicable to our operations.
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These and other possible changes to HIPAA or other U.S. federal
or state laws or regulations, or comparable laws and regulations in countries where we conduct business, could affect our business and
the costs of compliance could be significant. Failure by us to comply with any of the standards regarding patient privacy, identity theft
prevention and detection, and data security may subject us to penalties, including civil monetary penalties and in some circumstances,
criminal penalties. In addition, such failure may damage our reputation and adversely affect our ability to retain customers and attract
new customers.
The protection of personal data, particularly patient data, is
subject to strict laws and regulations in many countries. The collection and use of personal health data in the EU is governed by the
General Data Protection Regulation Reg. EU 2016/679, which became applicable on May 25, 2018, or the GDPR. The GDPR imposes a number of
requirements, including an obligation to seek the consent of individuals to whom the personal data relate, the information that must be
provided to the individuals, notification of data processing obligations to the competent national data protection authorities of individual
EU Member States and the security and confidentiality of the personal data. The GDPR also imposes strict rules on the transfer of personal
data out of the EU to the U.S. Failure to comply with the requirements of the GDPR and the related national data protection laws of the
EU Member States may result in fines and other administrative penalties and harm our business. We may incur extensive costs in ensuring
compliance with these laws and regulations, particularly if we are considered to be a data controller within the meaning of the GDPR.
The adoption of healthcare reform and deficit
reduction measures in the United States may adversely affect our business and financial results.
The Patient Protection and Affordable Care Act of 2010, or the
PPACA, which was modified on March 30, 2010 by the enactment of the Health Care and Education Reconciliation Act of 2010, affects the
way healthcare is financed by both governmental and private insurers, and significantly impacts the device industry. The PPACA is intended
to broaden access to health insurance, reduce or constrain the growth of healthcare spending, enhance remedies against fraud and abuse,
add new transparency requirements for healthcare and health insurance industries, impose new taxes and fees on pharmaceutical and medical
device manufacturers, and impose additional health policy reforms. The PPACA imposes, among other things, an annual excise tax of 2.3%
on any entity that manufactures or imports medical devices offered for sale in the United States beginning in 2013, resulting in an anticipated
cost to the medical device industry of up to $20 billion over the next decade. We likely will be subject to the excise tax with respect
to C-Scan if it is approved for sale in the United States. The PPACA also limits the rate of growth in Medicare payments to providers
and authorizes certain voluntary demonstration projects beginning no later than 2013 around development of bundling payments for acute,
inpatient hospital services, physician services, and post-acute services for episodes of hospital care. In addition, the PPACA provides
for the establishment of an Independent Payment Advisory Board, or IPAB, that, beginning in 2014, could recommend changes in Medicare
payments to physicians and other providers that would take effect unless Congress passes an alternative measure to achieve the same amount
of savings. The IPAB has not yet been created. The PPACA also increases fraud and abuse penalties and expands the scope and reach of the
Federal Civil False Claims Act and government enforcement tools, which may adversely impact healthcare companies.
There have been judicial and congressional challenges to the PPACA.
The U.S. Supreme Court heard a constitutional challenge to the PPACA and in June 2012 held that the PPACA is constitutional. However,
states are allowed to opt out of the expansion of eligibility criteria for Medicaid under the PPACA and many states have chosen to do
so, causing many uninsured patients to remain without coverage. In addition to the PPACA, the effect of which cannot presently be quantified
given its recent enactment, various healthcare reform proposals have also emerged at the state level. If a law is enacted, many if not
all of the provisions of the PPACA may no longer apply to prescription drugs. While we are unable to predict what changes may ultimately
be enacted, to the extent that future changes affect how any future products are paid for and reimbursed by government and private payers
our business could be adversely impacted. On December 14, 2018, a federal district court in Texas ruled that the PPACA is unconstitutional
as a result of the Tax Cuts and Jobs Act, the federal income tax reform legislation previously passed by Congress and signed by President
Trump on December 22, 2017, that eliminated the individual mandate portion of the PPACA. The case, Texas, et al, v. United States of America,
et al., (N.D. Texas), is an outlier, but in 2019, the Fifth Circuit Court of Appeals subsequently upheld the lower court decision which
was then appealed to the United States Supreme Court. On June 17, 2021, the U.S. Supreme Court held that the plaintiffs did not have standing
to challenge the individual mandate because they have not shown a past or future injury. In November 2020, Joseph Biden was elected President
and, in January 2021, the Democratic Party obtained control of the Senate. As a result of these electoral developments, it is unlikely
that continued legislative efforts will be pursued to repeal PPACA. Instead, it is possible that legislation will be pursued to enhance
or reform PPACA. We are not able to state with any certainty what will be the impact of this court decision on our business pending further
court action and possible appeals.
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We cannot predict whether future healthcare initiatives will be
implemented at the federal or state level or the effect any future legislation or regulation will have on us. However, we anticipate that
the PPACA, as well as other healthcare reform measures that may be adopted in the future, may result in more rigorous coverage criteria
and an additional downward pressure on the price that we receive for any approved product, and could adversely affect our business. Any
reduction in reimbursement from Medicare or other government programs may result in a similar reduction in payments from private payors.
Insurers may also refuse to provide any coverage of uses of approved products for medical indications other than those for which the FDA
has granted market approvals, all of which may adversely affect our business, financial condition and results of operations, possibly
materially.
In addition, other legislative changes have been proposed and adopted
since the PPACA was enacted. In August 2011, President Obama signed into law the Budget Control Act of 2011, which, among other things,
created the Joint Select Committee on Deficit Reduction to recommend to Congress proposals in spending reductions. The Joint Select Committee
did not achieve a targeted deficit reduction of an amount greater than $1.2 trillion for the years 2013 through 2021, triggering the legislation’s
automatic reduction to several government programs. This includes aggregate reductions to Medicare payments to healthcare providers of
up to 2.0% per fiscal year, starting in 2013. In January 2013, President Obama signed into law the American Taxpayer Relief Act of 2012,
which, among other things, reduced Medicare payments to several categories of healthcare providers and increased the statute of limitations
period for the government to recover overpayments to providers from three to five years. If we ever obtain regulatory approval and commercialization
of C-Scan or any future product candidates, these laws may result in additional reductions in Medicare and other healthcare funding, which
could have a material adverse effect on our customers and accordingly, our financial operations. Legislative and regulatory proposals
have been made to expand post-approval requirements and restrict sales and promotional activities for pharmaceutical products. We cannot
be sure whether additional legislative changes will be enacted, or whether the FDA regulations, guidance or interpretations will be changed,
or what the impact of such changes on the marketing approvals of C-Scan or any future product candidates may be.
Although we cannot predict the full effect on our business of the
implementation of existing legislation or the enactment of additional legislation pursuant to healthcare and other legislative reform,
we believe that legislation or regulations that would reduce reimbursement for, or restrict coverage of, C-Scan or any future product
candidates, could adversely affect how much or under what circumstances healthcare providers will prescribe or administer our products.
This could materially and adversely affect our business by reducing our ability to generate revenue, raise capital, obtain additional
collaborators and market C-Scan or any future product candidates. In addition, we believe the increasing emphasis on managed care in the
United States has and will continue to put pressure on the price and usage of pharmaceutical products, which may adversely impact any
future product sales.
In addition to healthcare reform, other deficit reduction measures
could affect reimbursement for our device and related procedures. For example, beginning April 1, 2013, Medicare payments for all items
and services have been reduced by 2% under the sequestration (i.e., automatic spending reductions) required by the Budget Control Act
of 2011, as amended by the American Taxpayer Relief Act of 2012. These cuts will remain in effect until 2024 unless Congress enacts legislation
to cancel or delay the cuts. These payment reductions, or similar efforts to reduce Medicare spending to control the federal deficit,
could adversely affect our business by reducing reimbursement to the providers who purchase and use our devices and perform related procedures.
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The implementation of the reporting and disclosure obligations
of the Physician Payment Sunshine Act’s provisions relating to healthcare reform could adversely affect our business. A health care
reform provision, generally referred to as the Physician Payment Sunshine Act or Open Payments Program, has imposed new reporting and
disclosure requirements for drug and device manufacturers with regard to payments or other transfers of value made to certain practitioners
(including physicians, dentists and teaching hospitals), and for such manufacturers and for group purchasing organizations, with regard
to certain ownership interests held by physicians in the reporting entity. On February 1, 2013, the Centers for Medicare and Medicaid
Services, or CMS, released the final rule to implement the Physician Payment Sunshine Act. As required under the Physician Payment Sunshine
Act, CMS will publish information from these reports on a publicly available website, including amounts transferred and physician, dentist
and teaching hospital identities.
The final rule implementing the Physician Payment Sunshine Act
is complex, ambiguous, and broad in scope. If we participate in federal healthcare programs, meaning our product is reimbursed by a federal
healthcare program such as Medicare, Medicaid, or Children’s Health Insurance Program, our product would be considered a “covered
device.” Within 180 days of becoming “covered,” we would be required to collect and report detailed information regarding
certain financial relationships we have with physicians and teaching hospitals. The Physician Payment Sunshine Act preempts similar state
reporting laws, although we may be required to report under certain of such state laws. Our compliance with the new final rule imposes
additional costs on us and requires additional resources including dedicated personnel with experience and expertise in this area. Failure
to comply may expose us to federal and/or state enforcement action and fines.
If we fail to comply with the U.S. federal
Anti-Kickback Statute and similar state and third-country laws, we could be subject to criminal and civil penalties and exclusion from
federally funded healthcare programs including the Medicare and Medicaid programs and equivalent third-country programs, which would have
a material adverse effect on our business and results of operations.
A provision of the Social Security Act, commonly referred to as
the federal Anti-Kickback Statute, prohibits the knowing and willful offer, payment, solicitation or receipt of any form of remuneration,
directly or indirectly, in cash or in kind, to induce or reward the referring, ordering, leasing, purchasing or arranging for, or recommending
the ordering, purchasing or leasing of, items or services payable, in whole or in part, by Medicare, Medicaid or any other federal healthcare
program. PPACA, among other things, clarified that a person or entity needs not to have actual knowledge of the federal Anti-Kickback
Statute or specific intent to violate it. Although there are a number of statutory exemptions and regulatory safe harbors to the federal
Anti- Kickback Statute protecting certain common business arrangements and activities from prosecution or regulatory sanctions, the exemptions
and safe harbors are drawn narrowly, and practices that do not fit squarely within an exemption or safe harbor may be subject to scrutiny.
The federal Anti-Kickback Statute is very broad in scope and many of its provisions have not been uniformly or definitively interpreted
by existing case law or regulations. In addition, most of the states have adopted laws similar to the federal Anti-Kickback Statute, and
some of these laws are even broader than the federal Anti-Kickback Statute in that their prohibitions may apply to items or services reimbursed
under Medicaid and other state programs or, in several states, apply regardless of the source of payment. Violations of the federal Anti-Kickback
Statute may result in substantial criminal, civil or administrative penalties, damages, fines and exclusion from participation in federal
healthcare programs.
All of our financial relationships with healthcare providers, purchasers,
formulary managers, and others who provide products or services to federal healthcare program beneficiaries are potentially governed by
the federal Anti-Kickback Statute and similar state laws. We believe our operations are in compliance with the federal Anti-Kickback Statute
and similar state laws. However, we cannot be certain that we will not be subject to investigations or litigation alleging violations
of these laws, which could be time-consuming and costly to us and could divert management’s attention from operating our business,
which in turn could have a material adverse effect on our business. In addition, if our arrangements were found to violate the federal
Anti- Kickback Statute or similar state laws, the consequences of such violations would likely have a material adverse effect on our business,
results of operations and financial condition.
There are other federal and state laws that may affect our ability
to operate, including the federal civil False Claims Act, which prohibits, among other things, individuals or entities from knowingly
presenting, or causing to be presented, a false or fraudulent claim for payment of government funds or knowingly making, using or causing
to be made or used, a false record or statement material to an obligation to pay money to the government or knowingly concealing or knowingly
and improperly avoiding, decreasing, or concealing an obligation to pay money to the federal government. PPACA amended the Social Security
Act to provide that the government may assert that a claim including items or services resulting from a violation of the federal Anti-
Kickback Statute constitutes a false or fraudulent claim for purposes of the federal civil False Claims Act. Moreover, we may be subject
to other federal false claim laws, including, among others, federal criminal healthcare fraud and false statement statutes that extend
to non-government healthcare benefit programs. Moreover, there are analogous state laws. Violations of these laws can result in substantial
criminal, civil or administrative penalties, damages, fines and exclusion from participation in federal healthcare programs.
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Similar restrictions are imposed by the national legislation of
many third countries in which our medical devices will be marketed. Moreover, the provisions of the Foreign Corrupt Practices Act of 1997
and other similar anti-bribery laws in other jurisdictions generally prohibit companies and their intermediaries from providing money
or anything of value to officials of foreign governments, foreign political parties, or international organizations with the intent to
obtain or retain business or seek a business advantage. Recently, there has been a substantial increase in anti-bribery law enforcement
activity by U.S. regulators, with more aggressive and frequent investigations and enforcement by both the U.S. Securities and Exchange
Commission and the Department of Justice. A determination that our operations or activities violated United States or foreign laws or
regulations could result in imposition of substantial fines, interruption of business, loss of supplier, vendor or other third-party relationships,
termination of necessary licenses and permits, and other legal or equitable sanctions. In addition, lawsuits brought by private litigants
may also follow as a consequence.
Our failure to comply with the necessary regulatory
approval regarding the use of radioactive materials could significantly impair our ability to develop, manufacture and/or sell C-Scan.
The manufacture of C-Scan requires the use and storage of radioactive
materials. In order to use such materials in the development and manufacture of C-Scan in Israel, we are required to obtain a permit from
the Israeli Commissioner for Environmental Radiation, or the Commissioner, pursuant to the Israeli Pharmaceutical Regulations (Radioactive
Elements and By-Products), 5740–1980. Should we fail to comply with the conditions of our currently existing permit, the Commissioner
would have authority to cancel our permit. Should the Commissioner determine that our activities or facilities , or the activities or
facilities adjacent to our premises, constitute a danger to the health and well-being of a person, the public or the environment, the
cancellation or suspension of our permit could be immediate and without prior notice. Furthermore, we cannot guarantee the annual renewal
of our permit and/or annual renewal subject to identical conditions, as the approval of an annual application and the conditions thereof
are at the discretion of the Commissioner. Similar requirements and regulations may apply to the manufacture of C-Scan in other countries.
Cancellation of or failure to renew our permit could have materially adverse consequences on our ability to manufacture and sell our products
and therefore on our ability to continue our business and operations.
Risks Related to Our Intellectual Property
If we are unable to protect our intellectual
property rights, our competitive position could be harmed.
Our success and ability to compete depends in large part upon our
ability to protect our intellectual property. Although we have patents issued in Israel, Europe, United States, Japan, China, India, Hong
Kong, Canada, South Korea, Brazil and Australia, we continue to file and prosecute in many of the same countries and additional countries.
We face several risks and uncertainties in connection with our intellectual property rights, including, among others:
| • |
pending and future patent applications may not result in the issuance of patents or, if issued, may not be issued in a form that
will be advantageous to us; |
| • |
our issued patents may be challenged, invalidated or legally circumvented by third parties; |
| • |
our patents may not be upheld as valid and enforceable or prevent the development of competitive products; |
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| • |
the eligibility of certain inventions related to diagnostic medicine, more specifically diagnostic methods and processes, for patent
protection in the United States has been limited recently which may affect our ability to enforce our issued patents in the United States
or may make it difficult to obtain broad patent protection going forward in the United States; |
| • |
the eligibility to protect methods for treating humans, which is available in the US, is generally not available in other countries,
for example in Europe; |
| • |
for a variety of reasons, we may decide not to file for patent protection on various improvements or additional features; and
|
| • |
intellectual property protection and/or enforcement may be unavailable or limited in some countries where laws or law enforcement
practices may not protect our proprietary rights to the same extent as the laws of the United States, the European Union, Canada or Israel.
|
Consequently, our competitors could develop, manufacture and sell
products that directly compete with our products, which could decrease our sales and diminish our ability to compete. In addition, competitors
could attempt to develop their own competitive technologies that fall outside of our intellectual property rights. If our intellectual
property does not adequately protect us from our competitors’ products and methods, our competitive position could be materially
adversely affected.
Because the medical device industry is litigious,
we are susceptible to intellectual property suits that could cause us to incur substantial costs or pay substantial damages or prohibit
us from selling C-Scan.
There is a substantial amount of litigation over patent and other
intellectual property rights in the medical device industry. Whether a product infringes a patent involves complex legal and factual issues,
the determination of which is often uncertain. Searches typically performed to identify potentially infringed patents of third parties
are often not conclusive and because patent applications can take many years to issue, there may be applications now pending, which may
later result in issued patents which our current or future products may infringe. In addition, our competitors or other parties may assert
that C-Scan and the methods it employs may be covered by patents held by them. If C-Scan or any of its components infringes a valid patent,
we could be prevented from manufacturing or selling it unless we can obtain a license or redesign the product to avoid infringement. For
example, in March 2021, we entered into an exclusive license agreement with the University of Missouri with respect to certain patents
held by the University of Missouri that the University of Missouri claimed included background intellectual property in C-Scan. In consideration
for the grant of an exclusive license to those patents in the medical field, we agreed to pay royalties ranging from $0.30 to $5.00 per
C-Scan unit depending on the number of units sold up to $15,000,000 in the aggregate. Third parties may currently have, or may eventually
be issued, patents on which our current or future products or technologies may infringe.
A license may not always be available or may require us to pay
substantial royalties. We also may not be successful in any attempt to redesign our product to avoid infringement. Infringement and other
intellectual property claims, with or without merit, can be expensive and time-consuming to litigate and could divert our management’s
attention from operating our business.
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The steps we have taken to protect our intellectual
property may not be adequate, which could have a material adverse effect on our ability to compete in the market.
In addition to patents, we rely on confidentiality, non-compete,
non-disclosure and assignment of inventions provisions, as appropriate, with our employees, consultants, subcontractors, suppliers and
clinical investigators to protect and otherwise seek to control access to, and distribution of, our proprietary information. These measures
may not be adequate to protect our intellectual property from unauthorized disclosure, third-party infringement or misappropriation, for
the following reasons:
| • |
the agreements may be breached, may not provide the scope of protection we believe they provide or may be determined to be unenforceable,
in part or in whole; |
| • |
we may have inadequate remedies for any breach; |
| • |
proprietary information could be disclosed to our competitors; or |
| • |
others may independently develop substantially equivalent or superior proprietary information and techniques or otherwise gain access
to our trade secrets or disclose such technologies. |
If, for any of the above reasons, our intellectual property is
disclosed or misappropriated, it could harm our ability to protect our rights and could have a material adverse effect on our business,
financial condition and results of operations.
Furthermore, although our employees and consultants have agreed
to assign to us all rights to any intellectual property created in the scope of their employment or engagement with us and most of our
current employees and consultants, have agreed to waive their economic rights with respect to our intellectual property, we cannot assure
you that such claims will not be brought against us by current or former employees or consultants, despite their contractual representations
and obligations toward us, or by any of the medical and/or governmental institutions that employ or engage such consultants, claiming
alleged rights to our intellectual property or demanding remuneration in consideration for assigned intellectual property rights, which
could result in litigation and adversely affect our business, financial condition and results of operations.
Third-party claims of infringement or other
claims against us could require us to redesign C-Scan, seek licenses, or engage in future costly intellectual property litigation, which
could negatively affect our future business and financial performance.
Substantial litigation over intellectual property rights exists
in the medical device industry in general and in the medical imaging or screening sectors in particular. We expect that we may be subject
to third-party infringement claims as our profile grows, we generate any future revenues, the number of competitors grows or the functionality
of products and technology in different industry segments converges. For example, in March 2021, we entered into an exclusive license
agreement with the University of Missouri with respect to certain patents held by the University of Missouri that the University of Missouri
claimed included background intellectual property in C-Scan. In consideration for the grant of an exclusive license to those patents in
the medical field, we agreed to pay royalties ranging from $0.30 to $5.00 per C-Scan unit depending on the number of units sold up to
$15,000,000 in the aggregate. Third parties may currently have, or may eventually be issued, patents on which our current or future products
or technologies may infringe.
In addition, litigation in which we are accused of infringement
may cause negative publicity, adversely impact prospective customers, cause product shipment delays, prohibit us from manufacturing, marketing
or selling our current or future products, require us to develop non-infringing technology, make substantial payments to third parties
or enter into royalty or license agreements, which may not be available on acceptable terms, or at all. If a successful claim of infringement
were made against us and we could not develop non-infringing technology or license the infringed or similar technology in a timely and
cost-effective manner, our ability to generate significant revenues may be substantially harmed and we could be exposed to significant
liability. A court could enter orders that temporarily, preliminarily or permanently enjoin us, our suppliers, distributors or our customers
from making, using, selling, offering to sell or importing our current or future products, or could enter an order mandating that we undertake
certain remedial activities. Claims that we have misappropriated the confidential information or trade secrets of third parties can have
a similar negative impact on our reputation, business, financial condition or results of operations.
We may also become involved in litigation in connection with our
brand name rights. We do not know whether others will assert that our brand name infringes their trademark rights. In addition, names
we choose for our products may be claimed to infringe names held by others. If we have to change the names we use, we may experience a
loss in goodwill associated with our brand name, customer confusion and a loss of sales.
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Third parties may challenge the validity of
our issued patents or challenge patent applications in administrative proceedings before various patent offices which, if successful,
could negatively affect our future business and financial performance.
Various patent offices, including in the United States and Europe,
provide administrative proceedings by which a third party can challenge the validity of an issued patent or challenge an application that
is being examined absent any threat of litigation. In some instances, including in the United States, the administrative proceedings provide
a more efficient and favorable forum to challenge our patents which may lead to more opportunities for competitors to do so, particularly
smaller competitors with limited resources. Moreover, the standards utilized in these administrative proceedings, at least in the United
States, provide certain legal advantages versus challenging the validity of a patent in a district court. If a third party is successful
in one of these administrative proceedings, the patent will no longer be enforceable in the corresponding jurisdiction. With this loss
in patent rights, we will not be able to prevent third parties from offering identical or similar competing products which may result
in lower profits and a less substantial market share.
We may need to initiate lawsuits to protect
or enforce our patents and other intellectual property rights, which could be expensive and, if we lose, could cause us to lose some of
our intellectual property rights, which would harm our ability to compete in the market.
We rely on patents to protect a portion of our intellectual property
and our competitive position. Patent law relating to the scope of claims in the technology fields in which we operate is still evolving
and, consequently, patent positions in the medical device industry are generally uncertain. In order to protect or enforce our patent
rights, we may initiate patent and related litigation against third parties, such as infringement suits or interference proceedings. Any
lawsuits that we initiate could be expensive, take significant time and divert our management’s attention from other business concerns
and the outcome of litigation to enforce our intellectual property rights in patents, copyrights, trade secrets or trademarks is highly
unpredictable. Litigation also puts our patents and other registered intellectual property at risk of being invalidated or interpreted
narrowly and our patent applications at risk of not being issued. In addition, we may provoke third parties to assert claims against us.
We may not prevail in any lawsuits that we initiate and the damages or other remedies awarded, including attorney fees, if any, may not
be commercially valuable. The occurrence of any of these events could have a material adverse effect on our business, financial condition
and results of operations.
We rely on trademark protection to distinguish
our products from the products of our competitors; however, if a third party is entitled to use our trademark, we could be forced to rebrand,
which could result in loss of brand recognition and our ability to distinguish our products may be impaired, which could adversely affect
our business.
We rely on trademark protection to distinguish our products from
the products of our competitors. In jurisdictions where we have not registered our trademarks and logos and are using them, and as permitted
by applicable local law, we rely on common law trademark protection. Third parties may oppose our trademark applications, or otherwise
challenge our use of the trademarks, and may be able to use our trademarks in jurisdictions where they are not registered or otherwise
protected by law. If our trademarks are successfully challenged or if a third party is using confusingly similar or identical trademarks
in particular jurisdictions before we do, we may be prevented from using our brands and/or domain names and/or could be forced to
rebrand our products, which could result in loss of brand recognition, and could require us to devote additional resources to marketing
new brands. If others are able to use our trademarks, our ability to distinguish our products may be impaired, which could adversely affect
our business. Further, we cannot assure you that competitors will not infringe upon our trademarks, or that we will have adequate resources
to enforce our trademarks.
We may not be able to enforce covenants not
to compete at all or, we may be unable to enforce them for the duration contemplated in our employment contracts and may, therefore, be
unable to prevent competitors from benefiting from the expertise of some of our former employees involved in research and development
activities.
We currently have non-compete agreements with substantially all
of our employees who are involved in research and development, all of whom are located in Israel. These agreements prohibit our employees,
if they cease working for us, from directly competing with us or working for our competitors for a limited period of time following termination
of employment. In many jurisdictions, courts are increasingly refusing to enforce restrictions on competition by former employees or have
interpreted them narrowly. For example, in Israel, where currently all of our employees reside, courts have 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. If we cannot demonstrate that harm would be caused to us, an Israeli
court may refuse to enforce our non-compete restrictions or reduce the contemplated period of non-competition such that we may be unable
to prevent our competitors from benefiting from the expertise of our former employees.
33
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 and research and development facilities are
located near Haifa, in the northern part of Israel and our own X-ray production line is located in Petach Tikva, Israel. In addition,
all of our employees and officers, and one of our directors, are residents of Israel. Accordingly, political, economic and military conditions
in Israel may directly affect our business. Since the establishment of the State of Israel in 1948, a number of armed conflicts have taken
place between Israel and its neighboring countries. In recent years, Israel has been engaged in sporadic armed conflicts with Hamas, an
Islamist terrorist group that controls the Gaza Strip, with Hezbollah, an Islamist terrorist group that controls large portions of southern
Lebanon, and with Iranian-backed military forces in Syria. In addition, Iran has threatened to attack Israel, may be developing nuclear
weapons and has targeted cyber attacks against Israeli entities. Some of these hostilities were accompanied by missiles being fired from
the Gaza Strip against civilian targets in various parts of Israel, and negatively affected business conditions in Israel. Any hostilities
involving Israel or the interruption or curtailment of trade between Israel and its trading partners could adversely affect our operations
and results of operations.
Popular uprisings in various countries in the Middle East and North
Africa are affecting the political stability of those countries. Such instability may lead to deterioration in the political and trade
relationships that exist between the State of Israel and these countries. Furthermore, several countries, principally in the Middle East,
restrict doing business with Israel and Israeli companies, and additional countries may impose restrictions on doing business with Israel
and Israeli companies if hostilities in the region continue or intensify. Such restrictions may seriously limit our ability to sell our
products to customers in those countries. Similarly, Israeli corporations are limited in conducting business with entities from several
countries. Parties with whom we may do business could decline to travel to Israel during periods of heightened unrest or tension. In addition,
the political and security situation in Israel may result in parties with whom we may have agreements involving performance in Israel
claiming that they are not obligated to perform their commitments under those agreements pursuant to force majeure provisions in such
agreements. In addition, any hostilities involving Israel could have a material adverse effect on our facilities including our corporate
office or on the facilities of our local suppliers, in which event all or a portion of our inventory may be damaged, and our ability to
deliver products to customers could be materially adversely affected.
Furthermore, the war and terrorism insurance we maintain may not
be adequate to cover our 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.
In addition, our operations could also be disrupted by the obligations
of personnel to perform military service. As of December 31, 2021, we had 81 employees and independent contractors, all of whom were based
in Israel. Some of these employees and independent contractors 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.
Any hostilities involving Israel, terrorist activities or political
instability in the region or the interruption or curtailment of trade between Israel and its present trading partners, or significant
downturns in the economic or financial condition of Israel, could adversely affect our operations and product development, cause our revenues
to decrease and adversely affect our share price.
34
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. In addition, the terms of Israeli government grants we received require us to satisfy specified conditions and to make additional
payments in addition to repayment of the grants upon certain events.
We have received grants from the Government of the State of Israel
through the IIA (formerly the OCS) for the financing of a portion of our research and development expenditures and recently, in January
2021, to finance a portion of the development of our manufacturing line, pursuant to the Innovation Law and related regulations and guidelines.
As of December 31, 2021, we had received funding from the IIA for research and development of C-Scan in the aggregate amount of approximately
$5.6 million. As of December 31, 2021, we had not paid any royalties to the IIA and had a contingent obligation to the IIA with respect
to such funding (including interest at the rate of 12-month LIBOR) in the amount of approximately $6.1 million.
In addition, in January 2021, we received an IIA grant approval to support the funding of our transition from research and development
to manufacturing in the amount of up to $786,000 (along with a co-investment by us of the same amount), which we are not required to repay
to the IIA , subject to the terms and conditions set forth in the grant approval, of which we received approximately $349,000 in 2021
and $82,000 in January 2022. We may apply for additional IIA grants in the future; however, there is no assurance that such applications
will be approved in the amount requested or at all. Furthermore, 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.
Under the terms of the Innovation Law as currently in effect, products
developed with IIA funding are required to be manufactured in Israel, unless the IIA approved grant program includes a pre-determined
portion of manufacturing that may be performed outside Israel (as certain of our IIA approved grants included). The approval of the IIA
is required for the transferring of manufacturing outside Israel in excess of such pre-determined portion (however, only a notice to the
IIA, as opposed to approval, is required for the transfer outside Israel of up to 10% of the cumulative manufacturing in excess of such
pre-approved portion). If manufacturing of IIA-funded products is transferred outside Israel (following IIA approval) in excess of the
pre-determined percentage included in the grant approval, then the royalty repayment rate will be increased by 1% with respect to the
additional approved percentage to be manufactured outside Israel and the royalty repayment for the entire approved program may be increased
to up to three times the amount of the grants received, depending on the percentage manufactured outside Israel (plus accrued interest).
For example, during 2019, in connection with the application to the IIA for certain research and development funding, we provided notice
to the IIA with respect to the transfer of manufacturing outside of Israel of our C-Scan Track in an amount that represents less than
10% of cumulative deviation exceeding the pre-determined portion to be manufactured abroad that was included in our grant approval. This
may increase our royalty repayment ceiling to 120% of the revenues of the C-Scan Track and the repayment rate may increase by 1% for the
part of manufacturing carried out abroad. We are continuing to explore whether certain other components of C-Scan can be assembled outside
of Israel. For example, we are continuing to explore whether it would be possible to assemble the capsule without the X-ray source in
Israel, and have the X-ray source subsequently manufactured and assembled into C-Scan at a certified radioisotope production facility
or at a distribution center outside Israel.
Over the years, we received approval of grant applications that
included a certain predetermined percentage of manufacturing to be performed outside of Israel of the X-ray source but additional examination
of these approvals and consequent manufacturing is required to determine liabilities to the IIA, if any. IIA prior approval is also required
for the transfer of IIA-funded know-how to a third party outside of Israel (including by way of license), which we may not receive (and
any such approval would typically be subject to payment of a redemption fee, calculated according to a formula under the Innovation Law,
which may be in the amount of up to six times the amount of the grants received (less paid royalties, if any, and depreciation, but no
less than the total grants received), plus accrued interest. Even following the full repayment of any IIA grants, we must nevertheless
continue to comply with the requirements of the Innovation Law and related regulations and guidelines. 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 product or technology outside of Israel. Furthermore, the consideration available to our
shareholders in a transaction involving the transfer outside of Israel of technology or know-how developed with IIA funding (such as a
merger or similar transaction) may be reduced by any amounts that we are required to pay to the IIA.
If we fail to comply with any of the conditions and restrictions
imposed by the Innovation Law and related regulations and guidelines, 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.
35
Your rights and responsibilities as a shareholder
are governed by Israeli law, which differ in some material respects from the rights and responsibilities of shareholders of U.S. companies.
The rights and responsibilities of the holders of our ordinary
shares are governed by our amended articles of association and by Israeli law. These rights and responsibilities differ in some material
respects from the rights and responsibilities of shareholders in U.S. based corporations. In particular, a shareholder of an Israeli company
has a duty to act in good faith and in a customary manner in exercising its rights and performing its obligations towards the company
and other shareholders, and to refrain from abusing its power in the company, including, among other things, in voting at a general meeting
of shareholders on matters such as amendments to a company’s articles of association, increases in a company’s authorized
share capital, mergers and acquisitions and certain related party transactions requiring shareholder approval under Israeli law. In addition,
a controlling shareholder of an Israeli company or a shareholder who is aware that it possesses the power to determine the outcome of
a shareholder vote or to appoint or prevent the appointment of a director or executive officer in the company or has other powers towards
the company, has a duty of fairness toward the company. There is limited case law available to assist us in understanding the nature of
this duty or the implications of these provisions. These provisions may be interpreted to impose additional obligations and liabilities
on holders of our ordinary shares that are not typically imposed on shareholders of U.S. corporations.
It may be difficult to enforce a judgment of
a U.S. court against us, certain of our officers and directors or the Israeli experts named in this Annual Report in Israel or the United
States, to assert U.S. securities laws claims in Israel or to serve process on certain of our officers and directors and these experts.
We are incorporated in Israel. All of our executive officers, one
of our directors and our Israeli experts, reside in Israel, and substantially all of our assets and a substantial portion of the assets
of these persons are located in Israel. Therefore, a judgment obtained against us, or any of these persons, including a judgment based
on the civil liability provisions of the U.S. federal securities laws, 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 these 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 will 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.
36
Provisions of Israeli law and our amended articles
of association may delay, prevent or otherwise impede a merger with, or an acquisition of, us, even when the terms of such a transaction
are favorable to us and our shareholders.
Israeli corporate law regulates mergers, requires tender offers
for acquisitions of shares above specified thresholds, requires special approvals for transactions involving directors, officers or significant
shareholders and regulates other matters that may be relevant to such types of transactions. For example, a full tender offer for all
of a public company’s issued and outstanding shares can only be completed if the acquirer receives positive responses from the holders
of at least 95% of the issued share capital and the approval of a majority of the offerees that do not have a personal interest in the
tender offer, unless at least 98% of the company’s outstanding shares are tendered. Furthermore, the shareholders, including those
who indicated their acceptance of the tender offer (unless the acquirer stipulated in its tender offer that a shareholder that accepts
the offer may not seek appraisal rights), may, at any time within six months following the completion of the tender offer, petition an
Israeli court for an appraisal right, to alter the consideration for the acquisition. In addition, a statutory merger may not be consummated
unless at least 50 days have passed from the date on which a proposal for approval of the merger was filed by each party with the Israeli
Registrar of Companies and at least 30 days have passed from the date on which the merger was approved by the shareholders of each party.
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. Section 134 of the
Patents Law provides that if no agreement between an employer and an employee exists that 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, or the Committee.
Although our employees have agreed to assign to us all rights to any intellectual property created in the scope of their employment and
most of our current employees, including all those involved in the development of our intellectual property, have agreed to waive their
economic rights with respect to service inventions, we cannot assure you that claims will not be brought against us by current or former
employees demanding remuneration in consideration for assigned service inventions. 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 be forced to litigate such
claims, which could negatively affect our business.
Risks Related to Ownership of our Ordinary Shares
We have and will continue to incur significant
costs as a result of operating as a public company in the United States, and our management is required to devote substantial time to
compliance initiatives.
As a public company whose securities are traded in the United States,
we have and will continue to incur significant legal, accounting and other expenses. The Sarbanes-Oxley Act of 2002, as well as rules
and regulations implemented by the U.S. Securities and Exchange Commission and the Nasdaq Stock Market, impose various requirements on
public companies, including requiring the establishment and maintenance of effective disclosure and financial controls. As a result, we
incurred and will continue to incur additional legal, accounting and other expenses that we did not incur as a privately-held company,
particularly since, as of December 31, 2020, we are no longer considered an “emerging growth company” as defined in the JOBS
Act and we must include an attestation report on internal control over financial reporting issued by our independent registered public
accounting firm. Our management and other personnel devote a substantial amount of time to these compliance initiatives. Changes in the
laws, rules and regulations affecting public companies would result in increased costs to us as we respond to their requirements. These
rules and regulations could make it more difficult or more expensive for us to obtain certain types of insurance, including director and
officer liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantial costs to obtain
or maintain the same or similar coverage. The impact of these requirements could also make it more difficult for us to attract and retain
qualified persons to serve on our board of directors, our board committees or as executive officers. We cannot predict or estimate the
amount or timing of additional costs we may incur in order to comply with such requirements.
37
If we fail to maintain effective internal control
over financial reporting, the price of our ordinary shares may be adversely affected.
Our internal control over financial reporting may have weaknesses
and conditions that could require correction or remediation, the disclosure of which may have an adverse impact on the price of our ordinary
shares. We are required to establish and maintain appropriate internal control over financial reporting. Failure to establish those controls,
or any failure of those controls once established, could adversely affect our public disclosures regarding our business, prospects, financial
condition or results of operations. In addition, management’s assessment of internal control over financial reporting may identify
weaknesses and conditions that need to be addressed in our internal control over financial reporting or other matters that may raise concerns
for investors. Additionally, as of December 31, 2020, we are no longer an “emerging growth company,” as defined in the JOBS
Act, and must include an attestation report on internal control over financial reporting issued by our independent registered public accounting
firm according to Section 404(b) of the Sarbanes-Oxley Act. If our independent registered public accounting firm is unable to express
an opinion or issues an adverse opinion in its attestation as to the effectiveness of our internal control over financial reporting, investors
may lose confidence in the accuracy and completeness of our financial reports and the trading price of our ordinary shares could be negatively
affected. Any actual or perceived weaknesses and conditions that need to be addressed in our internal control over financial
reporting or disclosure of management’s assessment of our internal control over financial reporting may have an adverse impact on
the price of our ordinary shares.
Our ordinary shares could be delisted from
the Nasdaq Capital Market.
Nasdaq has established certain standards for the continued listing
of a security on the Nasdaq Capital Market. The standards for continued listing include, inter alia,
that the minimum bid price for the listed securities be at least $1.00 per share. Under these rules, a security is considered deficient
if it fails to achieve at least a $1.00 closing bid price for a continuous period of 30 business days.
On June 5, 2020, we announced that we received a notification from
the Nasdaq Listing Qualifications, or the Staff, that we are not in compliance with the minimum bid price requirement for continued listing
set forth in Listing Rule 5550(a)(2), which requires listed securities to maintain a minimum bid price of $1.00 per share, or the Minimum
Bid Price Requirement. Further, on April 16, 2020, in response to the COVID-19 pandemic, and the resulting related market conditions,
Nasdaq elected to provide temporary relief from the bid price requirements by tolling compliance through June 30, 2020. As a result of
the tolling of the bid price requirements, we had 180 calendar days from July 1, 2020, or until December 28, 2020, to regain compliance
with the minimum bid price requirement. On December 29, 2020, we received a letter from the Staff notifying us that Nasdaq granted us
a 180-day extension, until June 28, 2021, or the Extension Period, to regain compliance with the Minimum Bid Price Requirement. We did
not regain compliance with the minimum bid price requirement before December 28, 2020, and instead we advised Nasdaq of our intent to
cure the deficiency within the Extension Period. On January 26, 2021 following the increase of the share price in Nasdaq during January
2021, we were notified by Nasdaq that we regained compliance with the minimum $1.00 bid price rule.
On December 23, 2021, we received a letter from the Staff, indicating
that the Company is not in compliance with the Minimum Bid Price Requirement. We were provided by Nasdaq with a compliance period of 180
calendar days (i.e., until June 21, 2022) in which to regain compliance pursuant to Nasdaq Listing Rules. We are able to regain compliance,
if at any time during such 180 day period, the closing bid price of our ordinary shares is at least $1.00 for a minimum of ten consecutive
business days. In the event we do not regain compliance after the initial 180-day period, we may then be eligible for an additional time
if we meets the continued listing requirement for market value of publicly held shares and all other initial listing standards for The
Nasdaq Capital Market, with the exception of the bid price requirement, and will need to provide written notice of our intention to cure
the deficiency during the second compliance period.
If we are delisted from Nasdaq, our ordinary shares may be eligible
for trading on an over-the-counter market in the United States. In the event that we are not able to obtain a listing on another U.S.
stock exchange or quotation service for our ordinary shares, it may be extremely difficult or impossible for shareholders to sell their
ordinary shares in the United States. Moreover, if we are delisted from Nasdaq, but obtain a substitute listing for our ordinary shares
in the United States, it will likely be on a market with less liquidity, and therefore, experience potentially more price volatility than
experienced on Nasdaq. Shareholders may not be able to sell their ordinary shares on any such substitute U.S. market in the quantities,
at the times, or at the prices that could potentially be available on a more liquid trading market. As a result of these factors, if our
ordinary shares are delisted from Nasdaq, the price of our ordinary shares is likely to decline. A delisting of our ordinary shares from
Nasdaq could also adversely affect our ability to obtain financing for our operations and/or result in a loss of confidence by investors,
or employees.
38
We are a foreign private issuer and, as a result,
we are not subject to U.S. proxy rules and are subject to the Securities Exchange Act of 1934 reporting obligations that, to some extent,
are more lenient and less frequent than those applicable to a U.S. issuer.
We report under the Securities Exchange Act of 1934, as amended,
or the Exchange Act as a foreign private issuer. Because we qualify as a foreign private issuer under the Exchange Act, we are exempt
from certain provisions of the Exchange Act that are applicable to U.S. public companies, including (i) the sections of the Exchange Act
regulating the solicitation of proxies, consents or authorizations in respect of a security registered under the Exchange Act; (ii) the
sections of the Exchange Act requiring insiders to file public reports of their stock ownership and trading activities and liability for
insiders who profit from trades made in a short period of time; and (iii) the rules under the Exchange Act requiring the filing with the
SEC of quarterly reports on Form 10-Q containing unaudited financial and other specified information, or current reports on Form 8-K,
upon the occurrence of specified significant events. We intend to furnish quarterly reports to the SEC on Form 6-K for so long as we are
subject to the reporting requirements of Section 13(g) or 15(d) of the Exchange Act, although the information we furnish may not be the
same as the information that is required in quarterly reports on Form 10-Q for U.S. domestic issuers. In addition, while U.S. domestic
issuers that are not large accelerated filers or accelerated filers are required to file their annual reports on Form 10-K within 90 days
after the end of each fiscal year, foreign private issuers are not required to file their annual report on Form 20-F until 120 days after
the end of each fiscal year. Foreign private issuers are also exempt from the Regulation FD (Fair Disclosure), aimed at preventing issuers
from making selective disclosures of material information. Although we intend to make interim reports available to our shareholders in
a timely manner, you may not have the same protections afforded to shareholders of companies that are not foreign private issuers.
As a foreign private issuer, we are permitted,
to follow, and follow certain home country corporate governance practices instead of otherwise applicable Nasdaq requirements, which may
result in less protection than is accorded to investors under rules applicable to domestic U.S. issuers.
As a foreign private issuer, we are permitted to follow certain
home country corporate governance practices instead of those otherwise required under the Listing Rules of the Nasdaq Stock Market for
domestic U.S. issuers. For instance, we follow home country practice in Israel with regard to, among other things, director nomination
procedures, the approval of compensation of officers and quorum requirements at general meetings of our shareholders. In addition, we
follow our home country law instead of the Listing Rules of the Nasdaq Stock Market that require us to obtain shareholder approval for
certain dilutive events, such as the establishment or amendment of certain equity based compensation plans, an issuance that will result
in a change of control of the company, certain transactions other than a public offering involving issuances of a 20% or greater interest
in the company, and certain acquisitions of the stock or assets of another company. Following our home country governance practices as
opposed to the requirements that would otherwise apply to a United States company listed on Nasdaq may provide less protection to you
than what is accorded to investors under the Listing Rules of the Nasdaq Stock Market applicable to domestic U.S. issuers.
If we lose our status as a foreign private
issuer under the SEC’s rules, our compliance costs will increase.
We would lose our foreign private issuer status if more than 50
percent of our outstanding voting securities are directly or indirectly held of record by residents of the United States and if a majority
of our directors or executive officers are U.S. citizens or residents and we fail to meet additional requirements necessary to avoid loss
of foreign private issuer status. Although we have elected to comply with certain U.S. regulatory provisions, our loss of foreign private
issuer status would make such provisions mandatory. The regulatory and compliance costs for us under U.S. securities laws as a U.S. domestic
issuer may be significantly higher. If we are not a foreign private issuer, we will be required to file periodic reports and registration
statements on
U.S. domestic issuer forms with the SEC, which are more detailed
and extensive than the forms available to a foreign private issuer. We would also be required to follow U.S. proxy disclosure requirements,
including the requirement to disclose more detailed information about the compensation of our senior executive officers on an individual
basis. We may also be required to modify certain of our policies to comply with corporate governance practices associated with U.S. domestic
issuers. Such conversion and modifications will involve additional costs. In addition, we may lose our ability to rely upon exemptions
from certain corporate governance requirements on U.S. stock exchanges that are available to foreign private issuers.
39
Exchange rate fluctuations between the U.S.
dollar and the NIS and the Euro and inflation may negatively affect our earnings and we may not be able to hedge our currency exchange
risks successfully.
The 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 depreciates relative to the
U.S. dollar, that the inflation rate in Israel may exceed such rate of depreciation of the NIS, or that the timing of such depreciation
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. In year 2021, the NIS appreciated by 3.266% relative to the U.S. dollar. The Israeli
rate of inflation has not had a material adverse effect on our financial condition during the years 2021, 2020 and 2019. In addition,
we may incur operating expenses denominated in Euros, and therefore, our operating results may also be subject to fluctuations due to
changes in the U.S. dollar/Euro exchange rate. We cannot predict any future trends in the rate of inflation in Israel or the rate of devaluation
(if any) of the NIS, the Euro and other foreign currencies against the U.S. dollar. Although we engage in currency hedging arrangements
from time to time, these measures may not adequately protect us from fluctuations in the exchange rates of the NIS, the Euro and other
foreign currencies in relation to the U.S. dollar (and/or from inflation of such foreign currencies), and involve costs and risk of their
own.
We have never declared or paid a dividend and
currently do not intend to pay cash dividends in the foreseeable future. Any return on investment may be limited to the value of our securities.
We have never declared and do not anticipate paying cash dividends
on our ordinary shares in the foreseeable future. Our board of directors has discretion to declare and pay dividends on our ordinary shares
and will make any determination to do so based on a number of factors, such as our operating results, financial condition, current and
anticipated cash needs and other business and economic factors that our board of directors may deem relevant. In addition, we are only
permitted to pay dividends out of “profits” (as defined by the Israeli Companies Law, 1999, or the Israeli Companies Law),
provided that there is no reasonable concern that the dividend distribution will prevent us from meeting our existing and foreseeable
obligations, as they become due. If we do not pay dividends, our ordinary shares may be less valuable because a return on your investment
will only occur if the trading price of our securities appreciates. Further, you should not rely on an investment in us if you require
dividend income from your investments.
If securities or industry analysts do not publish
research or reports about us or our business or publish unfavorable research about us or our business, the price of our securities and
their trading volume could decline.
The trading market for our securities will depend in part on the
research and reports that securities or industry analysts publish about us or our business. We currently have limited research coverage
by securities and industry analysts. If one or more of the analysts who covers us downgrades our securities, the price of our securities
would likely decline. We do not have control over these analysts and we do not have commitments from them to continue to write research
reports about us or our business. The price of our ordinary shares could decline if one or more equity research analysts downgrade our
ordinary shares or if those analysts issue other unfavorable commentary or cease publishing reports about us or our business.
40
Our stock price has and may be subject to fluctuation,
and purchasers of our securities could incur substantial losses.
Our stock price has been subject to considerable fluctuation since
our initial public offering in February 2015, with the closing price per share having varied from a low of $0.264 to a high of $70.56,
and may be subject to fluctuation in the future. The stock market in general has experienced extreme volatility that has often been unrelated
to the operating performance of particular companies. As a result of this volatility, investors may not be able to sell their securities
at or above the purchase price. The market price for our ordinary shares on the Nasdaq Capital Market may fluctuate as a result of a number
of factors, some of which are beyond our control, including, among others:
| • |
we may not be able to develop C-Scan at the rate or to the stage we desire; |
| • |
inability to obtain the approvals necessary to commence further clinical trials; |
| • |
unsatisfactory results of clinical trials; |
| • |
announcements of regulatory approval or the failure to obtain it, or specific label indications or patient populations for its use,
or changes or delays in the regulatory review process; |
| • |
any intellectual property infringement actions in which we may become involved; |
| • |
announcements concerning our competitors or the medical device industry in general; |
| • |
achievement of expected product sales and profitability or our failure to meet expectations; |
| • |
our commencement of, or involvement in, litigation; |
| • |
any major changes in our board of directors or management; |
| • |
legislation in the United States relating to the sale or pricing of medical device; |
| • |
future substantial sales of our ordinary shares; |
| • |
changes in earnings estimates or recommendations by securities analysts, if our ordinary shares are covered by analysts; |
| • |
the trading volume of our ordinary shares; or |
| • |
natural disasters and political and economic instability, including wars, terrorism, political unrest, results of certain elections
and votes, emergence of a pandemic, or other widespread health emergencies (or concerns over the possibility of such an emergency, including
for example, the COVID-19 pandemic), boycotts, adoption or expansion of government trade restrictions, and other business restrictions.
|
In addition, the stock market in general, and Nasdaq Stock Market
in particular, have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating
performance of small companies. Broad market and industry factors may negatively affect the market price of our ordinary shares, regardless
of our actual operating performance. Further, a systemic decline in the financial markets and related factors beyond our control may cause
our share price to decline rapidly and unexpectedly.
The trading market for our ordinary shares
is not always active, liquid and orderly, which may inhibit the ability of our shareholders to sell ordinary shares.
Since our initial public offering in February 2015, the trading
market for our ordinary shares has not always been active, liquid or orderly. The lack of an active market at times may impair your ability
to sell your shares at the time you wish to sell them or at a price that you consider reasonable. The lack of an active market may also
reduce the fair market value of your shares. An inactive market may also impair our ability to raise capital by selling shares.
41
We recently amended our articles of association
to increase our authorized share capital. There are certain risks associated with this increase.
In December 2020, our shareholders approved an increase to our
authorized share capital and to amend our Articles of Association accordingly. As a result, our authorized and registered share capital
is NIS 864,000,000 divided into 360,000,000 ordinary shares, nominal (par) value NIS 2.40 each. The increase of our authorized share capital
is designed to enable us to have sufficient authorized share capital that would allow us to meet our future business needs as they arise.
These needs could include, among other things, the sale of shares in public and private offerings to raise additional capital, the purchase
of property or assets, the use of shares for various equity compensation and other employee benefit plans and arrangements, the declaration
of share splits, and other bona fide corporate purposes. The possible future issuance of equity securities consisting of ordinary shares
or securities convertible into ordinary shares could affect our current shareholders in a number of ways, including the following: (i)
diluting the voting power of the current holders of ordinary shares; (ii) diluting the market price of the ordinary shares, to the extent
that the new ordinary shares are issued and sold at prices below current trading prices of the existing ordinary shares, or if the issuance
consists of equity securities convertible into ordinary shares, to the extent that the securities provide for the conversion into ordinary
shares at prices that could be below current trading prices of the ordinary shares; and (iii) diluting the book value per share of the
outstanding ordinary shares. Furthermore, the authorized shares could, in theory, also be used to resist or frustrate a third-party transaction
that is favored by a majority of the independent shareholders (for example, by permitting issuances that would dilute the share ownership
of a person seeking to effect a change in the composition of our board of directors or management or contemplating a tender offer or other
transaction for the combination of our company with another company).
We have broad discretion in how we use the
net proceeds from our financings, and we may not use these proceeds effectively.
Our management has broad discretion as to the application of the
net proceeds of our financings. Our shareholders may not agree with the manner in which our management chooses to allocate and spend the
net proceeds. Moreover, our management may use the net proceeds for corporate purposes that may not increase our profitability or our
market value.
We are currently operating in a period of economic uncertainty and
capital markets disruption, which has been significantly impacted by geopolitical instability due to the ongoing military conflict between
Russia and Ukraine. Our business, financial condition and results of operations may be materially adversely affected by any negative impact
on the global economy and capital markets resulting from the conflict in Ukraine or any other geopolitical tensions.
U.S. and global markets are experiencing volatility and disruption
following the escalation of geopolitical tensions and the start of the military conflict between Russia and Ukraine. On February 24, 2022,
a full-scale military invasion of Ukraine by Russian troops was reported. Although the length and impact of the ongoing military conflict
is highly unpredictable, the conflict in Ukraine could lead to market disruptions, including significant volatility in commodity prices,
credit and capital markets. Additionally, Russia’s prior annexation of Crimea, recent recognition of two separatist republics in
the Donetsk and Luhansk regions of Ukraine and subsequent military interventions in Ukraine have led to sanctions and other penalties
being levied by the United States, European Union and other countries against Russia, Belarus, the Crimea Region of Ukraine, the so-called
Donetsk People’s Republic, and the so-called Luhansk People’s Republic, including agreement to remove certain Russian financial
institutions from the Society for Worldwide Interbank Financial Telecommunication (SWIFT) payment system. Additional potential sanctions
and penalties have also been proposed and/or threatened. Russian military actions and the resulting sanctions could adversely affect the
global economy and financial markets and lead to instability and lack of liquidity in capital markets, potentially making it more difficult
for us to obtain additional funds. Any of the abovementioned factors could affect our business, prospects, financial condition, and operating
results. The extent and duration of the military action, sanctions and resulting market disruptions are impossible to predict, but could
be substantial. Any such disruptions may also magnify the impact of other risks described in this Annual Report on Form 20-F.
Risks Related to Taxation
There is a risk that we could be treated as
a domestic (U.S.) corporation for U.S. federal income tax purposes by reason of the transactions related to our acquisition of all of
the business operations and substantially all of the assets of Check-Cap LLC on May 31, 2009, or the Reorganization.
Section 7874(b) of the Internal Revenue Code of 1986, as amended,
or the Code, generally provides that a foreign corporation (i.e., a corporation created or organized under the laws of a jurisdiction
outside of the United States) would be treated as a domestic (U.S.) corporation for U.S. federal income tax purposes if, pursuant to a
plan or a series of related transactions, (1) the foreign corporation acquires, directly or indirectly, substantially all of the assets
of a domestic corporation (or substantially all of the properties constituting a trade or business of a domestic partnership), (2) after
the acquisition, the former shareholders of the acquired corporation by reason of holding shares of the acquired corporation (or, in the
case of an acquisition with respect to a domestic partnership, the former partners of the domestic partnership by reason of holding a
capital or profits interest in the domestic partnership) own at least 80% of the stock (by vote or value) of the acquiring corporation,
and (3) after the acquisition, the expanded affiliated group that includes the acquiring corporation does not have substantial business
activities in the foreign country in which, or under the laws of which, the acquiring corporation is created or organized when compared
to the total business activities of such expanded affiliated group. On the basis of analysis of the relevant facts and circumstances and
the relevant law (including the temporary regulations under Section 7874 applicable at the time of the Reorganization), it was determined
that the third condition described in the preceding sentence was not met with respect to the Reorganization and, therefore, that the inversion
tax rules of Section 7874(b) would not apply to treat us as a domestic corporation for U.S. federal income tax purposes. However, since
this determination was made on the basis of all of the relevant facts and circumstances, and it is not clear which facts and circumstances
the Internal Revenue Service, or the IRS, may consider more important than others, this conclusion is not free from doubt.
42
If Section 7874(b) were to apply to the Reorganization (and we
were to be treated as a domestic corporation for U.S. federal income tax purposes), then, among other things, (i) we would be subject
to U.S. federal income tax on our worldwide taxable income (if and when we have taxable income); (ii) certain payments (e.g., interest
and dividends) that we make (or have made) to our foreign investors may be (or may have been) subject to U.S. withholding taxes; (iii)
we may be subject to significant penalties for the failure to file certain tax returns and reports, including reports with respect to
our foreign bank accounts; and (iv) the U.S. unitholders of Check-Cap LLC would not have been subject to U.S. federal income tax on royalties
that are deemed to be paid to them under Section 367(d) of the Code as a result of the Reorganization. As discussed under Item 5B “Operating
and Financial Review and Prospects – Liquidity and Capital Resources – Application of Critical Accounting Policies and Estimates
– Royalties provision – Reimbursement liability to Check-Cap LLC unitholders,” as part of the Reorganization, we committed
to reimburse the unitholders of Check-Cap LLC for any tax burdens that may be imposed on them due to the Reorganization, including royalties
that are deemed to be paid to the U.S. unitholders under Section 367(d) of the Code.
Prospective investors are urged to consult their own advisors on
these issues. The balance of this discussion, including the discussion under Item 10E “Additional Information – Taxation –
U.S. Federal Income Taxation,” assumes that we will be and have been treated as a foreign corporation for U.S. federal income tax
purposes.
We may be eligible for tax benefits from government
programs, which require us to meet certain conditions, including regarding the location of our property, plant and equipment and manufacturing
in Israel. We can provide no assurance that we would continue to be eligible for such benefits and/or that any such benefits will not
be terminated in the future.
Our manufacturing facilities in Israel may qualify as a “Benefited
Enterprise” under the Israeli Law for Encouragement of Capital Investments, 5719-1959, which would entitle us to receive certain
tax benefits. In order to be eligible for such benefits, we would be required to meet certain conditions, including the making of a minimum
capital investment in our productive assets and the carrying on of a required portion of our manufacturing in Israel. The amount of the
benefit will be determined in accordance with various conditions, including the location of our property, plant and equipment and the
location of certain of our sub-contractors. If we cease to meet the required conditions for eligibility, the tax benefits could be cancelled
and we could be required to pay increased taxes or to refund the amounts of the benefits received with interest and penalties. We can
provide no assurance as to the amount of future capital investment in our productive assets, our future manufacturing location and the
future location of our property, plant and equipment and certain of our sub-contractors, and therefore, we cannot provide assurance that
we will be eligible for such tax benefits or assurance as to the amount of such tax benefits. Even if we continue to meet the relevant
requirements, the tax benefits that Benefited Enterprises receive may not be continued in the future at their current levels or at all.
If these tax benefits were reduced or eliminated, the amount of taxes that we would be required to pay would likely increase, as all of
our operations would consequently be subject to corporate tax at the standard rate, which could adversely affect our results of operations.
See Item 10E “Additional Information—Taxation—Israeli Tax Considerations and Government Programs—Law for the Encouragement
of Capital Investments, 5719-1959” for additional information concerning these tax benefits.
There is a risk that we may be classified as
a passive foreign investment company, or PFIC, which could result in adverse U.S. federal income tax consequences to U.S. investors.
In general, we will be treated as a passive foreign investment
company, or a PFIC, for any taxable year in which either (1) at least 75% of our gross income (including our pro rata share of the gross
income of our 25% or more- owned corporate subsidiaries) is passive income or (2) at least 50% of the average value of our assets (including
our pro rata share of the assets of our 25% or more-owned corporate subsidiaries) is attributable to assets that produce, or are held
for the production of, passive income. Passive income generally includes dividends, interest, rents, royalties, and gains from the disposition
of passive assets. If we are determined to be a PFIC for any taxable year (or portion thereof) that is included in the holding period
of a U.S. Holder (as defined in Item 10E “Additional Information—Taxation—U.S. Federal Income Taxation—General”)
of our securities, the U.S. Holder may be subject to increased U.S. federal income tax liability upon a sale or other disposition of our
securities or the receipt of certain excess distributions from us and may be subject to additional reporting requirements. We believe
that we were a PFIC for the taxable year ended December 31, 2021 and may be a PFIC for the taxable year ending December 31, 2022. Our
actual PFIC status for our current taxable year or any subsequent taxable year is uncertain and will not be determinable until after the
end of such taxable year. Accordingly, there can be no assurance with respect to our status as a PFIC for our taxable year ending December
31, 2022 or any subsequent taxable year.
U.S. investors are urged to consult their own tax advisors regarding
the possible application of the PFIC rules. For more information, see Item 10E “Additional Information—Taxation—U.S.
Federal Income Taxation—U.S. Holders—Passive Foreign Investment Company Rules.”
43
ITEM 4. INFORMATION
ON OUR COMPANY
| A. |
History and Development of the Company |
Our History
Our legal and commercial name is Check-Cap Ltd. We were formed
as a company in Israel on April 5, 2009. On May 31, 2009, we acquired all of the business operations and substantially all of the assets
of Check-Cap LLC, a Delaware limited liability company formed in December 2004. On May 15, 2015, we formed our wholly-owned subsidiary
Check-Cap US, Inc., a Delaware corporation.
On February 24, 2015, we successfully completed an initial public
offering in the United States and the listing of our securities on the Nasdaq Capital Market.
We are subject to the provisions of the Israeli Companies Law.
Our principal executive offices are located at Check-Cap Building, 29 Abba Hushi Avenue, P.O. Box 1271, Isfiya, 3009000, Israel. Our telephone
number is +972-4-8303400 and our website is located at www.check-cap.com (the information
contained therein or linked thereto shall not be considered incorporated by reference in this Annual Report). Our U.S. agent is Puglisi
& Associates, located at 850 Library Avenue, Suite 204, Newark, Delaware 19711.
We use our website (http://www.check-cap.com)
as a channel of distribution of company information. The information we post through this channel may be deemed material. Accordingly,
investors should monitor our website, in addition to following our press releases, SEC filings and public conference calls and webcasts.
The contents of our website are not, however, a part of this Annual Report.
Principal Capital Expenditures
For a discussion of our capital expenditures, see Item 5 “Operating
and Financial Review and Prospects—Liquidity and Capital Resources.”
| B. |
Business Overview |
Our Company
We are a clinical stage medical diagnostics company aiming to redefine
CRC screening through the introduction of C-Scan®, the first and only patient-friendly preparation-free test designed to detect polyps
before they may transform into cancer to enable early intervention and cancer prevention.
The disruptive capsule-based screening technology aims to increase
screening adherence worldwide and enable millions of people to stay healthy. The system utilizes ultra-low-dose X- rays to scan the inner
lining of the colon for precancerous polyps, and other structural abnormalities. CRC is the third most commonly diagnosed cancer, with
more than 1.9 million new cases identified every year globally. Nearly 935,000 deaths occur annually worldwide as a result of CRC. While
approximately 0.5% of the average-risk screening population presents with cancerous polyps in the colon and rectum at any given time,
approximately 25% of the same population presents with benign polyps that could potentially turn into cancer over time. It can take up
to 10 years before a pre-cancerous polyp develops into invasive cancer. As such, there is a crucial detection window for the prevention
of colorectal cancer, through the detection of these benign polyps. While routine screening is recommended by The American Cancer Society
for healthy people aged 45 years and older, screening adherence remains low. Currently, colonoscopy is the gold standard for the detection
of colorectal polyps, but about 1 in 3 adults among the targeted screening population avoids having a colonoscopy in the U.S., and adherence
in other regions of the world such as Europe and Asia is even lower, due to the invasiveness of the procedure and bowel preparation. Most
patient-friendly CRC screening tests currently available, or poised to enter the market, such as fecal or liquid biopsy tests, are primarily
designed to detect cancer and demonstrate low sensitivity in detecting pre-cancerous polyps. As such, they do not necessarily provide
patients with the time window to pre-empt the disease. C-Scan is non-invasive and requires no preparation or sedation, allowing the patients
to continue their daily routine with no interruption as the capsule is propelled through the gastrointestinal tract by natural motility.
C-Scan is comprised of three main components: (1) C-Scan Cap, an ingestible X-ray scanning capsule; (2) C-Scan Track, three miniaturized
patches worn on the patient’s back for integrated positioning, control and data recording; and (3) C-Scan View, a proprietary software
to process and represent 2D and 3D maps of the inner surface of the colon. We believe that this solution has the potential to become an
alternative for both physicians and patients and to increase the number of people completing CRC screening.
44
Our C-Scan Cap is swallowed and propelled by natural motility through
the gastrointestinal tract and excreted naturally with no need for retrieval for data collection. Unlike other existing CRC screening
methods, this process should not disrupt a patient’s normal activities or require fasting. Our C-Scan Cap employs ultra-low-dose
X-rays, which allow the C-Scan system to scan the interior lining of the colon even when surrounded by intestinal content. As such, we
believe that patients using C-Scan will not be required to undergo any prior bowel preparation.
Our C-Scan Cap is being designed to transmit position, motility
and the data it collects to the C-Scan Track that will be worn on the patient’s back. The external data recorder is being designed
to enable the download of the data to our C-Scan View application to allow physicians to analyze the data collected by our C-Scan Cap.
The C-Scan Track is being designed to provide the physician with localization data aligned with a reconstructed image. We intend for physicians
to be able to review the colon’s inner structural information.
Colonic polyps are tissue growths that occur on the lining of the
colon. Polyps in the colon are common, and certain types of polyps may become cancerous over time. In the event that polyps are identified
by C-Scan, the patient may be advised to undergo a subsequent traditional colonoscopy procedure to examine, remove and biopsy the polyps.
For those patients who require a subsequent colonoscopy, concerns regarding pain, discomfort and embarrassment may still remain. We do
not, however, believe that these concerns will make the use of C-Scan any less attractive to physicians and patients. Although patients
who are initially screened utilizing a traditional colonoscopy could avoid the need for a second colonoscopy if polyps are discovered,
we believe that C-Scan will still be attractive to physicians and patients who object to or cannot undergo a colonoscopy as a large number
of these patients if screened will not require a subsequent colonoscopy and those found with suspicious findings, will likely agree to
undergo colonoscopy.
We initiated our first clinical studies in 2010, consisting of
two single-center feasibility studies with non-scanning (no X-ray source) capsules for the purposes of measuring gastrointestinal tract
activity, colon contractions and associated capsule motility, and shortening capsule transit time.
In 2013, we initiated a multi-center prospective clinical feasibility
study, designed to allow for the recruitment of 100 subjects, to establish clinical proof of concept, safety and functionality of C-Scan
in patients eligible for CRC screening. Analysis conducted on the first 66 capsules swallowed by participants showed that 65 of 66 capsules
swallowed were naturally eliminated, without major or minor side effects, after 62±40.7 hours. The average calculated radiation exposure
was 0.06 ± 0.04 mSv (similar to a single chest radiograph). Both pedunculated and sessile polyps were detected in several patients
and validated later by colonoscopy.
In September 2017, we completed a multi-center study of C-Scan
in support of CE Mark submission. The objective of the study was to assess safety and the clinical performance of C- Scan in detecting
patients with polyps. The three-center trial enrolled 66 patients, with a mean age of 59 years. Following capsule ingestion, subjects
swallowed small doses of contrast agent and fiber supplements with each meal throughout capsule passage. Average capsule transit time
was 52±32 hours, and the average total X-ray dose was 0.05 mSv (CT colonography effective dose is ~ 6.0 mSv). No bowel preparation,
sedation, or change in diet was required. Both confirmatory colonoscopy, performed by an independent investigator, and C-Scan review,
performed by a central review group, were blinded to results. The study demonstrated a 44% sensitivity in the 45 subjects included in
the analysis for polyps, with specificity (ability to correctly identify lack of polyps) of 89%. Sensitivity strongly correlated (R-squared
= 0.98) to the percentage of the colon scanned. Sensitivity was 78% (p<0.05) and 100% (p<0.05) for subjects where greater than 50%
and 70% of the colon was scanned, respectively. Specificity was consistent for all subjects.
45
In the fourth quarter of 2017, we initiated an interim clinical
study for the purpose of introducing an advanced version of C-Scan, Version 3, which incorporated the then latest algorithms and system
optimization and tailored scanning of the colon to the patient’s natural colonic movements to maximize the amount of the colon that
is tracked and imaged. In March 2018, we announced results from the interim study. Evaluable results of 21 patients showed average colon
imaging coverage of 64%, a 40% improvement over 46% average colon imaging coverage in the multi-center study. Sensitivity was 78% (p<0.05)
for subjects with greater than 50% colon imaging coverage and 100% (p<0.05) for subjects with greater than 70% colon imaging coverage.
Specificity was consistent at around 89%.
Following our certification to ISO 13485:2016 by our Notified Body,
and completion of our multi-center clinical study and achievement of compliance with the requirements of the Medical Devices Directive,
in September 2017, we submitted a request for CE marking for the marketing and sale of C-Scan in the European Union. We received the CE
Mark certification from our notified body (DEKRA - 0344) on January 9, 2018. In September 2018, we received approval from AMAR for the
marketing and sale of C-Scan in Israel. Following the approval we received from our notified body according to the EU Regulation 2017/745,
the AMAR approval was renewed and is valid until December 31, 2022.
During the first quarter of 2018, we initiated a multi-center,
open label, home monitoring, prospective study designed to determine the performance characteristics of C-Scan system Version 3, for detecting
pre-cancerous polyps compared with the fecal immunochemical test (FIT), in each case using colonoscopy as the reference method, for the
purpose of collecting additional evidence of clinical effectiveness and clinical utility to support market adoption. The study included
90 evaluable patients who either had known polyps or were considered to be of average risk. Each patient ingested a C-Scan capsule and
also underwent a FIT and a comparative colonoscopy performed by independent gastroenterologists, who were blinded to the corresponding
test’s results. The C-Scan clinical evaluation was obtained using the evaluable patient population implementing a gender-based motility
analysis and the results of both C-Scan and FIT were compared to colonoscopy. The primary efficacy endpoint of the study was sensitivity
(ability to correctly identify patients with polyps) and specificity (ability to correctly identify patients with lack of polyps) of the
C-Scan system compared to FIT in detecting subjects with polyps ≥10 mm. In July 2019, we announced final results from our post-CE
approval study. The results demonstrate that C-Scan achieved a sensitivity of 76% (p=0.0005) in patients with polyps ≥10 mm, while
FIT achieved a sensitivity of 29% (p=0.005) in patients with polyps ≥10 mm. C- Scan achieved a specificity of 82% in all patients,
while FIT achieved a specificity of 96% in all patients. In addition, C-Scan detected all 4 patients (100%) with polyps ≥40 mm,
while the FIT detected only 1 of the 4 patients (25%) with polyps ≥40mm. Overall, C-Scan achieved a sensitivity of 66% (p=0.01)
in all patients, including patients with polyps <10mm, while FIT achieved a sensitivity of 23% (p<0.0001) in all patients, including
patients with polyps <10mm. In total, 142 patients enrolled in the study and after factoring in technical and physiological dropouts
and protocol violations, the number of evaluable patients was 90. No serious adverse events were reported, and the adverse events were
mild in severity.
We conducted pre-submission meetings with the FDA during the period
of December 2016 and February 2017 for the purpose of receiving feedback on the regulatory pathway for our system in the United States.
We also sought feedback on a proposed protocol for a feasibility or pilot study, the primary purposes of which is to establish the safety
of the C-Scan system and evaluate user compliance and satisfaction. In December 2018, we received from the FDA conditional approval of
our IDE application to initiate a U.S. pilot study of C-Scan and received final approval from the FDA in February 2019.
In April 2019, we initiated the U.S. pilot study of C-Scan. The U.S. pilot study (NCT03735407
) was a prospective, multi-center, open label, single arm study was designed to evaluate the safety, usability and subject compliance
of the C-Scan system. The study included 28 evaluable patients, more than two thirds of whom were considered to be of average risk for
colorectal cancer. Each patient ingested a C-Scan capsule and also underwent a fecal immunochemical test (FIT) as well as a comparative
colonoscopy, which was performed by an independent gastroenterologist who was blinded to the corresponding test results. The study was
performed at two sites, the NYU Grossman School of Medicine and Mayo Clinic, Rochester. The primary endpoint of the study was to evaluate
the incidence of device or procedure related serious adverse events. Secondary endpoints included patient compliance, subject satisfaction
and device and procedure related performance. Due to sample size, the study was not designed to be powered for statistical significance.
In December 2019, we announced the results of the study. No device or procedure related serious adverse events (SAEs) were reported and
all device or procedure related adverse events were mild in severity. In total, 45 patients enrolled in the study, of which 40 patients
underwent the study procedure. 39 patients complied with the procedure and completed a questionnaire following the procedure and reported
higher satisfaction with the C-Scan System procedure compared to colonoscopy. A total of 28 patients were evaluable after factoring in
technical and physiological dropouts and protocol violations. Analysis of the evaluable patient results revealed agreement between C-Scan
and colonoscopy in detection of polyps was consistent with data from the post-CE approval study.
46
We continue to optimize C-Scan’s functionality and patient experience
in preparation for our planned pivotal study in the United States by additional clinical data collection at Israeli sites through the
enrollment of up to 400 patients at 10 or more sites, using an advanced C-Scan version, which incorporates mainly advanced algorithms,
improved detection and reduced energy consumption. During the current study in Israel, we continue to enroll both average risk and high-risk
patients (e.g., “enriched population”). Following pivotal initiation, we intend to shift to enrollment of average risk population
while performing calibration in Israel in parallel to the conducting of the first stage of the pivotal study in the U.S. This is intended
to allow for readiness towards our second stage in the pivotal study, anticipated in the fourth quarter of 2022.
In November 2020, we finalized our proposed pivotal design and
submitted our IDE to the FDA and in March 2021, our IDE was approved.
In January 2021, we submitted to the FDA an amended IDE application
to amend the study design to add a first part to the trial that is designed to enable further calibration of the system, specifically
for the average risk U.S. population and in February 2022, our IDE amended application was approved. The U.S. pivotal study consists of
two parts. The first part is designed to enable further calibration of the system for the average risk U.S. population. The second part
will include a statistically powered, randomized study which will compare the performance of C-Scan to traditional colonoscopy. We anticipate
beginning the first part of the U.S. pivotal study in April 2022, and the second part of the pivotal study in the fourth quarter of 2022.
The goal of the pivotal study in the United States is to (i) demonstrate device safety as evidenced by a lack of device-related serious
adverse events; and (ii) provide efficacy data concerning C-Scan’s performance.
Following and subject to the successful completion of our pivotal trial
and available capital, our current strategy is to submit a direct de novo reclassification petition, which we anticipate submitting in
in early 2024, for FDA approval for the marketing of C-Scan in the United States. Direct de novo reclassification typically takes at least
9 to 12 months from filing to clearance if there are no comments or disapproval from the FDA. If the FDA determines that C-Scan is not
a candidate for de novo reclassification, it will require approval of the device for market through the PMA process. The PMA pathway is
much more costly and uncertain than the 510(k) clearance process or de novo reclassification, and generally takes at least 12 to 18 months,
or even longer, from the time the application is filed with FDA to ultimate approval if there are no comments or disapproval from the
FDA.
Since our formation, we have not generated any revenue. We do not
anticipate generating any significant revenue for the foreseeable future and we do not yet have any specific launch dates for our product.
We incurred net losses of $17.2 million in 2021, $13.8 million in 2020 and $13.8 million in 2019. As of December 31, 2021, we had an accumulated
deficit of $108.2 million and a total shareholders’ equity of $50.7 million.
Our Solution
CRC screening can reduce the incidence of and mortality from the disease
by enabling detection of precancerous polyps in the colon at an earlier, more treatable stage. CRC is one of the few cancers that can
be prevented through screening because pre-cancerous polyps, from which colon cancers often develop, can be identified and removed. Today,
there is a range of options for CRC screening in the average-risk population, with current technology falling into two general categories:
(i) structural exams that enable physicians to visualize the colon for abnormalities, such as optical colonoscopy (which is currently
regarded as the “gold standard” for CRC screening), sigmoidoscopy, CTC and optical capsules. All such exams require aggressive
bowel preparation and are invasive exams; and (ii) stool and serum based tests, such as FOBTs, FITs, stool DNA, and blood tests, which
test for blood in stool and irregularities in blood and DNA. Notwithstanding the many CRC screening alternatives and despite the fact
that the tests are encouraged by clinicians and insurers and the proven clinical value of screening for CRC, a large portion of the population
is still reluctant to perform CRC screening.
47
C-Scan is designed to enable early detection of precancerous polyps
while providing a patient friendly solution without requiring any colon cleansing. The purpose of C-Scan is to detect colorectal polyps
in subjects who, based on demographics and medical history factors, are considered average risk for CRC. If polyps are detected, the patient
is elevated to high risk for CRC, which studies have shown increases the adherence of patients to undergo a colonoscopy procedure. If
a positive result is obtained through the C-Scan, the patient should be referred to colonoscopy.
Although C-Scan utilizes radiation that is on average of 0.05 mSv,
we believe that the potential risks associated with such radiation exposure are low compared to the potential risks associated with other
procedures such as perforation, bleeding or sedation related effects (optical colonoscopy and sigmoidoscopy) and dehydration and damage
to kidneys. Unlike FOBTs, FITs and stool DNA tests, our capsule-based imaging modality generates structural information on the colon,
which could assist in the detection of pre-cancerous polyps. We therefore do not believe that the ultra-low-dose radiation in our capsule
will make C-Scan less attractive to physicians and patients than other less-effective products that do not employ any radiation.
The Radiation Safety Division of the Soreq Nuclear Research Center
found, as set forth in its report of November 2010 that was prepared at our request and based on the information provided by us and the
relevant methods and principles known at such time, or the Report, that the radiation dose to the patient in the proposed screening procedure
utilizing the scanning device developed by us at that time in routine operation and normal conditions is low relative to the radiation
dose involved in conventional imaging procedures using X-rays (such as fluoroscopy and CT) and is also low when compared to the radiation
dose involved in established screening procedures such as mammography, all as more fully described in the Report In addition, Michael
S. Gossman, M.S., DABR, FAAPM, FACR, the Chief Medical Physicist in Radiation Oncology and Radiation Safety Officer, Regulation Directive
Medical Physics, concluded, as set forth in his report dated November 14, 2018 that was prepared at our request and submitted to the FDA
in connection with the IDE application for the U.S. pilot study, following analysis of both normal capsule transit and extreme conditions,
that C-Scan is radiation dose safe for medical diagnostics and exposes patients to very low dose radiation during normal operation and
that even in extreme and unlikely scenarios, patient exposure to radiation is unlikely to cause severe harm to patients undergoing the
C-Scan procedure.
We believe that gastroenterologists will adopt our technology and
recommend the use of our capsule. This may increase the number of people undergoing CRC screening and may encourage more people with polyps
to undergo a polypectomy – a therapeutic procedure during which polyps are removed.
Our goal is to become a leading supplier of CRC screening technology
and to establish our technology as a leading CRC screening method. Key elements of our strategy include:
| • |
seeking to obtain regulatory approvals for the sale of C-Scan in the United States; |
| • |
enter into partnerships in the future when strategically attractive, including potentially with major medical device companies;
|
| • |
obtaining government and private third-party reimbursement for our technology; |
| • |
improving and enhancing our existing technology portfolio and developing new technologies; and |
| • |
successfully marketing our product to establish a large customer base, primarily in the U.S. |
48
Our Technology
Our technology is based on an ingestible capsule (C-Scan Cap),
which is swallowed by the patient and propelled by natural motility through the gastrointestinal tract. Our capsule transmits information
to a receiving device (C-Scan Track) worn on the patient’s body that stores the information for off-line analysis. Our C-Scan Cap
consists of an X-ray source and several X- ray detectors. The X-ray source is contained in a rotating radiation shield, enabling the generation
of 360-degree angular scans. The collection of successive angular scans is intended to enable the virtual reconstruction of a portion
of the colon’s inner surface. During movement of our capsule longitudinally through the colon, successive images of portions of
the colon enable the three-dimensional reconstruction of the colon. C-Scan is also intended to enable structural identification of polyps,
and masses, which protrude inward into the colon, through the detection of irregularities in the topography of the colon’s inner
surface.
C-Scan is intended to be prescribed to patients by physicians.
Prior to capsule ingestion, patients will swallow 15ml of iodinated oral contrast medium, combined with oral fiber, and continue to do
so in order to enhance the contrast of the colon surface. The capsule is propelled by natural motility through the gastrointestinal tract.
During transit, information is transmitted to the C-Scan Track, which stores the information for off-line analysis. After our C-Scan Cap
is expelled from a patient’s body, the C-Scan Track data will be downloaded into our workstation (C-Scan View) through which physicians
will utilize our data viewer software application to analyze the data collected by C-Scan. Our proprietary software is being designed
to process the data and produce a two and three-dimensional visualization of the colon’s inner surface. A physician will then analyze
the visualization to determine whether any anatomical anomalies are present on the inner surface of the colon.
C-Scan consists of the following three main subsystems that together
enable the generation of high-resolution 3D imaging of the colon’s inner surface, further described below: (i) an ultra-low-dose
X-ray based colon scanning capsule (C-Scan Cap); (ii) C-Scan Track; and (iii) a PC-based standalone application (C-Scan-View).
The C-Scan system enables a patient-friendly, preparation free
and painless evaluation of colorectal abnormalities. Using the C-Scan system, suspicious findings that may be colorectal polyps can be
identified, thus assisting the physician in deciding to elevate the patient to high risk category and refer the patient to a colonoscopy
procedure. Studies have shown that the adherence of an elevated-risk patient to undergo a colonoscopy procedure is higher than that of
an average risk patient.
The C-Scan system provides information for the physician, enabling
him to make a “YES / NO” decision for suspected presence of polyps in the colon, based on the premise that the presence of
polyps in the colon is associated with the potential development of CRC. The C-Scan system is intended to be used as a preliminary tool
to assist in the detecting of subjects who are at elevated risk for polyps and thus may increase the adherence of those subjects to undergo
colonoscopy.
The C-Scan system is designed to evaluate the presence of polyps,
without the need for fasting and prior bowel cleansing, through identifying suspects in the human colon supported by physiological data,
such as measured transit time of the capsule through the GI tract.
49
The C-Scan system presented in Figure 1 includes three main units,
C-Scan Cap, C-Scan Track and C-Scan View. The C-Scan procedure steps are illustrated in Figure 2. The C-Scan Track is attached to the
patient’s back, after which, the patient ingests the C-Scan capsule. The capsule starts moving through the patient’s gastrointestinal
system until it reaches the colon where it starts scanning the colon walls and transmitting the acquired data to the C-Scan Track. Following
the natural excretion of the capsule, the patient returns the C-Scan Track to enable data loading and analysis using C-Scan View. The
analysis report includes an indication of either “NO- Average Risk” in cases where no suspicious findings were identified
or “YES- Elevated Risk” in cases where suspicious findings were identified. An operational block diagram is presented below
in Figure 4.
Figure 1: Illustration of C-Scan system units
Figure 2: Illustration of C-Scan system procedure
C-Scan Cap
C-Scan Cap is an X-ray scanning capsule, which enables detection
of suspected polyps. C-Scan Cap is ingested by the patient and propelled by peristalsis, natural motility, it passes through the gastrointestinal
tract and is excreted naturally, with either no need for retrieval or required retrieval of the capsule, depending on the local agency
guidance.
C-Scan Cap is designed to measure, collect and transmit structural
information, and is comprised of the following components:
| • |
X-ray Source – Including radioactive material sealed in a cylindrical housing. |
| • |
Collimator – Radiation shield around the source, which absorbs most of the radiation. Several radial holes enable emission
of radiation in defined directions. |
| • |
X-ray Sensor – Comprised of several solid state X-ray detectors for measuring the scattered radiation intensity. |
| • |
Tilt Sensor – Indication of capsule motion (3D acceleration). |
| • |
Rotation Motor – For rotating the collimator and X-ray Source. |
| • |
Compass sensor – Indication of true north (reference coordinate system). |
| • |
Pressure sensor – indicating the hydrostatic pressure inside the colon. |
| • |
Source Concealment Mechanism – Conceals the source inside the radiation shield. |
| • |
R-T – Radio frequency transceiver device to communicate with the receiver. |
50
| • |
Batteries – Electrical power supply for the capsule. |
| • |
Memory – Data storage. The capsule should be able to store up to an hour of measured data. |
| • |
C-Scan Track Coil – Transmits a continuous electromagnetic field utilized by an external localization system to track 3D position.
|
Image for illustration purpose only
Figure 3: C-Scan Cap
C-Scan Track
C-Scan Track is a small, disposable system attached to the patient’s
back via biocompatible adhesive skin patches. C-Scan Track communicates with the C-Scan Cap and enables data download for analysis purposes.
Both the C-Scan Track and C-Scan Capsule are equipped with an electromagnetic capability allowing for capsule position and orientation
estimations through the C-Scan Track. A dedicated scan control algorithm (SCA) identifies the C-Scan Cap’s movements in the colon
and, accordingly, commands the C-Scan Cap when to perform a scan. C-Scan Track also measures the transit time from capsule ingestion to
excretion through radio frequency communication to a non-volatile memory device, and enable data retrieval, through either wired or wireless
communication, to an external processor.
The C-Scan Track is comprised of the following components:
| • |
Sticker Housings – Biocompatible and water-resistant stickers and housing integrating all functional components, attached to
the patient’s back, enabling approximately five days of continuous operation. |
| • |
Recorder – Consists of receiver electronics embedded software and nonvolatile memory. |
| • |
Antennas – Radio frequency antennas are embedded into the sticker housings and used to communicate with the capsule.
|
| • |
Activation/Deactivation Circuit – Used to activate/deactivate the C-Scan Track through a specialized protocol. |
51
| • |
UI Indicators – Provides user with vocal and vibration indication as required. |
| • |
PCB – Electronics’ printed circuit boards. |
| • |
Microcontroller – Runs embedded software, logic that manages the C-Scan Track and SCA. |
| • |
RF Transceivers – Several transceivers used to communicate with the capsule. |
| • |
TILT/Compass Sensors – To determine the patient’s body movements. |
| • |
Batteries – Electrical power supply for the C-Scan Track. |
| • |
Memory – Non-volatile data storage to store data acquired by the system. |
Image for illustration purpose only
C-Scan View
The C-Scan View software is a client/server-based application that
enables procedure data download from the C-Scan Track, data analysis and report generation. The C-Scan View’s main functions are:
| • |
Load and display procedure information and data; |
| • |
Image review, enabling the user to view structural information of the colon wall; |
| • |
Produce procedure report; and |
| • |
Store procedure results on server. |
The data from the C-Scan Track is loaded and processed to create
a reconstruction model of the colon wall, which is displayed in the C-Scan View as structural information of the colon wall, as well as
Whole-Gut-Transit-Time (WGTT) data. The data is analyzed by a team that includes expert analysts, who review the structural information
to identify suspicious findings that are protruding or bulging on the colon wall. The analysts consider capsule’s WGTT as part of
the analysis process. The gastroenterology physician reviews the analysis in the C-Scan View and generates the final report as to whether
the patient is assessed to be at average or at elevated risk, determined through a combined analysis consisting of both structural analysis
and transit time analyses.
Figure 4: Conceptual block-diagram of the C-Scan system
52
C-Scan System Non-Clinical and Clinical History
We have developed and validated our capsule-based imaging modality
for providing structural information on colonic polypoid lesions and masses for CRC screening. Below is a summary of the validation tests
carried out by us in the laboratory, in phantoms, animals and humans, which were designed to evaluate this new imaging modality’s
performance and potential clinical value.
Non-Clinical Testing
Imaging Performance Testing
The C-Scan Cap transmits data as it transits the colon. This data
consists of imaged slices perpendicular to the capsule’s longitudinal axis; slices are then reconstructed by the C-Scan View to
produce 2D and 3D images of the inner surface of the colon. Following are performance measurements of the capsule imaging.
• Modulation
Transfer Function, or MTF. The capsule was moved along a longitudinal-edge phantom setup in 3mm steps. The figure below shows a
typical raw signal after filtering for peak detection. The same test was carried out using an angular-edge phantom setup, which demonstrated
similar results to those shown below. These tests do not take into account noise characteristics.
Image for illustration purpose only
For each position of the capsule in the phantom, the mean signal
intensity (peak) was measured, the result of which is shown in the right figure below. Resulting line spread function, or LSF, which is
the differential of the curve in the left figure below.
Image for illustration purpose only
The graphs above demonstrate that the existing design of C-Scan
can detect objects of approximately 2-3mm when noise is not taken into account.
• Resolution
Limit: Estimation of the Smallest Visible Object Size. In order to estimate the size of the smallest visible object, both spatial
resolution and noise characteristics must be taken into account. The graph below presents the estimated MTF of C-Scan. Noise analysis
indicates MTF 1/3 for minimum visibility, which demonstrates that the smallest visible object that can be detected with the existing design
of C-Scan (in the conditions used, which included a colon diameter of 30mm) is of approximately 5-6 mm (see graph below).
Image for illustration purpose only
53
Image Reconstruction
Two main characteristics of C-Scan contribute to the image reconstruction
performance:
| • |
The number of photons hitting the detector per time frame. |
| • |
The angular spread of the photon beam coming out of the capsule collimator. |
Based on the laboratory tests performed with a previous version
of C-Scan, polyps of 6 mm and larger should be visible and 10 mm polyps and larger are expected to be detected at higher sensitivity.
To further enhance the visibility of 6 mm - 9 mm polyps, a new design of the collimator was successfully incorporated and tested in our
advanced C-Scan Cap that is expected to enable 1.5 times the number of photons to be detected by the detectors, allowing our recently
enhanced algorithm to improve the imaging performance.
Animal Testing and Tissue Equivalent Phantom
Image Reconstruction
The physics of our imaging modality was tested in the laboratory
on phantoms with tissue equivalent material and in animals to ensure that laboratory conditions mimic real life clinical scenarios.
Following the initial proof of concept, we performed a series of
studies in order to evaluate the feasibility and preliminary safety of our technology. All studies were performed in pigs ranging from
60 to 90 kg. Pigs, which are commonly used in gastrointestinal studies, were selected as the animal model for preliminary evaluation of
C-Scan based on the resemblance of the porcine colon size and morphology to the human colon. However, there are marked differences between
the colon of pigs and that of humans. The pig colon is much longer and has a larger diameter, in addition to other anatomical differences.
In the pig model, the pressure waves of peristalsis are believed to be more frequent and shorter than in humans. As a result, we believe
that colon content movement is substantially slower and more frequent in pigs than in humans. In these studies, we did not intend to collect
statistically significant data; hence, the tests were repeated a limited number of times until adequate data was collected.
The first test was performed to demonstrate imaging proof-of-concept
using a wired C-Scan. This technology included all the basic features intended to be included in the clinical C- Scan, but on a larger
scale due to the use of off-the-shelf components. The subsequent studies used versions of the C-Scan that integrated most of the imaging
components, software and electronics of C-Scan that we used with humans. Since off-the-shelf components were used, the animal capsules
were larger and heavier than the version of C-Scan that are used clinically.
Raw data from an animal colon showing a decrease in X-ray florescence,
or XRF, photon signals and an increase in Compton backscattering, or CMT, signals corresponding to the position of a polyp that was detected
when our C-Scan Cap passed over the polyp is shown in the image below. These two signals are combined in order to form a three dimensional
image below.
Image for illustration purpose only
The animal studies conducted to date demonstrate that our technology
provides sufficient resolution, in these studies, for the detection of 10 mm polyps which is the size of clinically significant polyps.
The animal studies also demonstrated that 5 mm polyps can be detected, though with lower resolution than 10 mm polyps in the first animal
capsule. Animal health was maintained throughout the studies. No adverse effects related to passage of our capsule were noted.
54
The capsules evaluated in the animal studies were significantly
larger than the capsules that we are using with humans. The differences in anatomy, physiology, and capsules may have several effects
on the data compared to use in the human population. Motility of the capsules through the digestive C-Scan was slow due to the specific
shape of the porcine gastrointestinal tract. In addition, because of the size of the capsule, it was retained in the stomach for many
hours and even days. Accordingly, the animal model required that normal ingestion be replaced by direct insertion of the capsule into
the small bowel. In order to simplify the development and animal testing, we used Tungsten radiation source with long half-life (120 days).
Following the success of the animal testing, a series of in-vitro
tests were conducted to simulate different clinical scenarios in the laboratory using a miniaturized human capsule. Polyps were created
and reconstruction of the laboratory phantoms with a human capsule was generated to assess the ability to detect polyps as the capsule
advances in the colon. The in-vitro tests demonstrated the imaging capabilities of our imaging technology. Below is the reconstruction
of a laboratory phantom image.
Image for illustration purpose only
Polyp Detection Analysis
Laboratory tests were carried out to estimate the capsule’s
ability to detect polyps in phantoms and demonstrate sensitivity and specificity of such detection. Below is an example of the reconstruction
of a scan composed of three slices: XRF, CMT and a fused (combined) image.
Image for illustration purpose only
Receiver Operating Characteristics
Standard receiver operating characteristics, or ROC, curves were
generated from phantom data with 8 mm polyp in a 30 mm barrel phantom with 3% iodine concentration mimicking the colon contents. CMT,
XRF and fused (combined) data were analyzed based on 2D slices that were generated and standard deviation indicator. There were a few
cases where the noise in the phantoms was high enough to generate polyp false positive condition separately for each data type, especially
in CMT. However, fusion of CMT and XRF data contributed to noise reduction and enabled to demonstrate 100% true positive and 0% false
positive.
Image for illustration purpose only
55
Clinical Trials
We initiated our first clinical study at University Hospital, Hamburg,
Germany in 2010. The purpose of this study was to monitor and record the colon contractions and the associated motility of the capsule
in the colon. This study was conducted with a passive capsule that contained no X-ray source or detectors. It included several electronic
components of C-Scan and had similar dimensions to the current capsule. 63 healthy volunteers were enrolled and no adverse events were
reported.
We completed a limited, single-center, feasibility study at Rambam
Medical Center, Haifa, Israel to assess the motility of a non-scanning capsule in healthy subjects. The objective of the study was optimizing
the daily routine of the subjects in order to shorten the transit time of our capsule. 15 subjects participated and swallowed a capsule
with the same weight and dimensions as our current C-Scan capsule. No adverse events were reported and all capsules were retrieved. A
structured daily routine determined the timing of the following: capsule ingestion, the subjects’ daily meals, the contrast agent
ingestion and one evening dose of 10 mg of Bisacodyl, and all subjects continued their regular active lifestyles (such as work and exercise).
The average transit time of the capsule in the 15 subjects was approximately 38 ± 19 hours, which is comparable to the average transit
time of our capsule in subjects participating in the multi-center feasibility study, in which the participants do not ingest a daily dose
of Bisacodyl, and participants are released to their homes and continue their regular lifestyles during the study.
A 10 subject clinical proof-of-concept study, conducted at Tel
Aviv Sourasky Medical Center in Israel and using a prior version of C-Scan, did not identify any material safety or feasibility issues.
The study demonstrated the applicability of C-Scan to the human colon, generating images of the colon without any prior bowel preparation.
All subjects ingested the capsule easily with smooth passage within the designated transit time, on average, within 48-72 hours. There
were no reported device-related adverse events. Mild effects on bowel movements were noted, which were determined to be related to the
contrast agent and passed within one to two days after the capsule excretion. Estimated total radiation exposure was calculated using
standard established factors for calculating effective radiation exposure, such as the duration of the capsule inside the body, and was
based on the activity of the radiation source inside the C-Scan Cap and radiation energy, both of which were measured for each case study.
The average calculated exposure for the entire procedure in the 10-case study, from ingestion of the capsule to excretion, was 0.03 mSv
(STD 0.007 mSv). This level of radiation exposure is similar to a single chest X-ray (approximately 0.06mSv) and two orders of magnitude
less than a CTC.
The 10-subject study constituted the initial phase of a multi-center,
prospective clinical feasibility study to establish the safety, functionality and preliminary efficacy of C-Scan in patients eligible
for CRC screening, by comparing results from the clinical feasibility study with those from non-invasive, low-sensitivity FITs, as well
as from optical colonoscopies. The feasibility study has been designed to allow for the recruitment of 100 subjects. The study was conducted
at multiple centers in Israel. The clinical feasibility study was used to evaluate the image resolution generated by the capsule in a
human colon without cathartic preparation, assess polyp imaging in various shapes and in different segments of the colon, and evaluated
the safety of the device in terms of total and segmental transit time and analyze the effects of the presence of polyps and variable colon
dimensions on these parameters. During the feasibility study we collected data regarding the overall imaging of the colon’s internal
surfaces during the passage of the capsule to support the development of a correlation map of polyps identified through our imaging system
with polyps imaged by optical colonoscopy and CTC. Additionally, the feasibility study allowed for the measurement of total radiation
exposure and the distribution of contrast material within the colon.
Analysis conducted on the first 66 capsules swallowed by participants
enrolled in the multi-center, prospective clinical feasibility study showed that 65 of 66 capsules swallowed were naturally eliminated,
without major or minor side effects, after 62±40.7 hours. The average calculated radiation exposure was 0.06 ± 0.04 mSv (similar
to a single chest radiograph). Image reconstructions allowed 2D/3D views of the colonic wall and lumen with the typical contour of different
segments (hepatic flexure, triangular shape of the transverse colon). Both pedunculated and sessile polyps were detected in several patients
and validated later by colonoscopy.
56
In September 2017, we completed a multi-center study of C-Scan
in support of CE Mark submission. The objective of the study was to assess safety and the clinical performance of C- Scan in detecting
patients with polyps. The three-center trial enrolled 66 patients, with a mean age of 59 years. Following capsule ingestion, subjects
swallowed small doses of contrast agent and fiber supplements with each meal throughout capsule passage. Average capsule transit time
was 52±32 hours, and the average total X-ray dose was 0.05 mSv (CT colonography effective dose is ~ 6.0 mSv). No bowel preparation,
sedation, or change in diet was required. Both confirmatory colonoscopy, performed by an independent investigator, and C-Scan review,
performed by a central review group, were blinded to results. The study demonstrated a 44% sensitivity in the 45 subjects included in
the analysis for polyps, with specificity (ability to correctly identify lack of polyps) of 89%. Sensitivity strongly correlated (R-squared
= 0.98) to the percentage of the colon scanned. Sensitivity was 78% (p<0.05) and 100% (p<0.05) for subjects where greater than 50%
and 70% of the colon was scanned, respectively. Specificity was consistent for all subjects.
In the fourth quarter of 2017, we initiated an interim clinical
study for the purpose of introducing an advanced C-Scan version, Version 3, which incorporated the then latest algorithms and system optimization
and tailored scanning of the colon to the patient’s natural colonic movements to maximize the amount of the colon that is tracked
and imaged. In March 2018, we announced results from the interim study. Evaluable results of 21 patients showed average colon imaging
coverage of 64%, a 40% improvement over 46% average colon imaging coverage in the multi-center study. Sensitivity was 78% (p<0.05)
for subjects with greater than 50% colon imaging coverage and 100% (p<0.05) for subjects with greater than 70% colon imaging coverage.
Specificity was consistent at around 89%.
During the first quarter of 2018, we initiated a multi-center,
open label, home monitoring, prospective study designed to determine the performance characteristics of C-Scan Version 3, for detecting
pre-cancerous polyps compared with the fecal immunochemical test (FIT), in each case using colonoscopy as the reference method, for the
purpose of collecting additional evidence of clinical effectiveness and clinical utility to support market adoption. The study included
90 evaluable patients who either had known polyps or were considered to be of average risk. Each patient ingested a C-Scan capsule and
also underwent a FIT and a comparative colonoscopy performed by independent gastroenterologists, who were blinded to the corresponding
test’s results. The C-Scan clinical evaluation was obtained using the evaluable patient population implementing a gender-based motility
analysis and the results of both C-Scan and FIT were compared to colonoscopy. The primary efficacy endpoint of the study was sensitivity
(ability to correctly identify patients with polyps) and specificity (ability to correctly identify patients with lack of polyps) of the
C-Scan system compared to FIT in detecting subjects with polyps ≥10 mm. In July 2019, we announced final results from our post-CE
approval study. The results demonstrate that C-Scan achieved a sensitivity of 76% (p=0.0005) in patients with polyps ≥10 mm, while
FIT achieved a sensitivity of 29% (p=0.005) in patients with polyps ≥10 mm. C-Scan achieved a specificity of 82% in all patients,
while FIT achieved a specificity of 96% in all patients. In addition, C-Scan detected all 4 patients (100%) with polyps ≥40 mm,
while the FIT detected only 1 of the 4 patients (25%) with polyps ≥40mm. Overall, C-Scan achieved a sensitivity of 66% (p=0.01)
in all patients, including patients with polyps <10mm, while FIT achieved a sensitivity of 23% (p<0.0001) in all patients, including
patients with polyps <10mm. In total, 142 patients enrolled in the study and after factoring in technical and physiological dropouts
and protocol violations, the number of evaluable patients was 90. No serious adverse events were reported, and the adverse events were
mild in severity.
In December 2018, we received from the FDA conditional approval of our IDE application
to initiate a U.S. pilot study of the C-Scan Version 3 and received final approval from the FDA in February 2019. In April 2019, we initiated
the U.S. pilot study of C-Scan. The U.S. pilot study (NCT03735407 ) was a prospective, multi-center, open label, single arm study was
designed to evaluate the safety, usability and subject compliance of the C-Scan. The study included 28 evaluable patients, more than two
thirds of whom were considered to be of average risk for colorectal cancer. Each patient ingested a C-Scan capsule and also underwent
a fecal immunochemical test (FIT) as well as a comparative colonoscopy, which was performed by an independent gastroenterologist who was
blinded to the corresponding test results. The study was performed at two sites, the NYU Grossman School of Medicine and Mayo Clinic,
Rochester. The primary endpoint of the study was to evaluate the incidence of device or procedure related serious adverse events. Secondary
endpoints included patient compliance, subject satisfaction and device and procedure related performance. Due to sample size, the study
was not designed to be powered for statistical significance. In December 2019, we announced the results of the study. No device or procedure
related serious adverse events (SAEs) were reported and all device or procedure related adverse events were mild in severity. In total,
45 patients enrolled in the study, of which 40 patients underwent the study procedure. 39 patients complied with the procedure and completed
a questionnaire following the procedure and reported higher satisfaction with C-Scan procedure compared to colonoscopy. A total of 28
patients were evaluable after factoring in technical and physiological dropouts and protocol violations. Analysis of the evaluable patient
results revealed agreement between C-Scan and colonoscopy in detection of polyps was consistent with data from the post-CE approval study.
57
In preparation for the planned pivotal study, we have continued
to optimize the functionality and patient experience of our advanced version of C-Scan, which incorporates mainly advanced algorithms,
improved detection and reduced energy consumption, through additional clinical data collection at Israel sites. To this end, we
have finalized a clinical trial protocol for a study in Israel and identified over 10 clinical trial sites to enroll up to 400 patients
(both average risk and high-risk) and intend to shift to enrollment of average risk patients in parallel to the first stage of the pivotal
study in the U.S.
In November 2020, we finalized our proposed pivotal design and submitted
our IDE application to the FDA and in March 2021, our IDE was approved. In January 2022, we submitted a supplement to the FDA to amend
the study design to add a first part to the trial that is designed to enable further calibration of the system, specifically for the average
risk U.S. population. On February 3, 2022 we received the agency approval of our IDE supplement and we anticipate beginning the first
part of the U.S. pivotal study in April 2022, and the second part of the pivotal study in the fourth quarter of 2022.
Research and Development
Our research and development strategy is centered on developing
C-Scan. Our research and development team consists of 71 individuals employed (including independent contractors) on a full-time basis
and four individuals on a part-time basis as of March 15, 2022, including our research and development employees, clinical team, quality
and assurance team and manufacturing team. All our research and development employees are located at our facility in Isfiya, Israel,
except for five full time employees that are located at our facility in Petach Tikva, Israel and one independent contractor which is located
in the U.S.
We have received grants from the Government of the State of Israel
through the IIA (formerly the OCS) for the financing of a portion of our research and development expenditures and a portion of our expenditures
relating to our transition to manufacturing pursuant to the Innovation Law and related regulations and guidelines. As of December 31,
2021, we had received funding from the IIA for research and development of our C-Scan, in the aggregate amount of approximately $5.6 million.
As of December 31, 2021, we had not paid any royalties to the IIA and had a contingent liability to the IIA with respect to such
funding (including interest at the rate of 12-month LIBOR) in the amount of approximately $6.1 million. In addition, in January 2021,
we received an IIA grant approval to support the funding of our transition from research and development to manufacturing in the amount
of up to $786,000 (along with a co-investment by us of the same amount), which we are not required to repay to the IIA, subject to the
terms and conditions set forth in the grant approval, of which we received approximately $349,000 in 2021 and $82,000 in January 2022.
We may apply for additional IIA grants in the future; however, there is no assurance that such applications will be approved in the amount
requested or at all. We cannot predict whether we will be entitled to any future grants, or the amounts of any such grants. See
“Risk Factors – Risks Related to Our Operations in Israel – 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. In addition, the terms of Israeli government grants we received require us to satisfy specified conditions
and to make additional payments in addition to repayment of the grants upon certain events.”
We incurred approximately $12.2 million, $10.0 million and $10.5
million in research and development expenses, net (after deducting participation by others and government grants) for the years ended
December 31, 2021, 2020 and 2019, respectively. For additional information, see “Management’s Discussion and Analysis of Financial
Condition and Results of Operations— Financial Operations Overview—Research and Development Expenses, Net.”
58
Intellectual Property
An important part of our competitive strategy is to seek, when
appropriate, protection for our products and proprietary technology through a combination of U.S. and foreign patents, trademarks, trade
secrets, non-disclosure and confidentiality, assignment of invention and other contractual arrangements with our employees, consultants
and suppliers. These measures, however, may not be adequate to protect our technology from unauthorized disclosure, third-party infringement
or misappropriation as these parties may breach these agreements, and we may not have adequate remedies for any such breach. We intend
to prosecute and defend our proprietary technology. The primary test for patent protection eligibility includes patentability, novelty,
non- obviousness, and utility.
We submit applications under the Patent Cooperation Treaty, or
PCT, which is an international patent law treaty that provides a unified procedure for filing a single initial patent application to seek
patent protection for an invention simultaneously in each of the member states. Although a PCT application is not itself examined and
cannot issue as a patent, it allows the applicant to seek protection in any of the member states through national-phase applications.
As of December 31, 2021, we had 54 granted patents (not including
separate validations in Europe) and one allowed patent in main world markets, covering various aspects of our technology. In addition,
we have 14 additional pending patent applications in the pipeline. We have submitted patent applications covering our technology in the
United States, member states of the European Patent Organization, Australia, Brazil, Canada, China, Hong Kong, India, Israel, Japan and
South Korea. We have received patent grants for our core patent by the United States Patent and Trademark Office as well as from the European
Patent Office, Australia, Brazil, China, Hong Kong, Israel, India, Canada, South Korea and Japan. We also filed patent applications describing
the use of our technology in several other medical applications.
Our registered U.S. Patent Number 7,787,926 discloses an ingestible
capsule with a radiation source and radiation detectors that, when used in conjunction with a radio opaque contrast agent, is adapted
to detect clinically relevant findings in the colon. Utilizing X-ray fluorescence and Compton back scatterings, the capsule is able to
measure the distance between the capsule and the colon wall and to distinguish between gas, intestinal contents, and clinically significant
findings in the gastrointestinal tract. If the appropriate maintenance, renewal, annuity or other governmental fees are paid, the non-extended
patent term for this patent will expire on August 28, 2026.
A second PCT patent application (PCT/IL2008/000163), granted in
Europe, Israel, United States, Australia, India, China, Canada and Hong Kong, discloses additional features such as a rotating collimator
and improved scanning mechanisms, the capability to determine tissue density to differentiate between different types of polyps, as well
as the capability to determine capsule movement in the colon. If the appropriate maintenance, renewal, annuity or other governmental fees
are paid, the non-extended patent term for all national phases will expire on February 6, 2028, other than the U.S. patent that will expire
on April 4, 2030.
Another PCT application (PCT/IL2011/000462), which is pending in
Brazil in the PCT national-phase and granted in Europe, Israel, United States, Canada, Australia and South Korea, discloses a number of
alternate fail safe concealment mechanisms that can be utilized in the capsule to ensure that the X-ray source is blocked when the capsule
is not scanning and is open when it is scanning, allowing the capsule to image the colon. The fail-safe feature ensures that in the event
of power failure, the radiation source is blocked and X-rays do not escape. If the appropriate maintenance, renewal, annuity or other
governmental fees are paid, the non-extended patent term for all national phases will expire on June 9, 2031, other than the U.S. patent
that will expire on July 5, 2032.
In another PCT patent application (PCT/IL2008/000765), which was
granted in the United States, Europe, Israel and Japan, we disclose an imaging catheter that utilizes X-ray fluorescence, Compton back
scattering and electron back scattering. The imaging catheter is designed for use in cardiac applications as well as intra-operative imaging
applications such as imaging inside blood vessels where optical imaging cannot be performed because of obscuring circumstances. If the
appropriate maintenance, renewal, annuity or other governmental fees are paid, the non-extended patent term for all national phases will
expire on June 4, 2028, other than the U.S. patent that will expire on July 28, 2028.
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During the year 2021 we were granted four new patents:
“Position Estimation of Imaging Capsule in Gastrointestinal
Tract,” granted in the U.S, covers C-Scan’s proprietary tracking technology, which enables real time tracking of the capsule
and its activation when it moves throughout the colon. This functionality allows for optimal scanning along the gastrointestinal (GI)
tract while maintaining low energy consumption during the procedure. The patent also covers the capsule positioning data recording utilized
by the C-Scan analysis suite, which enables gastroenterologists to make a clinical decision and generate a report with their diagnosis
and recommendations. Corresponding patents were issued in Japan and China and patents were approved for granting in Europe and Israel.
“Image reconstruction with radioactive imaging” was
granted in Israel, covering aspects of the technology developed by us to perform image reconstruction of the data acquired by the C-Scan
imaging capsule. This unique iterative algorithm is optimal for image reconstruction of X-ray fluorescence combined with Compton scattering
for intra lumen colon imaging. Corresponding patents were also granted in the U.S, in Europe and China.
“Nano particle detection with X-ray capsule” was granted
in Europe, which covers aspects of a synergic technology for C-Scan, using gold nanoparticles attached to cancer avid antibodies that
can allow selective detection of colon cancer tissue within the colon. This future technology developed by us has the potential to allow
C-Scan to discriminately detect and localize cancer lesions in real time as well as potentially detect rare flat lesions that currently
go mostly undetected with other screening technologies. A corresponding patent was also granted in the U.S.
“Imaging capsule location detection” was granted in
the U.S, which covers aspects of the technology developed by us to positively identify entrance of the C-Scan capsule to the colon with
high accuracy. A corresponding patent was also granted in Europe.
While our policy is to obtain patents by application, to maintain
trade secrets and to seek to operate without infringing on the intellectual property rights of third parties, technologies related to
our business have been rapidly developing in recent years. Additionally, patent applications that we may file may not result in the issuance
of patents, and our issued patents and any issued patents that we may receive in the future may be challenged, invalidated or circumvented.
For example, we cannot predict the extent of claims that may be allowed or enforced in our patents nor be certain of the priority of inventions
covered by pending third-party patent applications. If third parties prepare and file patent applications that also claim technology or
therapeutics to which we have rights, we may have to partake in proceedings to determine priority of invention, which could result in
substantial costs to us, even if the eventual outcome is favorable to us. Moreover, because of the extensive time required for clinical
development and regulatory review of a product we may develop, it is possible that, before C-Scan can be commercialized, related patents
will have expired or will expire a short period following commercialization, thereby reducing the advantage of such patent. Loss or invalidation
of certain of our patents, or a finding of unenforceability or limited scope of certain of our intellectual property, could have a material
adverse effect on us. See “Item 3D “Key Information—Risk Factors—Risks Related to Our Intellectual Property.”
In addition to patent protection, we rely on trade secrets, including
unpatented know-how, technology innovation, drawings, technical specifications and other proprietary. We also rely on protection available
under trademark laws, and hold the following registered trademarks in the United States and Hong Kong: “CHECK CAP”, CHECK
CAP (logo), “C-Scan” and C-Scan (logo) and the following registered trademarks in the European Union: CHECK CAP (logo), “C-Scan”
and C-Scan (logo), and the following trademark applications are pending in China: “CHECK CAP”, CHECK CAP (logo), “C-Scan”
and C-Scan (logo).
In March 2021, we entered into an exclusive license agreement with
the University of Missouri with respect to certain patents held by the University of Missouri that the University of Missouri claimed
included background intellectual property in C-Scan. In consideration for the grant of an exclusive license to those patents in the medical
field, we agreed to pay royalties ranging from $0.30 to $5.00 per C-Scan unit depending on the number of units sold up to $15,000,000
in the aggregate.
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Competition
Competition for C-Scan comes from traditional well-entrenched manufacturers
of tests and equipment for CRC screening, such as colonoscopy, sigmoidoscopy, CTC, optical capsule endoscopy, FOBTs and FITs. The principal
manufacturers of equipment for optical colonoscopy and sigmoidoscopy include Olympus, Pentax, Hoya and Fuji Film. The principal manufacturers
of equipment for CTC include General Electric Healthcare Systems, Siemens Medical Solutions, Philips Medical Systems Ltd. and Toshiba
Corporation. The principal manufacturer of equipment for optical capsule endoscopy includes Medtronic plc. All of these companies have
substantially greater financial resources than we do, and they have established reputations as well as worldwide distribution channels
for providing medical instruments to physicians.
In addition, several companies have developed or are developing
non-invasive technologies based on stool, serum (from blood and other bodily fluids), or molecular diagnostics (MDx), tests that
are used to indicate the presence of CRC and polyps in the colon. These companies include Exact Sciences, Polymedco, Epigenomics AG, Gene
News, EDP Biotech Corporation, Illumina, Inc., Quest Diagnostics, VolitionRx Nu.Q diagnostic, Freenome and Grail. Exact Sciences commenced
sales of its Cologuard ®, a non-invasive stool DNA screening test for colorectal cancer in 2015, and is constantly seeking performance
improvements through additional studies, alongside commercial expansion. During the past years, there has been an extensive effort on
the part of our competitors to utilize molecular biology and advanced computational techniques to develop methods capable of identifying
cell-free cancer biomarkers. These advancement efforts are assisted by large capital investments, supported in turn by claims that certain
products may promise the possibility of defeating certain cancers in their early stages.
Procedures for bowel cleansing that are less onerous are constantly
being developed, which could make our entry into the market more difficult. For instance, bowel cleansing initiated by the ingestion of
pills or food-substitute diet regimes rather than through drinking large amounts of distasteful liquids may be viewed as an improvement
to the cleansing process, but other screening methods may be even more palatable to patients.
Sales and Marketing
Our goal is to establish our position as a leading player in the
CRC screening market. Although we do not currently generate revenues, we expect to generate revenues through sales of C-Scan following
demonstration of acceptable clinical safety and effectiveness and obtaining required regulatory approvals and licensures.
Because we are still in the clinical and development stage, we
are subject to certain challenges, including, among others, that:
| • |
our technology has been tested on a limited basis and therefore we cannot assure the product’s clinical value; |
| • |
following the receipt of CE Mark of conformity to protection standards for sale of the C-Scan system in the European Union, we may
need to obtain additional regulatory approvals in certain local jurisdictions in the European Union before we can commence marketing and
sale of C-Scan and will need to obtain the requisite regulatory approvals in the United States, Japan and other markets where we plan
to focus our commercialization efforts; |
| • |
we need to raise an amount of capital sufficient to complete the development of our technology, obtain the requisite regulatory approvals
and commercialize our current and future products; |
| • |
we need to obtain reimbursement coverage from third-party payors for procedures using C-Scan; |
| • |
we need to scale-up our manufacturing capabilities of C-Scan in commercial quantities at an adequate quality and at an acceptable
cost; and |
| • |
we need to establish and expand our user base while competing against other sellers of capsule endoscopy systems as well as other
current and future CRC screening technologies and methods. |
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Our ability to operate our business and achieve our goals and strategies
is subject to numerous risks as described more fully in “Risk Factors.”
Our primary corporate objective is obtaining the U.S. clearance/approval
for C-Scan. However, in parallel we are evaluating opportunities in Europe and Israel, available capital and engagement with strategic
partners. In these markets, we are planning to work with strategic partners and/or local distributors who are active in the gastroenterology
field and who have already demonstrated excellent performance in introducing new and innovative technologies.
In Europe, we intend to offer C-Scan as an imaging and screening
tool for the general population. In the United States, we may choose to first obtain regulatory clearance/approval for C- Scan in a screening
sub-population, and after we have conducted more extensive clinical studies supported by compelling evidence in the United States, we
would anticipate applying to the FDA for the use of C-Scan as a primary screening tool.
Subject to the successful completion of our clinical trials and
the receipt of our initial FDA clearance/approval, we expect to launch the product in the U.S. market, where we will consider to either
set up our own sales force or align with a strategic partner. Initially, we anticipate selling C-Scan to the private sector. We are currently
building our strategy for reimbursement and we plan to work intensively to obtain reimbursement by Medicare and private insurers within
the shortest possible time frame.
Subject to local regulatory approval, we also intend at a later
stage to market C-Scan in key markets in Asia. Initial efforts are expected in Japan, in view of its developed CRC screening market.
Manufacturing and Suppliers
Our manufacturing operations are conducted at our facility located in Isfiya, Israel
and in our own X-ray production line in Petach Tikva. In Isfiya, we lease approximately 1,550 square meters at this facility under a lease
agreement expiring on December 31, 2023, and we have an option to extend the agreement for an additional period of three years. We have
the right to terminate the Isfiya lease agreement at any time, upon at least 60 days prior written notice. In December 2021, we signed
a Sub-lease Agreement with one of our suppliers, according to which we agreed to lease approximately 70 square meters of laboratory production
space at the supplier premises. The Sub-lease Agreement will enter into effect upon receipt of certain certificates including business
license from the Petach Tikva municipality. The Sub-lease Agreement expires on January 31, 2025, and we have an option to extend the lease
period for an additional two years. We have the right to terminate the agreement at any time, upon at least 90 days prior written notice.
The lessor has the right to terminate the Sub-lease Agreement, upon at least 12 months prior written notice. We currently have sufficient
space to manufacture C-Scan for the clinical studies, but have limited resources and facilities in commercially manufacturing large quantities
of C-Scan and C-Scan View to meet the demand we expect for our future commercialization efforts. We have faced and expect to face certain
technical challenges as we increase manufacturing capacity, including, among others, logistics associated with the handling of radioactive
materials, equipment design and automation, material procurement, lower than expected yields and increased scrap costs, as well as challenges
related to maintaining quality control and assurance standards, while maintaining commercially efficient pricing for C-Scan. Our production
objective is to establish a scalable capacity in order to meet such expanded demand for C-Scan and market expansion. If we are unable
to scale up our manufacturing capabilities to meet our clinical trials needs and future market demand, our growth could be limited and
our business, financial condition and results of operations could be materially adversely affected.
We are continuing to upgrade and expand our production system and
capacity and developing supply chain systems to support production for clinical trials. We have integrated a product life management system
to enable overall life cycle tracking and documentation including full configuration management control and manufacturing documentation.
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In July 2016, we entered into an agreement with GE Healthcare to develop and demonstrate
proof of principle of the process for high-volume manufacturing for the production of the X- ray source and its assembly into our C-Scan
capsule. The agreement was amended in November 2017 in order to further our manufacturing collaboration with GE Healthcare. The agreement
involves GE’s final assembly, packaging and shipping of C-Scan capsules. We supplied GE Healthcare with supporting calibration and
final assembly methodology and equipment and in August 2019, we announced the completion of manufacturing line transfer implementation
and qualification for C-Scan operated by GE Healthcare, primarily to enable the availability of C-Scan for U.S. clinical trials. At present,
we intend to ship systems for our U.S. clinical studies directly from our local site in Israel.
In January 2021, we received an IIA grant approval to support
the funding of our transition from research and development to manufacturing in the amount of up to $786,000, including for the purpose
of the establishment of our own X-Ray source manufacturing line in Israel. We do not currently have any sales. We are planning to develop
a scale-up plan to meet our expected commercial supply needs. We are also working on a plan to expand our manufacturing capacity to support
the expected larger clinical volume and subsequent higher volumes expected in the early commercialization stage. We are continuously exploring
whether certain components of C-Scan can be assembled outside of Israel. In addition, we are expanding our assembly line in Israel and
are considering, among other options, the buildup of new assembly lines in the United States and Europe, and obtaining alternative sources
for the key capsule components (such as the motor, X-ray detectors, electrical components and PCBs). All of the facilities in which manufacturing
and assembly of our products will be conducted will need to comply with applicable regulations and standards for medical devices.
We currently depend on sole or single source suppliers for some
of the components necessary for the production of C-Scan. For example, we currently have a sole supplier for the motor used to rotate
the collimated X-ray source in C-Scan, for the customized X-ray detectors and batteries used in C-Scan. There is a limited number of manufacturers
worldwide who are capable of manufacturing the motor, the customized X-ray detectors and the batteries that we currently use in C-Scan.
In addition, the ASIC residing in C-Scan is currently manufactured for us by a single FAB. However, there are many alternative FABs worldwide
and the design of our current ASIC could be adapted in the event it became necessary to use an alternative FAB. Furthermore, we do not
currently have written contracts with all our sole or single suppliers. While our current suppliers have been able to supply the required
quantities of such components to date, if the supply of these components is disrupted or terminated or if our current suppliers are unable
to supply required quantities of components, we may not be able to find alternative sources for these key components in a timely manner.
Although we are planning to maintain strategic inventory of key components, the inventory may not be sufficient to satisfy the demand
for C-Scan if such supply is interrupted, or subject to risk of loss due to catastrophic events such as a global political crisis or war,
or a fire at our storage facility. In addition, to partially mitigate the risks of reliance on sole and single source suppliers, we are
seeking alternate manufacturers for some of our components which requires us to dedicate significant resources and investment. There can
be no assurance that we will be successful in seeking alternate suppliers or establish our own production line. As a result of the foregoing,
we may be unable to meet our clinical trials timelines and to meet the demand for C-Scan, which could harm our ability to generate revenues,
lead to customer dissatisfaction and damage our reputation. If we are required to change the supplier of any of these key components,
there may be a significant delay in locating a suitable alternative manufacturer. In addition, we may be required to verify that the new
manufacturer maintains facilities and procedures that comply with FDA and other applicable quality standards and with all applicable regulations
and guidelines. Our service agreement with the sole supplier of the X-ray source used in C-Scan was scheduled to expire on December 31,
2021. As part of our mitigation plan, in December 2021, we signed the Amended Service Agreement with the sole supplier of
the X-ray source used in C-Scan, and we concurrently entered into the Sub-lease Agreement with the supplier, according to which we agreed
to lease approximately 70 square meters of laboratory production space at the supplier premises. According to the Amended Service Agreement
we will independently produce the X-ray source using our own production employees. The Amended Service Agreement extends the terms of
the service agreement until the Sub-lease Agreement enters into effect upon receipt of certain certificates, including a business license
from the Petach Tikva municipality. We plan to continue to expand our own production line for our X-ray source in Israel, however, we
cannot assure you that we will succeed in expanding our in house production line in Israel or abroad and we may be required to find an
alternative source for the X-ray source, which we may not be able to do in a timely manner. The delays associated with the introduction
of a new manufacturer for certain key components, could delay our ability to manufacture C-Scan in a timely manner or within budget. Furthermore,
in the event that the manufacturer of a key component of C-Scan ceases operations or otherwise ceases to do business with us, we may not
have access to the information necessary to enable an alternative supplier to manufacture the component. The occurrence of any of these
events could harm our ability to meet demand for C-Scan in a timely manner or within budget.
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Environmental Health and Safety Matters
We are subject to environmental health and safety laws and regulations
in Israel, governing, among other things, the use of radioactive materials, including the Israeli Radioactive Elements and their Products,
Regulation, 1980, the Hazardous Substances Law, 5753-1993 and regulations thereunder, including the Licensing of Business Regulations
(Disposal of Hazardous Substances), 5750-1990, the Israeli Work Safety Regulations (Occupational Safety and Health of Ionizing Radiation
Practitioners) 1992-5753 and Women Employment Regulations (Work with Ionizing Radiation), 1979-5739. Our current research and development
activities, including our production activities, require (and our currently contemplated commercial activities will require) permits from
various governmental authorities including, Israel’s Ministry of Environmental Protection, Israel’s Ministry of Health, local
municipal authorities and the NRC and Agreement State regulators. Failure to obtain or maintain any such permits or to comply with their
conditions could have a material adverse effect on our business, financial condition and results of operations. The Ministry of Environmental
Protection and the Ministry of Health conduct from time to time periodic inspections in order to review and ensure our compliance with
the various regulations.
These laws, regulations and permits could potentially require expenditure
by us for compliance or remediation. If we fail to comply with such laws, regulations or permits, we may be subject to fines and other
civil, administrative or criminal sanctions, including the revocation of permits and licenses necessary to continue our business activities
and could be subject to work stoppages or delays. In addition, we may be required to pay damages or civil judgments in respect of third-party
claims, including those relating to personal injury (including exposure to radioactive materials) or contribution claims. Some environmental,
health and safety laws apply strict, joint and several liability. We may be identified as a responsible party under such laws. Such developments
could have a material adverse effect on our business, financial condition and results of operations.
In addition, laws and regulations relating to environmental, health
and safety matters are often subject to change. In the event of any changes or new laws or regulations, we could be subject to new compliance
measures or to liabilities for activities which were previously permitted.
U.S. Government Regulation
C-Scan is a medical device subject to extensive regulation by FDA
and other U.S. federal and state regulatory bodies. To ensure that medical products distributed in the United States are safe and effective
for their intended use, FDA has promulgated regulations that govern, among other things, the following activities that we or our partners
perform and will continue to perform:
| • |
product design and development; |
| • |
product testing; |
| • |
validation and verifications; |
| • |
product manufacturing (good manufacturing practices); |
| • |
product labeling; |
| • |
product storage, shipping and handling; |
| • |
premarket clearance or approval; |
64
| • |
advertising and promotion; |
| • |
product marketing, sales and distribution; |
| • |
product recalls; and |
| • |
post-market surveillance reporting death or serious injuries and medical device reporting. |
FDA’s Premarket Clearance and Approval
Requirements
Unless an exemption applies, before we can commercially distribute
medical devices in the United States, we must obtain, depending on the type of device, either prior premarket notification, or 510(k)
clearance, de novo authorization or approval of a Premarket Approval Application , or PMA from the FDA. The FDA classifies medical devices
into one of three classes:
| • |
Class I devices, which are subject to only general controls (e.g., labeling, medical devices
reporting, and prohibitions against adulteration and misbranding) and, in some cases, to the 510(k) premarket clearance requirements;
|
| • |
Class II devices, generally requiring 510(k) premarket clearance before they may be commercially marketed in the United States; and
|
| • |
Class III devices, consisting of devices deemed by the FDA to pose the greatest risk, such as life-sustaining, life-supporting or
implantable devices, or devices deemed not substantially equivalent to a predicate device, generally requiring the submission of a PMA
approval supported by clinical trial data. |
510(k) Clearance Pathway
To obtain 510(k) clearance, we must submit a premarket notification,
or 510(k) notice, demonstrating that the proposed device is substantially equivalent to a previously cleared 510(k) device or a device
that was in commercial distribution before May 28, 1976 for which the FDA has not yet called for the submission of premarket approval
applications. By regulation, a premarket notification must be submitted to the FDA at least 90 days before we intend to market a device,
and we must receive 510(k) clearance from the FDA before we actually market the device. The Medical Device User Fee Amendments, or the
MDUFA, performance goal for a traditional 510(k) clearance is 90 days. As a practical matter, however, the 510(k) clearance pathway may
take approximately between 6 to 9 months, but it can take significantly longer. FDA may require additional information, including clinical
data, to make a determination regarding substantial equivalence.
There are three types of 510(k)s: traditional, special, and abbreviated.
Special 510(k)s are typically for devices that have certain technological, design or labelling changes that require a new 510(k) but where
the method(s) to evaluate the changes are well established and the results of change evaluation can be sufficiently reviewed in a summary
or risk analysis format. Abbreviated 510(k)s are for devices that conform to special controls for the device type or to a recognized standard.
The special and abbreviated 510(k)s are intended to streamline review, and the FDA intends to process special 510(k)s within 30 days of
receipt.
After a device receives 510(k) clearance, any modification that
could significantly affect its safety or effectiveness, or that would constitute a new or major change in its intended use, will require
a new 510(k) clearance or, depending on the modification, require premarket approval. The FDA requires each manufacturer to determine
whether the proposed change requires submission of a 510(k), or a premarket approval, but the FDA can review any such decision and can
disagree with a manufacturer’s determination. If the FDA disagrees with a manufacturer’s determination, the FDA can require
the manufacturer to cease marketing and/or recall the modified device until 510(k) clearance or premarket approval is obtained. If the
FDA requires us to seek 510(k) clearance or premarket approval for any modifications to a previously cleared product, we may be required
to cease marketing or recall the modified device until we obtain this clearance or approval. Also, in these circumstances, we may be subject
to significant regulatory fines or penalties.
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De Novo Reclassification
If the FDA finds that there is no suitable predicate device for
C-Scan, it will automatically be considered a class III device. However, in instances where a device is novel and there is no suitable
predicate device, but that device is deemed to be of low to moderate risk, the FDA can reclassify the device to class I or class II via
de novo reclassification. This process involves the submission of a reclassification petition, and the FDA’s acceptance that “special
controls” are adequate to ensure the product’s performance and safety.
The FDA also allows “direct” de novo reclassification
petitions, a mechanism by which a sponsor can directly submit a detailed de novo reclassification petition as the device’s initial
submission without having to first receive a not substantially equivalent, or NSE, decision on a 510(k) submission. The direct de novo
pathway generally takes at least 9 to 12 months from submission of the petition to device clearance, but could take longer.
Our current strategy is to submit a direct de novo reclassification
petition for C-Scan. To support a direct de novo reclassification petition, our objective is to demonstrate that the device poses a low
to moderate risk to patients. If the FDA determines that C-Scan is not a candidate for de novo reclassification, it will require approval
of the device for market through the PMA process.
Alternatively, if we seek 510(k) clearance and our device is found
not substantially equivalent, or NSE, a de novo petition must be filed within 30 days from the receipt of the NSE determination. The request
should include a description of the device, labeling for the device, reasons for the recommended classification and information to support
the recommendation. The de novo process following an NSE determination has a 60-day review period, although it is typical for the review
to take far longer. If the FDA classifies the device into class II, the company will then receive an approval order to market the device.
This device type can then be used as a predicate device for future 510(k) submissions. However, if the FDA subsequently determines that
the device will remain in the class III category, then the device may not be marketed until the company has obtained an approved PMA.
Premarket Approval Pathway
A premarket approval application must be submitted if the device
cannot be cleared through the 510(k) process or is found ineligible for de novo reclassification. PMAs are generally required for Class
III devices that support or sustain human life, are of substantial importance in preventing impairment of human health, or which present
a potential, unreasonable risk of illness or injury. The premarket approval application process is generally more costly and time consuming
than the 510(k) process. A premarket approval application must be supported by extensive data including, but not limited to, technical,
preclinical, clinical trials, manufacturing and labeling to demonstrate to the FDA’s satisfaction the safety and effectiveness of
the device for its intended use.
After a PMA application is submitted, the FDA has 45 days to determine
whether the application is sufficiently complete to permit a substantive review and thus whether the FDA will file the application for
review. After a premarket approval application is sufficiently complete, the FDA will accept the application and begin an in-depth review
of the submitted information. By statute, the FDA has 180 days to review the “accepted application,” although, generally,
review of the application can take at least 12 to 18 months, but it may take significantly longer. 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 FDA may be convened to review and evaluate the application and provide recommendations to the FDA as to the approvability
of the device. In addition, the FDA will conduct a preapproval inspection of the manufacturing facility to ensure compliance with quality
system regulations.
Upon completion of the PMA application review, the FDA may: (i) approve
the PMA which authorizes commercial marketing with specific prescribing information for one or more indications, which can be more limited
than those originally sought; (ii) issue an approvable letter which indicates the FDA’s belief that the PMA application is
approvable and states what additional information the FDA requires, or the post-approval commitments that must be agreed to prior to approval;
(iii) issue a not approvable letter which outlines steps required for approval, but which are typically more onerous than those in
an approvable letter, and may require additional clinical trials that are often expensive and time consuming and can delay approval for
months or even years; or (iv) deny the application. If the FDA issues an approvable or not approvable letter, the applicant has 180
days to respond, after which the FDA’s review clock is reset.
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New premarket approval applications or premarket approval application
supplements are required for modifications that affect the safety or effectiveness of the device, including, for example, certain types
of modifications to the device’s indication for use, manufacturing process, labeling and design. Premarket approval supplements
often require the submission of the same type of information as a premarket approval application, except that the supplement is limited
to information needed to support any changes from the device covered by the original premarket approval application and may not require
as extensive clinical data or the convening of an advisory panel.
Clinical Trials
Clinical trials are almost always required to support a premarket
approval application or de novo reclassification petition and are sometimes required for a 510(k) premarket notification. If the device
presents a “significant risk,” as defined by the FDA, to human health, the FDA requires the device sponsor to file an IDE
application with the FDA and obtain IDE approval prior to commencing the human clinical trials. During the trial, the sponsor must comply
with the FDA’s IDE requirements for investigator selection, trial monitoring, reporting, and recordkeeping. The investigators must
obtain patient informed consent, rigorously follow the investigational plan and study protocol, control the disposition of investigational
devices, and comply with all reporting and recordkeeping requirements. Clinical trials for significant risk devices may not begin until
the IDE application is approved by the FDA and the appropriate institutional review boards, or IRBs, at the clinical trial sites. An IRB
is an appropriately constituted group that has been formally designated to review and monitor medical research involving subjects and
which has the authority to approve, require modifications in, or disapprove research to protect the rights, safety and welfare of human
research subjects. A nonsignificant risk device does not require FDA approval of an IDE; however, the clinical trial must still be conducted
in compliance with various requirements of FDA’s IDE regulations and be approved by an IRB at the clinical trials sites. We, the
FDA, or the IRB at each site at which a clinical trial is being performed may withdraw approval of a clinical trial at any time for various
reasons, including a belief that the risks to study subjects outweigh the benefits or a failure to comply with FDA or IRB requirements.
Even if a trial is completed, the results of clinical testing may not demonstrate the safety and effectiveness of the device, may be equivocal
or may otherwise not be sufficient to obtain approval or clearance of the product.
Similarly, in Europe the clinical study must be approved by the
local ethics committee and in some cases, including studies of high-risk devices, by the Ministry of Health in the applicable country.
Sponsors of clinical trials of devices are required to register
with clinicaltrials.gov, a public database of clinical trial information. Information related to the device, patient population, phase
of investigation, study sites and investigators, and other aspects of the clinical trial is made public as part of the registration.
Pervasive and Continuing FDA Regulation
After a device is placed on the market, numerous regulatory requirements
continue to apply. These include:
| • |
product listing and establishment registration, which helps facilitate FDA inspections and other regulatory action; |
| • |
Quality System Regulation, or QSR, and current good manufacturing practices, or cGMP, which require manufacturers, including third-party
manufacturers, to follow stringent design, testing, control, documentation and other quality assurance procedures during all aspects of
the manufacturing process; |
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| • |
labeling regulations and FDA prohibitions against the promotion of products for uncleared, unapproved or off-label use or indication;
|
| • |
clearance of product modifications that could significantly affect safety or efficacy or that would constitute a major change in
intended use of one of our cleared devices; |
| • |
medical device reporting regulations, which require that manufacturers comply with FDA requirements to report if their device may
have caused or contributed to a death or serious injury, or has malfunctioned in a way that would likely cause or contribute to a death
or serious injury if the malfunction of the device or a similar device were to recur; |
| • |
post-approval restrictions or conditions, including post-approval study commitments; |
| • |
post-market surveillance regulations, which apply when necessary to protect the public health or to provide additional safety and
effectiveness data for the device; |
| • |
FDA’s recall authority, whereby it can ask, or under certain conditions order, device manufacturers to recall from the market
a product that is in violation of governing laws and regulations; |
| • |
regulations pertaining to voluntary recalls; and |
| • |
notices of corrections or removals. |
We and our third-party manufacturers must register with the FDA
as medical device manufacturers and must obtain all necessary state permits or licenses to operate our business. As manufacturers, we
and our third-party manufacturers are subject to announced and unannounced inspections by the FDA to determine our compliance with quality
system regulation and other regulations. We have not yet been inspected by the FDA.
Failure to comply with applicable regulatory requirements can result
in enforcement action by the FDA, which may include any of the following sanctions:
| • |
untitled letters, warning letters, fines, injunctions, consent decrees and civil penalties; |
| • |
unanticipated expenditures to address or defend such actions; |
| • |
customer notifications for repair, replacement, refunds; |
| • |
recall, detention or seizure of our products; |
| • |
operating restrictions or partial suspension or total shutdown of production; |
| • |
refusing or delaying our requests for 510(k) clearance, de novo classification or premarket approval of new products or modified
products; |
| • |
operating restrictions; |
| • |
withdrawing 510(k) clearances, de novo classification, or PMA approvals that have already been granted; |
| • |
refusal to grant export approval for our products; or |
| • |
criminal prosecution. |
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Regulatory Pathway for C-Scan
We have established a clinical and regulatory strategy with our
advisors and have conducted a pre submission meeting during the period of December 2016 and February 2017, with the FDA (an informal interaction
to facilitate a clearer understanding of FDA’s expectations). During this process, we received the FDA’s feedback on our submission
and our questions. We also sought feedback on a proposed protocol for a feasibility or pilot study, the primary purposes of which was
to establish the safety of the C-Scan system and evaluate user compliance and satisfaction. In December 2018, we received from the FDA
conditional approval of our IDE application to initiate a U.S. pilot study of the C-Scan system and received final approval from the FDA
in February 2019. In April 2019, we initiated the U.S. pilot study of C-Scan that was completed by December 2019. In November 2020, we
finalized our proposed pivotal design and submitted our IDE to the FDA and in March 2021, the FDA approved our IDE.
In January 2022, we submitted a supplement to the FDA to amend the
study design to add a first part to the trial that is designed to enable further calibration of the system, specifically for the average
risk U.S. population. In February 2022, we received the agency approval of our amended IDE application and we anticipate beginning the
first part of the U.S. pivotal study in April 2022, and the second part of the pivotal study in the fourth quarter of 2022. The goal of
the pivotal study in the United States is to (i) demonstrate device safety as evidenced by a lack of device-related serious adverse events;
and (ii) provide efficacy data concerning C-Scan’s performance.
In preparation for the planned pivotal study, we have continued
to optimize the functionality and patient experience of our advanced version of C-Scan, which incorporates mainly advanced algorithms,
improved detection and reduced energy consumption, through additional clinical data collection at Israel sites. To this end, we have finalized
a clinical trial protocol for a study in Israel and identified over 10 clinical trial sites to enroll up to 400 patients (both average
risk and high-risk) and intend to shift to enrollment of average risk patients in parallel to the first stage of the pivotal study in
the U.S.
Our current strategy is to submit a direct de novo reclassification
petition for our system. Although the FDA could require us to submit a PMA, we believe that the device could be considered for evaluation
under the FDA’s de novo reclassification provisions, which allow a novel device to be reclassified into class I or class II. To
support this, our objective is to demonstrate that the device poses a low to moderate risk to patients.
We believe that important potential benefits of C-Scan for CRC
screening are the elimination of the need for bowel preparation, the elimination of the need for conscious sedation, the minimally invasive,
painless nature of the examination, and the ability to pursue normal daily activities immediately following the procedure. Furthermore,
the C-Scan system is being designed to generate information from segments of the colon (e.g.,
cecum and ascending colon) that are difficult to access by conventional optical colonoscopy (i.e.,
incomplete colonoscopies) without the risks and discomforts of operative examination or other invasive methods. We believe these benefits
will be attractive to a large number of patients from the target populations that so far refrained from any screening tests. Thus, we
anticipate that our capsule will increase the public compliance to screening recommendation.
If FDA determines that C-Scan is not a candidate for de novo reclassification,
it will require approval of the device for market through the PMA process. Because of the technological characteristics of this device,
the non-clinical tests (including lab and animals) and clinical data required may not be significantly different between de novo and PMA
regulatory processes. We believe that under both scenarios, we will be required to conduct a multi-center clinical study to establish
the safety and efficacy and to demonstrate sensitivity and specificity of C-Scan in several hundreds of patients.
In February 2021, the FDA granted us a Breakthrough Device designation
for C-Scan for the indication as stated in the FDA’s Breakthrough Device designation approval, as follows: “C- Scan is intended
to identify adult subjects 50 years or older, within the average risk population, who are at elevated risk for polyps larger than or equal
to 1 cm. It is intended for adults who are poor candidates for colonoscopy. Polyps have been shown to be associated with the development
of colorectal cancer. C-Scan is not intended to replace colonoscopy. A positive C-Scan result should be followed by colonoscopy.”
The FDA’s Breakthrough Device Program aims to provide patients
and providers with expedited access to innovative medical devices that offer more effective diagnosis by expediting their development,
assessment and review while preserving the statutory standards for premarket approval. In addition, the Centers for Medicare & Medicaid
Services (CMS) has created expedited and special reimbursement pathways and programs based on FDA’s Breakthrough Device designation,
for which we may be eligible.
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FCC Clearance and Regulation
Because C-Scan includes a wireless radio frequency transmitter
and receiver, it is subject to equipment authorization requirements in the United States. The U.S. Federal Communications Commission,
or FCC, requires authorization of radio frequency devices before they can be sold or marketed in the United States, subject to limited
exceptions. The authorization requirements are intended to confirm that the proposed products comply with FCC radio frequency emission,
power level standards, and other technical requirements and will not cause interference. Our system is using the same frequency band as
other approved capsules. The current design of C-Scan complies with the FCC’s technical requirements and we expect that our advanced
design will comply with the FCC’s technical requirements, so it is expected that it will be authorized by the FCC as well.
Third-Party Coverage and Reimbursement
Coverage of and reimbursement for C-Scan and related procedures,
after approval, will be subject to the requirements of various third-party payors, including government-sponsored healthcare payment systems
and private third-party payors. Coverage policies and reimbursement methodologies vary significantly from program-to-program and may be
subject to federal and state regulations. For example, the Social Security Act requires all items and services to be “reasonable
and necessary for the diagnosis or treatment of illness or injury or to improve the functioning of a malformed body member” in order
to be covered by Medicare. While Medicare might not provide separate reimbursement for a device, it, may include payment for the device
in the payment to the facility or physician for the related procedure. Third-party payors’ coverage and reimbursement policies,
including their interpretations of whether an item or service is “reasonable and necessary” or experimental and/or investigational,
and their payment methodologies, are subject to change pursuant to legislation, regulation, or, in the case of private payors, negotiations
with industry and providers.
Fraud and Abuse Laws
In the United States, the healthcare industry is subject to extensive
federal, state, and local regulation. Both federal and state governmental agencies subject the healthcare industry to intense regulatory
scrutiny, including heightened civil and criminal enforcement efforts. These laws constrain the sales, marketing and other promotional
activities of manufacturers of medical devices, by limiting the kinds of financial arrangements (including sales programs) we may have
with hospitals, physicians and other potential purchasers of the medical devices. The laws and regulations that may affect our ability
to operate include, but are not limited to:
| • |
The federal Anti-Kickback Statute, which prohibits, among other things, knowingly or willingly offering, paying, soliciting or receiving
remuneration, directly or indirectly, in cash or in kind, to induce or reward the purchasing, leasing, ordering or arranging for or recommending
the purchase, lease or order of any health care items or service for which payment may be made, in whole or in part, by federal healthcare
programs such as Medicare and Medicaid. This statute has been interpreted to apply to arrangements between medical device manufacturers
on one hand and prescribers, purchasers and formulary managers on the other. Further, PPACA, among other things, clarified that a person
or entity needs not to have actual knowledge of the federal Anti-Kickback Statute or specific intent to violate it. Although there are
a number of statutory exemptions and regulatory safe harbors to the federal Anti-Kickback Statute protecting certain common business arrangements
and activities from prosecution or regulatory sanctions, the exemptions and safe harbors are drawn narrowly, and practices that do not
fit squarely within an exemption or safe harbor may be subject to scrutiny; |
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| • |
The federal civil False Claims Act, which prohibits, among other things, individuals or entities from knowingly presenting, or causing
to be presented, a false or fraudulent claim for payment of government funds or knowingly making, using or causing to be made or used,
a false record or statement material to an obligation to pay money to the government or knowingly concealing or knowingly and improperly
avoiding, decreasing, or concealing an obligation to pay money to the federal government. In addition, PPACA amended the Social Security
Act to provide that the government may assert that a claim including items or services resulting from a violation of the federal Anti-Kickback
Statute constitutes a false or fraudulent claim for purposes of the federal civil False Claims Act. Many medical device manufacturers
and other healthcare companies have been investigated and have reached substantial financial settlements with the federal government under
the civil False Claims Act for a variety of alleged improper marketing activities, including providing free product to customers with
the expectation that the customers would bill federal programs for the product; providing consulting fees, grants, free travel, and other
benefits to physicians to induce them to use the company’s products. In addition, in recent years the government has pursued civil
False Claims Act cases against a number of manufacturers for causing false claims to be submitted as a result of the marketing of their
products for unapproved, and thus non-reimbursable, uses. Device manufacturers also are subject to other federal false claim laws, including,
among others, federal criminal healthcare fraud and false statement statutes that extend to non-government health benefit programs;
|
| • |
Analogous state laws and regulations, such as state anti-kickback and false claims laws, may apply to items or services reimbursed
under Medicaid and other state programs or, in several states, apply regardless of the payor. Several states now require medical device
manufacturers to report expenses relating to the marketing and promotion or require them to implement compliance programs or marketing
codes. For example, California, Connecticut and Nevada mandate the implementation of corporate compliance programs, while Massachusetts
and Vermont impose more detailed restrictions on device manufacturers’ marketing practices and tracking and reporting of gifts,
compensation and other remuneration to healthcare providers; |
| • |
The federal Foreign Corrupt Practices Act of 1997 and other similar anti-bribery laws in other jurisdictions generally prohibit companies
and their intermediaries from providing money or anything of value to officials of foreign governments, foreign political parties, or
international organizations with the intent to obtain or retain business or seek a business advantage. Recently, there has been a substantial
increase in anti-bribery law enforcement activity by U.S. regulators, with more frequent and aggressive investigations and enforcement
proceedings by both the Department of Justice and the U.S. Securities and Exchange Commission. Violations of these laws can result in
the imposition of substantial fines, interruptions of business, loss of supplier, vendor or other third-party relationships, termination
of necessary licenses and permits, and other legal or equitable sanctions. Other internal or government investigations or legal or regulatory
proceedings, including lawsuits brought by private litigants, may also follow as a consequence; and |
| • |
The federal Physician Payment Sunshine Act, being implemented as the Open Payments Program, requires manufacturers of “covered
products” (drugs, devices, biologics, or medical supplies for which payment is available under Medicare, Medicaid, or the Children’s
Health Insurance Program) to track and publicly report payments and other transfers of value that they provide to U.S. physicians and
teaching hospitals, as well as any ownership interests that U.S. physicians hold in applicable manufacturer. Applicable manufacturers
must submit a report to the Centers for Medicare & Medicaid Services, or CMS, by the 90th day of each calendar year disclosing payments
and transfers of value made in the preceding calendar year. |
Violations of any of the laws described above or any other governmental
regulations that apply to us, may cause us to be subject to significant civil, criminal and administrative penalties, damages, fines,
exclusion from government-funded healthcare programs, like Medicare and Medicaid, and the curtailment or restructuring of our operations.
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Privacy Laws
HIPAA/HITECH and related U.S. federal and state laws protect the
confidentiality of certain patient health information, including patient records, and restrict the use and disclosure of that protected
information. In particular, the U.S. Department of Health and Human Services promulgated patient privacy rules under HIPAA.
These privacy rules protect medical records and other personal
health information by limiting their use and disclosure, giving individuals the right to access, amend and seek accounting of their protected
health information and limiting most use and disclosures of health information to the minimum degree reasonably necessary to accomplish
the intended purpose. Because we intend to sell products, once approved, to persons and entities subject to HIPAA and are exposed to personally-identifiable
health information in the course of our operations, we also may be subject to certain elements of HIPAA, particularly as a business associate
to covered entities, as well as similar state laws. HIPAA imposes civil and criminal penalties for violations of its provisions, which
could be substantial. State privacy laws have their own penalty provisions which may be applicable.
NRC Regulatory Matters
As a manufacturer of a medical device containing a sealed,
radioactive source, we are subject to regulation by various governmental authorities that oversee the possession, use, and disposal of
radioactive material. These nuclear regulations govern, among other things, the design, development, testing, manufacturing, packaging,
labeling, distribution, import/export, sale, and marketing and disposal of our product.
The C-Scan capsule contains within the device a radioactive sealed
source, which contains a small amount of byproduct material, a form of radioactive material. The C-Scan capsule is ingested by the
patient, and passes through the patient’s gastrointestinal tract before being eliminated.
Depending on where we manufacture and distribute the device, various
countries nuclear regulatory laws and regulations may apply. In Israel, where we manufacture the device, Israel nuclear regulatory
laws apply to the radioactive material in the device. We adhere to the Israeli regulations and guidance for the design, development,
testing, manufacturing and packaging, as well as the applicable nuclear regulations in the manufacturing phase.
In the United States, the C-Scan capsule is about to undergo clinical
trials. The U.S. Nuclear Regulatory Commission, or the NRC, and state nuclear regulatory agencies oversee the use of radioactive
materials in the United States. The NRC regulates the use of radioactive materials in medical devices under several parts of its regulations,
including 10 C.F.R. Part 20, “Standards for Protection Against Radiation,” 10 C.F.R. Part 30, “Rules of General Applicability
to Domestic Licensing of Byproduct Material,” and 10 C.F.R. Part 35, “Medical Use of Byproduct Material.” NRC
Agreement States implement similar regulations under a nuclear regulatory framework developed by the state pursuant to authority delegated
by the NRC.
In accordance with applicable NRC regulations, and relevant NRC
Agreement State requirements, we comply with the radioactive materials safety and handling requirements applicable for the our development
of our C-Scan technology applicable to clinical trials. The NRC places conditions and limitations on the disposal of radioactive
material in the sanitary sewer, therefore, during clinical trials in the U.S., the C-Scan capsule will need to be collected and cannot
be disposed of in the sanitary sewer system.
The future commercial sale of this device will also be subject
to extensive nuclear regulations in various jurisdictions around the world where the C-Scan capsule will be used, and we intend to comply
with such regulations as they become applicable. We expect the manufacture and distribution of the device commercially will also require
us, or a company affiliated with our company, to obtain a number of licenses and certifications related to nuclear regulatory compliance.
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Regulation in Europe, Israel, Japan and Other Countries
The European Union has adopted numerous directives and standards
regulating the design, manufacture, clinical trials, labeling and adverse event reporting for medical devices. Each European Union member
state has implemented legislation applying these directives and standards at the national level. Other countries, such as Switzerland,
have voluntarily adopted laws and regulations that mirror those of the European Union with respect to medical devices. Devices that comply
with the requirements of the laws of the relevant member state applying the applicable European Union directive are entitled to bear CE
conformity marking and, accordingly, can be commercially distributed throughout the member states of the European Union and other countries
that comply with or mirror these directives. The method of assessing conformity varies depending on the type and class of the product,
but normally involves a combination of self-assessment by the manufacturer and a third-party assessment by a “Notified Body,”
an independent and neutral institution appointed to conduct conformity assessment. This third-party assessment consists of an audit of
the manufacturer’s quality system and clinical information, as well as technical review of the manufacturer’s product. An
assessment by a Notified Body in one country within the European Union is required in order for a manufacturer to commercially distribute
the product throughout the European Union. In addition, compliance with ISO 13845:2016 on quality systems issued by the International
Organization for Standards, among other standards, establishes the presumption of conformity with the essential requirements for a CE
marking. In addition, many countries apply requirements in their reimbursement, pricing or health care systems that affect companies’
ability to market products.
On January 9, 2018, we obtained the CE mark of conformity for C-Scan.
On December 21, 2021, the European Medical Device Regulation (MDR) issued a renewal of our CE mark according to the EU Regulation 2017/745
on Medical Devices for the marketing and sale of C-Scan in the European Union, valid until December 1, 2026.
C-Scan and our operations are also subject to regulation by AMAR, which
is responsible for the registration of medical devices in Israel, issuance of import licenses and monitoring of marketing of medical equipment.
In September 2018, we received approval from AMAR for the marketing and sale of C-Scan in Israel. Following the approval we received from
our notified body according to the EU Regulation 2017/745, the AMAR approval was renewed and is valid until December 31, 2022.
In Japan, manufacturing and marketing medical devices are regulated
by the Pharmaceutical Affairs Law, or PAL. In accordance with the PAL, manufacturers must obtain a license for manufacturing medical devices
from the Ministry of Health, Labour and Welfare, or MHLW. A license is required for each manufacturing plant specified by an MHLW Ministerial
Ordinance.
A licensed manufacturer is responsible only for manufacturing medical
devices. In regard to the marketing of medical devices, the PAL specifies that a Marketing Authorization Holder, or MAH, licensed by MHLW
is responsible for putting medical devices into marketplace. Licenses for marketing medical devices are divided into the following 3 types,
which correspond to the classifications below:
| • |
No. 1 type license for marketing – Specially controlled medical devices (Class III, IV) |
| • |
No. 2 type license for marketing – Controlled medical devices (Class II) |
| • |
No. 3 type license for marketing – General medical devices (Class I) |
Generally, the process for obtaining marketing clearance for medical
devices in Japan ranges from twelve months (for products with only very minor modifications from previously cleared product versions)
to a few years in the case of a completely new device.
In order for us to market our products in countries other than
the United States, Israel, the EU and Japan (which were described above), we must obtain regulatory approvals and comply with extensive
safety and quality regulations in these countries. These regulations, including the requirements for approvals or clearance and the time
required for regulatory review varies from country to country. It is customary that once a product has been cleared for sales in the US
and is CE marked in the EU, many other countries will follow. Failure to obtain regulatory approval or clearance in any foreign country
in which we plan to market our product may harm our ability to generate revenue and harm our business.
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United Kingdom
The withdrawal of the United Kingdom (UK) from the EU took effect on
January 1, 2021, and there are 27 member states remaining in the EU. As of January 1, 2021, the UK is a “third country” with
regard to the EU (subject to the terms of the EU UK Trade Agreement) and EU law ceased to apply directly in the UK. However, the UK has
retained the EU regulatory regime with certain modifications as standalone UK legislation. Therefore, the UK regulatory regime is currently
similar to EU regulations, but under new legislation, the Medicines and Medical Devices Act, the UK may adopt changed regulations that
may diverge from the EU legislative regime for medicines and medical devices and their research, development and commercialization. For
a two-year period starting January 1, 2021, the UK has adopted transitional provisions, which inter alia apply to the importation of medical
devices into the UK and the acceptance of CE-certificates until the end of June 2023, subject to certain registrations with the UK Medicines
and Healthcare Products Regulatory Agency. From July 1, 2023, certification under the new UK medical device legislation will be required
to place products on the market in the UK.
Third-Party Reimbursement
Reimbursement in the United States
In the United States, healthcare providers that purchase and/or
prescribe medical devices generally rely on third-party payors, such as Medicare, Medicaid, or private health insurance plans, to reimburse
all or a portion of the cost of the devices, as well as any related healthcare services utilizing the device.
Coverage is not guaranteed simply because a product has received
FDA clearance or approval or has a CPT or HCPCS code that describes the product or service. For example, Medicare’s general definition
of a medically necessary service is one that is reasonable and necessary for the diagnosis or treatment of an illness or injury, or that
improves the functioning of a malformed body member.
Colorectal cancer (CRC) is the fourth most common cancer and the
second leading cause of cancer deaths in the United States. It is an important issue for the Medicare and the commercial population. Approximately
4.1 percent of men and women will be diagnosed with colorectal cancer at some point during their lifetime, based on 2016–2018 data.
In 2018, there were an estimated 1,365,135 people living with colorectal cancer in the United States. In 2021, the National Institutes
of Health (NIH) National Cancer Institute (NCI) estimated that there will be over 149,500 new cases of colon and rectal cancer in the
United States with a median age at diagnosis of 67 years. Colorectal cancer is most frequently diagnosed among people aged 65 –
74 years (NIH). The American Cancer Society’s estimates for the number of colorectal cancer cases in the United States for 2022
forecast over 151,000 new cases of colon and rectal cancer. From 2013 to 2017, while incidence rates dropped by about 1% each year,
there is a rising incidence among younger adults since at least the mid-1990s. From 2012 through 2016, it increased every year by 2% in
people younger than 50 and 1% in people 50 to 64. While the death rate from colorectal cancer has been dropping among both men and
women for several decades, deaths from colorectal cancer among people younger than 55 have increased 1% per year from 2008 to 2017
Among all races, African Americans have the highest death rate.
Based on data from SEER 21 2014-2018, the five-year relative survival rate was 64.7%.
COVID-19 has caused an unprecedented disruption in cancer prevention
efforts, including CRC screening. In general, colorectal cancer screening decreased by 28% to as much as 100% in different countries and
at different times after the onset of the COVID-19 pandemic. During this period, completion of colonoscopies requiring examination showed
a decrease of 65.7%, surveillance colonoscopy showed a decrease of 44.6 to 79%, prescription colonoscopy decreased 60 to 81%, and referrals
to colonoscopy showed a 43% decline. In a simulation model by Issaka, et al, COVID-19–related reductions in care utilization resulted
in an estimated 1,176,942 to 2,014,164 fewer colorectal cancer screenings, 8,346 to 12,894 fewer colorectal cancer diagnoses, and 6113
to 9301 fewer early-stage colorectal cancer diagnoses between 2020 and 2023. In an extended period of limited CRC screenings due to the
pandemic, up to 43% of eligible adults could remain unscreened.
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Since the 1990s, Medicare has covered a number of CRC screening
tests from non-invasive fecal based tests to colonoscopy, providing a range of choices for patients to choose the most individually suitable
modalities.
The cost-effectiveness of a device (or the service in which a device
is used) may be a key factor in obtaining third-party payer reimbursement for such device or service, but is usually not a factor for
Medicare. Medicare covers certain colorectal cancer (CRC) screening tests and procedures for Medicare beneficiaries that meet certain
eligibility criteria, as authorized by Sections 1861(s)(2)(R) and 1861(pp) of the Social Security Act and regulations at 42 CFR 410.37.
However, Medicare coverage of CRC screening tests as defined under Section 1861(pp)(1)(D) states “Such other tests or procedures,
and modifications to tests and procedures under this subsection, with such frequency and payment limits,
as the Secretary determines appropriate, in consultation with appropriate organizations.” (emphasis added).
A key factor affecting the cost-effectiveness of colorectal cancer
screening is patient adherence. Adherence is strongly affected by patients’ willingness to use the device (or service incorporating
a device) as a screening tool for CRC.
Several models have been designed to demonstrate the cost effectiveness
of optical colonoscopy, CT colonography (CTC), fecal testing and capsule endoscopy. Today, several technologies - FOBT / FIT, Flexible
Sigmoidoscopy, Optical Colonoscopy, Barium Enema, and multi-target stool DNA – are covered for Medicare beneficiaries meeting certain
eligibility criteria for screening for colorectal cancer, while other technologies including CTC, capsule endoscopy, and liquid biopsy
are not currently covered by Medicare for CRC screening.
In 2009, the Centers for Medicare and Medicaid Services (CMS) issued
a decision memorandum concluding that the evidence was inadequate to support Medicare coverage of CT colonography (CTC) for CRC screening.
Their main argument for the decision was based on available evidence that screening with CTC would not necessarily result in cost savings
at least at current screening compliance rates. CTC was not seen as a tool which could potentially increase patients’ adherence.
This procedure involves bowel preparation, as well as insufflations of the colon and the exposure of patients to very significant amount
of radiation. Extracolonic incidental findings on CT colonography are common, with the percentage of participants with extracolonic findings
ranging from 58% to 66%. Further, as CTC potentially detects lesions outside of the colon, CMS has no ability to pay for the evaluation
of incidental findings in a patient without signs or symptoms unless specifically directed by Congress to do so.
There are benefits of screening for advanced adenomas. The adenoma
detection rate (based on colonoscopies) was inversely associated with the risks of interval colorectal cancer, advanced-stage interval
cancer, and fatal interval cancer.
An important European study (C. Hassan et al, “Cost-Effectiveness
of Capsule Endoscopy in Screening for Colorectal Cancer,” Endoscopy; 2008 40: 414-421) assessed the potential cost effectiveness
of screening with optical capsule endoscopy and compared its cost-effectiveness with optical colonoscopy. Cost-effectiveness of screening
was measured in terms of cost per life-year saved through prevention or down staging of CRC. The conclusion was that the cost effectiveness
of capsule endoscopy in CRC screening will depend mainly on its ability to improve compliance in the general population.
Third-party payors in the United States began issuing coverage
policies for capsule endoscopy in early 2002, subsequent to FDA approval and availability of the technology Initially, reimbursement policies
provided coverage for capsule endoscopy of the small bowel only for the diagnosis of obscure gastrointestinal bleeding. Subsequently,
reimbursement coverage has been expanded to include other diagnoses and as of December 31, 2021, approximately 300 million people
in the United States have coverage of this technology for a number of capsule endoscopy of the small bowel indications including obscure
gastrointestinal bleeding, suspected Crohn’s disease, suspected small bowel tumors, celiac disease and other small bowel pathologies.
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Currently, there is no Medicare, Medicaid, or commercial insurance
reimbursement for capsule endoscopy of the colon in the United States for CRC screening, despite the availability of category I CPT code
91113 Gastrointestinal tract imaging, intraluminal (e.g., capsule endoscopy), colon, with interpretation and report, which converted
to a category I CPT code effective January 1, 2022.
In February 2020, CMS received a formal request for a national
coverage determination from Epigenomics to consider coverage of Epi proColon, one example of a blood-based biomarker screening test for
colorectal cancer. Over the last several years, blood-based biomarker tests have emerged as another potential non-invasive option for
the early detection of colorectal cancer. A blood-based biomarker (biological marker in the patient’s blood) is a measurable DNA,
RNA or protein component that indicates disease, in this case cancer. Blood-based cancer biomarkers include but are not limited to specific
gene mutations, methylation of genes, and antigens. The blood-based biomarker that is measured in a person’s blood can be an indicator
of a process, such as disease risk or progression, like progression to colorectal cancer, thought to be correlated with a long term outcome,
such as mortality. It is typically easier to measure a biomarker than the true outcome of interest, such as mortality from colorectal
cancer. However, the biomarker might not be a good surrogate for and not well correlated with the clinical outcome of interest, such as
cancer survival or mortality, or it might not identify a patient early enough to alter the clinical course of disease. One example test,
Epi proColon, functions as a blood-based colorectal cancer screening test by identifying the circulating mSEPT9 (Septin9) gene in cell-free
DNA isolated from plasma. CRC tumors have an increased likelihood of exhibiting aberrant methylation at the promoter region of the SEPT9
gene DNA.
In the past CRC screening NCDs, CMS has discussed appropriate test
performance criteria such as point sensitivity and specificity compared to colonoscopy. The determination of appropriateness is similar
to the consideration of what is appropriate for the device to be, “at least as beneficial as an existing and available medically
appropriate alternative.” Through the evaluation of evidence from published studies, the clinical data for the device must reach
the threshold for being appropriate. The direct evidence suggests that there is clinical utility in using FOBT and FIT for early detection
of colorectal cancer (CRC) because these tests reduce mortality of the disease. Conversely, there is no direct evidence on outcomes such
as mortality for blood-based biomarker tests used in screening for colorectal cancer. By comparing the test performance characteristics,
defined as sensitivity, specificity, and positive predictive value, of new screening tests to gFOBT or FIT, CMS can assess whether blood-based
tests might translate into similar reductions in disease mortality for Medicare beneficiaries. Thus, if the sensitivity and specificity
of the new screening tests are as good as or better than the sensitivity and specificity of gFOBT or FIT, then there is indirect evidence
suggesting that the new blood-based biomarker tests may reduce colorectal cancer mortality.
In January 2021, CMS updated National Coverage Determination 210.3,
stating that, effective for dates of service on or after January 19, 2021, a blood-based biomarker test is covered as an appropriate colorectal
cancer screening test once every 3 years for Medicare beneficiaries (i) when performed in a Clinical Laboratory Improvement Act (CLIA)-certified
laboratory, (ii) when ordered by a treating physician and (iii) when all of the following requirements are met: The patient is:
age 50-85 years; and, asymptomatic (no signs or symptoms of colorectal disease including but not limited to lower gastrointestinal pain,
blood in stool, positive guaiac fecal occult blood test or fecal immunochemical test); and, at average risk of developing colorectal cancer
(no personal history of adenomatous polyps, colorectal cancer, or inflammatory bowel disease, including Crohn’s Disease and ulcerative
colitis; no family history of colorectal cancers or adenomatous polyps, familial adenomatous polyposis, or hereditary nonpolyposis colorectal
cancer). The blood-based biomarker screening test must have all of the following: Food and Drug Administration (FDA) market
authorization with an indication for colorectal cancer screening; and, proven test performance characteristics for a blood-based screening
test with both sensitivity greater than or equal to 74% and specificity greater than or equal to 90% in the detection of colorectal cancer
compared to the recognized standard (accepted as colonoscopy at this time), as minimal threshold levels, based on the pivotal studies
included in the FDA labeling.
CMS concluded that the published evidence does not show that the
available blood-based biomarker CRC screening test improves health outcomes for Medicare beneficiaries. The indirect evidence (comparing
a blood-based screening test to another test that has been shown to improve mortality such as screening fecal immunochemical test) does
not show that blood- based screening test is equivalent in the detection of large adenomas or early stage cancer. The test performance
of the Epi proColon® test does not meet sensitivity and specificity levels established by prior evidence at which the benefits of
using the screening test outweigh harms to Medicare patients.
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There can be no assurance that coverage of the C-Scan by Medicare
and/or commercial payors will be obtained in the near future or at all. Third-party payors may deny coverage of the C-Scan if they determine
that a procedure was not reasonable or necessary as determined by the payor, was experimental, does not improve health outcomes, is not
equivalent in the detection of large adenomas or early stage cancers, and/or was used for an unapproved indication (among other factors).
Coverage Outside the United States
In countries outside the United States, coverage for CRC screening
may be obtained from various sources, including governmental authorities, private health insurance plans, and labor unions. In some countries,
private insurance systems may also offer payments for some therapies. Although not as prevalent as in the United States, health maintenance
organizations are emerging in certain European countries. Coverage systems in international markets vary significantly by country and,
within some countries, by region. Coverage approvals must be obtained on a country-by-country or region-by-region basis.
| C. |
Organizational Structure |
On May 15, 2015, we formed our wholly-owned subsidiary Check-Cap
US, Inc., a Delaware corporation.
| D. |
Property, Plants and Equipment |
Our principal executive offices and operations are conducted at a facility
located in Isfiya, Israel since June 1, 2009. We also have an X-ray production line in Petach Tikva, Israel. In Isfiya, we lease approximately
1,550 square meters at this facility under a lease agreement expiring on December 31, 2023, and we have an option to extend the agreement
for an additional period of three years. We have the right to terminate the Isfiya lease agreement at any time, upon at least 60 days
prior written notice. In December 2021, we signed a Sub-lease Agreement with one of our suppliers, according to which we agreed to lease
approximately 70 square meters of laboratory production space at the supplier premises. The agreement will enter into in effect upon receipt
of certain certificates including business license from Petach Tikva municipality. The Sub-lease Agreement expires on January 31, 2025,
and we have an option to extend the lease period for an additional two years. We have the right to terminate the agreement at any time,
upon at least 90 days prior written notice. The lessor has the right to terminate the Sub-lease Agreement, upon at least 12 months prior
written notice.
We believe that our current facilities are adequate to meet our
current needs for the clinical phase of our development. See Item 4B “Information on Our Company – Business Overview
– Manufacturing and Suppliers.”
ITEM 4A. Unresolved
Staff Comments
None.
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
You should read the following discussion and
analysis of our financial condition and results of operations in conjunction with our consolidated financial statements and related notes
included in this Annual Report beginning on page F-1. The following discussion and analysis contain forward-looking statements that involve
risks and uncertainties. Our actual results and the timing of selected events could differ materially from those anticipated in these
forward-looking statements as a result of various factors, including those set forth under Item 3D “Key Information - Risk factors”
and elsewhere in this Annual Report.
77
Overview
We are a clinical stage medical diagnostics company aiming to redefine
CRC screening through the introduction of C-Scan®, the first and only patient-friendly preparation-free test designed to detect polyps
before they may transform into cancer to enable early intervention and cancer prevention. The disruptive capsule-based screening technology
aims to increase screening adherence worldwide and enable millions of people to stay healthy. The system utilizes ultra-low-dose X-rays
to scan the inner lining of the colon for precancerous polyps, and other structural abnormalities. CRC is the third most commonly diagnosed
cancer, with more than 1.9 million new cases identified every year globally. Nearly 935,000 deaths occur annually worldwide as a result
of CRC. While approximately 0.5% of the average-risk screening population presents with cancerous polyps in the colon and rectum at any
given time, approximately 25% of the same population presents with benign polyps that could potentially turn into cancer over time. It
can take up to 10 years before a pre-cancerous polyp develops into invasive cancer. As such, there is a crucial detection window for the
prevention of colorectal cancer, through the detection of these benign polyps. While routine screening is recommended by The American
Cancer Society for healthy people aged 45 years and older, screening adherence remains low. Currently, colonoscopy is the gold standard
for the detection of colorectal polyps, but about 1 in 3 adults among the targeted screening population avoids having a colonoscopy in
the U.S., and adherence in other regions of the world such as Europe and Asia is even lower, due to the invasiveness of the procedure
and bowel preparation. Most patient-friendly CRC screening tests currently available, or poised to enter the market, such as fecal or
liquid biopsy tests, are primarily designed to detect cancer and demonstrate low sensitivity in detecting pre-cancerous polyps. As such,
they do not necessarily provide patients with the time window to pre-empt the disease. C-Scan is non- invasive and requires no preparation
or sedation, allowing the patients to continue their daily routine with no interruption as the capsule is propelled through the gastrointestinal
tract by natural motility. C-Scan is comprised of three main components: (1) C-Scan Cap, an ingestible X-ray scanning capsule; (2) C-Scan
Track, three miniaturized patches worn on the patient’s back for integrated positioning, control and data recording; and (3) C-Scan
View, a proprietary software to process and represent 2D and 3D maps of the inner surface of the colon. We believe that this solution
has the potential to become an alternative for both physicians and patients and to increase the number of people completing CRC screening.
Check-Cap LLC was formed in 2004 as a Delaware limited liability
company to develop a novel and superior solution for colon cancer screening. In 2009, all of the business operations and substantially
all of the assets of Check-Cap LLC were transferred to Check Cap Ltd., a newly-incorporated Israeli company. Our headquarters are located
near Haifa, in the northern part of Israel. Our management team includes an experienced group of executives in the business, research,
clinical and regulatory fields. As of March 15, 2022, our research and development team consists of 75 experienced professionals (including
employees and independent contractors) in a variety of fields such as clinics, physics, algorithms, electronics, software, mechanical
engineering, verification and validation, and manufacturing.
C-Scan is being designed to create a reconstructed three-dimensional
representation of the interior surface of the colon and to enable detection of clinically significant polyps with a high degree of sensitivity.
Colonic polyps are tissue growths that occur on the lining of the colon. Polyps in the colon are extremely common and certain types of
polyps can become cancerous over time.
For the past several years, we have focused on the research and
development of our imaging technology. For details regarding our clinical trials, see Item 4B “Business Overview—C- Scan System
Non-Clinical and Clinical History.”
We have generated significant losses to date, and we expect to
continue to generate losses for at least the next several years as we continue our investment in research and development and clinical
trials in order to complete the development of C-Scan and to attain regulatory approvals, manufacturing scale up, begin the commercialization
efforts for our products, increase our marketing and selling expenses, and incur additional costs as a result of being a public company
in the United States. The extent of our future operating losses and the timing of becoming profitable are highly uncertain, and we may
never achieve or sustain profitability. As of December 31, 2021, we had accumulated losses of approximately $108.2 million.
Our financing activities are described below under “Liquidity
and Capital Resources.”
78
Since our inception, we have devoted substantially all of our efforts
to research and development, clinical trials, recruiting management and technical staff, acquiring assets and raising capital. We are
still in the development and clinical stage and have not yet generated revenues. We have incurred losses of $17.2 million and $13.8 million
for the years ended December 31, 2021 and 2020, respectively. As of December 31, 2021, our accumulated deficit was approximately $108.2
million. The extent of our future operating losses and the timing of becoming profitable are uncertain.
We have funded our operations to date primarily through equity
financings, sales of our ordinary shares and warrants, the exercise of warrants and other funding transactions and through grants from
the IIA.
Additional funding will be required to complete our research and
development and clinical trials, to attain regulatory approvals, to establish manufacturing infrastructure and to begin the commercialization
efforts of C-Scan. We have not yet commercialized our product. Even if we commercialize our product, we may not become profitable in the
foreseeable future. Our ability to achieve profitability depends on a number of factors, including our ability to obtain regulatory approval
for our product, successfully complete any post-approval regulatory obligations and successfully commercialize our product alone or in
partnership.
To meet our capital needs, we are considering multiple alternatives,
including, but not limited to, additional equity financings and other funding transactions. While we have been successful in raising financing
in the past, there can be no assurance that we will be able to do so in the future on a timely basis on terms acceptable to us, or at
all. Uncertain market conditions and approval by regulatory bodies and adverse results from clinical trials may (among other reasons)
adversely impact our ability to raise capital in the future.
We believe that current cash on hand will be sufficient to fund our ongoing operations
and plans into the first quarter of 2024. Management expects that we will continue to generate losses from the development, manufacturing
and infrastructure costs, clinical development and regulatory activities of C-Scan, which will result in negative cash flow from operating
activity. The actual amount of cash that we will need to operate is subject to many factors, including, but not limited to, the timing,
conduct of clinical trials for C-Scan and regulatory path along with cost to commercialize our product.
For a more detailed description of our business and plans, see
Item 4B “Information on Our Company – Business Overview.”
| A. |
Operating Results |
Financial Operations Overview
Revenue
We have not generated any revenue since our inception. To date,
we have funded our operations primarily through equity financings, as well as from grants that we received from the IIA. If our product
development efforts result in clinical success, regulatory approval and the successful commercialization, we expect to generate revenue
from sales of C-Scan.
Operating Cost and Expenses
Our operating costs and expenses are classified into two categories:
research and development expenses and general and administrative expenses. For each category, the largest component is personnel costs,
which consists of salaries, employee benefits and share-based compensation. Operating costs and expenses also include allocated overhead
costs for depreciation of equipment. Operating costs and expenses are generally recognized as incurred. We expect personnel costs and
operating costs to continue to increase as we continue the development of C-Scan, including the pivotal study and scale up of our manufacturability.
79
Research and Development Expenses, Net
Research and development activities are central to our business
model. We intend to increase our research and development operations in order to complete the development of C-Scan, to conduct our clinical
trials, including the pivotal study in the United States that we plan to initiate in April 2022, and to attain regulatory approvals.
Since 2017, we have spent approximately $48 million on research
and development expenses as of December 31, 2021, of which $0.9 million was funded by government grants. Our total research and development
expenses, net of participations in the years ended December 31, 2021, 2020 and 2019 were approximately $12.2 million, $10.0 million and
$10.5 million, respectively. All research and development expenses are expensed as incurred. We expect research and development expenses
to increase in absolute terms in the near term.
Research and development expenses consist primarily of costs incurred
for our development activities, including:
| • |
employee-related expenses for research and development staff (including research and development, clinical, operations, production
and Q&A staff), including salaries, benefits and related expenses, share-based compensation and travel expenses; |
| • |
payments associated with clinical activities including payments made to third-party CROs, investigative sites, patients, materials
and consultants; |
| • |
payments associated with the development activities of our advanced C-Scan system and non-clinical activities, including payments
made to third-party subcontractors, providers and consultants; |
| • |
manufacturing development costs and manufacturing scale up costs; |
| • |
costs associated with regulatory operations; |
| • |
facilities, depreciation and other expenses, which include direct and allocated expenses for rent and maintenance of facilities;
and |
| • |
costs associated with obtaining and maintaining patents. |
Our research and development expenses, net, are net of grants for
the research and development for C-Scan and for the transition
from research and development to manufacturing that we have received from the Government of
Israel through the IIA. Under the terms of the Innovation Law as currently in effect, in exchange for the research and development grants
we received, we are required to pay the IIA royalties from our revenues 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. Pursuant to regulations under
the Innovation Law, the rate of royalty repayment is 3% or 4% of revenues (which may be increased under certain circumstances) from sales
of products and services based on know-how funded by the IIA research and development grants we have received. As of December 31,
2021, we had received funding from the IIA for the research and development of C-Scan in the aggregate amount of approximately $5.6 million.
As of December 31, 2021, we had not paid any royalties to the IIA and had a contingent obligation to the IIA in respect of such research
and development grants (including interest at the rate of 12-month LIBOR) in the amount of approximately $6.1 million. In addition,
in January 2021, we received an IIA grant approval to support the funding of our transition from research and development to manufacturing
in the amount of up to $786,000 (along with a co- investment by us of the same amount), which we are not required to repay to the IIA
, subject to the terms and conditions set forth in the grant approval, of which we received approximately $349,000 in 2021 and $82,000
in January 2022. For additional information regarding the IIA grants, see Item 10E “Additional Information - Taxation - Israeli
Tax Considerations and Government Programs - The Encouragement of Research, Development and Technological Innovation in the Industry Law
5744-1984 (formerly the Encouragement of Industrial Research and Development Law, 5744-1984).” There can be no assurance that we
will continue to receive grants from the IIA in amounts sufficient for our operations, if at all. See also “Item 3D “Key Information
- Risk Factors— Risks Related to Our Operations in Israel—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. In addition, the terms of the Israeli government grants we received require us to satisfy specified conditions
and to make additional payments in addition to repayment of the grants upon certain events.”
80
General and Administrative Expenses
Our general and administrative expenses consist primarily of salaries
and other related costs, including share-based compensation expense, for persons serving as our directors and executives, finance, legal,
human resources and administrative personnel, professional service fees, directors’ and officers’ liability insurance and
other general corporate expenses, such as communication, office and travel expenses. We expect that our general and administrative expenses
will increase in line with the future growth of our overall operations and, in part, due to costs associated with being a public company
in the United States, including compliance under the Sarbanes-Oxley Act of 2002 and rules promulgated by the U.S. Securities and Exchange
Commission. These public company-related expense increases will likely include costs of additional legal fees, accounting and audit fees,
directors’ and officers’ liability insurance premiums and costs related to investor relations.
Financial Income, net
Our finance income, net in 2021, 2020 and 2019 consists primarily
of interest earned on our cash equivalents and short-term bank deposits and changes in provision for royalties primarily to Check–Cap
LLC unitholders.
Foreign currency transactions are translated into U.S. dollars
using the exchange rates prevailing at the dates of the transactions or valuation where items are re-measured. Foreign exchange gains
and losses resulting from the settlement of such transactions and from the translation of year-end exchange rates of monetary assets and
liabilities denominated in foreign currencies are recognized to “finance income, net” in the consolidated statement of operations.
Taxes on Income
The standard corporate tax rate in Israel is 23% for the 2018 tax
year and thereafter.
We do not generate taxable income in Israel, as we have historically
incurred operating losses resulting in carryforward tax losses totaling approximately $107.3 million as of December 31, 2021. We anticipate
that we will be able to carry forward these tax losses indefinitely to future tax years. However, a tax loss that can be utilized in a
certain tax year cannot be carried forward to future tax years. Accordingly, we do not expect to pay taxes in Israel until we have taxable
income after the full utilization of our carry forward tax losses.
Under the Law for the Encouragement of Capital Investments, 5719-1959
and other Israeli legislation, we may be entitled to certain additional tax benefits, including reduced tax rates, accelerated depreciation
and amortization rates for tax purposes on certain assets, deduction of public offering expenses in three equal annual installments and
amortization of other intangible property rights for tax purposes. See Item 10E “Additional Information — Taxation—
Israeli Tax Considerations and Government Programs” for additional information concerning these tax benefits.
Results of Operations
For convenience purposes, the numbers set forth in the management’s
discussion and analysis below are, where applicable, rounded up and presented in millions, whereas the numbers in the tables below are
presented in thousands. As result, the percentages set forth in the year-over-year comparisons below are based on numbers that have (where
applicable) been rounded up to millions, which may slightly differ than the percentages that would result from the corresponding numbers
set forth in the table that are presented in thousands.
81
Year Ended December 31, 2021 Compared to Year Ended December 31,
2020
|
Year Ended December 31, |
||||||||
|
2021 |
2020 |
|||||||
|
(US$ in thousands, except per share data) |
||||||||
|
Research and development expenses, net |
$ |
12,349 |
$ |
10,008 |
||||
|
General and administrative expenses |
4,972 |
3,924 |
||||||
|
Operating loss |
17,321 |
13,932 |
||||||
|
Finance income, net |
119 |
86 |
||||||
|
Net loss |
$ |
17,202 |
$ |
13,846 |
||||
Research and Development Expenses, net. Research
and development expenses, net for the year ended December 31, 2021 were approximately $12.3 million, as compared with approximately $10.0
million for the year ended December 31, 2020, an increase of $2.3 million or 23.4%. The increase in research and development, net
expenses between 2021 and 2020 was primarily due to (i) an increase of approximately $1.3 million in salary and related expense, mainly
as a result of an expansion in head count and currency exchange rate fluctuation, (ii) a $1.2 million increase in material expenses, (iii)
an increase of approximately $0.16 million in share-based compensation, and (iv) an increase of approximately $0.3 million in other research
and development expenses, including clinical expenses. The increase in research and development expenses, net between 2021 and 2020,
was offset in part by a $0.17 million decrease in subcontractors and consultants and a $0.43 million grant received from the IIA.
|
2021 |
2020 |
Change |
||||||||||
|
(US$ in thousands) |
||||||||||||
|
Salaries and related expenses |
$ |
7,428 |
$ |
6,173 |
$ |
1,255 |
||||||
|
Share-based compensation |
329 |
165 |
164 |
|||||||||
|
Materials |
3,020 |
1,792 |
1,228 |
|||||||||
|
Subcontractors and consultants |
640 |
807 |
(167 |
) | ||||||||
|
Depreciation |
169 |
123 |
46 |
|||||||||
|
Cost for registration of patents |
153 |
164 |
(11 |
) | ||||||||
|
Other research and development expenses |
1,040 |
784 |
256 |
|||||||||
|
12,780 |
10,008 |
2,772 |
||||||||||
|
Less participation of the IIA (formerly the OCS) |
(431 |
) |
- |
(431 |
) | |||||||
|
Total research and development expenses, net |
$ |
12,349 |
$ |
10,008 |
$ |
2,341 |
||||||
General and Administrative Expenses.
Our general and administrative expenses for the year ended December 31, 2021 were approximately $5.0 million, as compared to approximately
$3.9 million for the year ended December 31, 2020, an increase of $1.1 million, or 27%. The increase in general and administrative expenses
is primarily due to a $0.3 million increase in salaries and related expenses, a $0.1 million increase in professional services expenses
and a $0.7 million increase in other general expenses, mainly associated with directors’ and officers’ liability insurance,
offset in part by a $0.1 million decrease in share-based compensation expenses.
|
2021 |
2020 |
Change |
||||||||||
|
(US$ in thousands) |
||||||||||||
|
Salaries and related expenses |
$ |
2,042 |
$ |
1,698 |
$ |
344 |
||||||
|
Share-based compensation |
162 |
243 |
(81 |
) | ||||||||
|
Professional services |
710 |
574 |
136 |
|||||||||
|
Office rent and maintenance |
172 |
174 |
(2 |
) | ||||||||
|
Depreciation |
36 |
25 |
11 |
|||||||||
|
Other general and administrative expenses |
1,850 |
1,210 |
640 |
|||||||||
|
Total general and administrative expenses |
$ |
4,972 |
$ |
3,924 |
$ |
1,048 |
||||||
82
Operating Loss. Our operating
loss for the year ended December 31, 2021 was approximately $17.3 million, as compared with approximately $13.9 million for the year ended
December 31, 2020, an increase of approximately $3.4 million, or 24.3%. The increase was as a result of the $2.2 million increase in research
and development expenses, net for the year ended December 31, 2021 and the $1.1 increase in general and administrative expenses for the
year ended December 31, 2021, as compared to the year ended December 31, 2020.
Finance Income, net. Our
finance income, net for the year ended December 31, 2021 was approximately $119,000, as compared to approximately $86,000 for the year
ended December 31, 2020, an increase of approximately $33,000. The change in our finance income, net is primarily due to an increase of
$31,000 of interest income on short-term deposits recorded for the year ended December 31, 2021, as compared to the year ended December
31, 2020.
Net loss. Our loss before
income tax and net loss for the year ended December 31, 2021 were approximately $17.2 million, as compared to approximately $13.8 million
for the year ended December 31, 2020, an increase of $3.4.
Year Ended December 31, 2020 Compared to Year Ended December 31,
2019
|
Year Ended December 31 |
||||||||
|
2020 |
2019 |
|||||||
|
(US$ in thousands, except per share data) |
||||||||
|
Research and development expenses, net |
$ |
10,008 |
$ |
10,474 |
||||
|
General and administrative expenses |
3,924 |
3,595 |
||||||
|
Operating loss |
13,932 |
14,069 |
||||||
|
Finance income, net |
86 |
233 |
||||||
|
Loss before income tax |
13,846 |
13,836 |
||||||
|
Taxes on income |
- |
- |
||||||
|
Net loss |
$ |
13,846 |
$ |
13,836 |
||||
Research and Development Expenses,
net. Research and development expenses, net for the year ended December 31, 2020 were approximately $10.0 million, as compared
with approximately $10.5 million for the year ended December 31, 2019, a decrease of $0.5 million or 4.4%. The decrease in research and
development, net expenses between 2020 and 2019 was primarily due to (i) a decrease of approximately $0.7 million in clinical expenses
mainly due to higher expenses for the pilot study in the U.S and post CE study in 2019 (ii) a decrease of approximately $0.4 million in
other research and development expenses, (iii) a decrease of approximately $0.3 million in share-based compensation. The foregoing decrease
was offset in part by an increase of approximately $0.8 million in salaries and related expenses mainly as a result of an expansion in
head count and currency exchange rate fluctuation. The decrease in research and development expenses, net between 2020 and 2019
also includes a $0.1 million decrease in grants received from the IIA.
|
2020 |
2019 |
Change |
||||||||||
|
(US$ in thousands) |
||||||||||||
|
Salaries and related expenses |
$ |
6,173 |
$ |
5,316 |
857 |
|||||||
|
Share-based compensation |
165 |
421 |
(256 |
) | ||||||||
|
Materials |
1,792 |
1,944 |
(152 |
) | ||||||||
|
Subcontractors and consultants |
807 |
764 |
43 |
|||||||||
|
Depreciation |
123 |
98 |
25 |
|||||||||
|
Cost for registration of patents |
164 |
132 |
32 |
|||||||||
|
Other research and development expenses |
784 |
1,889 |
(1,105 |
) | ||||||||
|
10,008 |
10,564 |
(556 |
) | |||||||||
|
Less participation of the IIA (formerly the OCS) |
(- |
) |
(90 |
) |
90 |
|||||||
|
Total research and development expenses, net |
$ |
10,008 |
$ |
10,474 |
$ |
(466 |
) | |||||
83
General and Administrative Expenses.
Our general and administrative expenses for the year ended December 31, 2020 were approximately $3.9 million, as compared to approximately
$3.6 million for the year ended December 31, 2019, an increase of $0.3 million, or 9.2%. The increase in general and administrative
expenses is primarily due to a $0.2 million increase in salaries and related expenses, $0.1 million increase in share-based compensation
expenses and $0.2 million increase in other general expenses, offset by a $0.2 million decrease in professional services expenses.
|
|
2020 |
2019 |
Change |
|||||||||
|
|
(US$ in thousands) |
|||||||||||
|
Salaries and related expenses |
$ |
1,698 |
$ |
1,506 |
$ |
192 |
||||||
|
Share-based compensation |
243 |
95 |
148 |
|||||||||
|
Professional services |
574 |
705 |
(131 |
) | ||||||||
|
Office rent and maintenance |
174 |
180 |
(6 |
) | ||||||||
|
Depreciation |
25 |
17 |
8 |
|||||||||
|
Other general and administrative expenses |
1,210 |
1,092 |
118 |
|||||||||
|
Total general and administrative expenses |
$ |
3,924 |
$ |
3,595 |
$ |
329 |
||||||
Operating Loss. Our
operating loss for the year ended December 31, 2020 was approximately $13.9 million, as compared with approximately $14.1 million for
the year ended December 31, 2019, a decrease of approximately $0.2 million, or 1.0%. The decrease was as a result of the $0.5 million
decrease in research and development expenses, net for the year ended December 31, 2019 offset by the increase of $0.3 in general and
administrative expenses compared to the year ended December 31, 2020.
Finance Income, net.
Our finance income, net for the year ended December 31, 2020 was approximately $86,000, as compared to approximately $233,000 for the
year ended December 31, 2019, a decrease of approximately $147,000. The change in our finance income, net is primarily due to a
decrease of $176,000 of interest income of short term deposits recorded for the year ended December 31, 2020, as compared to the
year ended December 31, 2019
Loss before income tax and net
loss. Our loss before income tax and net loss for the year ended December 31, 2020 was approximately $13.8 million, as compared
to approximately $13.8 million for the year ended December 31, 2019, a slight increase of $10,000.
| B. |
Liquidity and Capital Resources |
Sources of Liquidity
To date, we have funded our operations primarily through equity
financings consummated prior to our initial public offering, our initial public offering, private placements, registered direct and underwritten
public offerings, our warrant exercise transaction and grants that we received from the IIA (formerly the OCS) and the BIRD Foundation.
As of December 31, 2021, we had approximately $51.9 million cash and cash equivalents, and had invested most of our available cash in
short term bank deposits.
On February 4, 2020, we consummated a private placement of 2,720,178
ordinary shares at a purchase price of $1.75 per share. We received gross proceeds of approximately $4.76 million from the private placement.
On April 22, 2020, we consummated a registered direct offering
of 6,666,669 ordinary shares in a registered direct offering at a purchase price of $0.60 per share, resulting in gross proceeds of approximately
$4,000,000. In addition, we issued to the investors unregistered warrants to purchase an aggregate of 6,666,669 ordinary shares in a private
placement. The warrants are immediately exercisable and will expire five and one-half years from the issuance date at an exercise price
of $0.80 per ordinary share, subject to adjustment as set forth therein. The warrants may be exercised on a cashless basis if at the time
of exercise thereof, there is no effective registration statement registering the ordinary shares underlying the warrants. We paid an
aggregate of $280,000 in placement agent fees, a management fee equal to 1.0% of the gross proceeds raised in the offering, a non-accountable
expense allowance of $65,000 and clearing expenses of $12,900. We also issued unregistered placement agent warrants to purchase up to
an aggregate of 466,667 ordinary shares on the same terms as the warrants issued to the investors in the private placement, except they
have a term of five years and an exercise price of $0.75 per share. On July 27, 2020, as part of the Exercise Agreement (see below), aggregate
warrants to purchase 5,833,336 ordinary shares were exercised for ordinary shares. During the first quarter of 2021, all of the outstanding
warrants in the aggregate amount of warrants to purchase an aggregate 1,300,000 ordinary shares were exercised into ordinary shares, at
exercise prices ranging from $0.75-$0.80 per share, for total gross proceeds to us of approximately $1.0 million.
84
On May 4, 2020, we consummated a registered direct offering of
7,500,001 ordinary shares in a registered direct offering at a purchase price of $0.60 per share, resulting in gross proceeds of approximately
$4,500,000. In addition, we issued to the investors unregistered warrants to purchase up to an aggregate of 7,500,001 ordinary shares
in a concurrent private placement. The warrants are immediately exercisable and will expire five and one-half years from the issuance
date at an exercise price of $0.80 per ordinary share, subject to adjustment as set forth therein. The warrants may be exercised on a
cashless basis if at the time of exercise thereof, there is no effective registration statement registering the ordinary shares underlying
the warrants. We paid an aggregate of $315,000 in placement agent fees, a management fee equal to 1.0% of the gross proceeds raised in
the offering, a non-accountable expense allowance of $65,000 and clearing expenses of $12,900. We also issued unregistered placement agent
warrants to purchase up to an aggregate of 525,000 ordinary shares on the same terms as the warrants issued to the investors in the private
placement, except they have a term of five years and an exercise price of $0.75 per share. On July 27, 2020, as part of the Exercise Agreement
(see below), aggregate warrants to purchase 5,833,334 ordinary shares were exercised for ordinary shares. During the first quarter of
2021, all the warrants for an aggregate 2,191,667 ordinary shares were exercised into ordinary shares, at exercise prices ranging from
$0.75-$0.80 per share, for total gross proceeds to us of approximately $1.7 million.
On May 13, 2020, we consummated a registered direct offering of
5,000,000 ordinary shares in a registered direct offering at a purchase price of $0.60 per share, resulting in gross proceeds of $3,000,000.
In addition, we issued to the investors unregistered warrants to purchase up to an aggregate of 5,000,000 ordinary shares in a concurrent
private placement. The warrants are immediately exercisable and will expire five and one-half years from the issuance date at an exercise
price of $0.80 per ordinary share, subject to adjustment as set forth therein. The warrants may be exercised on a cashless basis if at
the time of exercise thereof, there is no effective registration statement registering the ordinary shares underlying the warrants. We
paid an aggregate of $210,000 in placement agent fees, a management fee equal to 1.0% of the gross proceeds raised in the offering, a
non-accountable expense allowance of $32,500 and clearing expenses of $12,900. We also issued unregistered placement agent warrants to
purchase up to an aggregate of 350,000 ordinary shares on the same terms as the warrants issued to the investors in the private placement,
except they have a term of five years and an exercise price of $0.75 per share. On July 27, 2020, as part of the Exercise Agreement (see
below), aggregate warrants to purchase 3,333,333 ordinary shares were exercised for ordinary shares. As. During the first quarter of 2021,
all the remaining warrants for an aggregate 2,016,667 ordinary shares were exercised into ordinary shares, at exercise prices ranging
from $0.75-$0.80 per share, for total gross proceeds to us of approximately $1.6 million.
On July 23, 2020, we entered into a warrant exercise agreement,
or the Exercise Agreement, with several existing institutional investors who are the holders, or the Holders, of warrants issued in May
2020, April 2020, February 2019 and November 2017, or the Old Warrants, to purchase our ordinary shares, pursuant to which the Holders
agreed to exercise in cash their Old Warrants to purchase up to an aggregate of 16,054,223 ordinary shares having exercise prices ranging
from $15.00 to $0.80 per share issued by us, at a reduced exercise price of $0.60 per share, resulting in gross proceeds of approximately
$9.6 million. Closing occurred on July 27, 2020. Under the Exercise Agreement, we also issued to the Holders new unregistered warrants
to purchase up to 19,265,068 ordinary shares, or the Private Placement Warrants. The Private Placement Warrants are immediately exercisable,
expire five and one-half years from issuance date and have an exercise price of $0.80 per share, subject to adjustment as set forth therein.
The Private Placement Warrants may be exercised on a cashless basis if at the time of exercise thereof, there is no effective registration
statement registering the ordinary shares underlying the warrants. We paid an aggregate of $674,277 in placement agent fees a management
fee equal to 1.0% of the gross proceeds raised in the offering, a non-accountable expense allowance of $65,000 and clearing expenses of
$12,900 and issued unregistered placement agent warrants to purchase up to an aggregate of 1,123,796 ordinary shares on the same terms
as the warrants issued to the Holders, except that they have an exercise price of $0.75 per share. During the first quarter of 2021, certain
warrants holders and the placement agent exercised 17,572,552 Private Placement Warrants and 1,123,796 warrants, respectively, at exercise
prices ranging from $0.75-$0.80 per share, for total gross proceeds to us of approximately $14.9 million.
85
During the first quarter of 2021, certain warrant holders exercised
24,204,682 warrants underlying ordinary shares, as a result of which we issued an aggregate of 24,204,682 ordinary shares, at exercise
prices ranging from $0.75-$0.80 per share, for total gross proceeds of approximately $19.2 million.
On July 2, 2021, we consummated a registered direct offering of
25,925,926 ordinary shares and warrants to purchase up to 25,925,926 ordinary shares, or the July 2021 Offering. Each ordinary share was
sold together with one warrant to purchase one ordinary share at a combined purchase price of $1.35 per share and accompanying warrant,
for aggregate gross proceeds of approximately $35,000,000, excluding any proceeds that may be received upon exercise of the warrants.
Each warrant will be immediately exercisable and will expire on January 2, 2024. The exercise price of each warrant is $1.50 per ordinary
share, subject to adjustment as set forth therein. The warrants may be exercised on a cashless basis if at the time of exercise thereof,
there is no effective registration statement registering the issuance or resale of ordinary shares underlying the warrants. The ordinary
shares and the warrants are separable and were issued separately, but purchased together in this offering. We agreed to pay the
placement agent an aggregate fee equal to 7.0% of the gross proceeds of the offering, a management fee of 1.0% of the gross proceeds of
the offering, a non-accountable expenses allowance of $25,000, fees and expenses up to $100,000, and a clearing fee of $15,950. In addition,
issued to the placement agent or its designees warrants to purchase up to a total of 5.0% of the aggregate number of ordinary shares sold
in the transaction, or warrants to purchase up to 1,296,296 ordinary shares, substantially on the same terms as the warrants issued to
the investors in the private placement, except that the placement agent warrants will have an exercise price of $1.6875 per share (which
represents 125% of the investors’ purchase price per share and accompanying warrant). Upon any exercise of the warrants for cash,
we agreed to pay the placement agent a total cash fee equal to 7.0% of the aggregate gross proceeds from the exercise of the warrants,
a management fee equal to 1.0% of the aggregate gross proceeds from the exercise of the warrants, and warrants to purchase up to 5.0%
of the number of ordinary shares issued upon the cash exercise of the warrants.
On March 3, 2022, we consummated a registered direct offering of
20,000,000 ordinary shares and warrants to purchase up to 15,000,000 ordinary shares, or the March 2022 Offering. Each ordinary share
was sold together with one warrant to purchase 0.75 ordinary share at a combined purchase price of $0.5 per share and accompanying warrant,
for aggregate gross proceeds of $10,000,000, excluding any proceeds that may be received upon exercise of the warrants. Each warrant
will be immediately exercisable and will expire on March 3, 2027. The exercise price of each warrant is $0.65 per ordinary share, subject
to adjustment as set forth therein. The warrants may be exercised on a cashless basis if at the time of exercise thereof, there is no
effective registration statement registering the issuance or resale of ordinary shares underlying the warrants. The ordinary shares and
the warrants are separable and were issued separately, but purchased together in this offering. We agreed to pay the placement agent
an aggregate fee equal to 7.0% of the gross proceeds of the offering, a management fee of 1.0% of the gross proceeds of the offering,
a non-accountable expenses a of $70,000, and a clearing fee of $15,950. In addition, we agreed to issue to the placement agent or its
designees warrants to purchase up to a total of 5.0% of the aggregate number of ordinary shares sold in the transaction, or warrants to
purchase up to 1,000,000 ordinary shares, substantially on the same terms as the warrants issued to the investors in the private placement,
except that the placement agent warrants will have an exercise price of $0.625 per share (which represents 125% of the investors’
purchase price per share and accompanying warrant) and expiration date of March 1, 2027. Upon any exercise of the warrants for cash, we
agreed to pay the placement agent a total cash fee equal to 7.0% of the aggregate gross proceeds from the exercise of the warrants, a
management fee equal to 1.0% of the aggregate gross proceeds from the exercise of the warrants, and warrants to purchase up to 5.0% of
the number of ordinary shares issued upon the cash exercise of the warrants. Simultaneously with this offering, we entered into a warrant
amendment agreement, or the Warrant Amendment Agreement, with the investors in the March 2022 Offering. Pursuant to the Warrant Amendment
Agreement, certain warrants to purchase up to an aggregate of 18,525,927 ordinary shares of the Company that were issued to the investors
in the July 2021 Offering were amended to have a reduced exercise price of $0.65 per share and the term of exercise was extended to January
2, 2025.
86
For the years ended December 31, 2020 and 2019, we received cash
in the amount of $31,000, and $59,000, respectively, in grants from the IIA for the financing of a portion of our research and development
expenditure. Since our inception through December 31, 2021, we had received funding from the IIA for research and development of C-Scan
in the aggregate amount of approximately $5.6 million. As of December 31, 2021, we had not paid any royalties to the IIA and had
a contingent obligation to the IIA with respect to such funding (including interest at the rate of 12-month LIBOR) in the amount of approximately
$6.1 million. In addition, in January 2021, we received an IIA grant approval to support
the funding of our transition from research and development to manufacturing in the amount of up to $786,000 (along with a co-investment
by us of the same amount) , which we are not required to repay to the IIA, subject to the terms and conditions set forth in the grant
approval, of which we received approximately $349,000 in 2021 and $82,000 in January 2022.
We are a clinical and development-stage medical diagnostics
company and have not yet generated revenues. We have incurred net losses in each fiscal year since we commenced operations in 2009. We
incurred net losses of $17.2 million, $13.8 million and $13.8 million in 2021, 2020 and 2019, respectively. As of December 31, 2021, our
accumulated deficit was $108.2 million. The extent of our future operating losses and the timing of becoming profitable are uncertain.
We believe that current cash on hand will be sufficient to fund our ongoing operations
and plans into the first quarter of 2024. We expect that we will continue to generate losses from our research and development and clinical
trials, regulatory activities, manufacturing infrastructure and commercialization efforts of C-Scan, which will result in a negative cash
flow from operating activity. The actual amount of cash that we will need to operate is subject to many factors, including, but not limited
to, the initiation, timing, progress and results of our clinical trials and other product development efforts along with cost to commercialize
our product.
We anticipate that we will need to raise substantial additional
financing in the future to fund our operations. In order to meet these additional cash requirements, we may incur debt, license certain
intellectual property, and seek to sell additional equity or convertible securities that may result in dilution to our shareholders. If
we raise additional funds through the issuance of equity or convertible securities, these securities could have rights or preferences
senior to those of our ordinary shares and could contain covenants that restrict our operations. There can be no assurance that we will
be able to obtain additional equity or debt financing on terms acceptable to us, if at all. Our future capital requirements will depend
on many factors, including:
| • |
our ability to obtain funding from third parties, including any future collaborative partners; |
| • |
the scope, rate of progress and cost of our clinical trials and other research and development programs; |
| • |
the time and costs required to gain regulatory approvals; |
| • |
the terms and timing of any collaborative, licensing and other arrangements that we may establish; |
| • |
the costs of filing, prosecuting, defending and enforcing patents, patent applications, patent claims, trademarks and other intellectual
property rights; |
| • |
any product liability or other lawsuits related to our product; |
| • |
the expenses needed to attract and retain skilled personnel; |
| • |
the costs and timing of future commercialization activities, including product manufacturing, marketing, sales, and distribution;
|
| • |
the revenue, if any, received from commercial sales of our product; |
87
| • |
the general and administrative expenses related to being a public company; |
| • |
the effect of competition and market developments |
| • |
future clinical trial results; and. |
| • |
the COVID – 19 pandemic |
Historical Cash Flows
The following table summarizes our statement of cash flows for the years ended December
31, 2021, 2020, and 2019.
|
Year Ended December 31, |
||||||||||||
| 2021
|
2020 |
2019 |
||||||||||
|
(US$ in thousands) |
||||||||||||
|
Net cash used in operating activities |
$ |
(16,264 |
) |
$ |
(13,113 |
) |
$ |
(12,843 |
) | |||
|
Net cash provided by (used in) investing activities |
$ |
(16,006 |
) |
$ |
(10,451 |
) |
$ |
5,445 |
||||
|
Net cash provided by financing activities |
$ |
51,024 |
$ |
23,582 |
$ |
6,511 |
||||||
Operating Activities
Net cash used in operating activities for the year ended December
31, 2021 was $16.3 million, as compared to $13.1 million for the year ended December 31, 2020. The increase in net cash used in operating
activities in 2021 was attributable primarily to the increase in operating loss offset by an increase in trade accounts payable, accruals
and other current liabilities, as compared to 2020. Net cash used in operating activities for the year ended December 31, 2020 was $13.1
million, as compared to $12.8 million for the year ended December 31, 2019. The increase in net cash used in operating activities in 2020
was attributable primarily to the increase in operating loss and decrease in trade accounts payable, accruals and other current liabilities,
as compared to 2019.
Investing Activities
Net cash used in investing activities for the year ended December
31, 2021 was $16.0 million, comprised primarily of investment in short-term bank deposits in the amount of $15.0 million and purchase
of property and equipment in the amount of $1.0 million. Net cash used in investing activities for the year ended December 31, 2020 was
$10.5 million, comprised primarily of investment in short-term bank and other deposits in the amount of $10.1 million and purchase of
property and equipment in the amount of $0.4 million. Net cash provided by investing activities for the year ended December 31,
2019 was $5.4 million, comprised primarily of proceeds from short-term bank deposits in the amount of $5.6 million and purchase of property
and equipment in the amount of $0.17 million.
Financing Activities
Net cash provided by financing activities for the year ended December
31, 2021 was $51.0 million, comprised primarily of net proceeds of $31.8 million from the issuance of ordinary shares in the July 2021
registered direct offering and $19.2 from exercise of warrants during the first quarter of 2021. Net cash provided by financing
activities for the year ended December 31, 2020 was $23.6 million, comprised primarily of net proceeds of $4.73 million from the issuance
of ordinary shares in the February 2020 private placement, net proceeds of $10.2 million from the April 2020 and May 2020 registered direct
offerings and net proceeds of $8.7 million from the July 2020 warrant exercise transaction. Net cash provided by financing activities
for the year ended December 31, 2019 was $6.5 million, comprised of proceeds from the issuance of ordinary shares in the February 2019
registered direct offering, net of issuance expenses.
We expect that our sources of cash for the year ended December 31, 2022 will include
cash held in our bank accounts and may include proceeds from issuance of ordinary shares as a result of financing transactions or from
the exercise of warrants.
88
Capital and Operating Expenditures
We expect to incur losses from operations for the foreseeable future.
In 2022, we expect to incur increasing research and development expenses, including expenses related to the hiring of personnel and conducting
additional clinical trials including the pivotal study in the United States that we plan to initiate in April 2022 and costs associated
with manufacturing scale up.
Our expected future expenditures related to product, clinical and
regulatory clearances include the following:
| • |
completion of the clinical development of C-Scan; |
| • |
conducting clinical trials in the United States and other territories for purposes of regulatory approval and post-marketing validation;
|
| • |
development of advanced version and future generations of C-Scan and future products; |
| • |
FDA and additional regulatory filing activities in countries we intend to commercialize our system; |
| • |
Manufacturing scale up costs; and |
| • |
Capital expenditures. |
We expect that our general and administrative expenses will also
increase as we expand our finance and administrative staff, add infrastructure, and incur additional costs related to being a public company
in the United States, including directors’ and officers’ liability insurance, investor relations programs, and increased professional
fees.
We believe that our cash and cash equivalents and short-term deposits will be sufficient
to fund our operations and plans including the U.S. pivotal study, into the first quarter of 2024.
Management’s plans include additional fund raising in the
future in order to secure sufficient cash resources to finance our plans above and to begin the commercialization efforts for our products.
To meet our capital needs, we are considering multiple alternatives,
including, but not limited to, additional equity financings and other funding transactions. While we have been successful in raising financing
in the past, there can be no assurance that we will be able to do so in the future on a timely basis on terms acceptable to us, or at
all. Uncertain market conditions and approval by regulatory bodies and adverse results from clinical trials may (among other reasons)
adversely impact our ability to raise capital in the future.
In the event we are unable to successfully raise additional capital,
we will not have sufficient cash flows and liquidity to finance our business operations as currently contemplated. Accordingly, in such
circumstances we would be compelled to immediately reduce general and administrative expenses and delay research and development projects
and clinical trials, until we are able to obtain sufficient financing. If such sufficient financing is not received timely, we would then
need to pursue a plan to license or sell our assets, seek to be acquired by another entity, cease operations and/or seek bankruptcy protection.
See “Item 3D “Key Information – Risk Factors—Risks
Related to Our Financial Position.”
The table below summarizes our contractual obligations as of December 31, 2021 and should be read together with the accompanying comments that follow.
|
Payments due by period |
||||||||||||||||||||
|
(US$ in thousands) |
||||||||||||||||||||
|
Total |
Less than 1 year |
1-3 years |
4-5 years |
More than 5 years |
||||||||||||||||
|
Operating lease obligations (1): |
$ |
1,145 |
350 |
605 |
190 |
- |
||||||||||||||
|
Royalties to ASIC designer (2) |
$ |
132 |
- |
132 |
- |
- |
||||||||||||||
The above table does not include royalties that we may be required to pay to the IIA. For more information, see
Item 4B “Information on Our Company—Business Overview—Research and Development.”
The above table also does not include contingent contractual obligations or commitments that may enter into effect in the future.
|
(1) |
Operating lease obligations consist of payments pursuant to a
lease agreement for office facilities in effect as of December 31, 2021, as well as lease agreements for vehicles, which generally run
for a period of three years. See Note 5 to our audited consolidated financial statements presented elsewhere in this Annual Report.
|
|
(2) |
Provision for royalties to an ASIC designer (see below “Royalties provision”)
|
89
Royalties provision
Provision for royalties to an ASIC designer
In December 2007, we entered into an agreement for the development
of an application specific integrated circuit, or ASIC, component to be used as an amplifier for the capture of signals at low frequencies
from X-ray detectors contained in our product. The ASIC developer is entitled to receive royalties from us in the amount of €0.5
(approximately $0.57) for every ASIC component that we will sell, up to €200,000 (approximately $226,000). The net present value
of the royalty liability to the ASIC designer is dependent upon our management estimates and assumption as to future product shipments
and interest rates used to calculate the present value of the cash payments required to repay the royalties to the ASIC designer. In calculating
the present value of future royalty payments to the ASIC designer, we used a discount factor of 17.6%, commensurate with our risk at the
date of initial recognition of the liability. Any updates in the expected product shipments and the liability will be recorded to profit
and loss each period. As of December 31, 2021, it was probable that we will be required to pay the above mentioned royalties, and accordingly,
a liability for this reimbursement has been accounted for in our financial statements in the amount of $132,000.
As more information is gathered to assist our management in making
forecasts, the liability will be updated.
| C. |
Research and development, patents and licenses, etc. |
For a description of our research and development programs and
the amounts that we have incurred over the last three years pursuant to those programs, see Item 4B “Information on Our Company—Business
Overview—Research and Development.”
| D. |
Trend Information |
Our results of operations and financial condition may be affected
by various trends and factors discussed in Item 3D “Key Information—Risk factors,” Item 4 “Information on Our
Company” and elsewhere in this Item 5 “Operating and Financial Review and Prospects”
| E. |
Critical Accounting Estimates |
Our consolidated financial statements are prepared in accordance
with U.S. GAAP. The preparation of our financial statements requires us to make estimates, judgments and assumptions that can affect the
reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and
the reported amounts of expenses during the reporting periods. We base our estimates, judgments and assumptions on historical experience
and other factors that we believe to be reasonable under the circumstances. Materially different results can occur as circumstances change
and additional information becomes known. See Note 2 to our audited consolidated financial statements presented elsewhere in this Annual
Report for a description of the significant accounting policies that we used to prepare our consolidated financial statements.
We believe the following critical policies reflect the more significant
judgments and estimates used in preparation of the Consolidated Financial Statements.
90
Share-based compensation
We
recognize expense for our share-based compensation based on the fair value of the awards granted. We estimate the fair value of equity-based
payment awards on the date of grant. The value of the portion of the award that is ultimately expected to vest is recognized as expense
over the requisite service periods in our consolidated statement of operations.
We
recognize compensation expenses for the value of our awards granted based on the graded-vesting method over the requisite service period
for each separately vesting portion of the award.
We
recognize compensation cost for awards with performance conditions if and when we conclude that it is probable that the performance conditions
will be achieved. We reassess at each reporting period the probability of vesting for awards with performance conditions and adjust compensation
cost based on our probability assessment.
We
use the Black-Scholes-Merton option-pricing model for our share-based awards. The option-pricing model requires a number of assumptions,
of which the most significant are the fair market value of the underlying ordinary shares, expected share price volatility and the expected
option term. In the year ended December 31, 2021, 2020 and 2019, expected volatility was calculated based upon actual historical stock
price movements over the most recent periods ending on the grant date, equal to the expected term of the options.
The
expected option term represents the period of time that options granted are expected to be outstanding. The expected option term is determined
based on the simplified method in accordance with Staff Accounting Bulletin No. 110, as adequate historical experience is not available
to provide a reasonable estimate.
The risk-free interest rate
is based on the yield from U.S. treasury bonds with an equivalent term. We have historically not paid dividends and have no foreseeable
plans to pay dividends.
Equity
In
the years ended December 31, 2021 and December 31, 2020 we completed certain financing transactions in which we issued ordinary shares
and warrants. The warrants are immediately exercisable at a fixed exercise price per ordinary share, subject to certain adjustments and
will expire on the expiring date as determined in the applicable warrant. The warrants may be exercised on a cashless basis if at the
time of exercise thereof, there is no effective registration statement registering the ordinary shares underlying the warrants. We analyzed
the terms of the warrants and concluded that the terms of the warrants did not include features that would preclude equity classification.
Therefore, we classified the warrants as equity.
Recent Accounting Pronouncements
See Note 2 to our audited consolidated financial statements presented
elsewhere in this Annual Report for a description of the recent accounting policies.
91
ITEM 6. DIRECTORS,
SENIOR MANAGEMENT AND EMPLOYEES
| A. |
Directors and senior management |
The following table sets forth information for our executive officers
and directors as of March 15, 2022. Unless otherwise stated, the address for our directors and executive officers is c/o Check-Cap Ltd.,
29 Abba Hushi Avenue, P.O. Box 1271, Isfiya, 3009000, Israel.
|
Name |
Age |
Position(s) | ||
|
Alex Ovadia |
60 |
Chief Executive Officer | ||
|
Mira Rosenzweig |
50 |
Chief Financial Officer | ||
|
Yoav Kimchy |
61 |
Chief Technology Officer | ||
|
Boaz Shpigelman |
50 |
Vice President, Research and Development | ||
|
Joshua (Shuki) Belkar |
53 |
Vice President, Operations | ||
|
Hanit Brenner-Lavie(1) |
50 |
Vice President, Clinical Affairs | ||
|
Israel Hershko |
56 |
Vice President, Quality Assurance and Regulatory Affairs | ||
|
Steven Hanley (2)(3) |
54 |
Chairman of the Board of Directors | ||
|
Clara Ezed (4)(5) |
52 |
Director | ||
|
Mary Jo Gorman (2)(3)(4)(5) |
62 |
Director | ||
|
XiangQian (XQ) Lin |
40 |
Director | ||
|
Yuval Yanai (2)(3)(4)(5) |
69 |
Director |
________________________
| (1) |
Dr. Hanit Brenner-Lavie has served as Vice President, Clinical Affairs since September 1, 2021. Dr. Segal, our former Vice
President of Clinical Affairs, had served in such capacity from October 2019 until September 2021 (commencing February 24, 2021, in a
60% capacity). |
| (2) |
Member of our Nominating Committee. |
| (3) |
Member of our Financing Committee. |
| (4) |
Member of our Compensation Committee. |
| (5) |
Member of our Audit Committee. |
Executive Officers and Directors
Alex Ovadia
has served as our Chief Executive Officer since February 26, 2018. Mr. Ovadia has served as a member of the Board of Directors
of our U.S. subsidiary, Check-Cap US, Inc., since March 2018. Prior to that, Mr. Ovadia served as our Chief Operating Officer and Israeli
Site Manager since July 1, 2015, in addition to serving as our Vice President of Research and Development since January 2013. Mr. Ovadia
has more than 25 years of experience leading global operations, in addition to worldwide management of complex projects. From 2001 to
2012, Mr. Ovadia served in various positions as global director and senior manager for CT research and development at Philips Healthcare
– CT Systems. Mr. Ovadia was also appointed as a member of Global CT R&D staff and as a member of management of Philips Medical
System Technologies Ltd. Prior to that, from 1990 to 2001, Mr. Ovadia served as project/systems engineering manager for large scale military
projects, mainly aircraft upgrades for U.S. and European governments performed by Elbit Systems Ltd. Mr. Ovadia holds a BSc degree in
electrical engineering from the Technion-Israel Institute of Technology.
Mira Rosenzweig
has served as our Chief Financial Officer since April 2019. Ms. Rosenzweig has 20 years of financial management experience. Prior
to joining Check-Cap, Ms. Rosenzweig served as Chief Financial Officer of Entera Bio Ltd. (Nasdaq: ENTX) since May 2014. Prior to Entera
Bio, from May 2013 to April 2014, Ms. Rosenzweig served as Chief Financial Officer of privately-held Paskal Technologies and, before that,
from September 2008 to November 2011, as Vice President and Chief Financial Officer of Camtek Ltd. (Nasdaq: CAMT). Prior to that, Ms.
Rosenzweig served in various finance roles including at Elron Electronic Industries Ltd. (TASE: ELRN). Ms. Rosenzweig began her career
as a senior accountant at Luboshitz Kasierer, which is now part of Ernst & Young. Ms. Rosenzweig holds a Bachelor of Arts in Accounting
and Economics from the University of Haifa, Israel, and is a Certified Public Accountant (Israel).
92
Yoav Kimchy
has served as our Chief Technology Officer since our inception in April 2009 and served as a member of our board of directors from
2009 and until December 1, 2015. Dr. Kimchy founded Check-Cap LLC in December 2004, serving as its president and chief executive officer
until March 2008, and as its president and chief technical officer since March 2008. Dr. Kimchy has also served as a member of the board
of directors of Check-Cap Ltd. (Delaware), the manager of Check-Cap LLC, since December 2004. Between 2005 and 2012, Dr. Kimchy also served
as our vice president of research and development. Between 2000 and 2003, Dr. Kimchy served as the vice president of research and development
of V-Target Ltd. (Israel), a medical device company developing gamma imaging applications. Prior to that, from 1998 to 2000, Dr. Kimchy
served as the Director of Cardiovascular Research at Impulse Dynamics Ltd. (Israel), a medical device company developing a unique therapeutic
pulsing technology for chronic heart failure. From 1994 to 1998, Dr. Kimchy served as a systems engineer and algorithm specialist for
an Israeli government contract project with the Israeli Navy. Dr. Kimchy also served as a lieutenant in the Israeli Navy. Dr. Kimchy holds
a B.Sc. degree in physics and mathematics from the Hebrew University of Jerusalem, an M.Sc. degree in biomedical engineering from Tel
Aviv University and a PhD from the Technion-Israel Institute of Technology.
Boaz Shpigelman
has served as our Vice President, Research and Development since March 2018. From 2012 to 2018, Mr. Shpigelman served as our director
of development. From 2007 to 2012, Mr. Shpigelman served as R&D Manager at Orsan Medical Technologies Ltd., which develops technologies
for brain monitoring, with particular attention to intracranial pressure and its influence on cerebral perfusion. From 2003 to 2007, Mr.
Shpigelman served as Vice R&D Manager at GI-View, a medical company that developed a single use auto maneuvering colonoscopy. From
1993 to 2003, Mr. Shpigelman held various positions at Scitex/Creo, a company that developed devices for the graphic art field, initially
as a hardware/software developer and subsequently as a director in the input division. Mr. Shpigelman holds a BSc degree in Electrical
Engineering from the Technion-Israel Institute of Technology.
Joshua (Shuki)
Belkar has served as Vice President of Operation since June 2019. Mr. Belkar has more than 20 years of experience managing operations
at global medical device companies, including managing large volume manufacturing of capsule-based products. Prior to joining Check-Cap,
Mr. Belkar served as vice president of operations and global services at Mazor Robotics Ltd., which was recently acquired by Medtronic
Plc. Prior to Mazor Robotics, Mr. Belkar served in various executive roles at Medtronic, including director of operations, vice
president of manufacturing and operations and director of production. Before joining Medtronic Plc., Mr. Belkar served as manager
of production at Elscint Medical Systems Ltd. Mr. Belkar holds a BD degree in Social Sciences from the Open University, Israel, and an
MA degree in logistic management and an executive MBA degree, both from Bar-Ilan University, Israel.
Hanit Brenner-Lavie,
Ph.D. has served as Vice President of Clinical Affairs since September 2021. Dr. Brenner-Lavie brings more than 15 years
of experience in global clinical and regulatory affairs, including experience within the medical devices industry. Most recently, from
2017 to August 2021, Dr. Brenner-Lavie served as the Vice President of Clinical Affairs at Alma Lasers, a global company developing medical
technology for the surgical and medical markets, where she led the successful introduction of innovative medical devices utilizing laser,
ultrasound and radio frequency (RF) technologies to address various medical indications. Previously, from 2012 to 2017, Dr. Brenner-Lavie
held the position of Clinical Director at Lumenis Ltd., a leader in lasers and light-based technological solutions for medical and aesthetic
treatments, and Clinical Research Manager at Syneron Ltd. (today Candela Medical), a global leader in aesthetic medical devices. Dr. Brenner-Lavie
holds a Ph.D. in Medical Sciences from the Technion – Israel Institute of Technology and an M.Sc. degree in Medical Sciences from
the Hebrew University of Jerusalem.
Israel Hershko
has served as Vice President of Quality Assurance and Regulatory Affairs since August 2019. Mr. Hershko has more than 30 years
of experience in quality assurance and regulatory affairs in the medical device industry. Mr. Hershko has led the transfer of several
new products into global markets from the regulatory and quality aspects. Prior to joining Check- Cap, Mr. Hershko held executive positions
as director of quality assurance and regulatory affairs in several medical device companies, including Medical Compression Systems Ltd.,
Q Core Medical Ltd., Syneron and GE Healthcare. Mr. Hershko holds a BA degree in Business from Derby University.
Steven Hanley
has served as a member of our Board of Directors since February 2015 and as the Chairman of our Board of Directors since September
2017, and has served as a member of our Nominating Committee since October 2015 and as a member of our Financing Committee since June
2016. Mr. Hanley served as a member of our Audit Committee from March 2015 until December 2017 and as a member of our Compensation Committee
from March 2015 until March 2019. Mr. Hanley is currently the Co-Founder, board member and Chief Executive Officer of MediBeacon Inc.,
an optical diagnostic company based in St. Louis, Missouri formed upon acquiring assets and intellectual property from Covidien in 2012.
Mr. Hanley is an experienced global business leader who has managed highly complex pharmaceutical and medical device operations with annual
global revenue exceeding US$1 billion. As the President of Covidien plc’s Imaging Solutions business unit, Mr. Hanley led a multifunctional
organization that included sales, marketing, logistics, manufacturing, as well as research and development. Internationally, Mr. Hanley’s
track record includes numerous new drug and device product introductions and sales force expansion in Eastern Europe, China and Latin
America. Mr. Hanley is experienced working in different cultures and successfully navigating dynamic regulatory environments. Over his
nearly 18 years with the Covidien family of companies, Mr. Hanley developed a large network of business leaders and clinicians to help
determine market needs, commercial potential and product positioning. As a sales leader, Mr. Hanley called on radiologists, nuclear medicine
physicians, cardiologists, as well as surgeons in specialties including general, orthopedic, and OB/GYN. Mr. Hanley is Principal and Founder
of Neem LLC, which was founded in 2009 to focus on startup and entrepreneurial medical device and other life science companies with whom
the firm works to bridge the gap between breakthrough technology and commercialization. Mr. Hanley is the Chairman of the Board of Managers
for Daya CNS LLC, based in St Louis Missouri. In addition, Mr. Hanley is currently on the Advisory Board for Kogent Surgical LLC, based
in St Louis Missouri. Mr. Hanley provided consultancy services to us on behalf of Neem LLC from November 2009 until December 31, 2014
and served as a Scientific Advisor to our company from June 2011 until his election to our Board of Directors in February 2015. Mr. Hanley
holds B.A. and M.A. degrees in business administration from Marquette University.
93
Clara Ezed
has served as a member of our Board of Directors since June 2017, and has served as a member of our Audit Committee since December
2017 and as a member of our Compensation Committee since March 2019. Ms. Ezed serves as an Executive Board Director Business Development
of DLRC Ltd., an EU based life-sciences consulting firm, since May 2021. Ms. Ezed has served as Head of EU Operations, EU General Counsel
and VP European Regulatory Affairs of La Jolla Pharmaceutical, a San Diego based biopharmaceutical company, from December 2017 to December
2020. Prior to that, Ms. Ezed served as VP, Legal & Regulatory Affairs of Emas Pharma Ltd., a global contract research organization,
from October 2013 to November 2017. From September 2009 to October 2013, Ms. Ezed served as VP, Regulatory Affairs & Drug Safety of
European Medical Advisory Services Ltd., a global contract research organization. Since 2011, Ms. Ezed has served as a director of a privately
listed company, Sebaroyale Ltd, focused on the development and commercialization of a range of cosmeceuticals. Ms. Ezed, a lawyer and
pharmacist with 22 years’ experience working in the pharmaceutical industry, has managed a large and varied portfolio working in
regulatory and medical affairs, quality assurance, clinical operations and pharmacovigilance. Ms. Ezed holds a BSc. in Pharmacy from the
University of Strathclyde, an MBA degree from Middlesex University, a Postgraduate Diploma in Pharmacovigilance from the University of
Hertfordshire, a Postgraduate Diploma in Law from Nottingham University and a Postgraduate Diploma in Legal Professional Services from
City Law School, London. Ms. Ezed is a member of the Bar of England and Wales and a member of the General Pharmaceutical Council.
Dr. Mary Jo
Gorman has served as a member of our Board of Directors and as a member of our Audit Committee and Compensation Committee since
May 2015, and has served as a member of our Financing Committee since June 2016. From 2019 to 2021, Dr. Gorman served as the chief executive
officer of Healthy Bytes, a venture backed healthcare services company, located in St. Louis, Missouri. Dr. Gorman also serves as Managing
Director at Prosper Capital, an early stage investment fund focused on women-led businesses. In 2006, Dr. Gorman founded Advanced ICU
Care, the largest telemedicine ICU services provider in the United States, in which she also served as Chairman and Chief Executive Officer
from 2006 and 2014. From December 2016 to 2018, Dr. Gorman served as interim CEO and as a member of the audit committee of TripleCare,
a U.S. provider of telemedicine-based healthcare services to skilled nursing facilities, subsequently sold to Curavi Health. Dr. Gorman
served on the board of directors of Curavi Health from 2019 to July 2020. From 1999 to 2006, Dr. Gorman served at IPC-The Hospitalist
Company (Nasdaq:IPCM), a leading national physician group practice, as Chief Medical Officer (2003-2006), Vice President of Medical Affairs
(2001-2003) and Regional Medical Director (1999-2001). From 1996 to 1998, Dr. Gorman served as President of Inpatient Care Group, a hospitalist
group in St. Louis, Missouri, which she had founded to provide hospitalist services to primary care physicians and hospitals and which
was subsequently sold to IPC. From 1991 to 2008, Dr. Gorman served as President of Critical Care Services, Inc., a privately held corporation
which she had founded and which was later sold to Advanced ICU Care. Dr. Gorman was awarded with the following awards: 2015 Distinguished
Alumni Award, Southern Illinois University School of Medicine; 2013 Distinguished Alumni Award, Olin School of Business, Washington University;
2011 EY Entrepreneurial Winning WomenTM Class of 2011; 2009 Top 25 Influential Women in Healthcare by Modern HealthCare Magazine. Dr.
Gorman holds a B.A. degree in Chemistry and Biology (Cum Laude) from St. Louis University, an M.B.A degree from Olin School of Business,
Washington University and an M.D. from Southern Illinois University School of Medicine.
XiangQian (XQ)
Lin has served as a member of our Board of Directors since February 2015. Mr. Lin has served as the President and Chief Executive
Officer of the Esco Group since 2011, and is a life sciences entrepreneur and investor with a demonstrated track record across the United
States, Asia and Europe. In 2018, Mr. Lin served as the founder and managing partner of EVX Ventures, a venture capital firm which builds
and invests in biotech companies across Asia. Mr. Mr. Lin has co-founded multiple companies including Carmine Therapeutics and PairX Bio.
Mr. Lin holds a BSc degree in Economics and Finance from the Wharton School of Business, University of Pennsylvania.
94
Yuval Yanai
has served as a member of our Board of Directors since March 2015 and has served as the Chairman of our Audit Committee and Compensation
Committee since March 2015, as the Chairman of our Nominating Committee since October 2015 and as the Chairman of our Financing Committee
since June 2016. Mr. Yanai served as Senior Vice President and Chief Financial Officer of Given Imaging Ltd. from September 2005 through
March 2014. From October 2000 through August 2005, Mr. Yanai served as Senior Vice President and Chief Financial Officer of Koor Industries
Ltd. Prior to that, from April 1998 to September 2000, Mr. Yanai served as Vice President and Chief Financial Officer of NICE Systems
Ltd., an Israeli global provider of Insight from Interactions, and, from 1991 to April 1998, he served as the Vice President, Finance
and Chief Financial Officer of Elscint Ltd., a former Israeli company engaged in the developing and manufacturing of medical imaging devices.
Mr. Yanai joined Elscint in 1985 and served as Corporate Controller and Corporate Treasurer through 1991. Mr. Yanai also serves as an
external director (within the meaning of the Israeli Companies Law) of S&P Global Maalot. Mr. Yanai also serves as an external director
(within the meaning of the Israeli Companies Law) of Clal Biotechnology Industries and serves as the Chairman of its audit, financial
reporting and compensation committees. Mr. Yanai also serves as a member of the board of directors of PulseNmore Ltd. and as a member
of its finance financial reporting and audit committees. Mr. Yanai also serves as a member of the board of directors of Nobio Ltd.
and BRH Medical Ltd. and as an acting CFO (part time) of Art Medical Ltd. Mr. Yanai also serves as the Chairman of The Israeli Fund for
UNICEF (pro bono). Previously, Mr. Yanai served as an external director (within the meaning of the Israeli Companies Law) of Hadassah
Medical Organization and as the Chairman of its finance and compensation committees and as a member of its tenders and donation committee.
Mr. Yanai also previously served as an external director (within the meaning of the Israeli Companies Law) of Mazor Robotics Ltd. and
Medical Compression Systems Ltd. and as a director of Medigus Ltd. and Alcobra Ltd. Mr. Yanai also served as a director of Macrocure Ltd.,
Citycon Oj, Starplast Industries Ltd., Adama Ltd. (formerly Makteshim-Agan Industries Ltd.), ECI Telecom Ltd., Equity One, Inc., BVR Systems
Ltd., Tadiran Communication Ltd., The Elisra Group, Telrad Networks Ltd. and Medical Compression Systems (D.B.N) Ltd. Mr. Yanai holds
a B.Sc. degree in Accounting and Economics from Tel-Aviv University.
Arrangements Concerning Election of Directors;
Family Relationships
We are not a party to, and are not aware of, any voting agreements
among our shareholders. In addition, there are no family relationships among our executive officers and directors.
Scientific Advisors
Certain of our officers and employees, including our chief executive
officer, our chief technology officer and our clinical director, consult from time to time, on an individual, as needed basis with the
individuals listed below with respect to matters of scientific relevance. We refer to these individuals as our Scientific Advisors. The
amount of consulting services provided by our Scientific Advisors ranges from several hours a month to several hours a year. The names
and biographies of the individuals who act as our Scientific Advisors are set forth below:
Prof. Nadir
Arber is a full Professor of Medicine and Gastroenterology. Prof. Arber is a holder of the Yechiel and Helen Lieber chair for Cancer
Research at Tel Aviv University, Sackler School of Medicine. Prof. Arber serves as the Director of the Integrated Cancer Prevention Center
(ICPC) at Tel Aviv Sourasky Medical Center in Tel Aviv. He chaired the grants committee of the Sackler School of Medicine at Tel Aviv
University. Prof. Arber is the Head of Cancer Research Center, Head of Djerassi Oncology Center. Prof. Arber, a noted expert in the field
of early detection and prevention, has been serving as the principal investigator (PI) of several international, multicenter clinical
trials in the field of early detection, prevention and therapy of gastrointestinal malignancies using NSAIDs and in particular, CRC. Prof.
Arber has published more than 330 publications. Prof. Arber received a MD from the Hadassah School of Medicine of the Hebrew University
of Jerusalem in 1987, an MSc degree from Sackler School of Medicine, Tel Aviv University in 1991 and a MHA degree from Rekanaty School
of Management, Tel Aviv University in 1991. Prof. Arber has served as a Scientific Advisor to the Company since January 2012. We have
entered into a consultation service agreement with Prof. Arber who is a leading investigator in our multicenter clinical study which is
held at Tel Aviv Sourasky Medical Center and other sites.
95
| B. |
Compensation of Directors and Executive Officers |
The aggregate compensation paid and share-based compensation and
other payments expensed by us to our directors and executive officers with respect to the year ended December 31, 2021 was $3.0 million.
This amount includes approximately $0.33 million set aside or accrued to provide pension, severance, retirement or similar benefits or
expenses, but does not include business travel, professional and business association dues and expenses reimbursed to office holders,
and other benefits commonly reimbursed or paid by companies in our industry. As of December 31, 2021, (i) options to purchase 47,008 ordinary
shares granted to our directors and executive officers were outstanding under our 2006 Unit Option Plan, with a weighted average exercise
price of approximately $50.85 per share, (ii) options to purchase 1,891,485 ordinary shares granted to our directors and executive officers
were outstanding under our 2015 Equity Incentive Plan and the United States Sub-Plan to our 2015 Equity Incentive Plan, with a weighted
average exercise price of approximately $1.57 per share; and (iii) 140,542 restricted share units awarded to our directors and executive
officers were outstanding under our 2015 Equity Incentive Plan and the United States Sub-Plan to our 2015 Equity Incentive Plan.
At our 2021 annual general meeting held on December 9, 2021, our
shareholders approved, following the approval of our Compensation Committee and Board of Directors, the payment to each of our directors
of the following fees: (i) an annual fee of $25,000 for service on the Board of Directors and $2,500 for service on the Audit Committee;
and (ii) a per meeting fee of $850 for each meeting of the Board of Directors or any committee thereof attended in person or via telephone.
In addition, our shareholders approved an annual fee of (i) $10,000 for service as Chairman of the Board of Directors (other than an Active
Chairman, who may be entitled to an increased fee in accordance with our Compensation Policy) and (ii) $5,000 for service as Chairman
of the Audit Committee. Our directors also benefit from directors’ and officers’ indemnification and exculpation agreements
as well as from our directors’ and officers’ liability insurance policy. The directors are also entitled to reimbursement
of expenses (including travel, stay and lodging), subject to the Israeli Companies Law and the regulations promulgated thereunder, and
in accordance with our company practices and our Compensation Policy for Executive Officers and Directors, or the Compensation Policy.
The foregoing fees are the same annual and per meeting fees that have been paid to our directors since our 2017 annual general meeting.
The directors are also entitled to reimbursement of expenses (including
travel, stay and lodging), subject to the Israeli Companies Law and the regulations promulgated thereunder, and in accordance with our
company practices and our Compensation Policy for Executive Officers and Directors, or the Compensation Policy.
We do not have any written agreements with any current director
providing for benefits upon the termination of such director’s relationship with us.
To our knowledge, there are no agreements and arrangements between
any director and any third party relating to compensation or other payment in connection with their candidacy or service on our Board
of Directors.
The table below sets forth the compensation paid to our five most
highly compensated office holders (within the meaning of the Israeli Companies Law), in each case during or with respect to the year ended
December 31, 2021. We refer to the five individuals for whom disclosure is provided herein as our “Covered Executives.”
For purposes of the table and the summary below, “compensation”
includes salary cost, consultancy fees, bonuses, equity-based compensation, retirement or termination payments, benefits and perquisites
such as car, phone and social benefits, to the extent applicable, and any undertaking to provide such compensation. All amounts reported
in the table are in terms of cost to us, as recognized in our financial statements for the year ended December 31, 2021, including compensation
paid to such Covered Executive following the end of the year in respect of services provided during the year. Each of the Covered Executives
was covered by our directors’ and officers’ liability insurance policy and was entitled to indemnification and exculpation
in accordance with indemnification and exculpation agreements, our articles of association and applicable law.
96
The exchange rate that we used to calculate the “Salary Cost”
as presented in the following table, was NIS 3.23 to US $1.00, and is provided herein for convenience (such exchange rate is based on
the average of the last-day exchange rate of each of the 12 months during 2021, as published by the Bank of Israel).
|
Salary Cost (1) |
Bonus (2) |
Share-Based Compensation (3) |
Total |
|||||||||||||
|
Name and Principal Position |
US$ |
|||||||||||||||
|
Alex Ovadia – Chief Executive Officer |
$ |
429,436 |
$ |
109,861 |
$ |
65,675 |
$ |
604,973 |
||||||||
|
Yoav Kimchy – Chief Technology Officer |
$ |
385,763 |
$ |
59,308 |
$ |
19,582 |
$ |
464,653 |
||||||||
|
Mira Rosenzweig- Chief Financial Officer |
$ |
291,672 |
$ |
38,979 |
$ |
25,029 |
$ |
355,679 |
||||||||
|
Boaz Shpigelman -Vice President, Research and Development |
$ |
275,901 |
$ |
32,422 |
$ |
22,249 |
$ |
330,572 |
||||||||
|
Joshua (Shuki) Belkar- Vice President, Operation |
$ |
259,122 |
$ |
32,202 |
$ |
22,848 |
$ |
314,172 |
||||||||
________________________
| (1) |
“Salary Cost” includes the Covered Executive’s gross salary plus payment of social benefits made by us on behalf
of such Covered Executive. Such benefits may include, to the extent applicable to the Covered Executive, payments, contributions and/or
allocations for savings funds, education funds, pension, severance, risk insurances, payments for social security and tax gross-up payments,
vacation, a leased car and associated expenses, medical insurances and benefits, convalescence or recreation pay and other benefits and
perquisites consistent with our policies. |
| (2) |
With respect to Mr. Ovadia, represents a special bonus awarded in 2021 and a provision for the 2021 annual bonus, and with respect
to each of the other Covered Executives, represents a provision for the 2021 annual bonus and adjustments to the annual bonus recorded
for the year ended December 31, 2020. The 2021 annual bonuses are subject to the approval of our Compensation Committee and Board of Directors.
|
| (3) |
Represents the share-based compensation expenses recorded in our consolidated financial statements for the year ended December 31,
2021 based on the fair value of the grant date of the equity awards, in accordance with accounting guidance for equity-based compensation.
|
97
The following table sets forth information with respect to the
options and RSUs granted to the Covered Executives for the year ended December 31, 2021.
|
Name |
Date of Grant |
Security Type |
Purchase Price |
Number of Shares Underlying Award |
Expiration Date |
Total Benefit (in US$) |
Benefit recognized in 2021 (in US$) | |||||||
|
Alex Ovadia(2) |
December 9, 2021 |
Options |
$1.34 |
1,150,000 |
December 9, 2031 |
$749,303 |
$23,376 | |||||||
|
Mira Rosenzweig(1) |
August 4, 2021 |
Options |
$1.23 |
49,000 |
August 4, 2031 |
$45,262 |
$10,884 | |||||||
|
August 4, 2021 |
RSU |
21,000 |
August 4, 2031 |
$22,890 |
$5,504 | |||||||||
|
Yoav Kimchy(1) |
August 4, 2021 |
Options |
$1.23 |
31,500 |
August 4, 2031 |
$29,097 |
$6,997 | |||||||
|
August 4, 2021 |
RSU |
13,500 |
August 4, 2031 |
$14,715 |
$3,538 | |||||||||
|
Boaz Shpigelman(1) |
August 4, 2021 |
Options |
$1.23 |
38,500 |
August 4, 2031 |
$35,563 |
$8,551 | |||||||
|
August 4, 2021 |
RSU |
16,500 |
August 4, 2031 |
$17,985 |
$4,325 | |||||||||
|
Joshua (Shuki) Belkar(1) |
August 4, 2021 |
Options |
$1.23 |
45,500 |
August 4, 2031 |
$42,029 |
$10,106 | |||||||
|
August 4, 2021 |
RSU |
19,500 |
August 4, 2031 |
$21,255 |
$5,111 |
________________________
| (1) |
All options and RSUs granted to the Covered Executives (other than Alex Ovadia, our Chief Executive Officer) in fiscal year 2021
vest over a four-year period commencing on their date of grant, such that 25% of the award shall vest on the first anniversary of the
date of grant and 2.0833% will vest at the end of each month thereafter. |
| (2) |
Options granted to Alex Ovadia, our Chief Executive Officer, in fiscal year 2021 vest as follows: (i) two-thirds of the options (options
to purchase 766,667 ordinary shares) shall vest over a period of four years commencing on their date of grant, such that 25% of the options
shall vest on the first anniversary of the date of grant and an additional 2.0833% will vest at the end of each month thereafter; and
(ii) one third of the options (options to purchase 383,333 ordinary shares) shall fully vest upon the approval by the FDA of the use of
C-Scan in humans, subject, in each case, to Mr. Ovadia’s continuing service with the company on each applicable vesting date.
|
Employment Agreements with Covered Executives
We have entered into written employment agreements with each of
our executive officers. These agreements 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 and the United States 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.
98
We entered into an Employment Agreement dated as of December 27,
2012, as amended, with Alex Ovadia, or Mr. Ovadia’s Employment Agreement, pursuant to which Mr. Ovadia served as our Vice President
of Research and Development, Israeli Site Manager and Chief Operations Officer until February 26, 2018. Effective as of February 26, 2018,
Mr. Ovadia was appointed as our Chief Executive Officer and Mr. Ovadia’s Employment Agreement was amended accordingly, effective
as of such date. The terms of Mr. Ovadia’s engagement in his capacity as our Chief Executive Officer were approved by our shareholders
at the extraordinary general meeting of shareholders held on April 2, 2018. Mr. Ovadia’s Employment Agreement, as currently in effect,
may be terminated by either us or Mr. Ovadia upon 90 days’ prior notice to the other party. Pursuant to Mr. Ovadia’s Employment
Agreement, we also have the right to immediately terminate Mr. Ovadia’s employment for “Cause” (as defined in Mr. Ovadia’s
Employment Agreement). Pursuant to Mr. Ovadia’s Employment Agreement, Mr. Ovadia was entitled to an annual salary of NIS 924,000
($286,068 per annum, paid in NIS based on an exchange rate of $1= NIS 3.23). Mr. Ovadia’s salary was subsequently increased in May
2019 to a monthly salary of NIS 80,808 (approximately $25,018 based on an exchange rate of $1= NIS 3.23) and effective as of December
1, 2019, to a monthly base salary NIS 84,500 (approximately $26,161 based on an exchange rate of $1= NIS 3.23), in each case by our Compensation
Committee in reliance on an exemption from shareholder approval available under Israel law. Mr. Ovadia is also entitled to a leased car
and associated expenses up to an aggregate monthly cost of NIS 12,000 (approximately $3,715 based on an exchange rate of $1= NIS 3.23).
In addition, prior to fiscal year 2022, Mr. Ovadia’s employment terms provided that he may be entitled to an annual bonus of up
to 30% of his annual salary subject to receipt of requisite approvals and commencing as of fiscal year 2022, Mr. Ovadia may be entitled
to an annual bonus of up 50%, as approved by the shareholders at the annual general meeting held on December 9, 2021. Payment of the annual
bonus shall be subject to the achievement of certain milestones determined by the Compensation Committee and Board of Directors. Mr. Ovadia’s
Employment Agreement also contains confidentiality, intellectual property, and non-competition and non-solicitation provisions.
We entered into an Employment Agreement effective as of April 28,
2019 with Mira Rosenzweig, or Ms. Rosenzweig’s Employment Agreement, pursuant to which Ms. Rosenzweig serves as our Chief Financial
Officer. Ms. Rosenzweig’s Employment Agreement may be terminated by either us or Ms. Rosenzweig upon 90 days’ prior notice
to the other party. Pursuant to Ms. Rosenzweig’s Employment Agreement, we also have the right to immediately terminate Ms. Rosenzweig’s
employment for “cause” (as described in Ms. Rosenzweig’s Employment Agreement). Pursuant to Ms. Rosenzweig’s Employment
Agreement, Ms. Rosenzweig is entitled to a salary of NIS 720,000 ($222,910 based on an exchange rate of $1= NIS 3.23) per annum. In addition,
Ms. Rosenzweig may be entitled to an annual bonus of up to 25% of her annual salary, based on our evaluation of Ms. Rosenzweig’s
performance and subject to receipt of customary approvals. Ms. Rosenzweig’s Employment Agreement also contains confidentiality,
intellectual property, and non-competition and non-solicitation provisions.
We entered into an Employment Agreement dated as of September 17,
2014, as amended from time to time, with Yoav Kimchy, or Mr. Kimchy’s Employment Agreement, pursuant to which Mr. Kimchy serves
our Chief Technology Officer. Mr. Kimchy’s Employment Agreement may be terminated by either us or Mr. Kimchy upon 120 business days’
prior notice to the other party. Pursuant to Mr. Kimchy’s Employment Agreement, we also have the right to immediately terminate
Mr. Kimchy’s employment for “Cause” (as defined in Mr. Kimchy’s Employment Agreement) or if Mr. Kimchy is unable
to perform his duties for a period of two consecutive months by reason of illness or accident. Pursuant to Mr. Kimchy’s Employment
Agreement, Mr. Kimchy is entitled to a salary of NIS 953,400 ($295,170 based on an exchange rate of $1= NIS 3.23) per annum. Mr.
Kimchy is also entitled to a company car up to an aggregate monthly cost of NIS 5,000 ($1,548 based on an exchange rate of $1= NIS 3.23)
and car associated expenses. In addition, Mr. Kimchy may be entitled to an annual bonus of up to 30% of his annual salary, subject to
receipt of requisite approvals. Payment of the annual bonus shall be subject to the achievement of certain milestones determined by the
Compensation Committee and Board of Directors.
We entered into an Employment Agreement dated as of March 30, 2018,
with Boaz Shpigelman, as amended from time to time, or Mr. Shpigelman’s Employment Agreement, pursuant to which Mr. Shpigelman serves
as our Vice President, Research and Development. Mr. Shpigelman’s Employment Agreement may be terminated by either us or Mr. Shpigelman
upon 30 days’ prior notice to the other party. Pursuant to Mr. Shpigelman’s Employment Agreement, we also have the right to
immediately terminate Mr. Shpigelman’s employment for “Cause” (as defined in Mr. Shpigelman’s Employment Agreement).
Pursuant to Mr. Shpigelman’s Employment Agreement, Mr. Shpigelman is entitled to a salary of NIS 651,060 ($201,567 based on an exchange
rate of $1= NIS 3.23) per annum. Mr. Shpigelman’s Employment Agreement also contains confidentiality, intellectual property, and
non-competition and non-solicitation provisions.
We entered into an Employment Agreement effective as of June 16,
2019 with Joshua (Shuki) Belkar, or Mr. Belkar’s Employment Agreement, pursuant to which Mr. Belkar serves as our Vice President,
Operation. Mr. Belkar’s Employment Agreement may be terminated by either us or Mr. Belkar upon 90 days’ prior notice to the
other party. Pursuant to Mr. Belkar’s Employment Agreement, we also have the right to immediately terminate Mr. Belkar’s employment
for “cause” (as described in Mr. Belkar’s Employment Agreement). Pursuant to Mr. Belkar’s Employment Agreement,
Mr. Belkar is entitled to a salary of NIS 636,000 ($196,904 based on an exchange rate of $1= NIS 3.23) per annum. In addition, Mr. Belkar
may be entitled to an annual bonus of up to 25% of his annual salary, based on our evaluation of Mr. Belkar’s performance and subject
to receipt of customary approvals. Mr. Belkar’s Employment Agreement also contains confidentiality, intellectual property, and non-competition
and non-solicitation provisions.
Our agreements with our executive officers do not provide for benefits
upon the termination of their respective employment with us, other than payment of salary and benefits during the required notice period
for termination of these agreements, which varies under these individual agreements.
99
| C. |
Board Practices |
Board of Directors
Under the Israeli Companies Law, the management of our business,
including strategy and policies, is vested in our board of directors. Our board of directors may exercise all powers and may take all
actions that are not specifically granted to our shareholders or to management. Our executive officers are responsible for our day-to-day
management and have individual responsibilities established by our board of directors. Our chief executive officer is appointed by, and
serves at the discretion of, our board of directors, subject to the employment agreement that we have entered into with him. All other
executive officers are appointed by our chief executive officer, and are subject to the terms of any applicable employment agreements
that we may enter into with them.
Under our amended articles of association, our board of directors
must consist of at least four and not more than eleven directors, including the external directors (if external directors serve on the
board of directors).
Our Board of Directors currently consists of five members, four
of whom satisfy the independence requirements of the Nasdaq Listing Rules, such that we comply with the Nasdaq Listing Rule that requires
that a majority of our board of directors be comprised of independent directors, within the meaning of Nasdaq Listing Rules.
Our directors are elected by the general meeting of our shareholders
by the vote of a majority of the ordinary shares present, in person or by proxy, and voting at that meeting. Each director will hold office
until the first annual general meeting of shareholders following his or her appointment, unless the tenure of such director expires earlier
pursuant to the Israeli Companies Law or unless he or she is removed from office as described below. In addition, our amended articles
of association allow our board of directors to appoint directors (other than the external directors) to fill vacancies on our board of
directors, for a term of office equal to the remaining period of the term of office of the director(s) whose office(s) have been vacated.
We rely on the exemption available to foreign private issuers under
the Nasdaq Listing Rules and follow Israeli law and practice with regard to the process of nominating directors, in accordance with which
our board of directors (or a committee thereof) is authorized to recommend to our shareholders director nominees for election. Our Board
of Directors has established a non-independent Nominating Committee, whose role is to select and recommend to the Board of Directors for
selection, director nominees, while considering the appropriate size and composition of the Board of Directors, the requirements applicable
to all members of the Board of Directors and the criteria for the selection of new members of the Board of Directors.
Under the Israeli Companies Law and our amended articles of association,
nominations for directors may also be added to the agenda of a future general meeting of shareholders, at the request of any one or more
shareholders holding at least 1% of our outstanding voting power. Any director nominated by a shareholder is required to certify to us,
as required by all director nominees, that he or she meets all the requirements of the Israeli Companies Law for election as a director
of a public company, and possesses the necessary qualifications and is able to dedicate sufficient time, to fulfill his or her duties
as a director of our company, taking into consideration our company’s size and special needs.
Under the Israeli Companies Law, our board of directors must determine
the minimum number of directors who are required to have accounting and financial expertise (as defined in regulations promulgated under
the Israeli Companies Law). In determining the number of directors required to have such expertise, our board of directors must consider,
among other things, the type and size of the company and the scope and complexity of its operations. Our board of directors has determined
that the minimum number of directors of our company who are required to have accounting and financial expertise is one.
External Directors
Under the Israeli Companies Law, companies incorporated under the
laws of the State of Israel that are “public companies,” must appoint at least two external directors who meet the qualification
requirements in the Companies Law.
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However, pursuant to regulations promulgated under the Israeli
Companies Law, Israeli companies whose shares are listed on certain stock exchanges outside of Israel (including the Nasdaq Capital Market)
with no controlling shareholder (within the meaning of the Israeli Companies Law), such as ourselves, that satisfy the requirements of
the laws in the foreign jurisdiction where the company’s shares are listed, as they apply to companies incorporated in such jurisdiction,
with respect to the appointment of independent directors and the composition of the audit committee and compensation committee, may elect
to exempt themselves from the requirements of Israeli law with respect to (i) the requirement to appoint outside directors and that one
outside director serve on each committee of the board of directors authorized to exercise any of the powers of the board of directors;
(ii) certain limitations on the employment or service of an outside director or his or her spouse, children or other relatives, following
the cessation of the service as an outside director, by or for the company, its controlling shareholder or an entity controlled by the
controlling shareholder; (iii) the composition, meetings and quorum of the audit committee; and (iv) the composition and meetings of the
compensation committee. If a company has elected to avail itself from the requirement to appoint external directors and at the time a
director is appointed all members of the board of directors are of the same gender, a director of the other gender must be appointed.
Following analysis of our qualification to rely on the exemption,
our Board of Directors determined to adopt the exemption, subject to and effective as of the approval by our shareholders of a certain
amendment to our articles of association, which was obtained at our 2017 annual general meeting held on June 22, 2017. If in the future
we were to have a controlling shareholder, we would again be required to comply with the requirements relating to external directors and
the composition of the audit committee and compensation committee under Israeli law.
Audit Committee
Our audit committee currently consists of Yuval Yanai, May Jo Gorman
and Clara Ezed. Yuval Yanai serves as the Chairman of the audit committee.
Composition of the Audit Committee
In accordance with regulations promulgated under the Companies
Law described above, we elected to “opt out” from the Israeli Companies Law requirement to appoint external directors and
related rules concerning the composition of the audit committee and compensation committee. Under such exemption, among other things,
the composition of our audit committee must comply with the requirements of SEC and Nasdaq rules.
Under the Nasdaq corporate governance rules, we are required to
maintain an audit committee consisting of at least three independent directors, within the meaning of the Exchange Act and Nasdaq Listing
Rules, each of whom must be able to read and understand fundamental financial statements, including the company’s balance sheet,
income statement and cash flow statement (and one of whom has past employment experience in finance or accounting, requisite professional
certification in accounting or other comparable experience or background that leads to financial sophistication) and none of whom has
participated in the preparation of our or any of our subsidiary’s financial statements at any time during the prior three years.
All members of our audit committee meet the requirements for financial
literacy under the applicable rules and regulations of the U.S. Securities and Exchange Commission and the Nasdaq Listing Rules. Our board
of directors has determined that Mr. Yanai is an audit committee financial expert as defined by the U.S. Securities and Exchange Commission
rules and has the requisite financial sophistication required by the Nasdaq Listing Rules.
Each of the members of the audit committee qualifies as an “independent
director” within the meaning of Nasdaq Listing Rules and is “independent” as such term is defined in Rule 10A- 3(b)(1)
under the Securities Exchange Act of 1934, as amended, or the Exchange Act, which is different from the general Nasdaq test for independence
of board and committee members.
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Audit Committee Role
Our board of directors adopted an audit committee charter, which
became effective upon the listing of our securities on the Nasdaq Capital Market, as subsequently amended, which sets forth the responsibilities
of the audit committee consistent with the rules of the U.S. Securities and Exchange Commission and the Nasdaq Listing Rules, as well
as the requirements for audit committees under the Israeli Companies Law, including the following:
| • |
oversight of our independent registered public accounting firm and recommending the engagement, compensation or termination of engagement
of our independent registered public accounting firm to the board of directors or shareholders for their approval, as applicable, in accordance
with the requirements of the Israeli Companies Law; |
| • |
recommending the engagement or termination of the person filling the office of our internal auditor; and |
| • |
recommending the terms of audit and non-audit services provided by the independent registered public accounting firm for pre-approval
by our board of directors or shareholders for their approval, as applicable, in accordance with the requirements of the Israeli Companies
Law. |
Our audit committee provides assistance to our board of directors
in fulfilling its legal and fiduciary obligations in matters involving our accounting, auditing, financial reporting, internal control
and legal compliance functions by pre-approving the services performed by our independent accountants and reviewing their reports regarding
our accounting practices and systems of internal control over financial reporting. Our audit committee also oversees the audit efforts
of our independent accountants and takes those actions that it deems necessary to satisfy itself that the accountants are independent
of management.
Under the Israeli Companies Law, our audit committee is responsible
for:
| • |
determining whether there are deficiencies in the business management practices of our company, including in consultation with our
internal auditor or the independent auditor, and making recommendations to the board of directors to improve such practices; |
| • |
determining whether to approve certain related party transactions (including transactions in which an office holder has a personal
interest) and whether such transaction is extraordinary or material under Israeli Companies Law (see “— Approval of Related
Party Transactions under Israeli Law”); |
| • |
determining whether a competitive process must be implemented for the approval of certain transactions with controlling shareholders
or its relative or in which a controlling shareholder has a personal interest (whether or not the transaction is an extraordinary transaction),
under the supervision of the audit committee or other party determined by the audit committee and in accordance with standards to be determined
by the audit committee, or whether a different process determined by the audit committee should be implemented for the approval of such
transactions; |
| • |
determining the process for the approval of certain transactions with controlling shareholders or in which a controlling shareholder
has a personal interest that the audit committee has determined are not extraordinary transactions but are not immaterial transactions;
|
| • |
where the board of directors approves the working plan of the internal auditor, to examine such working plan before its submission
to the board of directors and proposing amendments thereto; |
| • |
examining our internal controls and internal auditor’s performance, including whether the internal auditor has sufficient resources
and tools to dispose of its responsibilities; |
| • |
examining the scope of our auditor’s work and compensation and submitting a recommendation with respect thereto to our board
of directors or shareholders, depending on which of them is considering the compensation of our auditor; and |
| • |
establishing procedures for the handling of employees’ complaints as to the management of our business and the protection to
be provided to such employees. |
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Compensation Committee and Compensation Policy
Our compensation committee currently consists Yuval Yanai, Mary
Jo Gorman and Clara Ezed. Yuval Yanai serves as the Chairman of the compensation committee.
Composition of the Compensation Committee
In accordance with regulations promulgated under the Companies
Law described above, we elected to “opt out” from the Israeli Companies Law requirement to appoint external directors and
related rules concerning the composition of the audit committee and compensation committee.
Under the Nasdaq Listing Rules, we are required to maintain a compensation
committee consisting of at least two directors, each of whom is an independent director within the meaning of the Nasdaq Listing Rules.
Our compensation committee currently complies with the provisions of Nasdaq Listing Rules relating to composition requirements.
Compensation Committee Role
Our board of directors adopted a compensation committee charter,
which became effective upon the listing of our shares on the Nasdaq Capital Market, as subsequently amended, which sets forth the responsibilities
of the compensation committee consistent with the Nasdaq Listing Rules and the requirements for compensation committees under the Israeli
Companies Law, including the following:
| • |
recommending to the board of directors for its approval (i) a compensation policy; (ii) whether a compensation policy should continue
in effect, if the then-current policy has a term of greater than three years (approval of either a new compensation policy or the continuation
of an existing compensation policy must in any case occur every three years); and (iii) periodic updates to the compensation policy. See
“— Compensation Committee and Compensation Policy.” In addition, the compensation committee is required to periodically
examine the implementation of the compensation policy; |
| • |
the approval of the terms of employment and service of office holders (including determining whether the compensation terms of a
candidate for chief executive officer of the company need not be brought to approval of the shareholders); and |
| • |
reviewing and approving grants of options and other incentive awards to persons other than office holders to the extent such authority
is delegated by our board of directors, subject to the limitations on such delegation as provided in the Israeli Companies Law.
|
Compensation Policy
Under the Israeli Companies Law, the duties of the compensation
committee include the recommendation to the company’s board of directors of a policy regarding the terms of engagement of office
holders, as such term is defined in the Israeli Companies Law, to which we refer to as a compensation policy, and any extensions and updates
thereto. The compensation policy must be approved at least once every three years, first, by our board of directors, upon recommendation
of our compensation committee, and second, by the shareholders by the Special Approval for Compensation (as defined below under “—
Approval of Related Party Transactions under Israeli Law — Disclosure of Personal Interests of an Office Holder and Approval of
Certain Transactions”).
Our current Compensation Policy for Executive Officers and Directors,
which was approved by our shareholders at the 2020 annual general meeting held on December 10, 2020, serves as the basis for decisions
concerning the financial terms of employment or engagement of our office holders, including exculpation, insurance, indemnification and
any benefit, monetary payment or obligation of payment in respect of employment or engagement, including and any severance payment or
benefit.
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The Compensation Policy must be determined and later reevaluated
according to certain factors, including: (i) the advancement of a company’s objectives, business plan and its long- term strategy;
(ii) the creation of appropriate incentives for executives, while considering (among other things) the company’s risk management
policy; (iii) the size and the nature of the company’s operations; and (iv) with respect to variable compensation, the contribution
of the office holder towards the achievement of the company’s long-term goals and the maximization of its profits, all with a long-term
objective and in accordance with the position of the office holder.
In accordance with the Israeli Companies law, our Compensation
Policy refers to the following factors:
| • |
the knowledge, skills, expertise, professional experience and accomplishments of the relevant office holder; |
| • |
the office holder’s roles and responsibilities and prior compensation agreements with him or her; |
| • |
with respect to variable compensation – the possibility of reducing variable compensation at the discretion of the board of
directors, and the possibility of setting a limit on the exercise value of non-cash variable equity-based compensation; and |
| • |
with respect to severance compensation, the period of employment or service of the office holder, the terms of his or her compensation
during such period, the company’s performance during such period, the person’s contribution towards the company’s achievement
of its goals and the maximization of its profits, and the circumstances under which the person is leaving the company. |
In addition, in according with the Israeli Companies Law, our Compensation
Policy includes the following principles:
| • |
the link between variable compensation (e.g., bonuses) and long-term performance and measurable criteria (i.e., variable compensation
must be determined based on long-term performance and measurable criteria). Only “non-material” portion of variable compensation
may be determined based on criteria that is not measurable, taking into account office holders’ contribution to the company;
|
| • |
the ratio of variable to fixed compensation, and the ceiling for the value of variable compensation, which is determined at the time
of payment, except that the ceiling for equity-based compensation is determined at the time of grant; |
| • |
the conditions under which an office holder would be required to repay compensation paid to him or her if it was later shown that
the data upon which such compensation was based was inaccurate and was required to be restated in the company’s financial statements;
|
| • |
the minimum holding or vesting period for variable, equity-based compensation, while taking into account long-term objectives; and
|
| • |
maximum limits for severance compensation. |
Nominating Committee
Our Board of Directors has established a non-independent Nominating
Committee, whose role is to select and recommend to the Board of Directors for selection, director nominees, while considering the appropriate
size and composition of the Board of Directors, the requirements of applicable law regarding service as a member of our Board of Directors
and the criteria for the selection of new members of the Board of Directors. We rely on the exemption available to foreign private issuers
under the Nasdaq Listing Rules and follow Israeli law and practice with regard to the process of nominating directors, in accordance with
which our board of directors (or a committee thereof) is authorized to recommend to our shareholders director nominees for election. The
Nominating Committee is currently comprised of the following directors: Yuval Yanai, Steven Hanley and Mary-Jo Gorman. Yuval Yanai serves
as the Chairman of the Nominating Committee.
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Financing Committee
Our Board of Directors has established a financing committee, which
currently consists of Steven Hanley, Yuval Yanai and Mary Jo Gorman. Our financing committee is responsible for the review, approval and
oversight of any potential financings, including the negotiations of any potential financings, and to provide a recommendation to our
Board of Directors concerning the approval of any potential financings.
Internal Auditor
Under the Israeli Companies Law, the board of directors of an Israeli
public company must appoint an internal auditor recommended by the audit committee. An internal auditor may not be:
| • |
a person (or a relative of a person) who holds more than 5% of the company’s outstanding shares or voting rights; |
| • |
a person (or a relative of a person) who has the power to appoint a director or the general manager of the company; |
| • |
an office holder, within the meaning of the Israeli Companies Law (including a director and the general manager) of the company (or
a relative thereof); or |
| • |
a member of the company’s independent accounting firm, or anyone on his or her behalf. |
The role of the internal auditor is to examine, among other things,
our compliance with applicable law and orderly business procedures. The audit committee is required to oversee the activities and to assess
the performance of the internal auditor as well as to approve the internal auditor’s work plan. We have appointed Ms. Dana Gottesman
Erlich of BDO as our internal auditor.
Approval of Related Party Transactions under Israeli Law
Fiduciary Duties of Directors and Executive
Officers
The Israeli Companies Law codifies the fiduciary duties that office
holders owe to a company. Each person listed in the table under “Management—Executive Officers and Directors” is an
office holder under the Israeli Companies Law.
An office holder’s fiduciary duties consist of a duty of
care and a duty of loyalty. The duty of care requires an office holder to act with the level of care with which a reasonable office holder
in the same position would have acted under the same circumstances. The duty of care includes a duty to use reasonable means to obtain:
| • |
information on the advisability of a given action brought for his or her approval or performed by virtue of his or her position;
and |
| • |
all other important information pertaining to any such action. |
The duty of loyalty requires an office holder to act in good faith
and in the best interests of the company, and includes, among other things, the duty to:
| • |
refrain from any conflict of interest between the performance of his or her duties to the company and his or her other duties or
personal affairs; |
105
| • |
refrain from any activity that is competitive with the company; |
| • |
refrain from exploiting any business opportunity of the company to receive a personal gain for himself or herself or others; and
|
| • |
disclose to the company any information or documents relating to the company’s affairs which the office holder received as
a result of his or her position as an office holder. |
We may approve an act specified above which would otherwise constitute
a breach of the office holder’s duty of loyalty, provided that the office holder acted in good faith, the act or its approval does
not harm the company and the office holder discloses his or her personal interest a sufficient amount of time before the date for discussion
of approval of such act.
Disclosure of Personal Interests of an Office Holder and Approval
of Certain Transactions
Disclosure of Personal Interests of an Office Holder
The Israeli Companies Law requires that an office holder promptly
disclose to the company any “personal interest” that he or she may be aware of and all related material information or documents
concerning any existing or proposed transaction with the company. An interested office holder’s disclosure must be made promptly
and in any event no later than the first meeting of the board of directors at which the transaction is considered. A personal interest
includes an interest of any person in an act or transaction of a company, including a personal interest of such person’s relative
or of a corporate entity in which such person or a relative of such person holds 5% or more of the outstanding shares or voting rights,
is a director or general manager or in which he or she has the right to appoint at least one director or the general manager, but excluding
a personal interest arising from one’s ownership of shares in the company. A personal interest includes the personal interest of
a person for whom the office holder holds a voting proxy or the personal interest of the office holder with respect to his or her vote
on behalf of a person for whom he or she holds a proxy even if such shareholder has no personal interest in the matter. An office holder
is not, however, obliged to disclose a personal interest if it derives solely from the personal interest of his or her relative in a transaction
that is not considered an extraordinary transaction. Under the Israeli Companies Law, an extraordinary transaction is defined as any of
the following: a transaction other than in the ordinary course of business; a transaction that is not on market terms; or a transaction
that may have a material impact on a company’s profitability, assets or liabilities.
Generally, a person who has a personal interest in a matter which
is considered at a meeting of the board of directors or the audit committee shall not be present at such a meeting or vote on that matter
unless, with respect to an office holder, the chairman of the audit committee or board of directors (as applicable) determines that the
office holder should be present during the discussions in order to present the transaction that is subject to approval (provided that
the office holder may not vote on the matter). If a majority of the members of the audit committee or the board of directors (as applicable)
has a personal interest in the approval of a transaction, then all directors may participate in discussions of the audit committee or
the board of directors (as applicable) on such transaction and the voting on approval thereof. If a majority of the members of the board
of directors has a personal interest in the approval of a transaction, shareholder approval is also required for such transaction.
Approval of Transactions with Officer Holders
If it is determined that an office holder has a personal interest
in a transaction that is not an extraordinary transaction, approval by the board of directors is required for the transaction, unless
the company’s articles of association provide for a different method of approval. Further, so long as an office holder has disclosed
his or her personal interest in a transaction, the board of directors may approve an act by the office holder that would otherwise be
deemed a breach of his or her duty of loyalty, provided that the transaction is in the company’s best interest and the office holder
acted in good faith. An extraordinary transaction in which an office holder has a personal interest requires approval first by the company’s
audit committee and subsequently by the board of directors.
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Compensation of Officers Other than the Chief Executive Officer
The compensation of an office holder (other than the chief executive
officer) who is not a director generally requires approval first by the company’s compensation committee, then by the company’s
board of directors, according to the company’s compensation policy. In special circumstances the compensation committee and board
of directors may approve a compensation arrangement that is inconsistent with the company’s compensation policy, provided that they
have considered the same considerations and matters required for the approval of a compensation policy in accordance with the Israeli
Companies Law and such arrangement must be approved by a majority vote of the shares present and voting at a shareholders meeting on the
matter, provided that either: (i) such majority includes at least a majority of the shares held by all shareholders who are not controlling
shareholders and shareholders who do not have a personal interest in such compensation arrangement present and voting on the matter, excluding
abstentions; or (ii) the total number of shares of non-controlling shareholders and shareholders who do not have a personal interest in
the matter and who vote against the matter does not exceed 2% of the company’s aggregate voting rights. We refer to this as the
Special Approval for Compensation. However, if the shareholders of the company do not approve a compensation arrangement with an executive
officer that is inconsistent with the company’s compensation policy, the compensation committee and board of directors may, in special
circumstances, override the shareholders’ decision if each of the compensation committee and the board of directors discuss the
arrangement again, analyze the shareholders’ objection and provide detailed reasons for their decision.
An amendment to an existing arrangement with an office holder (other
than the chief executive officer) who is not a director requires only the approval of the compensation committee, if the compensation
committee determines that the amendment is not material in comparison to the existing arrangement. However, according to regulations promulgated
under the Israeli Companies Law, an amendment to an existing arrangement with an office holder (who is not a director) who is subordinate
to the chief executive officer shall not require the approval of the compensation committee, if (i) the amendment is approved by the chief
executive officer and the company’s compensation policy determines that a non-material amendment to the terms of service of an office
holder (other than the chief executive officer) may be approved by the chief executive officer and (ii) the engagement terms are consistent
with the company’s compensation policy.
Compensation of Chief Executive Officer
The compensation of a public company’s chief executive officer
generally requires the approval of first, the company’s compensation committee; second, the company’s board of directors and
third (except for a number of exceptions), the company’s shareholders by the Special Approval for Compensation. However, if the
shareholders of the company do not approve a compensation arrangement with a chief executive officer, the compensation committee and board
of directors may, in special circumstances, override the shareholders’ decision if each of the compensation committee and the board
of directors discuss the arrangement again, analyze the shareholders’ objection and provide detailed reasons for their decision.
However, an amendment to an existing arrangement with a chief executive officer who is not a director requires only the approval of the
compensation committee, if the compensation committee determines that the amendment is not material in comparison to the existing arrangement.
According to regulations promulgated under the Israeli Companies
Law, the renewal or extension of an existing arrangement with a chief executive officer shall not require shareholder approval if (i)
the renewal or extension is not beneficial to the chief executive officer as compared to the prior arrangement or there is no substantial
change in the terms and other relevant circumstances; and (ii) the engagement terms are consistent with the company’s compensation
policy and the prior arrangement was approved by the shareholders by the Special Approval for Compensation.
Compensation of Directors
Arrangements regarding the compensation of a director require the
approval of the compensation committee, board of directors and (except for a number of exceptions) shareholders by ordinary majority,
in that order. The approval of the compensation committee and board of directors must be in accordance with the compensation policy. In
special circumstances, the compensation committee and board of directors may approve a compensation arrangement that is inconsistent with
the company’s compensation policy, provided that they have considered the same considerations and matters required for the approval
of a compensation policy in accordance with the Israeli Companies Law and that shareholder approval was obtained by the Special Approval
for Compensation.
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With respect to compensation of an officer (including chief executive
officer) or director who is also a controlling shareholder, see “— Disclosure of Personal Interests of Controlling Shareholders
and Approval of Certain Transactions.”
Disclosure of Personal Interests of Controlling
Shareholders and Approval of Certain Transactions
Pursuant to Israeli law, the disclosure requirements regarding
personal interests that apply to directors and executive officers also apply to a controlling shareholder of a public company. In the
context of a transaction involving a shareholder of the company, a controlling shareholder also includes a shareholder who holds 25% or
more of the voting rights in the company if no other shareholder holds more than 50% of the voting rights in the company. For this purpose,
the holdings of all shareholders who have a personal interest in the same transaction will be aggregated. Extraordinary transactions with
a controlling shareholder or in which a controlling shareholder has a personal interest, including a private placement in which a controlling
shareholder has a personal interest, and the terms of engagement with a controlling shareholder or a relative thereof, directly or indirectly
(including through a corporation controlled by a controlling shareholder), for the provision of services to the company and his or her
terms of employment or service as an office holder or employment as other than an office holder, require the approval of each of (i) the
audit committee or the compensation committee with respect to the terms of service or employment by the company as an office holder, an
employee or service provider; (ii) the board of directors; and (iii) the shareholders, in that order. The shareholder approval requires
one of the following, which we refer to as a Special Majority:
| • |
a majority of the shares held by all shareholders who do not have a personal interest in the transaction and who are present and
voting on the matter approves the transaction, excluding abstentions; or |
| • |
the shares voted against the transaction by shareholders who have no personal interest in the transaction and who are present and
voting at the meeting do not exceed 2% of the voting rights in the company. |
Each shareholder voting on the approval of an extraordinary transaction
with a controlling shareholder must inform the company prior to voting whether or not he or she has a personal interest in the approval
of the transaction, otherwise, the shareholder is not eligible to vote on the proposal and his or her vote will not be counted for purposes
of the proposal.
To the extent that any such transaction with a controlling shareholder
is for a period of more than three years, approval is required once every three years, unless, with respect to any such extraordinary
transactions, the audit committee determines that the duration of the transaction is reasonable given the related circumstances.
The compensation committee and board approval for arrangements
regarding the terms of service or employment of a controlling shareholder must be in accordance with the company’s compensation
policy. In special circumstances the compensation committee and board of directors may approve a compensation arrangement that is inconsistent
with the company’s compensation policy, provided that they have considered the same considerations and matters required for the
approval of a compensation policy in accordance with the Israeli Companies Law and that shareholder approval was obtained by the Special
Majority.
Pursuant to regulations promulgated under the Israeli Companies
Law, certain transactions with a controlling shareholder or his or her relative, or with directors, relating to terms of service or employment
that would otherwise require approval of a company’s shareholders may be exempt from shareholder approval upon certain determinations
of the audit committee and board of directors. In addition, disclosure of a personal interest in a private placement of a public company
(including disclosure of any material fact or document) is required by (i) a shareholder holding 5% or more of the company’s issued
and outstanding capital or its voting rights whose holdings will increase as result of the private placement and a shareholder who will
hold 5% or more of the company’s issued and outstanding capital or its voting rights as a result of the private placement, if 20%
or more of the company’s outstanding share capital prior to the private placement is issued in the private placement and the payment
for which is not only in cash or listed securities or the transaction is not on market terms; and (ii) a person or entity that will become
a controlling shareholder as a result of the private placement.
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Shareholder Duties
Pursuant to the Israeli Companies Law, a shareholder has a duty
to act in good faith and in a customary manner toward the company and other shareholders and to refrain from abusing his or her power
in the company, including, among other things, in voting at a meeting of shareholder with respect to the following matters:
| • |
an amendment to the company’s articles of association; |
| • |
an increase of the company’s authorized share capital; |
| • |
a merger; and |
| • |
the approval of related party transactions and acts of office holders that require shareholder approval. |
In addition, a shareholder has a general duty to refrain from discriminating
against other shareholders.
Certain shareholders have a duty of fairness toward the company.
These shareholders include any controlling shareholder, any shareholder who knows that he or she has the power to determine the outcome
of a shareholder vote and any shareholder who has the power to appoint or to prevent the appointment of an office holder of the company
or other power towards the company. The Israeli Companies Law does not define the substance of the duty of fairness, except to state that
the remedies generally available upon a breach of contract will also apply in the event of a breach of the duty to act with fairness.
Exculpation, Insurance and Indemnification of Directors and Officers
Under the Israeli Companies Law, a company may not exculpate an
office holder from liability for a breach of the duty of loyalty. An Israeli company may exculpate an office holder in advance from liability
to the company, in whole or in part, for damages caused to the company as a result of a breach of duty of care, but only if a provision
authorizing such exculpation is included in its articles of association. Our amended articles of association include such a provision,
to the fullest extent permitted by law. The company may not exculpate in advance a director from liability arising out of a prohibited
dividend or other distribution to shareholders.
Under the Israeli Companies Law and the Israeli Securities Law,
5728-1968, or the Israeli Securities Law, a company may indemnify an office holder in respect of the following liabilities and expenses
incurred for acts performed by him or her as an office holder, either pursuant to an undertaking made in advance of any such event or
following an event, provided its articles of association include a provision authorizing such indemnification:
| • |
a financial liability imposed on him or her in favor of another person pursuant to a judgment, including a settlement or arbitrator’s
award approved by a court. However, if an undertaking to indemnify an office holder with respect to such liability is provided in advance,
then such an undertaking must be limited to events which, in the opinion of the board of directors, can be foreseen based on the company’s
activities when the undertaking to indemnify is given, and to an amount or according to criteria determined by the board of directors
as reasonable under the circumstances, and such undertaking shall detail the abovementioned foreseen events and amount or criteria;
|
| • |
reasonable litigation expenses, including attorneys’ fees, incurred by the office holder (1) as a result of an investigation
or proceeding instituted against him or her by an authority authorized to conduct such investigation or proceeding, provided that (i)
no indictment was filed against such office holder as a result of such investigation or proceeding; and (ii) no financial liability was
imposed upon him or her as a substitute for the criminal proceeding as a result of such investigation or proceeding or, if such financial
liability was imposed, it was imposed with respect to an offense that does not require proof of criminal intent; and (2) in connection
with a monetary sanction; |
109
| • |
reasonable litigation expenses, including attorneys’ fees, incurred by the office holder or imposed by a court in proceedings
instituted against him or her by the company, on its behalf, or by a third party, or in connection with criminal proceedings in which
the office holder was acquitted, or as a result of a conviction for an offense that does not require proof of criminal intent; and
|
| • |
expenses, including reasonable litigation expenses and legal fees, incurred by an office holder in relation to an administrative
proceeding instituted against such office holder, or certain compensation payments made to an injured party imposed on an office holder
by an administrative proceeding, pursuant to certain provisions of the Israeli Securities Law. |
Under the Israeli Companies Law and the Israeli Securities Law,
a company may insure an office holder against the following liabilities incurred for acts performed by him or her as an office holder
if and to the extent provided in the company’s articles of association:
| • |
a breach of the duty of loyalty to the company, provided that the office holder acted in good faith and had a reasonable basis to
believe that the act would not harm the company; |
| • |
a breach of the duty of care to the company or to a third party, to the extent such a breach arises out of the negligent conduct
of the office holder; |
| • |
a financial liability imposed on the office holder in favor of a third party; and |
| • |
expenses, including reasonable litigation expenses and legal fees, incurred by an office holder in relation to an administrative
proceeding instituted against such office holder or certain compensation payments to an injured party imposed on an office holder by an
administrative proceeding, pursuant to certain provisions of the Securities Law. |
Under the Israeli Companies Law, a company may not indemnify, exculpate
or enter into an insurance contract for office holder liability, for any of the following:
| • |
a breach of the duty of loyalty, except for indemnification and insurance for a breach of the duty of loyalty to the company to the
extent that the office holder acted in good faith and had a reasonable basis to believe that the act would not prejudice the company;
|
| • |
a breach of the duty of care committed intentionally or recklessly, excluding a breach arising out of the negligent conduct of the
office holder; |
| • |
an act or omission committed with intent to derive illegal personal benefit; or |
| • |
a fine, monetary sanction or forfeit levied against the office holder. |
Under the Israeli Companies Law, exculpation, indemnification and
insurance of office holders in a public company must be approved by the compensation committee and the board of directors and, with respect
to the chief executive officer and a director or (under certain circumstances), also by the shareholders. See “— Approval
of Related Party Transactions under Israeli Law.” However, the insurance of office holders shall not require shareholder approval
and may be approved only by the compensation committee, if the engagement terms are determined in the company’s compensation policy
and that policy was approved by the shareholders by the Special Approval for Compensation, provided that the policy is on market terms
and is not likely to materially impact the company’s profitability, assets or obligations.
110
Our amended articles of association permit us to exculpate, indemnify
and insure our office holders to the fullest extent permitted under the Israeli Companies Law and the Israeli Securities Law. We have
obtained directors’ and officers’ liability insurance for the benefit of our office holders and intend to continue to maintain
such coverage and pay all premiums thereunder to the fullest extent permitted by the Israeli Companies Law.
We have entered into indemnification and exculpation agreements
with each of our current officers and directors exculpating them from a breach of their duty of care to us to the fullest extent permitted
by the Israeli Companies Law and undertaking to indemnify them to the fullest extent permitted by the Israeli Companies Law and the Israeli
Securities Law, to the extent that these liabilities are not covered by insurance. This indemnification is limited to events determined
as foreseeable by our board of directors based on our activities, as set forth in the indemnification agreements. Under such indemnification
agreements, the maximum aggregate amount of indemnification that we may pay to any and all of our currently serving or future officers
and directors together may not exceed the higher of $5 million and 25% of our shareholders equity according to our most recent financial
statements at the time of payment. In the opinion of the SEC, however, indemnification of directors and office holders for liabilities
arising under the Securities Act of 1933, as amended, is against public policy and therefore unenforceable.
| D. |
Employees |
As of December 31, 2021, we had 81 employees and independent contractors,
all of whom were based in Israel, and of whom 10 persons were in administrative, legal, accounting, information technology and human resources
and 71 persons were in research and development. Under Israeli law, we and our employees are subject to 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 are 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.
Israeli law generally requires the payment of severance compensation
by employers upon the retirement, death or dismissal of an employee. We fund our ongoing severance obligations by making monthly payments
to insurance policies. All of our current employees 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.
In addition, we have various consulting arrangements with experts
including in regulatory, research and clinical matters, including with physicians.
| E. |
Share Ownership |
Share Ownership of Executive Officers and Directors
For information concerning the beneficial ownership of our ordinary
shares by our executive officers and directors, see the table in Item 7A. “Major Shareholders and Related Party Transactions—Major
shareholders.” As of December 31, 2021, (i) options to purchase 47,008 ordinary shares granted to our directors and executive officers
were outstanding under our 2006 Unit Option Plan, with a weighted average exercise price of approximately $50.85, (ii) options to purchase
1,803,755 ordinary shares granted to our directors and executive officers were outstanding under our 2015 Equity Incentive Plan and the
United States Sub-Plan to our 2015 Equity Incentive Plan, with a weighted average exercise price of approximately $1.59 per share; and
(iii) 140,542 restricted share units awarded to our directors and executive officers were outstanding under our 2015 Equity Incentive
Plan and the United States Sub-Plan to our 2015 Equity Incentive Plan.
111
Option and Incentive Plans
In connection with the transfer of all of the business operations
and substantially all of the assets of Check-Cap LLC to us in 2009, we assumed the Check-Cap LLC 2006 Unit Option Plan, or the 2006 Plan.
On June 23, 2015, our board of directors approved and adopted the Check-Cap Ltd. 2015 Equity Incentive Plan, or the 2015 Israeli Plan,
and the Check-Ltd. 2015 United States Sub-Plan to Check-Cap Ltd. 2015 Equity Incentive Plan, or the 2015 U.S. Sub-Plan. The 2015 Israeli
Plan and 2015 U.S. Sub-Plan are referred together as the 2015 Plan. As of such date, we ceased to grant options under the 2006 Plan and
all equity-based awards made after such date shall be made under the 2015 Plan. Our shareholders approved the 2015 Plan at an extraordinary
general meeting of shareholders held on August 13, 2015, and it was subsequently amended by our board of directors on July 30, 2018.
The primary provisions of the 2006 Plan and 2015 Plan are described
below.
2006 Plan
General. The 2006 Plan
provided for the grant of options to purchase our ordinary shares to our employees, consultants and service providers. For the purpose
of the 2006 Plan: (i) an “employee” means any person, including officers, directors or affiliates who are employed by us or
by our affiliates; (ii) a “consultant” means any person who is engaged by us to render consulting or advisory services to
us or to any of our entities provided that such services are provided in good faith and are (a) not in connection with the offer or sale
of our securities in a capital raising transaction and (b) not directly or indirectly promoting or maintaining a market for our securities;
(iii) a “service provider” means an employee, director, supplier or officer holder as defined in the Israeli Companies Law;
and (iv) an “affiliate” means any entity which is directly or indirectly our parent or subsidiary.
Administration of the 2006 Plan.
Our board of directors has had the authority to administer the 2006 Plan and to grant options under the 2006 Plan, including, the authority
to determine the persons to whom options would be granted, the number of shares subject to each option, the time or times at which the
options would be granted, restrictions on the transferability of the options, and the schedule and conditions on which such options may
be exercised.
Awards under the 2006 Plan. The
2006 Plan provided for the grant of options pursuant to Sections 102 and 3(i) of the Israeli Income Tax Ordinance [New Version], 5721-1961,
which we refer to as the Tax Ordinance. The 2006 Plan provides that Section 102 options may be granted only to employees who are Israeli
residents and who do not own interests possessing more than 10% of the total combined voting power of all classes of our equity or the
equity of our affiliates immediately before such option is granted. Options granted to optionees who are Israeli residents that are not
intended to qualify as Section 102 Options are granted under Section 3(i) of the Tax Ordinance, which does not provide for similar tax
benefits, and are referred to as Section 3(i) options. The 2006 Plan was submitted for the approval of the Israeli Tax Authority, which
we refer to as the ITA, as required by applicable law. Options granted to employees under the 2006 Plan were granted under Section 102(b)(2)
of the Tax Ordinance, which permits the issuance to a trustee under the “capital gains track.” 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 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
the grant. However, under this track, we are not allowed to deduct an expense with respect to the issuance of the options or shares.
Exercise Price; Vesting. The
exercise price of an option granted under the 2006 Plan has been determined by the board of directors or a committee appointed by it.
The first option grant to an employee generally vested over a period of three years and nine months commencing on the date of grant, such
that 8.33% vest on the first anniversary of the date of grant and an additional 8.33% vest on each subsequent three-month period thereafter,
for 33 months. Additional options granted to an employee generally vest over a period of three years commencing on the three months anniversary
of the date of grant, such that 8.33% is fully vested on the date of grant and an additional 8.33% vest on each subsequent three-month
period thereafter, for 33 months.
112
Options Term; Termination of Employment
or Service. Options granted under the 2006 Plan generally expire within ten years of the grant date or upon the earlier termination
of employment of, or services provided by, the optionee, as applicable, subject to the extended period of exercisability upon termination
of employment or services, as applicable. Upon termination of the employment of or services rendered by an optionee, as applicable (other
than for cause, disability or death), generally vested options may be exercised within three months after the date of such termination
or within such shorter time period (not to be less than 30 days) or such longer time period (not to exceed five years) as our board of
directors or a committee appointed by it shall determine, but in any event no later than the expiration date of the options. If the employment
or services of the optionee are terminated because of death or disability (or if the optionee dies within three months after termination
of employment or services other than for cause), the optionee’s options may be exercised by the optionee or the optionee’s
legal representative or authorized assignee to the extent exercisable on the date of such termination or within 12 months thereafter or
as otherwise determined by the board of directors or a committee appointed by it. If the employment or services of the optionee are terminated
for cause, all outstanding options will, to the extent not previously exercised, be of no force and effect as of the date of termination,
unless otherwise determined by the board of directors or a committee appointed by it.
M&A Transaction. The
2006 Plan provides that in the event of a merger or consolidation of our company in which our company is not the surviving entity, an
acquisition of all or substantially all of the outstanding capital of our company or the sale of all or substantially all of our assets,
the optionee shall be provided the opportunity to (i) exercise his or her options in connection with the transaction and to receive in
the transaction such consideration as the holder of ordinary shares shall receive in the transaction; or (ii) retain his or her options
or receive a substitute option from the surviving company, if any.
As of December 31, 2021, we had granted options to purchase an
aggregate 174,416 ordinary shares under the 2006 Plan, of which options to purchase an aggregate 25,783 ordinary shares had been exercised
into our ordinary shares, options to purchase an aggregate 99,520 ordinary shares had been forfeited without having been exercised and
options to purchase an aggregate 49,113 ordinary shares were outstanding with a weighted average exercise price of approximately $50.98
per share. As of December 31, 2021, no shares are available for future awards under the 2006 Plan.
2015 Equity Incentive Plan
Awards under the 2015 Plan. Awards
under the 2015 Plan may be options granted pursuant to Section 102 of the Tax Ordinance, or Section 102 Options, or Section 3(i) of the
Tax Ordinance, or Section 3(i) Options, “incentive stock options”, or ISOs, within the meaning of Section 422 of the U.S.
Internal Revenue Code of 1986, as amended, and options not intended to qualify as ISOs, or Non-statutory Stock Options, stock appreciation
rights, or SARs, restricted stock awards, or RSAs, and restricted stock units, or RSUs, or any combination of the foregoing.
Unless the Administrator (as defined below) determines otherwise
and subject to applicable law, Section 102 Options may be granted only to Israeli employees, executives and directors (excluding controlling
shareholders) and Section 3(i) Options may be granted to consultants, controlling shareholders and non-Israeli employees, executives and
directors, in each case of our company or any subsidiary. The Section 102 Options may be granted either pursuant to Section 102(c) of
the Tax Ordinance, which are not required to be held in trust by a trustee, or pursuant to Section 102(b), which are required to be held
in trust for a specified period to qualify for certain tax benefits. Options granted pursuant to Section 102(b) shall be designated to
qualify for capital gain tax treatment in accordance with Section 102(b)(2) of the Tax Ordinance or ordinary income tax in accordance
with Section 102(b)(1) of the Tax Ordinance and thereafter, only such type of Section 102(b) options shall be granted until the Administrator
has determined otherwise in accordance with applicable law (which may not be prior to one year after the first grant of such type of Section
102(b) options).
Unless the Administrator determines otherwise and subject to applicable
law, ISOs may be granted only to non-Israeli employees and Non-statutory Stock Options may be granted to non-Israeli employees and consultants,
in each case of our company or any subsidiary. To the extent that the aggregate fair market value of the ordinary shares with respect
to which ISOs are exercisable for the first time by a participant during any calendar year under all company plans exceeds $100,000, then
unless the Administrator determines otherwise at any time and subject to applicable law, such options shall be treated as Non-statutory
Stock Options.
113
Administration of the 2015 Plan.
The Plan 2015 will be administered by the Board of Directors or, subject to applicable law, a committee appointed by the Board of Directors,
or Committee and the Administrator. Subject to the provisions of the 2015 Plan and, in the case of a Committee, the specific duties delegated
by the Board of Directors, and subject to the approval of any relevant authorities and compliance with all applicable laws, the Administrator
shall have the full power and authority at its sole discretion, from time to time and at any time, among other things:
| • |
To determine whether and to what extent awards are to be granted to participants under the 2015 Plan and to select the eligible recipients
of awards under the 2015 Plan; |
| • |
To approve forms of agreement for use under the 2015 Plan; |
| • |
To determine the terms and conditions of any award under the 2015 Plan, including the exercise price, the time or times and the extent
to which the awards may be exercised (which may be based on performance criteria), any vesting acceleration or waiver of forfeiture restrictions,
and any restriction or limitation regarding any award or the ordinary shares relating thereto, based in each case on such factors as the
Administrator, at its sole discretion, shall determine; |
| • |
To determine the fair market value of the shares covered by each award; |
| • |
To make an election as to the type of Section 102 Option; |
| • |
To prescribe, amend and rescind rules and regulations relating to the 2015 Plan, including rules and regulations relating to sub-plans
established for the purpose of qualifying for preferred tax treatment under foreign tax laws; |
| • |
To authorize conversion or substitution under the 2015 Plan of any or all awards and to cancel or suspend awards, as necessary, provided
the material interests of the participants are not harmed; and |
| • |
To construe and interpret the terms of the 2015 Plan and awards granted pursuant to the 2015 Plan; |
| • |
To alter, revise or otherwise adjust the terms of the 2015 Plan and the award agreement, as may be required pursuant to any applicable
laws of local or foreign jurisdictions. |
Term of Awards. The term
of each option shall be stated in the award agreement but in no event may it be more than ten years from the date of grant. Unless the
Administrator determines otherwise and subject to applicable law, no ISO may be granted under the 2015 Plan to a grantee who possess more
than 10% of the total combined voting power of our company or any of our affiliate (a “10% Shareholder”) unless the option
terminates on a date that is not later than the day preceding the fifth anniversary of the date of grant. Unless otherwise specified in
the applicable award agreement, the term of a SAR will be ten years.
Exercise Price. The exercise
price of any award under the 2015 Plan shall be determined by the Administrator, subject to applicable law. Unless the Administrator determines
otherwise and subject to applicable law, in the case of ISOs and Non-Statutory Stock Options, the exercise price per share shall be no
less than the fair market value per ordinary share on the date of grant and in the case of an ISO granted to a 10% Shareholder, no less
than 110% of the fair market value per ordinary share on the date of grant.
Non-Transferability of Awards.
Unless the Administrator determines otherwise and subject to applicable law: (i) options and SARs may not be sold, pledged, assigned,
hypothecated, transferred, or disposed of in any manner other than by will or by the laws of descent or distribution and may be exercised,
during the lifetime of the participant, only by the participant. For as long as options or shares purchased upon the exercise of options
are held by a trustee on behalf of the participant, all rights of the participant with respect to such options and shares shall be personal,
and may not be transferred, assigned, pledged or mortgaged, other than by will or laws of descent and distribution; (ii) RSUs may not
be sold, pledged, transferred, assigned or encumbered; and (iii) RSAs may not be sold, transferred, pledged, assigned or otherwise disposed
of during the restricted period, provided that the Administrator may provide for the lapse of such restrictions in installments and may
accelerate or waive such restrictions in whole or in part.
114
Termination of Employment or Service.
Options and SARs. If a
participant ceases to be an employee or consultant, in the absence of specified period in the award agreement and unless the Administrator
determines otherwise, such participant may exercise his/her options (to the extent vested on the date of such termination) or SARs within
three months following such termination (but in no event later than the expiration date of the option or SAR). If a participant retires,
he/she may continue to enjoy such rights with respect to awards under the 2015 Plan, on such terms and conditions as the Administrator
may determine. If the participant’s employment or service is terminated as a result if his/her death or permanent disability, the
participant (or, if the participant died, the participant’s estate or any person who acquired the right to exercise the option by
bequest or inheritance), may exercise his/her options (to the extent vested on the date of such termination) and/or SARs within such additional
period of time following such termination as specified in the award agreement (which may not be less than six months), or in the absence
of a specified period in the award agreement, until 12 months following such termination or any longer period determined by the Administrator,
but in no event later than the expiration date of the option or SAR.
RSAs. If a participant’s
service of employment is terminated prior to the restricted period, subject to the terms of the award agreement or as otherwise determined
by the Administrator, the participant’s restricted stock and any associated dividends that remain subject to forfeiture will then
be forfeited automatically.
RSUs. If a participant’s
service of employment is terminated prior to the RSU vesting, subject to the terms of the award agreement or as otherwise determined by
the Administrator, the participant’s RSUs that remain subject to forfeiture will then be forfeited automatically.
M&A Transaction. In
the event of a Transaction (as defined in the 2015 Plan, which generally includes (among other things) a sale of all or substantially
all of our assets or shares, a merger, consolidation or amalgamation with or into another company or a scheme of arrangement for effecting
any of the foregoing or such other transaction determined as such by the Administrator, all subject to the conditions and limitations
in the 2015 Plan), unless otherwise determined by the Administrator, in its sole discretion, any award granted under the 2015 shall be
assumed or substituted by us or the successor company, under terms determined by the Administrator or the terms of the 2015 Plan applied
by the successor company to such assumed or substituted awards, all in accordance with the terms of the 2015 Plan. Regardless of whether
or not the awards are assumed or substituted, the Administrator may, at its sole discretion, among other things, provide for the exercise
of any exercisable and vested awards, the cancellation of unexercised and unvested awards, the acceleration of unvested awards, or the
cancellation of awards for payment in cash, shares or other property of our company or the acquiring company or other party to the Transaction,
under such terms as the Administrator may determine, all in accordance with the terms of the 2015 Plan.
Term and Termination of the 2015
Plan. The 2015 Plan became effective upon its adoption by our Board of Directors and shall continue in effect for a term of ten
years. Our Board of Directors may at any time amend, alter, suspend or terminate the 2015 Plan. No amendment, alteration, suspension or
termination of the 2015 Plan shall impair the rights of any participant, unless mutually agreed otherwise in writing between the participant
and the Administrator.
As of December 31, 2021, we had granted options to purchase an
aggregate 3,263,659 ordinary shares under the 2015 Plan, of which options to purchase an aggregate 7,000 ordinary shares had been exercised
into ordinary shares, an aggregate 389,563 ordinary shares had been forfeited without having been exercised and options to purchase an
aggregate 2,867,096 ordinary shares were outstanding as of such date, with a weighted average exercise price of approximately $1.58 per
share. In addition, as of December 31, 2021, we had issued 501,134 RSUs under the 2015 Plan, of which 67,255 RSUs had been forfeited,
101,337 RSUs had vested, and 332,542 RSUs were outstanding as of such date. As of December 31, 2021, 525,428 ordinary shares are available
for future awards under the 2015 Plan.
115
ITEM 7. MAJOR
SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
| A. |
Major shareholders |
The following table sets forth information with respect to the
beneficial ownership of our ordinary shares as of March 15, 2022 by (i) each person or entity known to us to beneficially own more than
5% of our outstanding ordinary shares; (ii) each of our current executive officers and directors individually; and (iii) all of our current
executive officers and directors as a group.
The percentage of beneficial ownership of our ordinary shares is
based on 116,411,949 ordinary shares, NIS 2.40 par value per share outstanding as of March 15, 2022. Beneficial ownership is determined
in accordance with the rules of the SEC and generally includes voting power or investment power with respect to securities. All ordinary
shares subject to options and warrants currently exercisable or exercisable into ordinary shares within 60 days of March 15, 2022, and
underlying RSUs that shall vest within 60 days of March 15, 2022, are deemed to be outstanding and beneficially owned by the shareholder
holding such options, warrants or RSUs for the purpose of computing the number of shares beneficially owned by such shareholder. Such
shares are also deemed outstanding for purposes of computing the percentage ownership of the person holding the option, warrant or RSU.
They are not, however, deemed to be outstanding and beneficially owned for the purpose of computing the percentage ownership of any other
shareholder.
This table is based upon information supplied by officers and directors
and is believed to be accurate. Except as indicated in footnotes to this table, we believe that the shareholders named in this table have
sole voting and investment power with respect to all shares shown to be beneficially owned by them, based on information provided to us
by such shareholders. Unless otherwise noted below, each shareholder’s address is: c/o 29 Abba Hushi Avenue, P.O. Box 1271, Isfiya,
3009000, Mount Carmel, Israel.
|
|
Ordinary Shares
Beneficially Owned |
|||||||
|
Number |
Percent |
|||||||
|
Directors and Executive Officers |
||||||||
|
Alex Ovadia (1) |
97,685 |
* |
||||||
|
Yoav Kimchy (2) |
121,837 |
- |
||||||
|
Boaz Shpigelman (3) |
54,351 |
* |
||||||
|
Joshua (Shuki) Belkar (4) |
10,706 |
* |
||||||
|
Hanit Brenner-Lavie |
- |
- |
||||||
|
Israel Hershko (5) |
27,352 |
- |
||||||
|
Mira Rosenzweig (6) |
23,688 |
* |
||||||
|
Steven Hanley (7) |
23,153 |
* |
||||||
|
Clara Ezed (8) |
22,237 |
* |
||||||
|
Mary Jo Gorman (9) |
23,036 |
* |
||||||
|
XiangQian (XQ) Lin (10)
|
41,075 |
* |
||||||
|
Yuval Yanai (11) |
23,158 |
* |
||||||
|
All director and executive officers as a group (13 persons)(12)
|
468,278 |
0.48 |
% | |||||
* Less than 1% of the Company’s ordinary shares.
| (1) |
Includes (i) 15,062 outstanding ordinary shares, and (ii) 82,623 ordinary shares subject to options currently exercisable or options
and/or RSUs that will become exercisable or vested within 60 days of the date of this table |
| (2) |
Includes (i) 40,413 ordinary shares directly held by Yoav Kimchy, (ii) 53,061 ordinary shares subject to options and RSUs held by
Yoav Kimchy currently exercisable or options and/or RSUs held by Yoav Kimchy that will become exercisable or vested within 60 days of
the date of this table, (iii) 26,655 ordinary shares directly held by Sigalit Kimchy, the wife of Yoav Kimchy, and (iv) 1,708 ordinary
shares subject to options and RSUs held by Sigalit Kimchy currently exercisable or options and/or RSUs that will become exercisable or
vested within 60 days of the date of this table. Yoav Kimchy and Sigalit Kimchy have joint beneficial ownership over the shares
beneficially held by them |
116
| (3) |
Includes (i) 11,737 outstanding ordinary shares, and (ii) 42,614 ordinary shares subject to options currently exercisable or options
and/or RSUs that will become exercisable or vested within 60 days of the date of this table. |
| (4) |
Includes 10,706 ordinary shares subject to options currently exercisable or exercisable within 60 days of the date of this table.
|
| (5) |
Includes (i) 4,762 outstanding ordinary shares, and (ii) 22,590 ordinary shares subject to options currently exercisable or options
and/or RSUs that will become exercisable or vested within 60 days of the date of this table. |
| (6) |
Includes 23,688 ordinary shares subject to options currently exercisable or options and/or RSUs that will become exercisable or vested
within 60 days of the date of this table. |
| (7) |
Includes (i) 5,149 outstanding ordinary shares, and (ii) 18,004 ordinary shares subject to options currently
exercisable or options and/or RSUs that will become exercisable or vested within 60 days of the date of this table. |
| (8) |
Includes (i) 4,233 outstanding ordinary shares, and (ii) 18,004 ordinary shares subject to options currently
exercisable or options and/or RSUs that will become exercisable or vested within 60 days of the date of this table. |
| (9) |
Includes (i) 5,032 outstanding ordinary shares, and (ii) 18,004 ordinary shares subject to options currently exercisable or options
and/or RSUs that will become exercisable or vested within 60 days of the date of this table. |
| (10) |
Includes (i) 19,038 outstanding ordinary shares, and (ii) 22,037 ordinary shares subject to options currently exercisable or options
and/or RSUs that will become exercisable or vested within 60 days of the date of this table. |
| (11) |
Includes (i) 5,154 outstanding ordinary shares, and (ii) 18,004 ordinary shares subject to options currently
exercisable or options and/or RSUs that will become exercisable or vested within 60 days of the date of this table. |
| (13) |
Includes (i) 137,235 outstanding ordinary shares, and (ii) 331,043 ordinary shares subject to options currently exercisable or options
and/or RSUs that will become exercisable or vested within 60 days of the date of this table. |
As of March 15, 2022, based on information provided to us by our
transfer agent in the United States and other information reasonably available to us, we had 51 holders of record of our ordinary shares
in the United States. Such holders of record held, as of that date, 99.87% of our outstanding ordinary shares. The number of record holders
is not representative of the number of beneficial holders of our ordinary shares, as 99.81% of our outstanding ordinary shares are recorded
in the name of Cede & Co. as nominee for the Depository Trust Company, in whose name all shares held in “street name”
are held in the United States.
None of our shareholders have voting rights different from the
voting rights of other shareholders. To the best of our knowledge, we are not owned or controlled, directly or indirectly, by another
corporation or by any government. We are not aware of any arrangement that may, at a subsequent date, result in a change of control of
our company.
To our knowledge, other than as disclosed in the
table above, our other filings with the SEC and this Annual Report, there has been no significant change in the percentage ownership held
by any major shareholder since January 1, 2019.
117
| B. |
Related Party Transactions |
Other than the executive and director compensation, executive officer
employment agreements, indemnification and exculpation arrangements and directors’ and officers’ liability insurance policy
discussed in “Management,” and the transactions described below, since January 1, 2019, we have not been or are not a party
to any related party transactions. The descriptions provided below are summaries of the terms of such agreements, do not purport to be
complete and are qualified in their entirety by the complete agreements.
Pontifax Warrants
On October 14, 2014, we issued warrants to purchase an aggregate
of 18,464 of our ordinary shares at an exercise price of NIS 2.40 per share, or the Pontifax Warrants, to the Pontifax Funds in consideration
of their commitment to provide to us, for no consideration, the following services, if and to the extent requested by us: (i) business
development services, in such scope and substance as shall be agreed between us and the Pontifax; and (ii) a representative designated
by Pontifax to serve as the chairman of our board of directors. The Pontifax Funds subsequently agreed that the exercise price of fifty-percent
of their warrants will increase to equal the price at which our ordinary shares are sold to the public in the initial public offering
of our securities, or if units are sold in the initial public offering of our securities, the exercise price per share will increase to
be equal to the effective price per share of the ordinary shares underlying the units sold to the public in the offering. The Pontifax
Funds also agreed that such portion of their warrants would vest and become exercisable only upon the consummation of the initial public
offering of our securities prior to their expiration date. The remaining warrants with an NIS 2.40 exercise price would vest on a quarterly
basis in eight equal installments during a period of 24 months from issuance. In addition, the Pontifax Funds agreed to reduce the term
of their respective warrants such that these warrants will now expire after eight years (instead of ten years) following their issuance,
i.e., on October 14, 2022. Upon the closing of our initial public offering any unvested portion of the warrants became fully vested and
exercisable. In September 2018, Pontifax exercised 9,232 of the Pontifax Warrants, with an exercise price of 2.40 per share, into 7,502
ordinary shares on a cashless basis. As of December 31, 2021, Pontifax Warrants to purchase 9,232 ordinary shares, with an exercise price
of $60.72 per share, were outstanding.
Transactions with Check-Cap LLC and the Members and Manager of
Check-Cap LLC
On May 31, 2009, we entered into an asset transfer agreement with Check-Cap LLC pursuant
to which Check-Cap LLC transferred all of its business operations and substantially all of its assets to us. Our shareholders’ holdings
on the date of the asset transfer transaction reflected their interests as members of Check-Cap LLC. In the framework of the asset transfer
agreement and under the Shareholders Agreement, we undertook to use commercially reasonable efforts to procure that distributions or advance
funds are made to our shareholders holding (at the date of the transaction) ordinary shares, Series A preferred shares and/or Series B
preferred shares (i.e., the shareholders who are also members of Check-Cap LLC), as would be necessary to eliminate the tax impact on
such shareholders of the Reorganization and the transfer of all of the business operations and substantially all of the assets from Check-Cap
LLC to us. Notwithstanding the foregoing, we will not advance payments to such shareholders to address the fact that they will no longer
receive a “pass through” of losses generated by us as they previously received while owning units of Check-Cap LLC. These
advances, if and to the extent made, will be deducted from any distributions such shareholders are entitled to receive from us. Since
we do not expect to be profitable in year 2023, the liability based on the discounted outflows is $0. As a result, as of December
31, 2021, the balance of the reimbursement liability totaled $0 ($14,000 as of December 31, 2020 and $53,000 as of December 31, 2019).
In connection with the asset transfer agreement entered into in
May 2009, we assumed the former obligation of Check-Cap LLC to distribute any proceeds it collects on the $1 million key man life insurance
policy with respect to Yoav Kimchy, the Company’s chief technology officer and a former director, to the former holders of the Series
A preferred units in an amount equal to their respective capital contributed to Check-Cap LLC, less any amounts previously distributed
to them, plus any accrued and unpaid dividends due to them as of the date of distribution. On November 16, 2016, we cancelled the key
man life insurance policy with respect to Yoav Kimchy.
| C. |
Interests of Experts and Counsel |
Not applicable.
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ITEM 8. FINANCIAL
INFORMATION
| A. |
Consolidated Statements and Other Financial Information. |
Consolidated Financial Statements
See Item 18 “Financial Statements.”
Legal Proceedings
From time to time, we may be involved in litigation that arises
through the normal course of business. As of the date of this filing, we are not a party to any material litigation nor are we aware of
any such threatened or pending litigation.
There are no material proceedings in which any of our directors,
officers or affiliates or any registered or beneficial shareholder of more than 5% of our ordinary shares, or any associate of any of
the foregoing is an adverse party or has a material interest adverse to our interest.
Dividend Policy
We have never declared or paid dividends on our ordinary shares
and currently do not intend to pay cash dividends on our ordinary shares in the foreseeable future. We currently intend to retain all
of our future earnings, if any, to finance the growth and development of our business. See Item 3D “Key Information – Risk
factors - Risks Related to the Company.”
Our ability to distribute dividends also may be limited by future
contractual obligations and by Israeli law. The Israeli Companies Law restricts our ability to declare dividends. Unless otherwise approved
by a court, we can distribute dividends only from “profits” (as defined by the Israeli Companies Law), and only if there is
no reasonable concern that the dividend distribution will prevent us from meeting our existing and foreseeable obligations as they become
due. Subject to the foregoing, payment of future dividends, if any, will be at the discretion of our board of directors and will depend
on various factors, such as our financial condition, operating results, current and anticipated cash needs and other business and economic
factors that our board of directors may deem relevant. See Exhibit 2.1 “Description of Securities—Dividend and Liquidation
Rights.” The payment of dividends may be subject to Israeli withholding taxes. See Item 10E. “Additional Information—Taxation—Israeli
Tax Considerations and Government Programs—Taxation of Our Shareholders—Taxation of Non-Israeli Shareholders on Receipt of
Dividends.” Furthermore, if we pay a dividend out of income attributed to our Benefited Enterprise that was generated during the
tax exemption period, we may be subject to tax on the grossed- up amount of such distributed income at the corporate tax rate which would
have been applied to our Benefited Enterprise’s income had we not enjoyed the exemption. See Item 10E. “Additional Information—Taxation
– Israeli Tax Considerations and Government Programs — Law for the Encouragement of Capital Investments, 5719-1959 —
Tax Benefits Subsequent to the 2005 Amendment.”
| B. |
Significant Changes |
Except as disclosed elsewhere in this Annual Report, there have
been no other significant changes since December 31, 2021, until the date of the filing of this Annual Report.
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ITEM 9. THE OFFER
AND LISTING
| A. |
Offer and Listing Details |
Our units were listed on the Nasdaq Capital Market on February
19, 2015 under the symbol “CHEKU.” Prior to that date, there was no public trading market for our securities. Our initial
public offering was priced at $72.00 per unit on February 20, 2015. Each unit consisted of one ordinary share and one-half of a Series
A Warrant to purchase one ordinary share. Each unit was issued with one and one-half non-transferrable Long Term Incentive Warrants. On
March 18, 2015, the units separated and ceased to exist. Since such date, our ordinary shares and Series A Warrants were listed on the
Nasdaq Capital Market under the symbols “CHEK” and “CHEKW”, respectively. The Series A Warrants expired on February
24, 2020 and ceased to be listed on the Nasdaq Capital Market since February 20, 2020. The Long Term Incentive Warrants expired on February
24, 2022. Since May 8, 2018, our Series C Warrants have also been listed on the Nasdaq Capital Market under the symbol “CHEKZ”.
On April 4, 2018, we effected a 1-for-12 reverse stock split of our ordinary shares.
| B. |
Plan of Distribution |
Not applicable.
| C. |
Markets for Ordinary Shares |
See “—Offer and Listing Details” above.
| D. |
Selling Shareholders |
Not applicable.
| E. |
Dilution |
Not applicable.
| F. |
Expenses of the Issue |
Not applicable.
ITEM 10. ADDITIONAL
INFORMATION
| A. |
Share Capital |
Not applicable.
| B. |
Memorandum and Articles of Association |
A copy of our amended and restated articles of association is incorporated
by reference attached as Exhibit 1.1 to this Annual Report. Other than as disclosed below, the information called for by this Item is
set forth in Exhibit 2.1 to this Annual Report and is incorporated by reference into this Annual Report.
Registration Number and Purposes of the Company
Our registration number with the Israeli Registrar of Companies
is 51-425981-1. Our purpose as set forth in our amended articles of association is to engage in any lawful activity.
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Shareholder Meetings
Under Israeli law, we are required to hold an annual general meeting
of our shareholders once every calendar year that must be held no later than 15 months after the date of the previous annual general meeting.
All meetings other than the annual general meeting of shareholders are referred to in our amended articles of association as special general
meetings. Our board of directors may call special general meetings whenever it sees fit, at such time and place, within or outside of
Israel, as it may determine. In addition, the Israeli Companies Law provides that our board of directors is required to convene a special
general meeting upon the written request of (i) any two of our directors or one-quarter of the serving members of our board of directors;
or (ii) one or more shareholders holding, in the aggregate, either (a) 5% or more of our outstanding shares and 1% of our outstanding
voting power or (b) 5% or more of our outstanding voting power.
Furthermore, the Israeli Companies Law requires that resolutions
regarding the following matters be approved by our shareholders at a general meeting:
| • |
approval of certain related party transactions; |
| • |
increases or reductions of our authorized share capital; |
| • |
mergers; and |
| • |
the exercise of our board of director’s powers by a general meeting, if our board of directors is unable to exercise its powers
and the exercise of any of its powers is essential for our proper management. |
Subject to the provisions of the Israeli Companies Law and regulations
promulgated thereunder, shareholders entitled to participate and vote at general meetings are the shareholders of record on a date to
be decided by the board of directors, which, as a company listed on an exchange outside Israel, may be between four and 40 days prior
to the date of the meeting.
The Israeli Companies Law requires that a notice of any annual
general meeting or special general meeting be provided to shareholders at least 21 days prior to the meeting and if the agenda of the
meeting includes, among other things, the appointment or removal of directors, the approval of transactions with office holders or interested
or related parties, an approval of a merger or the approval of the compensation policy, notice must be provided at least 35 days prior
to the meeting.
Under the Israeli Companies Law, our shareholders are not permitted
to take action via written consent in lieu of a meeting.
Borrowing powers
Pursuant to the Israeli Companies Law and our amended articles
of association, our board of directors may exercise all powers and take all actions that are not required under law or under our amended
articles of association to be exercised or taken by our shareholders, including the power to borrow money for company purposes.
For details regarding the approvals required under the Israeli
Companies Law for the approval of director compensation, see “Item 6C “Directors, Senior Management and Employees —
Board Practices -Approval of Related Party Transactions under Israeli Law — Disclosure of Personal Interests of an Office Holder
and Approval of Certain Transactions—Compensation of Directors.”
| C. |
Material Contracts |
We have not entered into any material contracts
other than in the ordinary course of business and other than those described in Item 4. “Information on Our Company,” Item
7B “Major Shareholders and Related Party Transactions - Related Party Transactions” or elsewhere in this Annual Report.
121
| D. |
Exchange controls |
There are currently no Israeli currency control restrictions on
remittances of dividends on our ordinary shares, proceeds from the sale of the shares or interest or other payments to non- residents
of Israel, except for shareholders who are subjects of countries that are, or have been, in a state of war with Israel.
| E. |
Taxation |
The following description is not intended to
constitute a complete analysis of all tax consequences relating to our ordinary shares, Series C Warrants and Series D Warrants (sometimes
referred to collectively or individually as our “securities”). You should consult your own tax advisor concerning the tax
consequences of your particular situation, as well as any tax consequences that may arise under the laws of any state, local, non-U.S.
or other taxing jurisdiction.
Israeli Tax Considerations and Government Programs
The following is a brief summary of the material Israeli tax laws
applicable to us and certain Israeli Government programs that benefit us. This section also contains a discussion of material Israeli
tax consequences concerning the ownership and disposition of our securities purchased by investors who are non-Israeli resident shareholders.
This summary does not discuss all the aspects of Israeli tax law that may be relevant to a particular investor in light of his or her
personal investment circumstances or to some types of investors subject to special treatment under Israeli law. Examples of such investors
include residents of Israel or traders in securities who are subject to special tax regimes not covered in this discussion. Because parts
of this discussion are based on new tax legislation that has not yet been subject to judicial or administrative interpretation, we cannot
assure you that the appropriate tax authorities or the courts will accept the views expressed in this discussion. The discussion below
is subject to change, including due to amendments under Israeli law or changes to the applicable judicial or administrative interpretations
of Israeli law, which change could affect the tax consequences described below.
General Corporate Tax Structure in Israel
Israeli resident companies are generally subject to corporate tax,
currently at the rate of 23% (effective as of January 1, 2018) of a company’s taxable income. However, the effective tax rate payable
by a company that derives income from an Approved Enterprise, a Benefited Enterprise a Preferred Enterprise or a Priority Technological
Enterprise (as discussed below) may be considerably less. Capital gains derived by an Israeli resident company are subject to tax at the
prevailing corporate tax rate.
Law for the Encouragement of Industry (Taxes),
5729-1969
The Law for the Encouragement of Industry (Taxes), 5729-1969, generally
referred to as the Industry Encouragement Law, provides several tax benefits for “Industrial Companies.” The Industry Encouragement
Law defines an “Industrial Company” as a company resident in Israel, of which 90% or more of its income in any tax year, other
than income from defense loans, is derived from an “Industrial Enterprise” owned by it and located in Israel or in the “Area”
(as such term is defined under Section 3A of the Israeli Income Tax Ordinance (New Version), 5721-1961, referred to as the Ordinance).
An “Industrial Enterprise” is defined as an enterprise whose principal activity in a given tax year is industrial production.
The following corporate tax benefits, among others, are available
to Industrial Companies:
| • |
amortization over an eight-year period, beginning from the year in which such rights were first used, of the cost of purchased know-how
and patents and rights to use a patent and know-how which are used for the development or advancement of the Industrial Enterprise;
|
| • |
under limited conditions, an election to file consolidated tax returns with related Israeli Industrial Companies; and |
122
| • |
expenses related to a public offering are deductible in equal amounts over three years beginning from the year of the offering.
|
Eligibility for the benefits under the Industry Encouragement Law
is not subject to receipt of prior approval from any governmental authority. We believe that we may qualify as an “Industrial Company”
within the meaning of the Industry Encouragement Law; however, there can be no assurance that we will qualify as an Industrial Company
or that the benefits described above will be available in the future.
Law for the Encouragement of Capital Investments,
5719-1959
The Law for the Encouragement of Capital Investments, 5719-1959,
generally referred to as the Investment Law, was originally enacted in order to provide certain incentives for capital investments in
production facilities (or other eligible assets).
The Investment Law has been amended several times in recent years,
primarily: Amendment 60, effective as of April 1, 2005, referred to as the 2005 Amendment; Amendment 68, effective as of January 1, 2011,
referred to as the 2011 Amendment; Amendment 71, effective as of January 1, 2014, referred to as the 2014 Amendment; Amendment 73, effective
as of January 1, 2017, referred to as the 2017 Amendment; and Amendment 74, effective as of August 15, 2021, referred to as the 2021 Amendment.
Pursuant to the foregoing amendments, generally tax benefits that were granted in accordance with the provisions of the Investment Law
prior to each such amendment remain in force; however, any benefits granted subsequent to the respective amendment are subject to the
provisions of the Investment Law as amended.
Tax Benefits Prior to the 2005 Amendment
Prior to the 2005 Amendment, a capital investment in eligible production
facilities (or other eligible assets) could, upon application to the Investment Center of the Israeli Ministry of Economy (formerly named
the Ministry of Industry, Trade and Labor), be designated as an “Approved Enterprise” and accordingly, entitled to certain
tax benefits under the Investment Law. Each certificate of approval for an Approved Enterprise relates to a specific investment program
in the Approved Enterprise, delineated both by the financial scope of the investment and by the physical characteristics of the facility
or the asset. We do not have any Approved Enterprises.
Tax Benefits Subsequent to the 2005 Amendment
Pursuant to the 2005 Amendment, a company whose facilities meet
certain criteria set forth in the 2005 Amendment may claim certain tax benefits offered by the Investment Law (as further described below)
directly in its tax returns, without the need to obtain prior approval. In order to receive the tax benefits, a company must make an investment
which meets all of the conditions, including exceeding a minimum entitling investment amount, set forth in the Investment Law. Such investment
allows a company to receive “Benefited Enterprise” status, and may be made over a period of no more than three years ending
at the end of the year in which the company chose to have the tax benefits apply to its Benefited Enterprise, referred to as the “Year
of Election.”
The extent of the tax benefits available under the 2005 Amendment
to qualifying income of a Benefited Enterprise depends on, among other things, the geographic location in Israel of the Benefited Enterprise.
The location will also determine the period for which tax benefits are available. Under the “Exemption Track” the tax benefits
include an exemption from corporate tax on undistributed income generated by the Benefited Enterprise for a period of two to ten years,
depending on the geographic location of the Benefited Enterprise in Israel, and a reduced corporate tax rate of 10% to 25% for the remainder
of the benefits period, depending on the level of foreign investment in the company in each year. The benefits period is for a duration
of seven or ten years, depending on the location of the Benefited Enterprise, from the later of the first year in which the company generated
taxable income from its Benefited Enterprise and the Year of Election, but in any event not more than 12 or 14 years from the Year of
Election, depending on the location of the Benefited Enterprise. A company qualifying for tax benefits under the Exemption Track which
pays a dividend (as well as a deemed dividend, such as investments in foreign resident subsidiaries, granting loans to related parties,
repurchases of shares, acquisitions of securities/shares, capital reductions and additional events which reflect the transfer of funds
out of the Benefitted Enterprise activity) out of income derived during the tax exemption period by its Benefited Enterprise will be subject
to corporate tax in respect of the amount of the dividend (grossed-up to reflect the pre-tax income that it would have had to earn in
order to distribute the dividend) at the corporate tax rate which would have otherwise been applicable. Dividends paid out of income attributed
to a Benefited Enterprise are generally subject to withholding tax at source at the rate of 20% or such lower rate as may be provided
in an applicable tax treaty. With respect to such dividends, the recently enacted 2021 Amendment introduced a new dividend distribution
ordering rule as well as a Temporary Order to incentivize the distribution thereof (see discussion below under “Tax
Benefits under the 2021 Amendment”). Applying reduced tax rates in accordance with
a certain tax treaty is subject to the receipt in advance of a valid certificate from the Israel Tax Authority allowing for a reduced
tax rate.
123
The benefits available to a Benefited Enterprise are subject to
the fulfillment of conditions stipulated in the Investment Law and its regulations. If a company does not meet these conditions, it may
be required to refund the amount of tax benefits, as adjusted by the Israeli consumer price index, plus interest, or other monetary penalties.
We currently have one Benefited Enterprise program under the Investment
Law, which, we believe, entitles us to certain tax benefits with respect to income to be derived from our Benefited Enterprise. We chose
2010 as the Year of Election. We believe that we are located in the Zone A specified development zone and therefore, believe we are entitled
to a 10-year benefit period, during which taxable income from our Benefited Enterprise program (once generated) will be tax exempt, commencing
with the year we will first earn taxable income relating to such enterprise, subject to a 14-year limitation from the Year of Election,
and therefore, the tax benefit period will in any event end in 2023.
Tax Benefits under the 2011 Amendment and the 2014 Amendment
The 2011 Amendment canceled the availability of the benefits granted
to companies under the Investment Law prior to 2011 and, instead, introduced new benefits for income generated by a “Preferred Company”
through its “Preferred Enterprise” (as such terms are defined in the Investment Law) as of January 1, 2011. The definition
of a Preferred Company includes a company incorporated in Israel that is not wholly-owned by a governmental entity, and that, among other
things, owns a Preferred Enterprise and is controlled and managed from Israel. Under the 2014 Amendment, effective as of January 1, 2014,
a Preferred Company is entitled to a reduced corporate tax rate of 16% with respect to its income derived by its Preferred Enterprise
in 2014 and thereafter, unless the Preferred Enterprise is located in a specified development zone (referred to as “Zone A”),
in which case the rate will be 9% for the tax years 2014-2016 and, pursuant to the 2017 Amendment (as discussed below), 7.5% from 2017
and thereafter. We believe our facilities are located in the Zone A specified development zone.
Dividends paid out of income attributed to a Preferred Enterprise
are generally subject to withholding tax at source at the rate of 20% or such lower rate as may be provided in an applicable tax treaty.
However, if such dividends are paid to an Israeli company, no tax is required to be withheld (although, if such dividends are subsequently
distributed to individuals or a non-Israeli company, withholding tax at a rate of 20% or such lower rate as may be provided in an applicable
tax treaty will apply).
The 2011 Amendment also provided transitional provisions to address
companies already enjoying existing tax benefits under the Investment Law. These transitional provisions provide, among other things,
that unless an irrevocable request is made to apply the provisions of the Investment Law as amended in 2011 with respect to income to
be derived as of January 1, 2011, a Benefited Enterprise can elect to continue to benefit from the benefits provided to it before the
2011 Amendment came into effect, provided that certain conditions are met.
We are currently examining whether we are eligible for the tax
benefits under the 2011 Amendment and the possible effect, if any, of the provisions of the 2011 Amendment on our financial statements.
Tax Benefits under the 2017 Amendment
The 2017 Amendment was enacted as part of the Economic Efficiency
Law that was published on December 29, 2016, and became effective as of January 1, 2017. The 2017 Amendment provides new tax benefits
for two types of “Technological Enterprises”, as described below, and is in addition to the other existing tax beneficial
programs under the Investment Law.
124
The 2017 Amendment provides two new tax incentive tracks –
the “Priority Technological Enterprise” track and “Special Priority Technological Enterprise” track (as such terms
are defined in the Investment Law). The benefits available to a Priority Technological Enterprise or Special Priority Technological Enterprise
are subject to the fulfillment of conditions stipulated in the Investment Law.
A Priority Technological Enterprise is entitled (among other things)
to a reduced corporate tax rate of 12% with respect to its income which qualifies as “Preferred Technology Income”, as defined
in the Investment Law, unless the Priority Technological Enterprise is located in a specified development zone (referred to as “Zone
A”), in which case the rate will be 7.5%. A Special Priority Technological Enterprises is entitled to a reduced corporate tax rate
of 6% with respect to its Preferred Technology Income, regardless of the company’s geographic location within Israel.
We are currently examining whether we are eligible for the tax
benefits under the 2017 Amendment and the possible effect, if any, of the provisions of the 2017 Amendment on our financial statements.
Tax Benefits under the 2021 Amendment
The 2021 Amendment introduced a new dividend distribution ordering
rule to cause the distribution of earnings that were tax-exempt under the historical Approved or Beneficial Enterprise regimes (Trapped
Earnings), to be on a pro-rata basis from any dividend distribution, which is applicable to distributions starting from August 15, 2021
onwards. Accordingly, the corporate income tax claw-back will apply to any dividend distribution, as long as the company has Trapped Earnings.
Additionally, the 2021 Amendment also includes a Temporary Order
to enhance the release of Trapped Earnings by reducing the claw-back income tax rate that is applicable upon such a release or distribution
by up to 60%, but not less than 6% income tax rate, during a one-year period beginning from November 15, 2021.
The termination or substantial reduction of
any of the benefits available under the Investment Law could materially increase our future tax liabilities.
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)
Under 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 Innovation Law, research and development programs that meet specified criteria and are approved by the IIA are eligible
for grants. As of December 31, 2021, we had received funding from the IIA for the financing of a portion of our research and development
expenditures for C-Scan in the aggregate amount of approximately $5.6 million. As of December 31, 2021, we had not paid any royalties
to the IIA and had a contingent liability to the IIA with respect to such funding (including interest at the rate of 12-month LIBOR) in
the amount of approximately $6.1 million. In addition, in January 2021, we received an IIA
grant approval to support the funding of our transition from research and development to manufacturing in the amount of up to $786,000
(along with a co-investment by us of the same amount), subject to the terms and conditions set forth in the grant approval, which we are
not required to repay to the IIA, of which we received approximately $349,000 in 2021 and $82,000 in January 2022, .
Under the Innovation Law as currently in effect, the research and
development grants are typically up to 50% of the project’s approved expenditures. The grantee is required to pay royalties to the
State of Israel from the sale of products (and associated services) developed using IIA research and development funding. Regulations
under the Innovation Law, as currently in effect, generally provide for the payment of royalties of 3% or 4% (and at an increased rate
under certain circumstances) on sales of products and services based on technology and know-how developed using such IIA research and
development grants, until 100% (which may be increased under certain circumstances) of the grant, linked to the U.S. dollar and bearing
interest at the LIBOR rate, is repaid.
125
The terms of IIA grants that we have received (the research and
development grants and the transition to manufacturing grants) require that products developed with IIA funded be manufactured in
Israel, unless the IIA approved grant program includes a pre-determined portion of manufacturing that may be performed outside Israel
(as certain of our IIA approved grants included). The approval of the IIA is required for the transferring of manufacturing outside Israel
in excess of such pre-determined portion (however, only a notice to the IIA, as opposed to approval, is required for the transfer outside
Israel of up to 10% of the cumulative manufacturing in excess of such pre-approved portion). If manufacturing of IIA-funded products is
transferred outside Israel (following IIA approval) in excess of the pre-determined percentage included in the grant approval, then the
royalty repayment rate is increased by 1% with respect to the additional approved percentage to be manufactured outside Israel and the
royalty repayment for the entire approved program may be increased to up to three times the amount of the grants received, depending on
the percentage manufactured outside Israel (plus accrued interest). For example, during 2019, in connection with the application to the
IIA for certain research and development funding we provided notice to the IIA with respect to the transfer of manufacturing outside of
Israel of our C-Scan Track in an amount that represents less than 10% of cumulative deviation exceeding the pre-determined portion to
be manufactured abroad that was included in our grant approval. This may increase our royalty repayment ceiling to 120% of the revenues
of the C-Scan Track and the repayment rate may increase by 1% for the part of manufacturing carried out abroad. We are continuing to explore
whether certain other components of C-Scan can be assembled outside of Israel. For example, in preparation for commercialization in the
U.S., we are continuing to explore whether it would be possible to assemble the capsule without the X-ray source in Israel, and have the
X-ray source subsequently assembled into C-Scan at a certified radioisotope production facility or at a distribution center outside Israel.
Over the years, we received approval of grant applications (the
research and development grants and the transition to manufacturing grants) , that included a certain predetermined percentage of manufacturing
to be performed outside of Israel of the X-ray source but additional examination of these approvals and consequent manufacturing is required
to determine liabilities to the IIA, if any.
IIA prior approval is also required for the transfer of IIA-funded
know-how to a third party outside of Israel (including by way of license), which we may not receive (and any such approval would be subject
to payment of a redemption fee, calculated according to a formula under the Innovation Law, which may be in the amount of up to six times
the amount of the grants received, (less paid royalties, if any, and depreciation, but no less than the total grants received), plus accrued
interest). Even following the full repayment of any IIA grants, we must nevertheless continue to comply with the requirements of the Innovation
Law. If we fail to comply with any of the conditions and restrictions imposed by the Innovation Law and regulations and guidelines thereunder,
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.
Taxation of our Shareholders
Capital Gains Taxes Applicable
to Non-Israeli Resident Shareholders. A non-Israeli resident who derives capital gains from the sale of securities of an Israeli
resident company will be exempt from Israeli tax so long as (i) the capital gains are not attributed to a permanent establishment that
the non-resident maintains in Israel, (ii) the securities were not received from a relative or in a tax free reorganization transaction
and (iii) the securities are not traded on the Tel Aviv Stock Exchange on the date of sale (provided, however, that other exemptions may
apply if a an Israeli resident company is listed for trading on the Tel Aviv Stock Exchange). However, non-Israeli corporations will not
be entitled to the foregoing exemption if Israeli residents: (i) have a controlling interest of 25% or more in such non-Israeli corporation;
or (ii) are the beneficiaries of, or are entitled to, 25% or more of the revenues or profits of such non-Israeli corporation, whether
directly or indirectly.
Additionally, a sale of securities by a non-Israeli resident may
be exempt from Israeli capital gains tax under the provisions of an applicable tax treaty. For example, under the Convention Between the
Government of the United States of America and the Government of the State of Israel with respect to Taxes on Income, as amended, generally
referred to as the United States-Israel Tax Treaty, the sale, exchange or other disposition of shares by a shareholder who (i) is a U.S.
resident (for purposes of the treaty); (ii) holds the shares as a capital asset; and (iii) is entitled to claim the benefits afforded
to such person by the treaty, is generally exempt from Israeli capital gains tax. Such exemption will not apply if, among other things:
(i) the capital gain arising from such sale, exchange or other disposition is treated as industrial or commercial profits attributed to
a permanent establishment in Israel, subject to certain conditions; (ii) the shareholder holds, directly or indirectly, shares representing
10% or more of the voting capital of the corporation during any part of the 12-month period preceding the disposition, subject to certain
conditions; (iii) the capital gain arising from such sale, exchange or disposition is treated as royalties; or (iv) such U.S. resident
is an individual and was present in Israel for 183 days or more during the relevant taxable year. In such case, the sale, exchange or
disposition of our securities would be subject to Israeli tax, to the extent applicable; however, under the United States-Israel Tax Treaty,
the taxpayer would be permitted to claim a credit for such taxes against the U.S. federal income tax imposed with respect to such sale,
exchange or disposition, subject to the limitations under U.S. law applicable to foreign tax credits. The United States-Israel Tax Treaty
does not relate to U.S. state or local taxes. The United States-Israel Tax Treaty is currently under review and subject to change.
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In some instances where our shareholders may be liable for Israeli
tax on the sale of their securities, the payment of the consideration may be subject to the withholding of Israeli tax at source. Shareholders
may be required to demonstrate that they are exempt from tax on their capital gains and to obtain an exemption from withholding tax certificate
from the Israel Tax Authority in order to avoid withholding at source at the time of sale.
Taxation of Non-Israeli Shareholders
on Receipt of Dividends. Non-Israeli residents are generally subject to Israeli withholding tax on the receipt of dividends paid
on our ordinary shares at the rate of 25%, unless relief is provided in a treaty between Israel and the shareholder’s country of
residence (subject to the receipt of a valid certificate from the Israeli Tax Authority allowing for a reduced tax rate). With respect
to a person who is a “substantial shareholder” at the time of receiving the dividend or at any time during the preceding 12
months, the applicable withholding tax rate is 30%, unless such “substantial shareholder” holds such shares through a nominee
company, in which case the rate is 25%. A “substantial shareholder” is generally a person who alone or together with such
person’s relative (as such term is defined in the Ordinance) or another person who collaborates with such person on a permanent
basis, holds, directly or indirectly, at least 10% of any of the “means of control” of the corporation. “Means of control”
generally include the right to vote, receive profits, nominate a director or an executive officer, receive assets upon liquidation, or
order someone who holds any of the aforesaid rights how to act, regardless of the source of such right.
However, a distribution of dividends to non-Israeli residents is
subject to withholding tax at source at a rate of 15% if the dividend is distributed from income attributed to an Approved Enterprise
or a Benefited Enterprise and 20% if the dividend is distributed from income attributed to a Preferred Enterprise or a Priority Technological
Enterprise, unless a reduced tax rate is provided under an applicable tax treaty. The corporate income tax claw-back may apply upon any
dividend distribution, as long as the company has Trapped Earnings (see discussion above under “Tax
Benefits under the 2021 Amendment”). We cannot assure you that in the event we declare a dividend we will designate the income
out of which the dividend is paid in a manner that will reduce shareholders’ tax liability.
Under the United States-Israel Tax Treaty, the maximum rate of
tax withheld at source in Israel on dividends paid to a holder of our ordinary shares who is a U.S. resident (for purposes of the United
States-Israel Tax Treaty) is 25%. With respect to dividends paid to a U.S. corporation that held 10% or more of the capital of the paying
corporation throughout the tax year in which the dividend is distributed and the preceding tax year and provided that not more than 25%
of the gross income of the paying corporation for such prior taxable year (if any) consists of certain interest or dividends, the maximum
rate of tax withheld at source is 12.5%; provided, however, that if the paying corporation is an Approved Enterprise, the applicable withholding
tax rate under such circumstances is reduced to 15% (rather than 12.5%). We believe that the reference in the United States-Israel Tax
Treaty to an Approved Enterprise under the Investment Law is deemed to include also a Benefitted Enterprise Preferred Enterprise and Priority
Technological Enterprise under the Investment Law. The United States-Israel Tax Treaty is currently under review and subject to change.
U.S. residents who are subject to Israeli withholding tax on a
dividend may be entitled to a credit or deduction for U.S. federal income tax purposes in the amount of the taxes withheld, subject to
detailed rules contained in U.S. tax legislation.
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Exercise or Lapse of Series C
Warrant or Series D Warrant. A holder of a Series C Warrant or Series D Warrant generally will not recognize gain or loss upon
the exercise of a Series C Warrant or Series D Warrant for cash. An ordinary share acquired pursuant to the exercise of a Series C Warrant
or Series D Warrant for cash generally will have a tax basis equal to the holder’s tax basis in the Series C Warrant or Series D
Warrant (as the case may be), increased by the amount paid to exercise the Series C Warrant or Series D Warrant. The holding period of
such ordinary share generally would begin on the day after the date of exercise of the Series C Warrant or Series D Warrant. If a Series
C Warrant or Series D Warrant is allowed to lapse unexercised, the holder generally will recognize a capital loss equal to such holder’s
tax basis in the Series C Warrant or Series D Warrant (as the case may be).
It is possible that a cashless exercise would be treated as a taxable
exchange in which gain or loss is recognized. In such event, a holder could be deemed to have surrendered a number of Series C Warrants
or Series D Warrants with a fair market value equal to the exercise price for the number of Series C Warrants or Series D deemed exercised.
For this purpose, the number of Series C Warrants or Series D Warrants deemed exercised would be equal to the number of Series C Warrants
or Series D Warrants, as applicable, that would entitle the holder to receive upon exercise the number of ordinary shares issued pursuant
to the cashless exercise of the Series C Warrants or Series D Warrants (as the case maybe). In this situation, the holder would recognize
capital gain or loss in an amount equal to the difference between the fair market value of the Series C Warrants or Series D Warrants
deemed surrendered to pay the exercise price and the holder’s tax basis in the Series C Warrants or Series D Warrants deemed surrendered.
Adjustments with Respect to Warrants.
The terms of the Series C Warrant and Series D Warrant provide for an adjustment to the number of ordinary shares for which the
warrant may be exercised or adjustment to the exercise price of the warrant in certain events. An adjustment of the exercise price or
an adjustment that has the effect of preventing dilution generally is not taxable. However, the holders of the Series C Warrants and Series
D Warrants may be treated as receiving a constructive distribution from us if, for example, the adjustment increases the warrant holders’
proportionate interest in our assets or earnings and profits (e.g., through a decrease in the exercise price of the Series C Warrants
or Series D Warrants) as a result of a distribution of cash to the holders of our ordinary shares, which is taxable to the holders of
such ordinary shares as described under “—Taxation of our Shareholders,” above. Such constructive distribution would
be subject to tax as described under that section in the same manner as if the holders of the Series C Warrants or Series D Warrants received
a cash distribution from us equal to the fair market value of such increased interest. Holders of Series C Warrants and Series D
Warrants are urged to consult their own tax advisors on these issues.
Surtax
Subject to the provisions of an applicable tax treaty, individuals
who are subject to tax in Israel are also subject to an additional tax at a rate of 3% on annual income (including, but not limited to,
dividends, interest and capital gain) exceeding NIS 663,240 for 2022, which amount is linked to the annual change in the Israeli consumer
price index.
Estate and Gift Tax
Israeli law presently does not impose estate or gift taxes.
EACH HOLDER OF OUR SECURITIES IS URGED TO CONSULT ITS OWN TAX ADVISOR
WITH RESPECT TO THE PARTICULAR TAX CONSEQUENCES TO SUCH HOLDER OF THE ACQUISITION, OWNERSHIP AND DISPOSITION OF OUR SECURITIES, INCLUDING
THE APPLICABILITY AND EFFECT OF ANY ISRAELI TAX LAWS AND ANY APPLICABLE TAX TREATIES.
U.S. Federal Income Taxation
The following are certain material U.S. federal income tax consequences
of the acquisition, ownership and disposition of our securities.
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The discussion below of the U.S. federal income tax consequences
to “U.S. Holders” will apply to a beneficial owner of our securities that is for U.S. federal income tax purposes:
| • |
an individual citizen or resident of the United States; |
| • |
a corporation (or other entity treated as a corporation) that is created or organized (or treated as created or organized) in or
under the laws of the United States, any state thereof or the District of Columbia; |
| • |
an estate whose income is includible in gross income for U.S. federal income tax purposes regardless of its source; or |
| • |
a trust if (i) a U.S. court can exercise primary supervision over the trust’s administration and one or more U.S. persons are
authorized to control all substantial decisions of the trust; or (ii) it has a valid election in effect under applicable U.S. Treasury
regulations to be treated as a U.S. person. |
A beneficial owner of our securities that is described above is
referred to herein as a “U.S. Holder.” If a beneficial owner of our securities is not described as a U.S. Holder and is not
an entity treated as a partnership or other pass-through entity for U.S. federal income tax purposes, such owner will be considered a
“Non-U.S. Holder.” Certain material U.S. federal income tax consequences of the acquisition, ownership and disposition of
our securities applicable specifically to Non-U.S. Holders are described below under the heading “Non-U.S. Holders.”
This discussion is based on the Code, its legislative history,
Treasury regulations promulgated thereunder, published rulings and court decisions, all as currently in effect. These authorities are
subject to change or differing interpretations, possibly on a retroactive basis.
This discussion does not address all aspects of U.S. federal income
taxation that may be relevant to any particular holder based on such holder’s individual circumstances. In particular, this discussion
considers only holders that own and hold our securities as capital assets within the meaning of Section 1221 of the Code (generally, property
held for investment), and does not address the potential application of the alternative minimum tax or the U.S. federal income tax consequences
to holders that are subject to special rules, including, but not limited to:
| • |
financial institutions or financial services entities; |
| • |
broker-dealers; |
| • |
persons that are subject to the mark-to-market accounting rules under Section 475 of the Code; |
| • |
tax-exempt entities; |
| • |
governments or agencies or instrumentalities thereof; |
| • |
insurance companies; |
| • |
regulated investment companies; |
| • |
real estate investment trusts; |
| • |
certain expatriates or former long-term residents of the United States; |
| • |
persons that actually or constructively own 5% or more of our shares (by vote or value); |
| • |
persons that acquired our securities pursuant to an exercise of employee options, in connection with employee incentive plans or
otherwise as compensation; |
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persons that hold our securities as part of a straddle, constructive sale, hedging, conversion or other integrated transaction;
|
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persons whose functional currency is not the U.S. dollar; |
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passive foreign investment companies; or |
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controlled foreign corporations. |
This discussion does not address any aspect of U.S. federal non-income
tax laws, such as gift or estate tax laws, or state, local or non-U.S. tax laws or, except as discussed herein, any tax reporting obligations
applicable to a holder of our securities. Additionally, this discussion does not consider the tax treatment of partnerships or other pass-through
entities or persons who hold our securities through such entities. If a partnership (or other entity classified as a partnership for U.S.
federal income tax purposes) is the beneficial owner of our securities, the U.S. federal income tax treatment of a partner (or person
or entity treated as a partner) in the partnership generally will depend on the status of the partner and the activities of the partnership.
This discussion also assumes that any distribution made (or deemed made) to a holder in respect of our securities and any consideration
received (or deemed received) by a holder in connection with the sale or other disposition of our securities will be in U.S. dollars.
In addition, as described in “Risk Factors – Risks Related to Taxation”, there is a risk that we could be treated as
a domestic (U.S.) corporation for U.S. federal income tax purposes by reason of the Reorganization; this discussion also assumes that
we will be and have been treated as a foreign corporation for U.S. federal income tax purposes. Moreover, this discussion assumes that
a holder owns a sufficient number of Series C Warrants and/or Series D Warrants, such that the holder will not have a fractional warrant
upon the exercise of a Series C Warrant and/or, Series D Warrant, as the case may be.
We have not sought, and will not seek, a ruling from the IRS or
an opinion of counsel as to any U.S. federal income tax consequence described herein. The IRS may disagree with the description herein,
and its determination may be upheld by a court. Moreover, there can be no assurance that future legislation, regulations, administrative
rulings or court decisions will not adversely affect the accuracy of the statements in this discussion.
EACH HOLDER OF OUR SECURITIES IS URGED TO CONSULT ITS OWN TAX ADVISOR
WITH RESPECT TO THE PARTICULAR TAX CONSEQUENCES TO SUCH HOLDER OF THE ACQUISITION, OWNERSHIP AND DISPOSITION OF OUR SECURITIES, INCLUDING
THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL, AND NON-U.S. TAX LAWS, AS WELL AS U.S. FEDERAL TAX LAWS AND ANY APPLICABLE TAX TREATIES.
U.S. Holders
Taxation of Cash Distributions
As noted above, we currently do not intend to pay cash dividends
on our ordinary shares in the foreseeable future. Subject to the passive foreign investment company, or PFIC, rules discussed below, a
U.S. Holder generally will be required to include in gross income as ordinary income the amount of any cash dividend paid in respect of
our ordinary shares. A cash distribution on our ordinary shares generally will be treated as a dividend for U.S. federal income tax purposes
to the extent the distribution is paid out of our current or accumulated earnings and profits (as determined for U.S. federal income tax
purposes). Such dividend generally will not be eligible for the dividends-received deduction generally allowed to U.S. corporations in
respect of dividends received from other U.S. corporations. The portion of such cash distribution, if any, in excess of such earnings
and profits will be applied against and reduce (but not below zero) the U.S. Holder’s adjusted tax basis in the ordinary shares.
Any remaining excess generally will be treated as gain from the sale or other taxable disposition of such ordinary shares.
With respect to non-corporate U.S. Holders, any such cash dividends
may be subject to U.S. federal income tax at the lower applicable regular long term capital gains tax rate (see “— Taxation
on the Disposition of Ordinary Shares or Series C Warrants or Series D Warrants” below) provided that (a) our ordinary shares are
readily tradable on an established securities market in the United States or we are eligible for the benefits of the United States-Israel
Tax Treaty, (b) we are not a PFIC, as discussed below, for either the taxable year in which the dividend was paid or the preceding taxable
year, and (c) certain holding period requirements are met. Therefore, if our ordinary shares are not readily tradable on an established
securities market, and we are not eligible for the benefits of the United States-Israel Tax Treaty, then cash dividends paid by us to
non-corporate U.S. Holders will not be subject to U.S. federal income tax at the lower regular long term capital gains tax rate. Under
published IRS authority, shares are considered for purposes of clause (a) above to be readily tradable on an established securities market
in the United States only if they are listed on certain exchanges, which presently include the Nasdaq Capital Market. Although our ordinary
shares are currently listed and traded on the Nasdaq Capital Market, U.S. Holders nevertheless should consult their own tax advisors regarding
the availability of the lower rate for any cash dividends paid with respect to our ordinary shares.
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Dividends paid to a U.S. Holder with respect to our ordinary shares
generally will be foreign source income, which may be relevant in calculating such U.S. Holder’s foreign tax credit limitations.
Subject to certain conditions and limitations, Israeli tax withheld on dividends may be deducted from such U.S. Holder’s taxable
income or credited against such U.S. Holder’s U.S. federal income tax liability. The limitation on foreign taxes eligible for credit
is calculated separately with respect to specific classes of income. For this purpose, dividends that we distribute generally should constitute
“passive category income,” or, in the case of certain U.S. Holders, “general category income.” A foreign tax credit
for foreign taxes imposed on distributions may be denied if a U.S. Holder does not satisfy certain minimum holding period requirements.
The rules relating to the determination of the foreign tax credit are complex, and U.S. Holders should consult their tax advisors to determine
whether and to what extent they will be entitled to this credit.
Adjustments with Respect to Warrants
The terms of each Series C Warrant and Series D Warrant provide
for an adjustment to the number of ordinary shares for which the warrant may be exercised or to the exercise price of the warrant in certain
events. An adjustment that has the effect of preventing dilution generally is not taxable. However, the U.S. Holders of the Series C Warrants
and Series D Warrants would be treated as receiving a constructive distribution from us if, for example, the adjustment increases the
warrant holders’ proportionate interest in our assets or earnings and profits (e.g., through a decrease in the exercise price of
the Series C Warrants or Series D Warrants) as a result of a distribution of cash to the holders of our ordinary shares, which is taxable
to the U.S. Holders of such ordinary shares as described under “— Taxation of Cash Distributions,” above. Such constructive
distribution would be subject to tax as described under that section in the same manner as if the U.S. Holders of the Series C Warrants
and Series D Warrants received a cash distribution from us equal to the fair market value of such increased interest. U.S. Holders of
Series C Warrants and Series D Warrants are urged to consult their own tax advisors on these issues.
Taxation on the Disposition of Ordinary Shares or Series C Warrants
or Series D Warrants
Upon a sale or other taxable disposition of our ordinary shares
or the Series C Warrants or Series D Warrants, and subject to the PFIC rules discussed below, a U.S. Holder generally will recognize capital
gain or loss in an amount equal to the difference between the amount realized and the U.S. Holder’s adjusted tax basis in the securities.
The regular U.S. federal income tax rate on capital gains recognized
by U.S. Holders generally is the same as the regular U.S. federal income tax rate on ordinary income, except that long term capital gains
recognized by non-corporate U.S. Holders generally are subject to U.S. federal income tax at a maximum regular rate of 20%. Capital gain
or loss will constitute long term capital gain or loss if the U.S. Holder’s holding period for the securities exceeds one year.
The deductibility of capital losses is subject to various limitations. Any such gain or loss that a U.S. Holder recognizes generally will
be treated as U.S. source income or loss for foreign tax credit limitation purposes.
If an Israeli capital gains tax applies to any gains from the disposition
of our ordinary shares or the Series C Warrants or Series D Warrants by a U.S. Holder, as discussed in “Israeli Tax Considerations
and Government Programs – Taxation of our Shareholders” above, such tax may be treated as a foreign tax eligible for a deduction
from such holder’s U.S. federal taxable income or a foreign tax credit against such holder’s U.S. federal income tax liability
(subject to certain conditions and limitations). In addition, if such Israeli tax applies to any such gain, a U.S. Holder may be entitled
to certain benefits under the United States-Israel Tax Treaty, if such holder is considered a resident of the United States for purposes
of, and otherwise meets the requirements of, the United States-Israel Tax Treaty. U.S. Holders should consult their own tax advisors regarding
the deduction or credit for any such Israeli tax and their eligibility for the benefits of the United States-Israel Tax Treaty.
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Additional Taxes
U.S. Holders that are individuals, estates or trusts and whose
income exceeds certain thresholds generally may be subject to a 3.8% Medicare contribution tax on unearned income, including, without
limitation, dividends on, and gains from the sale or other taxable disposition of, our ordinary shares or the Series C Warrants or Series
D Warrants, subject to certain limitations and exceptions. U.S. Holders should consult their own tax advisors regarding the effect, if
any, of such tax on their ownership and disposition of our ordinary shares or the Series C Warrants or Series D Warrants.
Exercise or Lapse of a Series C Warrant or Series D Warrant
Subject to the PFIC rules discussed below, a U.S. Holder generally
will not recognize gain or loss upon the exercise of a Series C Warrant or Series D Warrant for cash. An ordinary share acquired pursuant
to the exercise of a Series C Warrant or Series D Warrant for cash generally will have a tax basis equal to the U.S. Holder’s tax
basis in the Series C Warrant or Series D Warrant, as applicable, increased by the amount paid to exercise the Series C Warrant or Series
D Warrant. The holding period of such ordinary share generally would begin on the day after the date of exercise of the Series C Warrant
or Series D Warrant. If a Series C Warrant or Series D Warrant is allowed to lapse unexercised, a U.S. Holder generally will recognize
a capital loss equal to such holder’s tax basis in the Series C Warrant or Series D Warrant.
The tax consequences of a cashless exercise of Series C Warrants
and Series D Warrants are not clear under current tax law. A cashless exercise may be tax-free, either because it is not a realization
event (i.e., not a transaction in which gain or loss is realized) or because the transaction is treated as a recapitalization for U.S.
federal income tax purposes. In either tax-free situation, a U.S. Holder’s tax basis in the ordinary shares received would equal
the U.S. Holder’s basis in the Series C Warrants or Series D Warrants surrendered. If the cashless exercise were treated as not
being a realization event, the U.S. Holder’s holding period in the ordinary shares could be treated as commencing on the date following
the date of exercise of the Series C Warrants or Series D Warrants. If the cashless exercise were treated as a recapitalization, the holding
period of the ordinary shares received would include the holding period of the Series C Warrants or Series D Warrants, as applicable.
It is also possible that a cashless exercise could be treated as
a taxable exchange in which gain or loss is recognized. In such event, a U.S. Holder could be deemed to have surrendered a number of Series
C Warrants or Series D Warrants, as applicable, with a fair market value equal to the exercise price for the number of Series C Warrants
or Series D Warrants deemed exercised. For this purpose, the number of Series C Warrants or Series D Warrants deemed exercised would be
equal to the amount needed to receive on exercise the number of ordinary shares issued pursuant to the cashless exercise of the Series
C Warrants or Series D Warrants. In this situation, the U.S. Holder would recognize capital gain or loss in an amount equal to the difference
between the fair market value of the Series C Warrants or Series D Warrants deemed surrendered to pay the exercise price and the U.S.
Holder’s tax basis in such Series C Warrants or Series D Warrants deemed surrendered. Such gain or loss would be long-term or short-term
depending on the U.S. Holder’s holding period in the Series C Warrants or Series D Warrants, as applicable. In this case, a U.S.
Holder’s tax basis in the ordinary shares received would equal the sum of the fair market value of the Series C Warrants or Series
D Warrants deemed surrendered to pay the exercise price and the U.S. Holder’s tax basis in the Series C Warrants or Series D Warrants
deemed exercised, and a U.S. Holder’s holding period for the ordinary shares should commence on the date following the date of exercise
of the Series C Warrants or Series D Warrants. There also may be alternative characterizations of any such taxable exchange that would
result in similar tax consequences, except that a U.S. Holder’s gain or loss would be short-term.
Due to the absence of authority on the U.S. federal income tax
treatment of a cashless exercise of Series C Warrants and Series D Warrants, it is unclear which, if any, of the alternative tax consequences
and holding periods described above would be adopted by the IRS or a court of law. Accordingly, U.S. Holders should consult their tax
advisors regarding the tax consequences of a cashless exercise of Series C Warrants and Series D Warrants.
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Passive Foreign Investment Company Rules
A foreign (i.e., non-U.S.) corporation will be a PFIC if either
(a) at least 75% of its gross income in a taxable year of the foreign corporation, including its pro rata share of the gross income of
any corporation in which it is considered to own at least 25% of the corporation by value, is passive income, or (b) at least 50% of the
average value of its assets in a taxable year of the foreign corporation, including its pro rata share of the assets of any corporation
in which it is considered to own at least 25% of the corporation by value, are held for the production of, or produce, passive income.
Passive income generally includes dividends, interest, rents and royalties (other than certain rents or royalties derived from the active
conduct of a trade or business), and gains from the disposition of passive assets.
We believe that we were a PFIC for the taxable year ended December
31, 2021 and may be a PFIC for the taxable year ending December 31, 2022. Our PFIC status for our current taxable year or any subsequent
taxable year is uncertain and will not be determinable until after the end of such taxable year. Accordingly, there can be no assurance
with respect to our status as a PFIC for our taxable year ending December 31, 2022 or any subsequent taxable year.
If we are determined to be a PFIC for any taxable year (or portion
thereof) that is included in the holding period of a U.S. Holder of our ordinary shares or Series C Warrants or Series D Warrants, and,
in the case of our ordinary shares, the U.S. Holder did not make a timely qualified electing fund or a QEF, election for our first taxable
year as a PFIC in which the U.S. Holder held (or was deemed to hold) the ordinary shares, a purging election, a QEF election along with
a purging election, or a mark-to-market election, each as described below, such holder generally will be subject to special rules for
regular U.S. federal income tax purposes with respect to:
| • |
any gain recognized by the U.S. Holder on the sale or other disposition of its ordinary shares or Series C Warrants or Series D Warrants;
and |
| • |
any “excess distribution” made to the U.S. Holder (generally, any distributions to such U.S. Holder during a taxable
year of the U.S. Holder that are greater than 125% of the average annual distributions received by such U.S. Holder in respect of the
ordinary shares during the three preceding taxable years of such U.S. Holder or, if shorter, such U.S. Holder’s holding period for
the ordinary shares). |
Under these rules,
| • |
the U.S. Holder’s gain or excess distribution will be allocated ratably over the U.S. Holder’s holding period for the
ordinary shares or Series C Warrants or Series D Warrants; |
| • |
the amount allocated to the U.S. Holder’s taxable year in which the U.S. Holder recognized the gain or received the excess
distribution or to the period in the U.S. Holder’s holding period before the first day of our first taxable year in which we qualified
as a PFIC will be taxed as ordinary income; |
| • |
the amount allocated to other taxable years (or portions thereof) of the U.S. Holder and included in its holding period will be taxed
at the highest ordinary tax rate in effect for that year and applicable to the U.S. Holder; and |
| • |
the interest charge generally applicable to underpayments of tax will be imposed in respect of the tax attributable to each such
other taxable year of the U.S. Holder. |
Although a determination as to our PFIC status is made annually,
an initial determination that we are a PFIC generally will apply for subsequent years to a U.S. Holder that held (or was deemed to hold)
our ordinary shares or Series C Warrants or Series D Warrants while we were a PFIC, whether or not we meet the test for PFIC status in
those subsequent years. If we are determined to be a PFIC in any taxable year, and then cease to meet the test for PFIC status in a subsequent
taxable year, a U.S. Holder may be able to make a purging election to eliminate this continuing PFIC status with respect to its ordinary
shares in certain circumstances. A purging election generally creates a deemed sale of such ordinary shares at their fair market value
on the last day of our tax year during which we qualified as a PFIC (or, in the case of a purging election made in connection with a QEF
election, the first day of our taxable year in which qualify as a QEF with respect to such U.S. Holder). Any gain recognized by the purging
election generally will be treated as an excess distribution subject to the special tax and interest charge rules described above. As
a result of the purging election, the U.S. Holder generally will increase the adjusted basis in its ordinary shares by the amount of gain
recognized and will also have a new holding period in its ordinary shares for purposes of the PFIC rules.
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In general, if we are determined to be a PFIC, a U.S. Holder may
avoid the PFIC tax consequences described above with respect to the ordinary shares by making a timely QEF election (or a QEF election
along with a purging election). Pursuant to the QEF election, a U.S. Holder generally will be required to include in income its pro rata
share of our net capital gains (as long term capital gain) and other earnings and profits (as ordinary income), on a current basis, in
each case whether or not distributed, in the taxable year of the U.S. Holder in which or with which our taxable year ends if we are treated
as a PFIC for that taxable year. However, a U.S. Holder may make a QEF election only if we agree to provide certain tax information to
such holder annually. At this time, we do not intend to provide U.S. Holders with such information as may be required to make a QEF election
effective.
Alternatively, if a U.S. Holder, at the close of its taxable year,
owns ordinary shares in a PFIC that are treated as marketable stock, the U.S. Holder may make a mark-to-market election with respect to
such ordinary shares for such taxable year. If the U.S. Holder makes a valid mark-to-market election for the first taxable year of the
U.S. Holder in which the U.S. Holder holds (or is deemed to hold) the ordinary shares and for which we are determined to be a PFIC, such
holder generally will not be subject to the PFIC rules described above with respect to its ordinary shares as long as such shares continue
to be treated as marketable stock. Instead, in general, the U.S. Holder will include as ordinary income for each year that we are treated
as a PFIC the excess, if any, of the fair market value of its ordinary shares at the end of its taxable year over the adjusted tax basis
in its ordinary shares. The U.S. Holder also will be allowed to take an ordinary loss in respect of the excess, if any, of the adjusted
tax basis of its ordinary shares over the fair market value of its ordinary shares at the end of its taxable year (but only to the extent
of the net amount of previously included income as a result of the mark-to-market election). The U.S. Holder’s adjusted tax basis
in its ordinary shares will be adjusted to reflect any such income or loss amounts, and any further gain recognized on a sale or other
taxable disposition of the ordinary shares in a taxable year in which we are treated as a PFIC generally will be treated as ordinary income.
Special tax rules may also apply if a U.S. Holder makes a mark-to-market election for a taxable year after the first taxable year in which
the U.S. Holder holds (or is deemed to hold) our ordinary shares and for which we are determined to be a PFIC. Currently, a mark-to-market
election may not be made with respect to warrants.
The mark-to-market election is available only for stock that is
regularly traded on a national securities exchange that is registered with the U.S. Securities and Exchange Commission, including the
Nasdaq Capital Market, or on a foreign exchange or market that is regulated or supervised by a governmental authority of the country in
which the exchange or market is located and which (A) meets certain requirements, that are enforced by law, relating to trading volume,
listing, financial disclosure, surveillance and other requirements that are designed to (i) prevent fraudulent and manipulative acts and
practices, (ii) remove impediments to and perfect the mechanism of a free and open, fair and orderly market and (iii) protect investors
and (B) has rules that effectively promote the active trading of listed stock. Although our ordinary shares are currently listed and traded
on the Nasdaq Capital Market, U.S. Holders nevertheless should consult their own tax advisors regarding the availability and tax consequences
of a mark-to-market election with respect to our ordinary shares under their particular circumstances.
If we are a PFIC and, at any time, have a foreign subsidiary that
is classified as a PFIC, a U.S. Holder of our ordinary shares generally should be deemed to own a portion of the shares of such lower-tier
PFIC, and generally could incur liability for the deferred tax and interest charge described above if we receive a distribution from,
or dispose of all or part of our interest in, or the U.S. Holder were otherwise deemed to have disposed of an interest in, the lower-tier
PFIC. A mark-to-market election generally would not be available with respect to such a lower-tier PFIC. U.S. Holders are urged to consult
their own tax advisors regarding the tax issues raised by lower-tier PFICs.
A U.S. Holder that owns (or is deemed to own) ordinary shares in
a PFIC during any taxable year of the U.S. Holder may have to file an IRS Form 8621 (whether or not a mark-to-market election is or has
been made) with such U.S. Holder’s U.S. federal income tax return and provide such other information as may be required by the U.S.
Treasury Department.
The rules dealing with PFICs and purging and mark-to-market elections
are very complex and are affected by various factors in addition to those described above. Accordingly, U.S. Holders of our securities
should consult their own tax advisors concerning the application of the PFIC rules to our securities under their particular circumstances.
134
Non-U.S. Holders
Cash dividends paid or deemed paid to a Non-U.S. Holder with respect
to our ordinary shares generally will not be subject to U.S. federal income tax unless such dividends are effectively connected with the
Non-U.S. Holder’s conduct of a trade or business within the United States (and, if required by an applicable income tax treaty,
are attributable to a permanent establishment or fixed base that such holder maintains or maintained in the United States).
In addition, a Non-U.S. Holder generally will not be subject to
U.S. federal income tax on any gain attributable to a sale or other taxable disposition of our securities unless such gain is effectively
connected with its conduct of a trade or business in the United States (and, if required by an applicable income tax treaty, is attributable
to a permanent establishment or fixed base that such holder maintains or maintained in the United States) or the Non-U.S. Holder is an
individual who is present in the United States for 183 days or more in the taxable year of such sale or other disposition and certain
other conditions are met (in which case, such gain from U.S. sources generally is subject to U.S. federal income tax at a 30% rate or
a lower applicable tax treaty rate).
Dividends and gains that are effectively connected with the Non-U.S.
Holder’s conduct of a trade or business in the United States (and, if required by an applicable income tax treaty, are attributable
to a permanent establishment or fixed base that such holder maintains or maintained in the United States) generally will be subject to
regular U.S. federal income tax at the same regular U.S. federal income tax rates as applicable to a comparable U.S. Holder and, in the
case of a Non-U.S. Holder that is a corporation for U.S. federal income tax purposes, may also be subject to an additional branch profits
tax at a 30% rate or a lower applicable tax treaty rate.
Backup Withholding and Information Reporting
In general, information reporting for U.S. federal income tax purposes
should apply to distributions made on our securities within the United States to a U.S. Holder (other than an exempt recipient) and to
the proceeds from sales and other dispositions of our securities by a U.S. Holder (other than an exempt recipient) to or through a U.S.
office of a broker. Payments made (and sales and other dispositions effected at an office) outside the United States will be subject to
information reporting in limited circumstances. In addition, certain information concerning a
U.S. Holder’s adjusted tax basis in its securities and adjustments
to that tax basis and whether any gain or loss with respect to such securities is long term or short term also may be required to be reported
to the IRS, and certain holders may be required to file an IRS Form 8938 (Statement of Specified Foreign Financial Assets) to report their
interest in our securities.
Moreover, backup withholding of U.S. federal income tax, currently
at a rate of 24%, generally will apply to dividends paid on our securities to a U.S. Holder (other than an exempt recipient) and the proceeds
from sales and other dispositions of our securities by a U.S. Holder (other than an exempt recipient), in each case who:
| • |
fails to provide an accurate taxpayer identification number; |
| • |
is notified by the IRS that backup withholding is required; or |
| • |
in certain circumstances, fails to comply with applicable certification requirements. |
A Non-U.S. Holder generally may eliminate the requirement for information
reporting and backup withholding by providing certification of its foreign status, under penalties of perjury, on a duly executed applicable
IRS Form W-8 or by otherwise establishing an exemption.
135
Backup withholding is not an additional tax. Rather, the amount
of any backup withholding will be allowed as a credit against a U.S. Holder’s or a Non-U.S. Holder’s U.S. federal income tax
liability and may entitle such holder to a refund, provided that certain required information is timely furnished to the IRS.
Holders are urged to consult their own tax advisors regarding information
reporting, the application of backup withholding, and the availability of and procedures for obtaining an exemption from backup withholding
in their particular circumstances.
| F. |
Dividends and paying agents |
Not applicable.
| G. |
Statement by experts |
Not applicable.
| H. |
Documents on display |
We are subject to the informational requirements of the Exchange
Act. Accordingly, we are required to file reports and other information with the SEC, including annual reports on Form 20-F and reports
on Form 6-K. As a foreign private issuer, we are exempt under the Exchange Act from, among other things, the rules prescribing the furnishing
and content of proxy statements, and our officers, directors and principal shareholders are exempt from the reporting and short swing
profit recovery provisions contained in Section 16 of the Exchange Act. In addition, we are not required under the Exchange Act to file
periodic reports and financial statements with the SEC as frequently or as promptly as U.S. companies whose securities are registered
under the Exchange Act. The SEC maintains a website at www.sec.gov that contains reports, proxy and information statements and other information
regarding registrants like us that file electronically with the SEC. You can also inspect this Annual Report on such website.
A copy of each document (or a translation thereof to the extent
not in English) concerning our company that is referred to in this Annual Report is available for public view (subject to confidential
treatment of certain agreements pursuant to applicable law) at our principal executive offices at Check-Cap Building, 29 Abba Hushi Avenue,
P.O. Box 1271, Isfiya, 3009000, Israel.
| I. |
Subsidiary Information |
Not applicable.
ITEM 11. QUANTITATIVE
AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Exchange Rate Risk
Some of our assets and liabilities are affected by fluctuations
in the exchange rate between the U.S. dollar and the NIS and between the U.S. dollar and the Euro. For example, salaries and related expenses
for Israeli employees are paid in NIS and some of our suppliers are located in Europe and require payment in Euros.
During 2021, we entered into zero-cost collars or minimal cost
collars contracts to hedge against the risk of changes in exchange rates on future cash flow from payments denominated in NIS. As of December
31, 2021, we had outstanding foreign exchange collars in the notional amount of approximately $3.5 million with a fair value asset net
of $65.
As of December 31, 2021, our total assets and liabilities linked
to the NIS amounted to approximately $1.9 million and $3.1 million, respectively. A 10% depreciation of the dollar in relation to the
NIS would cause an exchange rate loss of approximately $115,000.
136
As of December 31, 2021, we had no assets linked to the Euro and
our total liabilities linked to the Euro amounted to approximately $180,000. A 10% depreciation of the dollar in relation to the Euro
would cause an exchange rate gain of approximately $16,000 .
During the year ended December 31, 2021, the exchange rate between
the U.S. dollar and the NIS decreased by 3.27 % and the exchange rate between the U.S. dollar and the Euro increased by 8.39 %. During
the year ended December 31, 2020, the exchange rate between the U.S. dollar and the NIS decreased by 6.97% and the exchange rate between
the U.S. dollar and the Euro decreased by 8.53%. During the year ended December 31, 2019, the exchange rate between the U.S. dollar and
the NIS decreased by 7.79% and the exchange rate between the U.S. dollar and the Euro increased by 2.08%.
Interest Rate Risk
Our obligation to pay royalties to the IIA is linked to LIBOR and
we are therefore exposed to changes in LIBOR.
In addition, we invest and intend to invest our cash balances,
including certain of the net proceeds from our recent financings pending their ultimate use, primarily in bank deposits, corporate securities
and securities issued by the U.S. and Israeli governments. We are exposed to market risks resulting from changes in interest rates relating
primarily to our financial investments in cash and deposits. We do not use derivative financial instruments to limit exposure to interest
rate risk. Our interest income slightly increased in 2021 mainly due to the increase in our cash amounts. Interest rates may decline in
the future as a result of changes in the financial markets; however, we believe any such potential loss would be immaterial to us.
ITEM 12. DESCRIPTION
OF SECURITIES OTHER THAN EQUITY SECURITIES
Not applicable.
PART II
ITEM 13. DEFAULTS,
DIVIDEND ARREARAGES AND DELINQUENCIES
Not applicable.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY
HOLDERS AND USE OF PROCEEDS
Not applicable.
ITEM 15. CONTROLS AND PROCEDURES
(a) Disclosure
Controls and Procedures. Our management, including our Chief Executive Officer and Chief
Financial Officer have evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e)
and 15d-15(e) of the Exchange Act) as of the end of the period covered by this Annual Report, or the Evaluation Date. Based on such evaluation,
the Chief Executive Officer and the Chief Financial Officer have concluded that, as of the Evaluation Date, the Company’s disclosure
controls and procedures are effective.
(b) Management’s
Annual Report on Internal Control Over Financial Reporting. Our management is responsible
for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f)
of the Exchange Act. Our management, including our Chief Executive Officer and our Chief Financial Officer, conducted an evaluation of
the effectiveness of our internal control over financial reporting based on the framework and criteria established in Internal Control—Integrated
Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) as of the Evaluation Date. Based
on that evaluation, our management has concluded that our internal control over financial reporting was effective as of the Evaluation
Date. As all internal control systems, no matter how well designed, have inherent limitations, our internal control over financial reporting
may not prevent or detect misstatements.
137
(c) Attestation
Report of Registered Public Accounting Firm. Our independent registered public accounting firm has audited the consolidated financial
statements included in this Annual Report, and as part of its audit, has issued its audit report on the effectiveness of our internal
control over financial reporting. This report is included in pages F-1 and F-41 of this Annual Report and is incorporated herein by reference.
(d) Changes
in Internal Control Over Financial Reporting. Based on the evaluation conducted by our Chief Executive Officer and our Chief Financial
Officer pursuant to Rules 13a-15(d) and 15d-15(d) under the Exchange Act, our management has concluded that there was no change in our
internal control over financial reporting that occurred during the year ended December 31, 2021 that materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.
ITEM 16. [RESERVED]
ITEM 16A. Audit Committee Financial Expert.
Our Board of Directors has determined that Mr. Yuval Yanai, a member
of our audit committee is an audit committee financial expert as defined by rules of the U.S. Securities and Exchange Commission and is
an independent director under Nasdaq Listing Rules.
ITEM 16B. Code of Ethics.
We have adopted a Code of Business Conduct and Ethics that applies
to all of our directors and employees, including our chief executive officer, chief financial officer, controller or principal accounting
officer, or other persons performing similar functions, which complies with the “code of ethics” contemplated by Item 16B
of Form 20-F promulgated by the U.S. Securities and Exchange Commission. A copy of our Code of Business Conduct and Ethics is available
on our website at http://ir.check-cap.com/corporate-governance.
Information contained on, or that can be accessed through, our website does not constitute a part of this Annual Report and is not incorporated
by reference herein. If we make any amendment to the Code of Business Conduct and Ethics or grant any waivers, including any implicit
waiver, from a provision of the code of ethics, we will disclose the nature of such amendment or waiver on our website to the extent required
by the rules and regulations of the U.S. Securities and Exchange Commission. Under Item 16B of the U.S. Securities and Exchange Commission’s
Form 20-F, if a waiver or amendment of the Code of Business Conduct and Ethics applies to our principal executive officer, principal financial
officer, principal accounting officer or controller and relates to standards promoting any of the values described in Item 16B(b) of Form
20-F, we will disclose such waiver or amendment on our website in accordance with the requirements of Instruction 4 to such Item 16B.
138
ITEM 16C. Principal
Accountant Fees and Services.
The following table represents aggregate fees billed to us for
professional services rendered for fiscal years ended December 31, 2021 and 2020 by Deloitte Brightman Almagor Zohar & Co., a Firm
in the Deloitte Global Network, an independent registered accounting firm.
|
2021 |
2020 |
|||||||
|
Audit Fees (1) |
$ |
140,000 |
$ |
75,000 |
||||
|
Tax Fees (2) |
$ |
5,060 |
$ |
19,437 |
||||
|
Other Fees (3) |
$ |
2,961 |
$ |
7,000 |
||||
|
Total |
$ |
148,021 |
$ |
101,434 |
||||
_______________________
| (1) |
The audit fees for the years ended December 31, 2021 and 2020 were for professional services rendered for the audits of our financial
statements, consents and in connection with certain of our filings with the U.S. Securities and Exchange Commission. |
| (2) |
Tax fees for the year ended December 31, 2021, are for services rendered by our auditors in connection with a tax audit. Tax fees
for the year ended December 31,2020 are for services rendered by our auditors in connection with the IIA. |
| (3) |
Other fees for the year ended December 31, 2021 and 2020, are for services rendered by our auditors in connection with a benchmark
study. |
Audit Committee Pre-approval Policies and Procedures
Our audit committee has adopted a pre-approval policy for the engagement
of our independent registered public accounting firm to perform certain audit and non-audit services. Pursuant to this policy, which is
designed to assure that such engagements do not impair the independence of our auditors, the audit committee pre-approves annually a catalog
of specific audit and non-audit services in the categories of audit services, audit-related services and tax services that may be performed
by our independent registered public accounting firm. If a type of service, that is to be provided by our auditors, has not received such
general pre-approval, it will require specific pre-approval by our audit committee. The policy prohibits retention of the independent
registered public accounting firm to perform the prohibited non-audit functions defined in applicable SEC rules.
ITEM 16D. Exemptions
from the Listing Standards for Audit Committees.
Not applicable.
ITEM 16E. Purchases of Equity Securities by the Issuer
and Affiliated Purchasers.
Not applicable.
ITEM 16F. Change in Registrant’s Certifying Accountant.
Not applicable.
139
ITEM 16G. Corporate
governance.
Under the Israeli Companies Law, companies incorporated under the
laws of the State of Israel whose shares are publicly traded, including companies with shares listed on the Nasdaq Capital Market, are
considered public companies under Israeli law and are required to comply with various corporate governance requirements relating to such
matters as external directors, the audit committee, the compensation committee and an internal auditor. These requirements are in addition
to the corporate governance requirements imposed by the Listing Rules of the Nasdaq Stock Market and other applicable provisions of U.S.
securities laws to which we became subject (as a foreign private issuer) upon the closing of our initial public offering and the listing
of our securities on the Nasdaq Capital Market. Under the Listing Rules of the Nasdaq Stock Market, a foreign private issuer, such as
us, may generally follow its home country rules of corporate governance in lieu of the comparable requirements of the Listing Rules of
the Nasdaq Stock Market, except for certain matters including (among others) the composition and responsibilities of the audit committee
and the independence of its members within the meaning of the rules and regulations of the U.S. Securities and Exchange Commission. We
currently rely on this “home country practice exemption” solely with respect to the following items:
| • |
Nomination of our directors. Israeli law and our amended articles of association do not require
director nominations to be made by a nominating committee of our board of directors consisting solely of independent directors, as required
under the Listing Rules of the Nasdaq Stock Market. We rely on the exemption available to foreign private issuers under the Nasdaq Listing
Rules and follow Israeli law and practice with regard to the process of nominating directors, in accordance with which directors are recommended
by our board of directors for election by our shareholders (other than directors elected by our board of directors to fill a vacancy).
Our Board of Directors has established a non-independent Nominating Committee, whose role is to select and recommend to the Board of Directors
for selection, director nominees, while considering the appropriate size and composition of the Board of Directors, the requirements of
applicable law regarding service as a member of our Board of Directors and the criteria for the selection of new members of the Board
of Directors. |
| • |
Compensation of officers. We follow Israeli law and practice with respect to the approval
of officer compensation. While our compensation committee currently complies with the provisions of the Nasdaq Listing Rules relating
to composition requirements and Israeli law generally requires that the compensation of the chief executive officer and all other executive
officers be approved, or recommended to the board for approval, by the compensation committee (and in certain instances, shareholder approval
is required), Israeli law includes relief from compensation committee approval in certain instances. For details regarding the approvals
required under the Israeli Companies Law and regulation promulgated thereunder for the approval of compensation of the chief executive
officer, all other executive officers and directors, see Item 6C “Directors, Senior Management and Employees— Board Practices
— Approval of Related Party Transactions under Israeli Law — Disclosure of Personal Interests of an Office Holder and Approval
of Certain Transactions”). |
| • |
Shareholder approval. We will seek shareholder approval for all corporate actions requiring
such approval under the requirements of the Israeli Companies Law, rather than seeking approval for corporate actions in accordance with
Nasdaq Listing Rule 5635. In particular, under the Nasdaq Listing Rule, shareholder approval is generally required for: (i) an acquisition
of shares/assets of another company that involves the issuance of 20% or more of the acquirer’s shares or voting rights or if a
director, officer or 5% shareholder has greater than a 5% interest (or such persons collectively have a 10% or greater interest) in the
target company or the assets to be acquired or the consideration to be received and the present or potential issuance of ordinary shares,
or securities convertible into or exercisable for ordinary shares, could result in an increase in outstanding common shares or voting
power of 5% or more; (ii) the issuance of shares leading to a change of control; (iii) adoption/amendment of a stock option or purchase
plan or other equity compensation arrangements, pursuant to which stock may be acquired by officers, directors, employees or consultants
(with certain limited exception); and (iv) issuances of 20% or more of the shares or voting rights (including securities convertible into,
or exercisable for, equity) of a listed company via a private placement (and/or via sales by directors/officers/5% shareholders) if such
equity is issued (or sold) at below the greater of the book or market value of shares. We will seek shareholder approval for all actions
requiring such under the Israeli Companies Law. Under the Israeli Companies Law, the adoption of, and material changes to, equity-based
compensation plans generally require the approval of the board of directors. For details regarding the approvals required under the Israeli
Companies Law for the approval of compensation of the chief executive officer, all other executive officers and directors, see “Item
6C “Directors, Senior Management and Employees — Board Practices -Approval of Related Party Transactions under Israeli Law
— Disclosure of Personal Interests of an Office Holder and Approval of Certain Transactions.” For details regarding the approvals
required under the Israeli Companies Law for the approval of transactions with and compensation of controlling shareholders, see “Item
6C “Directors, Senior Management and Employees — Board Practices - Approval of Related Party Transactions under Israeli Law
— Disclosure of Personal Interests of Controlling Shareholders and Approval of Certain Transactions.” For details regarding
the approvals required under the Israeli Companies Law for certain acquisitions of our shares and mergers, see Exhibit 2.1. “Description
of Securities — Acquisitions under Israeli Law.” |
| • |
Quorum requirement. Under our amended and restated articles of association and as permitted
under the Israeli Companies Law, a quorum for any meeting of shareholders shall be the presence of at least two shareholders present in
person, by proxy or by a written ballot, who hold at least 25% of the voting power of our shares (or if a higher percentage is required
by law, such higher percentage) instead of 33 1/3% of the issued share capital required under the Nasdaq Listing Rules. If the meeting
was adjourned for lack of a quorum, at the adjourned meeting, at least two shareholders present in person or by proxy shall constitute
a quorum, unless the meeting of shareholders was convened at the demand of shareholders, in which case, the quorum shall be the presence
of one or more shareholders holding at least 5% of our issued share capital and at least one percent of the voting power of our shares,
or one or more shareholders with at least 5% of the voting power of our shares. |
140
Except as stated above, we currently intend to comply with the
rules generally applicable to U.S. domestic companies listed on Nasdaq. We may in the future decide to use the foreign private issuer
exemption with respect to some or all of the other Nasdaq corporate governance rules. Following our home country governance practices,
as opposed to the requirements that would otherwise apply to a company listed on Nasdaq, may provide less protection than is accorded
to investors under Nasdaq listing requirements applicable to domestic issuers. For more information, see “Item 3D “Key Information
- Risk Factors Risks Related to the Company”- As a foreign private issuer, we are permitted, and intend, to follow certain home
country corporate governance practices instead of otherwise applicable Nasdaq requirements, which may result in less protection than is
accorded to investors under rules applicable to domestic U.S. issuers.”
ITEM 16H. Mine
Safety Disclosure.
Not applicable.
ITEM 16I. Disclosure Regarding Foreign Jurisdictions
that Prevent Inspections.
Not applicable.
PART III
ITEM 17. FINANCIAL
STATEMENTS
Not applicable.
ITEM 18. FINANCIAL STATEMENTS
Our Financial Statements beginning on pages F-1 through F-41 are
hereby incorporated herein by reference. These Financial Statements are filed as part of this Annual Report.
141
ITEM 19. EXHIBITS
Exhibit Index
| Exhibit No. |
Description |
| 1.1 |
| 2.1 |
| 2.2 |
| 2.3 |
| 2.4 |
| 2.5 |
| 2.6 |
| 2.7 |
| 2.8 |
| 2.9 |
| 2.10 |
| 2.11 |
| 2.12 |
| 2.13 |
| 2.14 |
| 2.15 |
| 4.1 |
| 4.2 |
| 4.3 |
| 4.4 |
| 4.5 |
| 4.6 |
| 4.7 |
| 4.8 |
142
| 4.9 |
| 4.10 |
| 4.11 |
| 4.12 |
| 4.13 |
| 4.14 |
| 4.15 |
| 4.16 |
| 4.17 |
| 4.18 |
| 4.19 |
| 4.20 |
| 4.21 |
| 4.22 |
| 4.23 |
| 4.24 |
| 4.25 |
| 4.26 |
| 4.27 |
| 4.28 |
| 4.29 |
| 4.30 |
| 4.31 |
| 4.32 |
| 4.33 |
143
| 8.1 |
| 12.1 |
| 12.2 |
| 13.1 |
| 15.1 |
| 101.INS |
Inline XBRL Instant Document |
| 101.SCH |
Inline XBRL Taxonomy Extension Schema Document |
| 101.CAL |
Inline XBRL Taxonomy Extension Calculation Linkbase Document |
| 101.DEF |
Inline XBRL Taxonomy Extension Definition Linkbase |
| 101.LAB |
Inline XBRL Taxonomy Extension Label Linkbase |
| 101.PRE |
Inline XBRL Taxonomy Extension Presentation Linkbase |
____________________________
| (1) |
Incorporated by reference to the Registration Statement on Form F-1 of the Registrant (File No. 333-201250). |
| (2) |
Incorporated by reference to the Form 6-K filed by the Registrant with the Securities Exchange Commission on July 6, 2015.
|
| (3) |
Incorporated by reference to the Form 6-K filed by the Registrant with the Securities and Exchange Commission on August 12, 2016.
|
| (4) |
Incorporated by reference to the Form 6-K filed by the Registrant with the Securities and Exchange Commission on June 2, 2017.
|
| (5) |
Incorporated by reference to the Form 6-K filed by the Registrant with the Securities and Exchange Commission on November 22, 2017.
|
| (6) |
Incorporated by reference to the Form 6-K filed by the Registrant with the Securities and Exchange Commission on June 24, 2015.
|
| (7) |
Incorporated by reference to the Registration Statement on Form F-1/A by the Registrant with the Securities and Exchange Commission
on April 25, 2018. |
| (8) |
Incorporated by reference to the Form 6-K filed by the Registrant with the Securities and Exchange Commission on May 4, 2018.
|
| (9) |
Incorporated by reference to the Form 6-K filed by the Registrant with the Securities and Exchange Commission on February 6, 2019.
|
144
| (10) |
Incorporated by reference to the Annual Report on Form 20-F filed by the Registrant with the SEC on March 6, 2020. |
| (11) |
Incorporated by reference to the Form 6-K filed by the Registrant with the Securities and Exchange Commission on April 22, 2020.
|
| (12) |
Incorporated by reference to the Form 6-K filed by the Registrant with the Securities and Exchange Commission on May 4, 2020.
|
| (13) |
Incorporated by reference to the Form 6-K filed by the Registrant with the Securities and Exchange Commission on May 12, 2020.
|
| (14) |
Incorporated by reference to the Form 6-K filed by the Registrant with the Securities and Exchange Commission on July 24, 2020.
|
| (15) |
Incorporated by reference to the Registration Statement on Form F-1 by the Registrant with the SEC on May 20, 2020. |
| (16) |
Incorporated by reference to the Annual Report on Form 20-F filed by the Registrant with the Securities and Exchange Commission on
March 15, 2016. |
| (17) |
Incorporated by reference to the Annual Report on Form 20-F filed by the Registrant with the Securities and Exchange Commission on
March 15, 2016. |
| (18) |
Incorporated by reference to the Form 6-K filed by the Registrant with the Securities and Exchange Commission on July 2, 2021.
|
| (19) |
Incorporated by reference to the Form 6-K filed by the Registrant with the Securities and Exchange Commission on March 3, 2022.
|
| (20) |
Incorporated by reference to the Annual Report on Form 20-F filed by the Registrant with the SEC on March 18, 2021. |
145
SIGNATURES
The Registrant hereby certifies that it meets all of the requirements
for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this Annual Report on its behalf.
|
CHECK-CAP LTD. | |
|
Date: April 6, 2022 |
By: /s/ Alex Ovadia |
|
Name: Alex Ovadia | |
|
Title: Chief Executive Officer (Principal Executive Officer) | |
|
By: /s/ Mira Rosenzweig | |
|
Name: Mira Rosenzweig | |
|
Title: Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)
|
146
CHECK CAP LTD.
CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2021
CHECK CAP LTD.
CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2021
Table of Contents
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Page
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Report of Independent Registered Public Accounting Firm (PCAOB ID No.
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F-3
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F-5
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F-6
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F-7
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F-8-F-9 |
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F-10 - F-40
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F - 2
To the Shareholders and the Board of Directors of Check-Cap Ltd.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Check-Cap Ltd. and its subsidiary (the "Company”) as of December 31, 2021 and 2020, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2021, and the related notes (collectively referred to as the "consolidated financial statements"). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated April 6, 2022, expressed an unqualified opinion on the Company's internal control over financial reporting.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits 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. Our audits 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 audits 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 audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Changes in Ordinary Share Capital– Refer to Note 10 to the Consolidated Financial Statements
Critical Audit Matter Description
During the year ending December 31, 2021, the Company raised equity in the aggregate amount of $35,000 thousands ($31,801 thousands net of issuance expenses), through an equity transaction, by issuing shares and warrants.
During the year ending December 31, 2021, the Company raised equity in the aggregate amount of $35,000 thousands ($31,801 thousands net of issuance expenses), through an equity transaction, by issuing shares and warrants.
We deemed our audit over the allocation, classification and accuracy of equity transaction as challenging from a perspective of audit effort in comparison to our audit as a whole, because of the amount of equity transaction and due to the magnitude of total amounts raised. As such, we believe this represents a critical audit matter.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to equity transaction included the following, among others:
| 1. |
We tested the effectiveness of the Company’s controls over the accounting treatment for the equity transaction.
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| 2. |
We read the agreements and analyzed the terms of the Company’s equity transaction.
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| 3. |
We evaluated the interpretation and application of the relevant accounting guidance in relation to the appropriateness of the classification in equity of warrants issued in this transaction.
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| 4. |
We agreed the consideration received from the transaction to the respective bank statement.
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| 5. |
We compared the shares issued and outstanding to the confirmation obtained directly from the transfer agent.
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/s/ Brightman Almagor Zohar & Co.
Certified Public Accountants
A Firm in the Deloitte Global Network
Tel Aviv, Israel
April 6, 2022
We have served as the Company's auditor since 2005.
F - 3
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders and the Board of Directors of Check-Cap Ltd.
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Check-Cap Ltd. and subsidiary (the “Company”) as of December 31, 2021, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended December 31, 2021, of the Company and our report dated April 6, 2022, expressed an unqualified opinion on those consolidated financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control over Financing Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the 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 effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the consolidated financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of the consolidated financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the consolidated financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/
Brightman Almagor
Zohar & Co.
Certified Public Accountants
A Firm in the Deloitte Global Network
Tel Aviv, Israel
April 6, 2022
F - 4
CHECK CAP LTD
(U.S. dollars in thousands, except share and per share data)
|
|
December 31,
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|||||||||||
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Note
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2 0 2 1
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2 0 2 0
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|||||||||
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Assets
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||||||||||||
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Current assets
|
||||||||||||
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Cash and cash equivalents
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$
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$
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||||||||||
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Restricted cash
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2
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|||||||||||
|
Short-term bank deposit
|
||||||||||||
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Prepaid expenses and other current assets
|
3
|
|||||||||||
|
Total current assets
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||||||||||||
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|
||||||||||||
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Non-current assets
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||||||||||||
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Property and equipment, net
|
4
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|||||||||||
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Operating leases
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5
|
|||||||||||
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Total non-current assets
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||||||||||||
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Total assets
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$
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$
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||||||||||
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|
||||||||||||
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Liabilities and shareholders' equity
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||||||||||||
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Current liabilities
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||||||||||||
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Accounts payable and accruals
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||||||||||||
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Trade
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$
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$
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||||||||||
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Other
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||||||||||||
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Employees and payroll accruals
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6
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|||||||||||
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Operating lease liabilities
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5
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|||||||||||
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Total current liabilities
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||||||||||||
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||||||||||||
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Non-current liabilities
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||||||||||||
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Royalties provision
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8A
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||||||||||
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Operating lease liabilities
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5
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|||||||||||
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Total non-current liabilities
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||||||||||||
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||||||||||||
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Shareholders' equity
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10
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|||||||||||
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Share capital, Ordinary shares,
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||||||||||||
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of December 31, 2021 and 2020;
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||||||||||||
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outstanding as of December 31, 2021 and 2020, respectively)
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||||||||||||
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Additional paid-in capital
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||||||||||||
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Accumulated deficit
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( |
)
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( |
)
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||||||||
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Total shareholders' equity
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||||||||||||
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||||||||||||
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Total liabilities and shareholders' equity
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$
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$
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||||||||||
The accompanying notes to the consolidated financial statements are an integral part of them.
F - 5
CHECK CAP LTD
(U.S. dollars in thousands, except share and per share data)
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Year ended December 31,
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Note
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2 0 2 1
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2 0 2 0
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2 0 1 9
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||||||||||||
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|
||||||||||||||||
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Research and development expenses, net
|
12
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$
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$
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$
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||||||||||||
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General and administrative expenses
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13
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|||||||||||||||
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Operating loss
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||||||||||||||||
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|
||||||||||||||||
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Finance income, net
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14
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|||||||||||||||
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|
||||||||||||||||
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Net loss
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$
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$
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$
|
|||||||||||||
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Other comprehensive loss:
|
||||||||||||||||
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Change in fair value of cash flow hedge
|
( |
) | ||||||||||||||
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Comprehensive loss
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$
|
$
|
$
|
|||||||||||||
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Loss per share:
|
||||||||||||||||
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Net loss per ordinary share - basic and diluted
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$
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$
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$
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|||||||||||||
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|
||||||||||||||||
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Weighted average number of ordinary shares outstanding - basic and diluted
|
15
|
|||||||||||||||
The accompanying notes to the consolidated financial statements are an integral part of them.
F - 6
CHECK CAP LTD
(U.S. dollars in thousands, except share and per share data)
|
|
Ordinary shares
|
|||||||||||||||||||||||
|
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Additional
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Other
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Total
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|||||||||||||||||||||
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paid-in
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comprehensive
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Accumulated
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Shareholders’
|
||||||||||||||||||||
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Number
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Amount
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capital
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Loss
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deficit
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equity
|
||||||||||||||||||
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Balance as of December 31, 2018
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$
|
$
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$
|
( |
)
|
$
|
( |
)
|
$
|
|||||||||||||||
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Changes during 2019:
|
||||||||||||||||||||||||
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Issuance of ordinary shares and warrants,
|
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in the 2019 registered direct
|
||||||||||||||||||||||||
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offering, net of issuance expenses in an amount of $
|
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|||||||||||||||||||||||
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Exercise of warrants into ordinary shares
|
||||||||||||||||||||||||
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RSU vesting
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( |
)
|
||||||||||||||||||||||
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Share-based compensation
|
||||||||||||||||||||||||
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Change in fair values of cash flow hedge
|
||||||||||||||||||||||||
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Net loss
|
( |
)
|
( |
)
|
||||||||||||||||||||
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Balance as of December 31, 2019
|
$
|
$
|
$
|
$
|
( |
)
|
$
|
|||||||||||||||||
|
Changes during 2020:
|
||||||||||||||||||||||||
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Issuance of ordinary shares in private
|
||||||||||||||||||||||||
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placement, net of issuance expenses in
|
||||||||||||||||||||||||
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an amount of approximately $
|
||||||||||||||||||||||||
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Issuance of ordinary shares and warrants
|
||||||||||||||||||||||||
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in the April – May 2020 Financings, net
|
||||||||||||||||||||||||
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of issuance expenses in an amount of $
|
( |
)
|
||||||||||||||||||||||
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Issuance of ordinary shares and
|
||||||||||||||||||||||||
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warrants in the Warrant Exercise Transaction,
|
||||||||||||||||||||||||
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net of issuance expenses in an amount of $
|
( |
)
|
||||||||||||||||||||||
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RSU vesting
|
( |
)
|
||||||||||||||||||||||
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Share-based compensation
|
||||||||||||||||||||||||
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Net loss
|
-
|
( |
)
|
( |
)
|
|||||||||||||||||||
|
Balance as of December 31, 2020
|
$
|
$
|
$
|
$
|
( |
)
|
$
|
|||||||||||||||||
|
Exercise of warrants, net of issuance expenses in
|
||||||||||||||||||||||||
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an amount of $
|
||||||||||||||||||||||||
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Issuance of ordinary shares and warrants
|
||||||||||||||||||||||||
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in the June 2021 Registered Direct Offering, net
|
||||||||||||||||||||||||
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of issuance expenses in an amount of
|
||||||||||||||||||||||||
| $ |
||||||||||||||||||||||||
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Option exercise
|
( |
)
|
||||||||||||||||||||||
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RSU vesting
|
( |
)
|
||||||||||||||||||||||
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Share-based compensation
|
-
|
-
|
||||||||||||||||||||||
|
Net loss
|
-
|
( |
)
|
( |
)
|
|||||||||||||||||||
|
Balance as of December 31, 2021
|
$
|
$
|
$
|
$
|
( |
)
|
$
|
|||||||||||||||||
| (1) |
Includes pre-funded units to purchase
|
The accompanying notes to the consolidated financial statements are an integral part of them.
F - 7
CHECK CAP LTD
(U.S. dollars in thousands, except share and per share data)
|
|
Year ended December 31,
|
|||||||||||
|
|
2 0 2 1
|
2 0 2 0
|
2 0 1 9
|
|||||||||
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CASH FLOWS FROM OPERATING ACTIVITIES
|
||||||||||||
|
Net loss
|
$
|
( |
)
|
$
|
( |
)
|
$
|
( |
)
|
|||
|
Adjustments required to reconcile net loss to net cash used in operating activities:
|
||||||||||||
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Depreciation
|
||||||||||||
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Share-based compensation
|
||||||||||||
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Financial expenses, net
|
||||||||||||
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Changes in assets and liabilities items:
|
||||||||||||
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Decrease (increase) in prepaid and other current assets and non-current assets
|
( |
)
|
( |
)
|
||||||||
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Increase (decrease) in trade accounts payable, accruals and other current liabilities
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( |
) | ||||||||||
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Increase in employees and payroll accruals
|
||||||||||||
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Decrease in royalties provision
|
( |
)
|
( |
) | ( |
)
|
||||||
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Net cash used in operating activities
|
$
|
( |
)
|
$
|
( |
)
|
$
|
( |
)
|
|||
|
|
||||||||||||
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
||||||||||||
|
Purchase of property and equipment
|
( |
)
|
( |
) | ( |
)
|
||||||
|
Proceeds from (Investment in) short-term bank and other deposits
|
( |
)
|
( |
) | ||||||||
|
Net cash provided by (used in) investing activities
|
$
|
( |
)
|
$
|
( |
) |
$
|
|||||
|
|
||||||||||||
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
||||||||||||
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Exercise of warrants into ordinary shares, net of issuance expenses
|
|
|
||||||||||
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Issuance of ordinary shares in the registered direct offerings, net of issuance expenses
|
|
|
||||||||||
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Options Exercise
|
|
|
||||||||||
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Issuance of ordinary shares and warrants in the Warrant Exercise Transaction, net of issuance expenses
|
||||||||||||
|
Issuance of ordinary shares in the private placement, net of issuance expenses
|
||||||||||||
|
Net cash provided by financing activities
|
$
|
$
|
$
|
|||||||||
|
|
||||||||||||
|
Net increase (decrease) in cash, cash equivalents and restricted cash
|
( |
) | ||||||||||
|
|
||||||||||||
|
Cash, cash equivalents and restricted cash at the beginning of the year
|
||||||||||||
|
|
||||||||||||
|
Cash, cash equivalents and restricted cash at the end of the year
|
$
|
$
|
$
|
|||||||||
Supplemental information for Cash Flow:
|
|
Year ended December 31,
|
|||||||||||
|
2 0 2 1
|
2 0 2 0
|
2 0 1 9
|
||||||||||
|
Supplemental disclosure of non-cash flow information
|
||||||||||||
|
Purchase of property and equipment
|
||||||||||||
|
Recognition of operating leases and operating lease liabilities from adoption of ASU 2016-02
|
||||||||||||
|
Assets acquired under operating leases
|
||||||||||||
|
Supplemental disclosure of cash flow information
|
||||||||||||
|
Cash paid for taxes
|
||||||||||||
The accompanying notes to the consolidated financial statements are an integral part of them.
F - 8
CHECK CAP LTD
CONSOLIDATED STATEMENTS OF CASH FLOWS
(U.S. dollars in thousands, except share and per share data)
|
|
Year ended December 31,
|
|||||||||||
|
2 0 2 1
|
2 0 2 0
|
2 0 1 9
|
||||||||||
|
RECONCILIATION OF CASH, CASH EQUIVALENTS AND RESTRICTED CASH TO THE CONSOLIDATED BALANCE SHEET
|
||||||||||||
|
Cash and Cash equivalents
|
$
|
$
|
$
|
|||||||||
|
Restricted cash included current assets
|
||||||||||||
|
Total cash, cash equivalents, and restricted cash
|
$
|
$ |
$
|
$
|
||||||||
The accompanying notes to the consolidated financial statements are an integral part of them.
F - 9
CHECK CAP LTD
(U.S. dollars in thousands, except share and per share data)
NOTE 1 - GENERAL INFORMATION
| A. |
General
|
| (1) |
Check Cap Ltd. (the “Company") was incorporated under the laws of the State of Israel. The registered address of its offices is 29 Abba Hushi Avenue, Isfiya 3009000, Israel.
|
| (2) |
The Company has a wholly-owned subsidiary, Check-Cap US, Inc., that was incorporated under the laws of the State of Delaware on May 15, 2015.
|
| (3) |
The Company is a clinical-stage medical diagnostics company aiming to redefine colorectal cancer (CRC) screening and prevention through the introduction of C-Scan®, the first and only patient-friendly preparation-free screening test to detect polyps before they may transform into cancer. The Company’s disruptive capsule-based screening technology aims to significantly increase screening adherence worldwide and help millions of people to stay healthy through preventive CRC screening. C-Scan uses an ultra-low dose X-ray capsule, an integrated positioning, control and recording system, as well as proprietary software to generate a 3D map of the inner lining of the colon. C-Scan is non-invasive and requires no preparation or sedation, allowing the patients to continue their daily routine with no interruption as the capsule is propelled through the gastrointestinal tract by natural motility.
|
| (4) |
Since its inception, the Company has devoted substantially all of its efforts to research and development, clinical trials, recruiting management and technical staff, acquiring assets and raising capital. The Company is still in its development and clinical stage and has not yet generated revenues. The Company has incurred losses of $
The Company has funded its operations to date primarily through equity financings, sale of its ordinary shares and warrants, the exercise of warrants and other financing transactions and through grants from the Israel Innovation Authority of the Ministry of Economy and Industry (the "IIA").
Additional funding will be required to complete the Company's research and development and clinical trials, to attain regulatory approvals, to establish manufacturing infrastructure and to begin the commercialization efforts of C-Scan. The Company has not yet commercialized its product. Even if the Company commercializes its product, it may not become profitable in the foreseeable future. The Company’s ability to achieve profitability depends on a number of factors, including its ability to obtain regulatory approval for its product, successfully complete any post-approval regulatory obligations and successfully commercialize its product alone or in partnership.
To meet its capital needs, the Company is considering multiple alternatives, including, but not limited to, additional equity financings and other financing transactions. While the Company has been successful in raising funds in the past, there can be no assurance that it will be able to do so in the future on a timely basis on terms acceptable to the Company, or at all. Uncertain market conditions and approval by regulatory bodies and adverse results from clinical trials may (among other reasons) adversely impact the Company's ability to raise capital in the future.
On March 3, 2022, the Company consummated a registered direct offering (the “March 2022 Registered Direct Offering”) for gross proceeds of $
|
| (5) |
As described in Notes 10B(2)(b) and 10B(2)(d), on February 24, 2015, the Company consummated an Initial Public Offering in the United States (U.S.) (the "IPO") concurrently with a private placement.
On August 11, 2016, the Company consummated a registered direct offering of ordinary shares and pre-funded warrants. See Note 10B(2)(g).
|
F - 10
CHECK CAP LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except share and per share data)
NOTE 1 - GENERAL INFORMATION (Cont.)
| A. |
General (cont.)
|
On June 2, 2017, the Company consummated a registered direct offering of ordinary shares and a simultaneous private placement of warrants. See Note 10B(2)(h).
On November 22, 2017, the Company consummated a registered direct offering of ordinary shares and a simultaneous private placement of warrants. See Note 10B(2)(i).
On May 8, 2018, the Company consummated an underwritten public offering of ordinary shares, pre-funded warrants and Series C warrants. See Note 10B(2)(j).
On February 6, 2019, the Company consummated a registered direct offering of ordinary shares and warrants. See Note 10B(2)(k).
In February 2020, the Company consummated a private placement of ordinary shares. See Note 10B(2)(l).
During April and May 2020, the Company consummated three registered direct offerings of ordinary shares and simultaneous private placements of warrants. See Note 10B(2)(m).
On July 27, 2020, the Company consummated a warrant exercise transaction to purchase ordinary shares and a simultaneous private placement of warrants. See Note 10B(2)(n).
During the first quarter of 2021, certain investors exercised their warrants previously issued by the Company. See Note 10B(2)(o).
On July 1, 2021, the Company consummated a registered direct offering of ordinary shares and warrants. See Note 10B(2)(p).
On March 3, 2022, the Company consummated a registered direct offering of ordinary shares and warrants. See Note 17(2).
The Company's ordinary shares and Series C Warrants are listed on the NASDAQ Capital Market under the symbols "CHEK" and CHEKZ” respectively.
The Company’s Series A Warrants, formerly listed on the NASDAQ Capital Market under the symbol “CHEKW”, expired on February 24, 2020; and their listing was suspended on February 28, 2020.
The consolidated financial statements of the Company as of and for the year ended December 31, 2021 include the financial statements of the Company and its wholly-owned U.S. subsidiary.
F - 11
CHECK CAP LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except share and per share data)
NOTE 1 - GENERAL INFORMATION (Cont.)
| A. |
General (cont.)
|
| (6) |
On December 23, 2021, the Company announced that it received a letter from the Staff, indicating that the Company is not in compliance with the minimum bid price requirement for continued listing set forth in Nasdaq Listing Rule 5550(a)(2), which requires listed companies to maintain a minimum bid price of $
|
| (7) |
In early 2020, the World Health Organization declared the rapidly spreading coronavirus disease (COVID-19) outbreak a pandemic. The Company has in the past experienced temporary disruptions to its operations as a result of the COVID-19 pandemic including disruptions to the Company’s clinical studies and implemented several temporary cost reduction measures. The Company has also implemented several measures according to the Israel Ministry of Health’s guidelines, including remote working whenever possible, physical separation between employees and daily employee health monitoring. Infection rates in Israel have recently spiked upwards and the extent to which the COVID-19 pandemic shall impact the Company’s operations will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the duration and severity of the outbreak, the impact on the global economy, the impact of any further waves of COVID-19, the efficacy of the vaccines and the other actions that may be required to contain COVID-19 or treat its impact. In particular, the continued spread of COVID-19 globally could materially adversely impact the Company’s operations and workforce, including its research and clinical trials and its ability to continue raise capital, could affect the operations of key governmental agencies, such as the FDA, which may delay the Company’s development plans, and could result in the inability of the Company’s suppliers to deliver components or raw materials on a timely basis or at all, each of which in turn could have a material adverse impact on the Company’s business, financial condition and results of operation.
|
F - 12
CHECK CAP LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except share and per share data)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company`s consolidated financial statements are presented in accordance with U.S. generally accepted accounting principles ("U.S. GAAP").
| A. |
Use of estimates in preparation of financial statements |
The preparation of financial statements in conformity with US GAAP requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements, and the reported amounts of expenses during the reporting periods. Actual results could differ from those estimates.
| B. |
Principles of consolidation
|
The Company's consolidated financial statements include the financial statements of Check-Cap Ltd. and its wholly-owned subsidiary, Check-Cap US, Inc. The Company's consolidated financial statements are presented after elimination of inter-company transactions and balances.
| C. |
Financial statements in U.S. dollars
|
The Company has not yet generated revenues and the majority of its expenses are in U.S. dollars (dollar or USD) or NIS.
The financial statements are presented in dollars, which is the functional currency of the Company. In management's judgment, setting the dollar as the Company's functional currency, is based mainly on the following criteria: the Company's budget and other Company internal reports, including reports to the Company's Board of Directors and investors, are presented in dollars. Management uses these reports in order to make decisions for the Company. All of the Company's equity financings have been in dollars; and it is expected that a significant portion of the Company's future revenues will be in dollars.
Transactions and balances denominated in dollars are presented at their original amounts. Non‑dollar transactions and balances 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.
| D. |
Cash and cash equivalents |
Cash and cash equivalents include cash in hand, short–term deposits in banks and short-term, highly liquid investments with an original maturity of up to three months, with a high level of liquidity that may be easily converted to known amounts of cash, and that are exposed to insignificant risk of change in value.
| E. |
Short-term bank deposit
|
Short-term bank deposits are deposits with maturities of more than three months but less than one year. The short–term bank deposits are presented at their cost, including accrued interest, which approximates fair value.
| F. |
Cash flow hedges
|
As a matter of policy, the Company uses derivatives for risk management purposes and does not use derivatives for speculative purposes. From time to time, the Company may enter into foreign currency zero-cost collars or minimal cost collars contracts to hedge foreign currency cash flow transactions.
F - 13
CHECK CAP LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except share and per share data)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont.)
| F. |
Cash flow hedges (cont.)
|
As of December 31, 2021 and 2020, the Company had outstanding foreign exchange collars in the notional amount of approximately $3,466 and $1,870 , respectively. These options were set for a period of up to six months as of December 31, 2021. The Company measured the fair value of the options in accordance with provisions of ASC No. 820 (classified as level 2 of the fair value hierarchy). The fair value of the Company’s outstanding collars on December 31, 2021 and 2020 amounted to an asset, net, of $65 and $12 , respectively and is included in other current assets.
| G. |
Property and equipment |
Property and equipment are stated at cost, net of accumulated depreciation. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets at the following annual rates:
|
|
Length of useful life
|
Depreciation rate
|
||||||
|
|
Years
|
%
|
||||||
|
|
||||||||
|
Office furniture and equipment
|
|
|
||||||
|
Laboratory equipment
|
|
|
||||||
|
Computers and auxiliary equipment
|
||||||||
| H. |
Impairment of long-lived assets
|
The Company's long-lived assets are reviewed for impairment in accordance with ASC 360-10 "Accounting for the Impairment or Disposal of Long-Lived Assets" whenever events or changes in circumstances indicate that the carrying amount of an asset (or asset group) may not be recoverable. Recoverability of assets (or asset group) to be held and used is measured by a comparison of the carrying amount of an asset to the future undiscounted cash flows expected to be generated by the assets. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. During the years ended December 31, 2021, 2020 and 2019, no impairment losses were recorded.
| I. |
Research and development costs
|
Research and development costs are expensed as incurred and consist primarily of costs for personnel, subcontractors and consultants (mainly in connection with clinical trials) and materials for research and development and clinical activities. Grants received by the Company from the IIA 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 research and development expenses. Such grants are included as a deduction of research and development costs.
F - 14
CHECK CAP LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except share and per share data)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont.)
| J. |
Contingent liabilities
|
The Company accounts for its contingent liabilities in accordance with ASC No. 450, "Contingencies". A provision is recorded when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated.
With respect to legal matters, provisions are reviewed and adjusted to reflect the impact of negotiations, estimated settlements, legal rulings, advice of legal counsel and other information and events pertaining to a particular matter. As of December 31, 2021, and 2020, the Company is not a party to any ligation that could have a material adverse effect on the Company's business, financial position, results of operations or cash flows.
| K. |
Share-based compensation
|
The Company recognizes expense for its share-based compensation based on the fair value of the awards granted. The Company’s share-based compensation plans provide for the award of stock options and restricted stock units. In accordance with ASC 718-10 "Compensation-Stock Compensation", the Company estimates 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 expense over the requisite service periods in the Company's consolidated statement of operations.
The Company recognizes compensation expenses for the value of its awards granted based on the graded-vesting method over the requisite service period for each separately vesting portion of the award. Accounting Standards Update (“ASU”) 2016-09, Compensation-Stock Compensation (Topic 718) allows companies to account for forfeitures when they occur.
The Company recognizes compensation cost for awards with performance conditions if and when the company concludes that it is probable that the performance conditions will be achieved. ASC 718’s use of the term probable is consistent with that term’s use in ASC 450, Contingencies, which refers to an event that is likely to occur (ASC Master Glossary). The Company reassess at each reporting period the probability of vesting for awards with performance conditions and adjusts compensation cost based on its probability assessment.
The Company selected the Black-Scholes-Merton option-pricing model as the most appropriate fair value method for its share-based awards. The option-pricing model requires a number of assumptions, of which the most significant are the fair market value of the underlying ordinary shares, expected share price volatility and the expected option term. In the years ended December 31, 2021, 2020 and 2019, expected volatility was calculated based upon actual historical stock price movements over the most recent periods ending on the grant date, equal to the expected term of the options.
The expected option term represents the period of time that options granted are expected to be outstanding. The expected option term is determined based on the simplified method in accordance with Staff Accounting Bulletin No. 110, as adequate historical experience is not available to provide a reasonable estimate.
The risk-free interest rate is based on the yield from U.S. treasury bonds with an equivalent term. The Company has historically not paid dividends and has no foreseeable plans to pay dividends.
F - 15
CHECK CAP LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except share and per share data)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont.)
| L. |
Income taxes
|
The Company accounts for income taxes in accordance with ASC 740-10 "Accounting for Income Taxes." This Statement requires the use of the liability method of accounting for income taxes, whereby deferred tax assets and liability account balances are determined based on the differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
In accordance with ASC 740, the Company reflects in the financial statements the benefit of positions taken in a previously filed tax return or expected to be taken in a future tax return only when it is considered 'more-likely-than-not' that the position taken will be sustained by a taxing authority. As of December 31, 2021 and 2020, the Company had no unrecognized income tax positions, and, accordingly, there is no impact on the Company's effective income tax rate associated with these items.
| M. |
Fair value of financial instruments
|
The Company measures its investments in money market funds (classified as cash equivalents) and its foreign currency net purchased options at fair value. Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. A three-tier fair value hierarchy is established as a basis for considering such assumptions and for inputs used in the valuation methodologies in measuring fair value:
| • |
Level 1. Observable inputs based on unadjusted quoted prices in active markets for identical assets or liabilities;
|
| • |
Level 2. Inputs, other than quoted prices in active markets, that are observable either directly or indirectly; and
|
| • |
Level 3. Unobservable inputs for which there is little or no market data requiring the Company to develop its own assumptions.
|
The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
F - 16
CHECK CAP LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except share and per share data)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont.)
| N. |
Comprehensive loss
|
The Company accounts for comprehensive income in accordance with ASC No. 220, “Comprehensive Income”. Comprehensive income generally represents all changes in shareholders’ equity during the period except those resulting from investments by, or distributions to, shareholders.
| O. |
Restricted Cash
|
The Company has granted a pledge in favor of Bank Leumi Le-Israel B.M in the amount of $350
| P. |
Leases
|
ASU 2016-02, “Leases (Topic 842)” was issued by the FASB in February 2016. The Company adopted this ASU 2016-02 effective January 1, 2019 using the modified retrospective application, applying the new standard to leases in place as of the adoption date. Prior periods have not been adjusted. Leases existing for the reporting period beginning January 1, 2019 are presented under ASU 2016-02.
Arrangements that are determined to be leases at inception are recognized as long-term operating lease assets and lease liabilities in the consolidated balance sheet at lease commencement. Operating lease liabilities are recognized based on the present value of the future lease payments over the lease term at commencement date. As the Company’s leases do not provide an implicit rate, the Company applies its incremental borrowing rate based on the economic environment at the commencement date in determining the present value of future lease payments. Lease terms may include options to extend the lease when it is reasonably certain that the Company will exercise that option. Lease expense for operating leases or payments are recognized on a straight-line basis over the lease term.
The Company elected to adopt a package of practical expedients offered by the FASB which removes the requirement to reassess whether expired or existing contracts contain leases and removes the requirement to reassess the lease classification for any existing leases prior to the adoption date of January 1, 2019. The Company has also elected the practical expedient to include both lease and non-lease components as a single component and account for it as a lease. Additionally, the Company has made a policy election not to capitalize leases with an original term of 12 months or less.
In accordance with ASC 360-10, management reviews operating lease assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable based on estimated future undiscounted cash flows. If so indicated, an impairment loss would be recognized for the difference between the carrying amount of the asset and its fair value.
F - 17
CHECK CAP LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except share and per share data)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont.)
| Q. |
Recent accounting pronouncements
|
In December 2019, the FASB issued ASU No. 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes” (“ASU 2019-12”), which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. This standard is effective for the Company from January 1, 2021 and must be applied on a modified retrospective basis. The adoption of the standard did not have a material impact on the Company's financial statements and disclosures.
In November 2021, the FASB issued ASU No. 2021- 10, Government Assistance (Topic 832). This ASU requires business entities to disclose information about government assistance they receive if the transactions were accounted for by analogy to either a grant or a contribution accounting model. The disclosure requirements include the nature of the transaction and the related accounting policy used, the line items on the balance sheets and statements of operations that are affected and the amounts applicable to each financial statement line item and the significant terms and conditions of the transactions. The ASU is effective for annual periods beginning after December 15, 2021. The disclosure requirements can be applied either retrospectively or prospectively to all transactions in the scope of the amendments that are reflected in the financial statements at the date of initial application and new transactions that are entered into after the date of initial application. The Company already adopted ASU No. 2021- 10, in its financial statements.
F - 18
CHECK CAP LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except share and per share data)
NOTE 3 - PREPAID EXPENSES AND OTHER CURRENT ASSETS
Composition:
|
|
December 31,
|
|||||||
|
|
2 0 2 1
|
2 0 2 0
|
||||||
|
|
||||||||
|
Government institutions
|
||||||||
|
Prepaid expenses
|
||||||||
|
Deposits
|
||||||||
|
Other assets
|
||||||||
|
|
||||||||
NOTE 4 - PROPERTY AND EQUIPMENT, NET
Composition:
|
|
December 31,
|
|||||||
|
|
2 0 2 1
|
2 0 2 0
|
||||||
|
Cost:
|
||||||||
|
Office furniture and equipment
|
||||||||
|
Laboratory equipment
|
||||||||
|
Computers and auxiliary equipment
|
||||||||
|
|
||||||||
|
Accumulated depreciation
|
||||||||
|
Property and equipment, net
|
||||||||
Depreciation expenses amounted to $205 , $148 and $115 for the years ended December 31, 2021, 2020 and 2019, respectively.
NOTE 5 - LEASES
On January 1, 2019, the Company adopted ASU 2016-02, using the modified retrospective approach for all lease arrangements at the beginning period of adoption.
On January 26, 2021, the Company entered into a new lease agreement, as amended (the “Amended Lease Agreement”), according to which, effective as of April 1, 2021, the Company leases a total of approximately 1,550 square meters at its facility located in Isfiya, Israel. The Amended Lease Agreement expires on December 31, 2023 , and the Company has an option to extend the lease period for an additional three years . The Company has the right to terminate the Amended Lease Agreement at any time, upon at least 60 days prior written notice. Monthly rental expenses under the lease agreement are $16.1 . Prior to entering into the Amended Lease Agreement, the Company leased approximately 900 square meters at the same facility under a lease agreement, originally scheduled to expire on May 31, 2022 .
According to ASC 842, the Amended Lease Agreement was accounted for as a lease modification and, therefore, the lease liability was remeasured as of the modification date with an adjustment recorded to the underlying right of use asset.
F - 19
CHECK CAP LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except share and per share data)
NOTE 5 - LEASES (Cont.)
In addition, the Company leases vehicles under various operating lease agreements.
On December 31, 2021, the Company’s operating lease assets and lease liabilities (both the current and non-current portion) for operating leases totaled $1,116 and $1,145 , respectively.
Supplemental cash flow information related to operating leases was as follows:
|
|
Year
|
|||
|
|
Ended
|
|||
|
|
December
31, 2021
|
|||
|
Cash payments for operating leases
|
$
|
|
||
The Company uses its incremental borrowing rate as the discount rate for its leases, as the implicit rate in the lease is not readily determinable. As of December 31, 2021, the Company’s operating leases had a weighted average remaining lease term of 4.3 years and a weighted average borrowing rate of 3.8 %. Upon adoption of ASC 842, discount rates for existing operating leases were established as of January 1, 2019. Future lease payments under operating leases as of December 31, 2021 were as follows:
|
|
Operating
|
|||
|
|
Leases
|
|||
|
|
||||
|
2022
|
$
|
|||
|
2023
|
||||
|
2024 and after
|
||||
|
Total future lease payments
|
||||
|
Less imputed interest
|
( |
)
|
||
|
Total lease liability balance
|
$
|
|||
F - 20
CHECK CAP LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except share and per share data)
NOTE 6 - EMPLOYEE BENEFITS AND PAYROLL ACCRUALS
| A. |
Composition:
|
|
|
December 31,
|
|||||||
|
|
2 0 2 1
|
2 0 2 0
|
||||||
|
Short-term employee benefits:
|
||||||||
|
Benefits for vacation and recreation pay
|
||||||||
|
Liability for payroll, bonuses and wages
|
||||||||
|
|
||||||||
| B. |
Post-employment benefits
|
Pursuant to Israel's Severance Pay Law, 1963, Israeli employees are entitled to severance pay equal to one month's salary for each year of employment, or a portion thereof. All of the Company's employees elected to be included under Section 14 of the Severance Pay Law, 1963 ("Section 14"). According to Section 14, employees are entitled only to monthly deposits, at a rate of 8.33% of their monthly salary, made in their name with insurance companies. Payments in accordance with Section 14 release the Company from any future severance payments under the Israeli Severance Pay Law, 1963 in respect of those employees; therefore, related assets and liabilities are not presented in the balance sheet.
| C. |
Short-term employee benefits
|
| (1) |
Paid vacation days
|
In accordance with the Yearly Vacation Law-1951 (the "Vacation Law"), the Company's employees are entitled to a certain number of paid vacation days for each year of employment. In accordance with the Vacation Law and its appendix, and as determined in the agreement between the Company and the employees, the number of vacation days per year to which each employee is entitled is based on the seniority of the employee.
The employee may use vacation days based on his or her needs and with the Company's consent, and accrue the remainder of unused vacation days, subject to the provision of the Vacation Law. The vacation days utilized first are those credited for the current year and subsequently from any balance transferred from the prior year (on a "LIFO" basis). An employee who ceased working before utilizing the balance of vacation days accrued is entitled to payment for the balance of unutilized vacation days.
| (2) |
Related parties
|
For information regarding related parties, see Note 16.
F - 21
CHECK CAP LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except share and per share data)
NOTE 7 - INCOME TAXES
| A. |
The Company
|
Check-Cap Ltd. is taxed according to Israeli tax laws:
| 1. |
Corporate tax rates in Israel
|
The Israeli corporate tax rate in years 2019, 2020, 2021 and onwards is 23
| 2. |
The Law for the Encouragement of Capital Investments, 1959 (the "Investments Law")
|
Under the Investments Law, including Amendment No. 60 to the Investments Law as published in April 2005, by virtue of the "Benefited Enterprise" status, the Company is entitled to various tax benefits as follows:
| a) |
Reduced tax rates
|
The Company has one Benefited Enterprise program under the Investments Law, which entitles it to certain tax benefits with respect to income to be derived from the Company's Benefited Enterprise. During the benefits period, taxable income from its Benefited Enterprise program (once generated) will be tax exempt for a period of ten years commencing with the year the Company will first earn taxable income relating to such enterprise. The Company chose 2010 as the year of election (the "Year of Election"). Due to the location of the Company's offices, the Company believes it is entitled to a 10 year benefit period, subject to a 14 year limitation from the Year of Election, and therefore, the tax benefit period will, in any event, end in 2023.
| b) |
Conditions for entitlement to the benefits
|
The benefits available to a Benefited Enterprise are subject to the fulfillment of conditions stipulated in the Investment Law and its regulations.
| c) |
Amendment of the Law for the Encouragement of Capital Investments, 1959
|
The Investments Law was amended as part of the Economic Policy Law for the years 2011-2012, which was passed by the Israeli Knesset on December 29, 2010 (the "Capital Investments Law Amendment").
The Capital Investments Law Amendment set alternative benefit tracks to those in effect prior to such amendment under the provisions of the Investments Law.
The benefits granted to the Preferred Enterprise will be unlimited in time, unlike the benefits granted to special Benefited Enterprises, which will be limited for a 10 year period. The benefits shall be granted to companies that will qualify under criteria set forth in the law; for the most part, those criteria are similar to the criteria that were set forth in the Investments Law prior to its amendment.
Under the transitional provisions of the Investments Law, the Company is entitled to take advantage of the tax benefits available under the Investments Law prior to its amendment until the end of the benefits period, as defined in the Investments Law. The Company was entitled to set the "year of election" no later than tax year 2012, provided that the minimum qualifying investment was made not later than the end of 2010. On each year during the benefits period, the Company will be able to elect that the Investments Amendment applies to the Company, thereby making the tax rates described above available to the Company. An election to have the Capital Investments Amendment apply is irrecoverable. The Company elected not to have the Capital Investments Amendment apply to the Company.
F - 22
CHECK CAP LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except share and per share data)
NOTE 7 - INCOME TAXES (Cont.)
| 2. |
The Law for the Encouragement of Capital Investments, 1959 (the "Investments Law") (Cont.)
|
| c) |
Amendment of the Law for the Encouragement of Capital Investments, 1959 (Cont.)
|
On December 22, 2016, the Knesset approved the 2017-2018 State budget, which includes amendment number 73 to the law for the Encouragement of Capital Investments. The amendment includes:
Adoption of tax benefits for high-tech preferred enterprises, based on the provisions and rules adopted by the Organization for Cooperation and Economic Development, creating new tax tracks of 7.5 % for Development Area A and 12 % for the rest of the country.
Reduction of corporate tax rate for all preferred enterprises from 9 % to 7.5 %.
Lowering the threshold for the conditions that were previously set in order to enter the track of a "special preferred enterprise" for very big enterprises entitled to a reduced tax rate of 5 % in Area A or 8 % in the rest of the country.
Updating the definitions of preferred income, preferred enterprise, etc.
In accordance with the Income Tax Ordinance, as of December 31, 2021, all of the Company’s tax assessments through tax year 2016 are considered final.
| B. |
Check-Cap US, Inc.
|
Check-Cap US, Inc. is taxed according to U.S. tax laws at a rate of 21 %.
Check-Cap US, Inc. operating loss or “NOL” carry-forwards was $4
| C. |
Deferred income taxes
|
In assessing the realization of deferred tax assets, the Company considers whether it is more likely than not that all or some portion of the deferred tax assets will not be realized. Based on the Company's history of losses, the Company established a full valuation allowance on its net-operating loss carryforwards.
|
|
December 31,
|
|||||||
|
|
2 0 2 1
|
2 0 2 0
|
||||||
|
|
||||||||
|
Carry-forward tax losses
|
||||||||
|
Less valuation allowance
|
( |
)
|
( |
)
|
||||
|
|
||||||||
F - 23
CHECK CAP LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except share and per share data)
NOTE 7 - INCOME TAXES (Cont.)
| D. |
Reconciliation of the theoretical tax expense to actual tax expense
|
The main reconciling item between the statutory tax rate of the Company and the effective rate is the provision of full valuation allowance in respect of tax benefits from carry forward tax losses due to the uncertainty of the realization of such tax benefits (see above).
NOTE 8 - COMMITMENTS AND CONTINGENT LIABILITIES
| A. |
Royalties provision
|
| 1. |
Royalties to an ASIC designer
|
The Company has a liability to pay royalties for the development of an ASIC component which is used as an amplifier for the capture of signals at low frequencies from X-ray detectors contained in the capsule. The institution that developed the ASIC is entitled to receive royalties from the Company in the amount of 50 € cents (57 U.S cents) for every ASIC component that the Company will sell, capped at €200 (approximately $226 ). This royalty is considered as a liability.
The royalty liability is calculated based on estimated future sales generated by products which include the ASIC component. As of December 31, 2021, the Company believes that it will be required to pay the above mentioned royalties, and accordingly, recorded, as of December 31, 2021, a provision in a total amount of $132 .
| 2. |
Reimbursement liability to Predecessor Entity's unit holders
|
On May 31, 2009, the Company entered into an asset transfer agreement with Check Cap LLC (the "Predecessor Entity"), a company with the same shareholders as the Company at the time of transfer. According to the agreement, the Predecessor Entity transferred all of its business operations and substantially all of its assets to the Company, including development and consulting agreements, cash, property and equipment and intangible ownership rights, free of any debt.
As a part of the reorganization, the Company committed to reimburse the unit holders of the Predecessor Entity for any tax burdens that may be imposed on them due to the reorganization. The reimbursement liability is calculated assuming deemed royalties are paid to the U.S. unit holders of Check-Cap LLC under Section 367(d) of the Code, and is based in part on the Company’s forecasted sales with a cap calculated as the fair value of the share as determined at the date of the financial statements. The reimbursement liability is calculated by multiplying the estimated tax rate by the lowest of: (1) expected cash outflows for a period of 15 years ended December 31, 2023, discounted using a discount factor commensurate with the risk of the Company, and (2) value of the shares held by U.S. unit holders of the Predecessor Entity as of December 31, 2021 multiplied by $0.6747, the last reported price per share of the Company’s ordinary shares on the Nasdaq Capital Market on December 31, 2021. Any updates in the contingent liability will be charged to earnings. Since the Company does not expect to be profitable in year 2023, the liability based on the discounted outflows is $0. As a result, as of December 31, 2021, the balance of the reimbursement liability totaled $0 .
|
|
December 31,
|
|||||||
|
|
2 0 2 1
|
2 0 2 0
|
||||||
|
|
||||||||
|
Royalties to an ASIC designer
|
||||||||
|
Reimbursement liability to Predecessor Entity's unit holders
|
||||||||
|
|
||||||||
F - 24
CHECK CAP LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except share and per share data)
NOTE 8 - COMMITMENTS AND CONTINGENT LIABILITIES (Cont.)
| B. |
Commitments
|
| (1) |
Royalties
|
The Company's research and development efforts are financed, in part, through funding from the IIA and the BIRD Foundation. Since the Company's inception through December 31, 2021, the Company received funding from the IIA and the BIRD Foundation in the total amount of approximately $5,600 and $114 , respectively. In year 2021, the Company received grants approval from the IIA to support the funding of the Company’s transition from research and development to manufacturing, of which approximately $349 was received in year 2021 and $82 was received in January 2022. The grants received under this plan are not subject to future royalties.
According to the terms of applicable law as currently in effect regarding the grants received before year 2021, the IIA is entitled to royalties equal to 3 -4 % (or at an increased rate under certain circumstances) of the revenues from sales of products and services based on technology developed using IIA grants, up to the full principal amount (which may be increased under certain circumstances) of the U.S. Dollar-linked value of the grants, plus interest at the rate of 12-month LIBOR. The obligation to pay these royalties is contingent on actual sales of the applicable products and services and in the absence of such sales, no payment is required. As of December 31, 2021, the Company had not paid any royalties to the IIA and had a contingent liability to the IIA in the amount of approximately $6,136 .
On July 13, 2014, the Company entered into a Cooperation and Project Funding Agreement with the BIRD Foundation and Synergy and during 2014-2017, the Company, together with Synergy, had received funding from the BIRD Foundation in the aggregate amount of approximately $127 . Based on the aggregate expenses that the Company incurred for such project, it refunded to the BIRD Foundation an amount of approximately $13 . The Company will not be receiving additional funding from the BIRD Foundation for the project, which is no longer active. As of December 31, 2021, the Company had not paid any royalties to the BIRD Foundation and had a contingent obligation to the BIRD foundation in the amount of $194 .
| (2) |
Rental agreements
|
| 1. |
On January 26, 2021, the Company entered into the Amended Lease Agreement according to which, effective as of April 1, 2021, it leases approximately
|
Monthly rental expenses under the Amended Lease Agreement are $16.1 . See also Note 5.
| 2. |
On December 30, 2021, the Company entered into a Sub-lease Agreement (the “Sub-lease Agreement”), with a Company supplier ( the “Lessor”) according to which, the Company leases approximately
|
F - 25
CHECK CAP LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except share and per share data)
NOTE 8 - COMMITMENTS AND CONTINGENT LIABILITIES (Cont.)
| B. |
Commitments (Cont.)
|
| (3) |
Vehicle lease and maintenance agreements
|
The Company entered into several 32 -36 months lease and maintenance agreements for vehicles, which are regularly amended as new vehicles are leased. The current monthly lease fees are approximately $21 . See also Note 5.
| (4) |
The Company issued purchase orders to certain suppliers in order to secure strategic inventory of key components that as of December 31,2021 have not yet been supplied.
|
| C. |
Legal
|
As of the date of the financial statements, the Company is not a party to any pending litigation.
NOTE 9 - FAIR VALUE MEASUREMENTS
In accordance with ASC No. 820, the Company measures its money market funds and foreign currency derivative contracts at fair value. Money market funds are classified within Level 1. This is because these assets are valued using quoted market prices or alternative pricing sources and models utilizing market observable inputs. Foreign currency derivative contracts are classified within Level 2 as the valuation inputs are based on quoted prices and market observable data of similar instruments.
The Company’s financial assets measured at fair value on a recurring basis, excluding accrued interest components, consisted of the following types of instruments as of the following dates:
|
|
December 31, 2021
|
|||||||||||
|
|
Fair value measurements using input type
|
|||||||||||
|
|
Level 1
|
Level 2
|
Total
|
|||||||||
|
Cash and cash equivalents:
|
||||||||||||
|
Money market funds
|
$
|
$
|
||||||||||
|
Other current assets :
|
||||||||||||
|
Foreign currency derivative instruments
|
$
|
$
|
||||||||||
|
Total financial assets
|
$
|
$
|
$
|
|||||||||
|
|
December 31, 2020
|
|||||||||||
|
|
Fair value measurements using input type
|
|||||||||||
|
|
Level 1
|
Level 2
|
Total
|
|||||||||
|
Cash and cash equivalents:
|
||||||||||||
|
Money market funds
|
$
|
$
|
||||||||||
|
Other current assets:
|
||||||||||||
|
Foreign currency derivative instruments
|
$
|
$
|
||||||||||
|
Total financial assets
|
$
|
$
|
$
|
|||||||||
F - 26
CHECK CAP LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except share and per share data)
NOTE 10 - SHAREHOLDERS' EQUITY
| A. |
Effective April 4, 2018, the Company's Board of Directors effected a reverse share split of 1-for-12 (i.e., 12 ordinary shares were combined into one ordinary share) (“Reverse Share Split”). Share and per share amounts in the financial statements, prior to April 4, 2018, have been adjusted to reflect the Reverse Share Split.
|
| B. |
Ordinary shares
|
| 1. The ordinary shares provide their holder with rights to receive dividends in cash and shares, and rights to participate at the time of distributing liquidation dividends. Additionally, the ordinary shareholders have the right to vote at shareholder meetings in a manner that each share provides one voting right to its holder. | ||
| 2. |
Changes in ordinary share capital |
|
| a) |
On May 11, 2010, the Company issued, free of charge, to all of its shareholders (except for certain ordinary shareholders), warrants to purchase an aggregate of
|
| b) |
On February 24, 2015, the Company consummated an IPO in the U.S. of
|
The Company granted the underwriters a 45-day over-allotment option to purchase up to 25,000 additional units (together with an accompanying 37,500 Long Term Incentive Warrants). The option to purchase additional 8,334 units was partially exercised on March 6, 2015. The units were separated into one ordinary share and one-half of a Series A Warrant to purchase one ordinary share on March 18, 2015, and the units ceased to exist as of such date. On April 6, 2015, the option to purchase an additional 12,500 ordinary shares and 6,250 Series A Warrants was partially exercised. The Company received net proceeds from the IPO and partial exercise of the over-allotment option of approximately $10,800 (net of issuance cost of approximately $2,900 , including certain warrants with a value of $196 issued in connection with the IPO).
| c) |
Immediately prior to the consummation of the IPO, certain members of the Company's management exercised options to purchase
|
F - 27
CHECK CAP LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except share and per share data)
NOTE 10 - SHAREHOLDERS' EQUITY (Cont.)
| B. |
Ordinary shares (Cont.)
|
| 2. |
Changes in ordinary share capital (Cont.) |
| d) |
On August 20, 2014, the Company entered into a certain credit line agreement, pursuant to which it obtained a credit line in an aggregate principal amount of $
|
Under the terms of the credit line agreement, the Company directed that the entire credit line amount (that was in escrow) be invested in the Private Placement, consummated simultaneously with the consummation of the IPO on February 24, 2015. The Company issued to the Lenders 166,667 units at a price of $72 per unit, before issuance cost. Each unit consisted of one ordinary share and one-half of a Series A Warrant to purchase one ordinary share. Each unit was issued with one and one-half non-transferrable Long Term Incentive Warrants. Each whole Series A Warrant entitled the holder to purchase one ordinary share at an exercise price of $90 . Upon vesting, each Long Term Incentive Warrant entitles the holder to purchase one ordinary share at an exercise price of $82.80 . The Company received net proceeds from the Private Placement of approximately $10,900 (net of issuance cost of approximately $1,200 , including certain warrants with a value of $125 issued in connection with the Private Placement). The Series A Warrants expired on February 24, 2020. As of December 31, 2021 and December 31, 2020, Long Term Incentive Warrants to purchase 378,047
| e) |
No CLA Warrants were exercised during the years ended December 31, 2021 and 2020. As of December 31, 2021, CLA Warrants to purchase
|
| f) |
Upon the closing of the IPO, the Company issued warrants to purchase
|
| g) |
On August 11, 2016, the Company consummated a registered direct offering of
|
F - 28
CHECK CAP LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except share and per share data)
NOTE 10 - SHAREHOLDERS' EQUITY (Cont.)
| B. |
Ordinary shares (Cont.)
|
| 2. |
Changes in ordinary share capital (Cont.) |
| h) |
On June 2, 2017, the Company consummated a registered direct offering of
|
| i) |
On November 22, 2017, the Company consummated a registered direct offering of
|
| j) |
On May 8, 2018, the Company consummated an underwritten public offering (the “2018 Public Offering”) of
|
The Company granted the underwriters a 30-day over-allotment option to purchase up to an additional 478,407 ordinary shares and/or Series C Warrants to purchase up to an additional 478,407 ordinary shares at the public offering price. The underwriters’ option was exercised in full on May 8, 2018.
The Company received gross proceeds from the 2018 Public Offering and exercise in full of the over-allotment option of approximately $20,200 (before deducting underwriting discounts and commissions and other offering fees and expenses). During May 2018, the 450,909 pre-funded warrants were exercised in full in consideration of additional gross proceeds of approximately $4,500 . As of December 31, 2021, Series C Warrants to purchase 3,667,788 ordinary shares were outstanding.
| k) |
On February 6, 2019, the Company issued
|
F - 29
CHECK CAP LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except share and per share data)
NOTE 10 - SHAREHOLDERS' EQUITY (Cont.)
| B. |
Ordinary shares (Cont.)
|
| 2. |
Changes in ordinary share capital (Cont.) |
| l) |
On December 19, 2019, the Company entered into definitive agreements with certain investors to sell an aggregate of
|
|
|
m) |
April – May 2020 registered direct offerings |
On April 22, 2020, May 4, 2020 and May 13, 2020, the Company issued 6,666,669 , 7,500,001 and 5,000,000 ordinary shares, respectively, in registered direct offerings (the “April-May 2020 Registered Direct Offering”) at a purchase price of $0.60 6,666,669 , 7,500,001 and 5,000,000 ordinary shares, respectively, in a private placement. The warrants are immediately exercisable and will expire five and one-half years from the issuance date at an exercise price of $0.80 per ordinary share, subject to certain adjustments. The warrants may be exercised on a cashless basis if at the time of exercise thereof, there is no effective registration statement registering the ordinary shares underlying the warrants. The terms of the warrants did not include features that would preclude equity classification. The Company also issued unregistered placement agent warrants to purchase up to an aggregate of 466,667 , 525,000 and 350,000 ordinary shares, respectively, on the same terms as the warrants issued to the investors in the private placement, except they have a term of five years 0.75 per share. The Company received gross proceeds from the April-May 2020 Registered Direct Offerings of approximately $11,500 , or approximately $10,139 , net of issuance expenses in the amount of $1,361 .
On July 27, 2020, as part of the Warrants Exercise Transaction, warrants to purchase an aggregate 15,000,003 ordinary shares were exercised. During the first quarter of 2021, warrants to purchase 4,166,667 ordinary shares held by certain investors and warrants to purchase 1,341,667 ordinary shares held by the placement agent warrants were exercised into ordinary shares (see Note 10B(2)(n)).
| n) |
On July 23, 2020, the Company entered into a warrant exercise agreement, (the “Warrants Exercise Transaction”), with several existing institutional investors who are the holders (the “Holders”) of warrants issued in May 2020, April 2020, February 2019 and November 2017 (the “Old Warrants”), to purchase ordinary shares, pursuant to which the Holders agreed to exercise in cash their Old Warrants to purchase up to an aggregate of
|
F - 30
CHECK CAP LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except share and per share data)
NOTE 10 - SHAREHOLDERS' EQUITY (Cont.)
| B. |
Ordinary shares (Cont.)
|
| 2. |
Changes in ordinary share capital (Cont.) |
| o) |
During the first quarter of 2021, as a result of an exercise of warrants by the investors from the Warrants Exercise Transaction and the April-May 2020 Offerings, the Company issued an aggregate of
|
| p) |
On June 30, 2021, the Company entered into a definitive agreement with several institutional and accredited investors for the purchase and sale of
|
| q) |
On October 14, 2014, the Company issued warrants to purchase an aggregate
|
| r) |
On March 3, 2022, the Company consummated registered direct offering. See Note 17(2).
|
F - 31
CHECK CAP LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except share and per share data)
NOTE 11 - SHARE-BASED COMPENSATION
| A. |
General |
1. In connection with the transfer of all of the business operations and substantially all of the assets of Check-Cap LLC to the Company in 2009, the Company assumed the Check-Cap LLC 2006 Unit Option Plan (the "2006 Plan"). According to the 2006 Plan, the Company is authorized to grant options to purchase ordinary shares of the Company to employees, directors and consultants of the Company. The options granted according to the 2006 Plan are generally exercisable for 10 years from the grant date unless otherwise determined by the Company's Board of Directors, vest over a period to be determined by the Company's Board of Directors, and have an exercise price to be determined by the Company's Board of Directors.
2. On August 13, 2015, the shareholders approved and adopted the Check-Cap Ltd. 2015 Equity Incentive Plan (the "2015 Israeli Plan") and the Check-Cap Ltd. 2015 United States Sub-Plan to Check-Cap Ltd. 2015 Equity Incentive Plan (the "2015 U.S. Sub-Plan" and together with the 2015 Israeli Plan, the "2015 Plan"). As of such date, the Company ceased to grant options under the 2006 Plan. All of the remaining shares authorized but unissued under the 2006 Plan were rolled over to the 2015 Plan.
3. On August 5, 2020, the Company's Board of Directors resolved to increase the number of ordinary shares of the Company reserved for issuance under the 2015 Plan by an additional 350,000 shares to 1,555,594 shares.
4. On August 5, 2021, the Company's Board of Directors resolved to increase the number of ordinary shares of the Company reserved for issuance under the 2015 Plan by an additional 2,500,000 .
5. As of December 31, 2021, the available number of ordinary shares of the Company reserved for future awards under the 2015 Plan was 525,428 shares.
6. On January 27, 2022 the Company's Board of Directors resolved to increase the number of ordinary shares of the Company reserved for issuance under the 2015 Plan by an additional 500,000 shares.
F - 32
CHECK CAP LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except share and per share data)
NOTE 11 - SHARE-BASED COMPENSATION (Cont.)
| B. |
Details of share-based grants made by the Company |
The following tables presents the grant dates, number of underlying shares and related exercise prices of awards granted to employees and non-employees during the years 2021, 2020 and 2019 as well as the estimated fair value of the underlying ordinary shares on the grant date:
Options:
|
|
|
Share based
|
|||||||||||||||||||
|
|
|
Fair value
|
expenses (1)
|
||||||||||||||||||
|
|
|
on grant
|
$in
|
Vesting
|
|||||||||||||||||
|
Grant date
|
No. of options
|
Expiration date
|
Exercise price
|
date
|
thousands
|
terms
|
|||||||||||||||
|
May 6, 2019 (3)
|
|
$
|
$
|
$
|
(2 |
)
|
|||||||||||||||
|
August 5, 2019 (3)
|
|
$
|
$
|
$
|
(2 |
)
|
|||||||||||||||
|
November 4, 2019 (3)
|
|
$
|
$
|
$
|
(2 |
)
|
|||||||||||||||
|
December 12, 2019 (4)
|
|
$
|
$
|
$
|
(2 |
)
|
|||||||||||||||
|
March 5, 2020
|
|
$
|
$
|
$
|
(2 |
)
|
|||||||||||||||
|
May 27, 2020
|
|
$
|
$
|
$
|
(2 |
)
|
|||||||||||||||
|
August 5, 2020
|
|
$
|
$
|
$
|
(6 |
)
|
|||||||||||||||
|
November 17, 2020
|
|
$
|
$
|
$
|
(6 |
)
|
|||||||||||||||
|
December 10, 2020 (5)
|
|
$
|
$
|
$
|
(6 |
)
|
|||||||||||||||
|
March 17, 2021
|
|
$
|
$
|
$
|
(6 |
)
|
|||||||||||||||
|
May 11, 2021
|
|
$
|
$
|
$
|
(6 |
)
|
|||||||||||||||
|
August 4, 2021 (7)
|
|
$
|
$
|
$
|
(6 |
)
|
|||||||||||||||
|
September 13, 2021
|
|
$
|
$
|
$
|
(10 |
)
|
|||||||||||||||
|
September 20, 2021 (8)
|
|
$
|
$
|
$
|
(6 |
)
|
|||||||||||||||
|
November 2, 2021
|
|
$
|
$
|
$
|
(6 |
)
|
|||||||||||||||
|
December 9, 2021 (9)
|
|
$
|
$
|
$
|
(9 |
)
|
|||||||||||||||
|
December 9, 2021 (9)
|
|
$
|
$
|
$
|
(9 |
)
|
|||||||||||||||
F - 33
CHECK CAP LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except share and per share data)
NOTE 11 - SHARE-BASED COMPENSATION (Cont.)
| B. |
Details of share-based grants made by the Company (Cont.)
|
RSUs:
|
|
No. of RSUs
|
|
Fair value on
|
Share based
|
Vesting
|
||||||||||||
|
Grant date
|
and PSUs
|
Expiration date
|
grant date
|
expenses (1)
|
terms
|
||||||||||||
|
December 12, 2019 (4)
|
|
$
|
$
|
(2 |
)
|
||||||||||||
|
August 4, 2021 (7)
|
|
$
|
$
|
(6 |
)
|
||||||||||||
| 1. |
Share based expenses are based on their fair value on grant date. The amount is charged to the statement of operations over the vesting periods.
|
| 2. |
The options vest over a period of three years commencing on the date of grant, such that one third of the options vested on the first anniversary of the date of grant and thereafter, the remaining options vest in quarterly installments.
|
| 3. |
Of the
|
| 4. |
On December 12, 2019, the Company's shareholders approved the award of
|
F - 34
CHECK CAP LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except share and per share data)
NOTE 11 - SHARE-BASED COMPENSATION (Cont.)
| B. |
Details of share-based grants made by the Company (Cont.)
|
The performance-based RSUs will vest over a period of three years commencing on January 1, 2020, in three equal tranches, and is subject to the achievement of Performance Targets. At least 60% of the Performance Targets for any calendar year must be met to be entitled to the tranche with respect to such calendar year, and once met, the applicable tranche will vest in full. Each of the Company’s CEO and the members of the Board of Directors must be serving as the Company CEO and members of the Board of Directors, respectively, on the date of the filing of the Company’s annual financial statements for each calendar year during the three year vesting period to be entitled to the performance based RSU tranche for any such calendar year. The vesting conditions for the performance-based RSUs with respect to the Performance Targets include a mechanism for deferring vesting to the following years in the event of a failure to fulfill the criteria for any calendar year, provided that the cumulative average achievement criteria of the Performance Targets during the vesting period is met.
The compensation expense was based on the fair value on the grant date and was estimated at approximately $166 and $66 for the options and performance based RSUs granted to the Company’s CEO and to certain members of the Company's Board of Directors, respectively. These amounts are charged to the statement of operations over the vesting periods of which $59 , $148 and $5 was recorded to general and administrative expenses in the year ended December 31, 2021, 2020 and 2019, respectively.
| 5. |
On December 10, 2020, the Company's Board of Directors approved the award of
|
| 6. |
The options vest over a period of
|
| 7. |
Of the
|
| 8. |
On September 20, 2021, the Company's Board of Directors approved the award of
|
| 9. |
On December 9, 2021, the Company's shareholders approved the award of
|
| 10. |
Options to service provider. The options vest over a period of twelve (12) months.
|
F - 35
CHECK CAP LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except share and per share data)
NOTE 11 - SHARE-BASED COMPENSATION (Cont.)
| C. |
Options Fair Value
|
The parameters which were used in applying the model are as follows:
|
|
For the year ended December 31,
|
||||||||||
|
|
2 0 2 1
|
2 0 2 0
|
2 0 1 9
|
||||||||
|
Expected volatility (1)
|
|
%
|
|
%
|
|
%
|
|||||
|
Risk-free rate
|
|
%
|
|
%
|
|
%
|
|||||
|
Dividend yield
|
% |
% |
% |
||||||||
|
Expected term (in years)
|
|
|
||||||||||
|
Share price
|
|
$
|
|
$
|
|
$
|
(1)
| D. |
Effect of share-based compensation transactions on the Company's statements of operations
|
|
|
For the year ended December 31,
|
|||||||||||
|
|
2 0 2 1
|
2 0 2 0
|
2 0 1 9
|
|||||||||
|
|
||||||||||||
|
Research and development, net
|
||||||||||||
|
General and administrative, net
|
||||||||||||
|
Total
|
||||||||||||
| E. |
A summary of the Company's option activity related to options granted to employees, service providers and directors, and related information under the 2006 Plan and the 2015 Plan is as follows:
|
|
|
Year ended December 31, 2021
|
|||||||||||||||
|
|
Weighted
|
Aggregate
|
||||||||||||||
|
|
Weighted
|
average
|
intrinsic
|
|||||||||||||
|
|
average of
|
remaining
|
value
|
|||||||||||||
|
|
exercise
|
contractual
|
($in
|
|||||||||||||
|
|
Price
|
life
|
thousands)
|
|||||||||||||
|
|
Number
|
(in $)
|
(in years)
|
(2)
|
|
|||||||||||
|
Options outstanding at beginning of year
|
||||||||||||||||
|
Options granted
|
||||||||||||||||
|
Options forfeited
|
( |
)
|
||||||||||||||
|
Options exercised
|
( |
)
|
||||||||||||||
|
Options outstanding at end of year
|
||||||||||||||||
|
|
||||||||||||||||
|
Options exercisable at end of year
|
||||||||||||||||
F - 36
CHECK CAP LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except share and per share data)
NOTE 11 - SHARE-BASED COMPENSATION (Cont.)
|
|
Year ended December 31, 2020
|
|||||||||||||||
|
|
Weighted
|
Aggregate
|
||||||||||||||
|
|
Weighted
|
average
|
intrinsic
|
|||||||||||||
|
|
average of
|
remaining
|
value
|
|||||||||||||
|
|
exercise
|
contractual
|
($in
|
|||||||||||||
|
|
Price
|
life
|
thousands)
|
|||||||||||||
|
|
Number
|
(in $)
|
(in years)
|
(2)
|
|
|||||||||||
|
Options outstanding at beginning of year
|
||||||||||||||||
|
Options granted
|
||||||||||||||||
|
Options forfeited
|
( |
)
|
||||||||||||||
|
Options outstanding at end of year
|
||||||||||||||||
|
|
||||||||||||||||
|
Options exercisable at end of year
|
||||||||||||||||
|
|
Year ended December 31, 2019
|
|||||||||||||||
|
|
Weighted
|
Aggregate
|
||||||||||||||
|
|
average
|
intrinsic
|
||||||||||||||
|
|
Weighted
|
remaining
|
value
|
|||||||||||||
|
|
average of
|
contractual
|
($in
|
|||||||||||||
|
|
exercise price
|
life
|
thousands)
|
|||||||||||||
|
|
Number
|
(in $)
|
(in years)
|
(2)
|
|
|||||||||||
|
Options outstanding at beginning of year
|
||||||||||||||||
|
Options granted
|
||||||||||||||||
|
Options forfeited
|
( |
)
|
||||||||||||||
|
Options outstanding at end of year
|
||||||||||||||||
|
|
||||||||||||||||
|
Options exercisable at end of year
|
||||||||||||||||
| 1. |
The weighted average grant date fair values of options granted during the years ended December 31, 2021, 2020 and 2019 were $
|
| 2. |
|
A summary of the Company’s RSUs activity is as follows:
|
|
Year ended December 31
|
|||||||||||
|
|
2021
|
2020
|
2019
|
|||||||||
|
|
Number of RSUs
|
|||||||||||
|
Unvested at beginning of year
|
||||||||||||
|
Granted
|
||||||||||||
|
Vested
|
( |
)
|
( |
)
|
( |
)
|
||||||
|
Forfeited
|
( |
)
|
( |
)
|
( |
)
|
||||||
|
Unvested at end of year
|
||||||||||||
| 3. |
The weighted average grant date fair values of RSUs awarded during the years ended December 31, 2021 and 2019 were $
|
| 4. |
As of December 31, 2021, 2020 and 2019, there were $
|
F - 37
CHECK CAP LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except share and per share data)
NOTE 12 - RESEARCH AND DEVELOPMENT EXPENSES, NET
Composition:
|
|
For the year ended December 31,
|
|||||||||||
|
|
2 0 2 1
|
2 0 2 0
|
2 0 1 9
|
|||||||||
|
|
||||||||||||
|
Salaries and related expenses
|
||||||||||||
|
Share-based compensation
|
||||||||||||
|
Materials
|
||||||||||||
|
Subcontractors and consultants
|
||||||||||||
|
Depreciation
|
||||||||||||
|
Cost for registration of patents
|
||||||||||||
|
Others
|
||||||||||||
|
|
||||||||||||
|
Less participation of the IIA
|
( |
)
|
( |
)
|
||||||||
|
Total research and development expenses, net
|
||||||||||||
NOTE 13 - GENERAL AND ADMINISTRATIVE EXPENSES
Composition:
|
|
For the year ended December 31,
|
|||||||||||
|
|
2 0 2 1
|
2 0 2 0
|
2 0 1 9
|
|||||||||
|
|
||||||||||||
|
Salaries and related expenses
|
||||||||||||
|
Share-based compensation, net
|
||||||||||||
|
Professional services
|
||||||||||||
|
Office rent and maintenance
|
||||||||||||
|
Depreciation
|
||||||||||||
|
Others
|
||||||||||||
|
Total general and administrative expenses
|
||||||||||||
NOTE 14 - FINANCE INCOME (EXPENSES), NET
Composition:
|
|
For the year ended December 31,
|
|||||||||||
|
2 0 2 1
|
2 0 2 0
|
2 0 1 9
|
||||||||||
|
|
||||||||||||
|
Interest income on short-term deposits and other
|
||||||||||||
|
Bank fees and interest expenses
|
( |
)
|
( |
)
|
( |
)
|
||||||
|
Changes in provision for royalties
|
||||||||||||
|
Exchange rate differences
|
( |
)
|
( |
)
|
( |
)
|
||||||
|
Changes in fair value of derivatives
|
||||||||||||
|
Total financing income, net
|
||||||||||||
F - 38
CHECK CAP LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except share and per share data)
NOTE 15 - LOSS PER SHARE
Basic loss per share is computed based on the weighted average number of shares outstanding during each year. Diluted net loss per share is computed based on the weighted average number of shares outstanding during each year, plus the dilutive potential of the ordinary shares considered outstanding during the year, in accordance with ASC 260-10 "Earnings per share".
All outstanding options and warrants have been excluded from the calculation of the diluted loss per share for each period presented, since all such securities have an anti-dilutive effect.
The following table sets forth the computation of the Company`s basic and diluted net loss per ordinary share:
|
|
For the year ended December 31,
|
|||||||||||
|
|
2 0 2 1
|
2 0 2 0
|
2 0 1 9
|
|||||||||
|
|
||||||||||||
|
Net loss
|
||||||||||||
|
Shares used in computing net loss per ordinary share, basic and diluted
|
||||||||||||
|
Net loss per ordinary share, basic and diluted
|
||||||||||||
Instruments that may potentially dilute the basic loss per share in the future but were not included in the calculation of diluted loss per share, since their effect is anti-dilutive.
|
|
|
For the year ended December 31,
|
|||||||||
|
|
|
2 0 2 1
|
|
2 0 2 0
|
|
2 0 1 9
|
|||||
|
|
|
(number)
|
|||||||||
|
Warrants and share options
|
|
|
|||||||||
F - 39
CHECK CAP LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except share and per share data)
NOTE 16 - RELATED PARTIES
| A. |
Compensation to the non-executive directors:
|
|
|
For the year ended December 31,
|
|||||||||||
|
|
2 0 2 1
|
2 0 2 0
|
2 0 1 9
|
|||||||||
|
|
||||||||||||
|
Fees, including reimbursement of expenses
|
||||||||||||
|
Share-based compensation
|
||||||||||||
|
|
||||||||||||
| B. |
Transactions with related parties:
|
|
|
For the year ended December 31,
|
|||||||||||
|
|
2 0 2 1
|
2 0 2 0
|
2 0 1 9
|
|||||||||
|
|
||||||||||||
|
Consulting fees, including share-based compensation and reimbursement of expenses (1)
|
||||||||||||
|
|
||||||||||||
On April 4, 2016, the Company entered into an employment agreement with Sigalit Kimchy, according to which Ms. Kimchy serves as marcom and user interface lead, in a 50% part-time role (no less than 112 hours per month), for a monthly salary of NIS 10 ($3.1 ), plus up to 35 monthly overtime hours at a gross monthly rate of NIS 2.5 ($1 ), or an aggregate monthly salary of up to NIS 12.5 ($3.9 ). Ms. Kimchy is entitled to an education fund, managers' insurance or pension fund and reimbursement of monthly travel expenses. Sigalit Kimchy is the wife of Yoav Kimchy, the Company’s Chief Technology Officer.
NOTE 17 - SUBSEQUENT EVENTS
| 1. |
Share based compensation
|
| a. |
On January 27, 2022, the Company's Board of Directors approved the award of options to purchase
|
| b. |
On March 21, 2022, the Company's Board of Directors approved the award of options to purchase
|
The options and RSUs vest over a period of four years commencing on the date of grant, such that 25 % of the options and RSUs shall vest and become exercisable on the first anniversary of the date of grant and thereafter, shall vest monthly in equal portions at the end of each month over the subsequent thirty-six (36) months .
| 2. |
On March 1, 2022, the Company entered into a definitive agreement with several institutional and accredited investors for the purchase and sale of
|
F - 40