Wearable Devices Ltd F-1/A, filed Apr 6, 2022
Wearable Devices Ltd. (WLDS)
As filed with the Securities and Exchange Commission on April 6, 2022
Registration No. 333-262838
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Amendment No. 2
to
Form F-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
WEARABLE DEVICES LTD.
(Exact name of registrant as specified in its charter)
| State of Israel | 3873 | Not Applicable | ||
| (State or other jurisdiction of incorporation or organization) |
(Primary Standard Industrial Classification Code Number) |
(I.R.S. Employer Identification Number) |
| 2 Ha-Ta’asiya St., | Mudra Wearable, Inc. | |
| Yokne’am Illit, 2069803 Israel | 24A Trolley Square #2203 | |
| Tel: +972.4.6185670 | Wilmington, DE 19806 | |
| (Address, including zip code, and telephone number, | (Name, address, including zip code, and telephone | |
| including area code, of registrant’s principal executive offices) | number, including area code, of agent for service) |
Copies to:
| Oded Har-Even, Esq. | Reut Alfiah, Adv. | Anthony W. Basch, Esq. J. Britton Williston, Esq. |
Howard Berkenblit, Esq. Sullivan & Worcester LLP 1633 Broadway New York, NY 10019 Tel: 212.660.3000 |
Sullivan & Worcester Tel-Aviv (Har-Even & Co.) HaArba’a Towers 28 HaArba’a St. North Tower, 35th floor Tel-Aviv,
Israel 6473925 |
Kaufman & Canoles, P.C. Two James Center, 14th Floor 1021 E. Cary St. Richmond, VA 23219 Tel: +1.804.771.5700 |
Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date hereof.
If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act, check the following box. ☒
If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐
If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐
If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933.
Emerging growth company ☒
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards † provided pursuant to Section 7(a)(2)(B) of the Securities Act. ☒
† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.
The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.
The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.
| PRELIMINARY PROSPECTUS | SUBJECT TO COMPLETION | DATED APRIL 6, 2022 |
Up to Units Each Consisting of
One Ordinary Share and One Warrant to Purchase One Ordinary Share
Up to Pre-Funded Units Each Consisting of
One Pre-Funded Warrant to Purchase One Ordinary Share and One Warrant to Purchase One Ordinary Share
Wearable Devices Ltd.
This is the initial public offering in the United States of Wearable Devices Ltd., an Israeli company, or the Company. We are offering units, or Units, each consisting of one ordinary share of the Company, NIS 0.01 per share, or Ordinary Shares, and one warrant to purchase one Ordinary Share, or each, a Warrant. We are offering all of the Units offered by this prospectus.
We anticipate that the initial public offering price will be in the range of $5.20 and $7.20 per Unit, and the assumed exercise price of each Warrant included in the Unit will be $6.20 (100% of the public offering price per Unit, based on an assumed public offering price of $6.20 per Unit, the midpoint of the price range of the Units) per Ordinary Share. The number of Units offered in this prospectus and all other applicable information has been determined based on an assumed public offering price of $6.20 per Unit, which is the midpoint of the above range. The actual public offering price of the Units will be determined between the underwriter and us at the time of pricing, considering our historical performance and capital structure, prevailing market conditions, and overall assessment of our business. Therefore, the assumed public offering price per Unit used throughout this prospectus may not be indicative of the actual public offering price for the Ordinary Shares (see “Underwriting—Offering Price Determination” for additional information). The Units have no stand-alone rights and will not be certificated or issued as stand-alone securities. The Ordinary Shares and Warrants are immediately separable and will be issued separately in this offering. The Warrants offered hereby will be immediately exercisable on the date of issuance and will expire five years from the date of issuance. The Warrants will be subject to forced exercise commencing six months from issuance subject to the condition that the volume weighted average price of the Company’s Ordinary Shares exceeds 200% of the initial exercise price for ten consecutive trading days and subject to certain other conditions set forth in the Warrants.
We are also offering to those purchasers, if any, whose purchase of Units in this offering would otherwise result in the purchaser, together with its affiliates and certain related parties, beneficially owning more than 4.99% of our outstanding Ordinary Shares immediately following the consummation of this offering, the opportunity to purchase, if they so choose, up to pre-funded units, or, each, a Pre-funded Unit, in lieu of the Units that would otherwise result in ownership in excess of 4.99% (or, at the election of the purchaser, 9.99%) of our outstanding Ordinary Shares, with each Pre-funded Unit consisting of a pre-funded warrant to purchase one Ordinary Share, or a Pre-funded Warrant, and one Warrant. The purchase price of each Pre-funded Unit will equal the price per Unit, minus $0.001, and the exercise price of each Pre-funded Warrant included in the Pre-funded Unit will be $0.001 per Ordinary Share. The Pre-funded Units have no stand-alone rights and will not be certificated or issued as stand-alone securities. The Pre-funded Warrants and Warrants are immediately separable and will be issued separately in this offering. There can be no assurance that we will sell any of the Pre-funded Units being offered. The Pre-funded Warrants offered hereby will be immediately exercisable and may be exercised on the date of issuance at any time until exercised in full.
For each Pre-funded Unit we sell, the number of Units we are offering will be decreased on a one-for-one basis. Because we will issue a Warrant as part of each Unit or Pre-funded Unit, the number of Warrants sold in this offering will not change as a result of a change in the mix of the Units and Pre-funded Units sold.
We refer to the Ordinary Shares, the Warrants, the Pre-funded Warrants and the Ordinary Shares issued or issuable upon exercise of the Warrants and Pre-funded Warrants, collectively, as the securities. See “Description of the Securities We are Offering” for more information.
We have applied to list the Ordinary Shares and Warrants, on the Nasdaq Capital Market, or Nasdaq, under the symbol “WLDS” and “WLDSW,” respectively. No assurance can be given that the Ordinary Shares or the Warrants will be approved for listing or that a trading market will develop for the Ordinary Shares or the Warrants. We will not complete this offering if the Ordinary Shares and the Warrants are not approved for listing. We do not intend to apply to list the Pre-funded Warrants on any securities exchange or other nationally recognized trading system.
We are an emerging growth company, as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, and are subject to reduced public company reporting requirements.
Investing in our securities involves a high degree of risk. See “Risk Factors” beginning on page 8.
Neither the Securities and Exchange Commission, or the SEC, nor any state or other foreign securities commission has approved nor disapproved these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
| Per Unit | Per Pre-Funded Unit | Total | ||||||||||
| Public offering price | $ | $ | $ | |||||||||
| Underwriting discounts and commissions (1) | $ | $ | $ | |||||||||
| Proceeds to us (before expenses)(2) | $ | $ | $ | |||||||||
| (1) | We have agreed to reimburse the underwriter for certain expenses and the underwriter will receive compensation in addition to underwriting discounts and commissions. See the section titled “Underwriting” beginning on page 107 of this prospectus for additional disclosure regarding underwriter compensation and offering expenses. | |
| (2) | The amount of offering proceeds to us presented in this table does not give effect to any exercise of the: (i) underwriter’s over-allotment option (if any) we have granted to the underwriter as described below; (ii) warrants to be issued to the underwriter, or the Underwriter’s Warrants; or (iii) Warrants. |
This offering is being conducted on a firm commitment basis. The underwriter is obligated to take and pay for all the Units offered by this prospectus if any such Units are taken.
We have granted the underwriter an option to purchase from us, at the public offering price, less the underwriting discounts and commissions, up to additional Ordinary Shares and/or Pre-Funded Warrants, and/or up to an additional Warrants, within 45 days from the date of this prospectus to cover over-allotments, if any. The purchase price to be paid per additional Ordinary Share or Pre-Funded Warrant will be equal to the public offering price of one Unit or Pre-Funded Unit (less $0.001 allocated to the Warrants), as applicable, less the underwriting discounts and commissions, and the purchase price to be paid per additional Warrant will be $0.001. If the underwriter exercises the option in full, the total underwriting discounts and commissions payable will be $ and the total proceeds to us, before expenses, will be $ .
The underwriter expects to deliver the Units against payment to the investors in this offering on or about , 2022.
Sole Book – Running Manager
Aegis Capital Corp.
The date of this prospectus is , 2022
TABLE OF CONTENTS
You should rely only on the information contained in this prospectus and any free writing prospectus prepared by or on behalf of us or to which we have referred you. We have not authorized anyone to provide you with information that is different. We are offering to sell the securities, and seeking offers to buy the securities, only in jurisdictions where offers and sales are permitted. The information in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or any sale of the securities.
For investors outside of the United States: Neither we nor the underwriter have done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. You are required to inform yourselves about and to observe any restrictions relating to this offering and the distribution of this prospectus.
In this prospectus, “we,” “us,” “our,” the “Company” and “Wearable Devices” refer to Wearable Devices Ltd. “Mudra” is a registered trademark of Wearable Devices Ltd.
All trademarks or trade names referred to in this prospectus are the property of their respective owners. Solely for convenience, the trademarks and trade names in this prospectus are referred to without the ® and ™ symbols, but such references should not be construed as any indicator that their respective owners will not assert, to the fullest extent under applicable law, their rights thereto. We do not intend the use or display of other companies’ trademarks and trade names to imply a relationship with, or endorsement or sponsorship of us by, any other companies.
Our reporting currency and functional currency is the U.S. dollar. Unless otherwise expressly stated or the context otherwise requires, references in this prospectus to “NIS” are to New Israeli Shekels, and references to “dollars” or “$” mean U.S. dollars.
This prospectus includes statistical, market and industry data and forecasts which we obtained from publicly available information and independent industry publications and reports that we believe to be reliable sources. These publicly available industry publications and reports generally state that they obtain their information from sources that they believe to be reliable, but they do not guarantee the accuracy or completeness of the information.
We report in accordance with generally accepted accounting principles in the United States, or U.S. GAAP.
i
This summary highlights information contained elsewhere in this prospectus. This summary does not contain all of the information you should consider before investing in our securities. Before you decide to invest in our securities, you should read the entire prospectus carefully, including the “Risk Factors” section and the financial statements and related notes appearing at the end of this prospectus.
Our Company
We are a growth company developing a non-invasive neural input interface in the form of a wrist wearable band for controlling digital devices using subtle finger movements. Since our technology was introduced to the market in 2014, we have been working with both Business-to-Business, or B2B, and Business to Consumer, or B2C, customers as part of our push-pull strategy. We are now in the transition phase from research and development to commercialization of our technology into B2B products. At the same time, we are in the final stage of manufacturing our first B2C consumer product, the “Mudra Band”, an aftermarket accessory band for the Apple Watch which allows touchless operation and control of the watch and iPhone.
Our company’s vision is to create a world in which the user’s hand becomes a universal input device for touchlessly interacting with technology. We believe that our technology is setting the standard input interface for the Metaverse. According to an article “CES 2021: The Mudra Band and How Wearable Devices Defining the Future of Immersive Customer Experiences,” published in January 2021 by Futurum Research, the Mudra Band has the potential to bring a whole new level of accessibility and immersive experiences to the wearer of the device. Moreover, according to the article, what sets the Mudra Band apart from similar technology is its add-on approach to interface with existing commands, as opposed to fixing the technology into the controlled device. Further, we have generated insights based on dozens of feedbacks we have received for our technology and learned about the preferred methods of users to produce commands with multiple digital devices, and the Mudra Band incorporates those preferred methods. We intend to transform interaction and control of digital devices to be as natural and intuitive as real-life experiences. We imagine a future in which humans can share skills, thoughts, emotions, and movements with each other and with computers, using wearable interfaces and devices. We believe that neural-based interfaces will become as ubiquitous to interact with wearable computing and digital devices in the near future as the touchscreen is a universal input method for smartphones.
Combining our own proprietary sensors and Artificial Intelligence, or AI, algorithms into a stylish wristband, our Mudra platform enables users to control digital devices through subtle finger movements and hand gestures, without physical touch or contact. These digital devices include consumer electronics, smart watches, smartphones, Augmented Reality, or AR glasses, Virtual Reality, or VR headsets, televisions, personal computers and laptop computers, drones, robots, etc.
We have sold our Mudra Inspire development kit product to B2B customers since 2018 as our first point of business engagement and it has contributed to our early-stage revenues. At the Consumer Electronics Show (CES) 2021, the Mudra Band for Apple Watch, our flagship consumer product, won Innovation Award Honoree and the Best Wearable Award. The product is in its final stages of manufacturing.
Our early-stage revenues were derived from the sales of our Mudra Inspire development kit and from pilot transactions to evaluate the integration of our solution with the clients’ products. In 2020 and 2021, we generated revenues of $57 thousand and $142, respectively, and comprehensive and net loss of $1,258 thousand, $2,614, respectively.
Over 100 companies have purchased our Mudra Inspire development kit, 30 of which are multinational technology companies. These companies are exploring various input and control use-cases for their products, ranging over multiple countries and industry sectors, including consumer electronics manufacturers, consumer electronics brands, electronic components manufacturers, Information Technology, or IT, services and software development companies, industrial companies, and utility providers. Our objective with these companies is to commercialize our Mudra technology by licensing it for integration in the hardware and software of these companies’ products and services. We estimate that there will be a three-to-five-year period from the time we are first introduced to a customer to signing a licensing agreement. As of the date of this prospectus, we have not signed a license agreement with any of these companies.
The core of our platform is Mudra — our Surface Nerve Conductance, or SNC, technology and wristband. Mudra tracks neural signals on the surface of the user’s wrist, which our algorithms decipher to predict as finger movements or hand gestures. The interface binds each gesture with a specific digital function, allowing users to input commands without physical touch or contact. Mudra gestures are natural to perform, and gestures can be tailored per a user’s intent, desired function, and the controlled digital device. Mudra can detect multiple types of gesture, including hand movements, finger movements, and fingertip pressure gradations. In addition to the control use-case, our Mudra technology and SNC sensor can be utilized in multiple monitoring use-cases where we can monitor neural and hand movements for digital health purposes, sport analytics performance, and Industry 4.0 solutions.
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Our Growth Strategy
We intend to achieve a leading brand position for neural input technology, and to expand our operations to digital and wearable computers. Key elements of our growth strategy include:
| ● | Offer a broad range of platform devices. We believe everyone’s needs are unique, so we will offer our users a wide range of connected devices to interact and control in multiple styles, form factors, and price points, to allow people to find the devices that fit their lifestyles and goals. We believe that we can leverage the growing public acceptance and awareness of wearable neural technologies and the rising adoption of wearable devices to market multiple Mudra-based consumer products. |
| ● | Introduce new features, use-cases, software applications, and services. We plan to continue introducing new features and services to increase user engagement and revenue. For example, we are investing in building a diverse user-gesture data bank, which will enable us to develop additional new gestures. It is our belief that the gestures should be natural for the user and tailored based on the use-case and controlled device, instead of a “one size fits all” approach which forces the user to learn new interactions. In addition to the control use-case, our Mudra technology and SNC sensor can be utilized in multiple monitoring use-cases where we can monitor neural and hand movements for digital health purposes, sport analytics performance, and Industry solutions. The platform serves multiple corporations, businesses and individuals in the form of customized mobile and computer applications with a broad range of business models that include hardware sales, licensing, and Software-as-a-Service, or SaaS model. |
| ● | Integrate our Mudra technology into existing devices. We intend to leverage our strong relationships with multiple consumer electronics companies and brands to sign software and hardware licenses and royalty contracts to make ourselves a fundamental input component for all digital devices and platforms. We also believe our superior software and hardware integration ability to work with companies will enable us to sign agreements with leading global and smaller companies for consumer devices and industry use-cases. |
| ● | Further penetrate the additional markets. We intend to increase our focus on building relationships with corporations in Industry 4.0, wellness and digital health, and sports analytics. Our main advantage is the ability to continuously and securely track the user’s engagement over lengthened periods of times and supply meaningful insights for employee performance and safety and the user’s physiology. |
| ● | Expand brand awareness, global distribution and drive sales of our products and services. We intend to increase our marketing efforts to further expand global awareness of our brand and drive greater sales of our products and services. The international markets represent a significant growth opportunity for us, and we intend to expand sales of our products and services globally through select retailers and strategic partnerships. |
| ● | Data monetization. Once we have a sufficiently large database, we intend to monetize data derived from a combination of gestures that authenticates a user, identification of patterns of daily behavior, and monitoring of metrics and identification. This will expand our offerings related to data and user behavior, which can open multiple new markets and opportunities. |
Corporate Information
We are an Israeli corporation based in Yokne’am Illit, Israel and were incorporated in Israel in 2014 under the name Wearable Devices Ltd. Our principal executive offices are located at 2 Ha-Ta’asiya St., Yokne’am Illit, 2069803 Israel. Our telephone number in Israel is 972.4.6185670 Our website address is www.wearabledevices.co.il. The information contained on, or that can be accessed through, our website is not part of this prospectus. We have included our website address in this prospectus solely as an inactive textual reference.
Implications of Being an Emerging Growth Company
We are an “emerging growth company,” as defined in Section 2(a) of the U.S. Securities Act of 1933, as amended, or the Securities Act, as modified by the JOBS Act. As such, we are eligible to, and intend to, take advantage of certain exemptions from various reporting requirements applicable to other public companies that are not “emerging growth companies” such as not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act. We could remain an “emerging growth company” for up to five years, or until the earliest of (a) the last day of the first fiscal year in which our annual gross revenue exceeds $1.07 billion, (b) the date that we become a “large accelerated filer” as defined in Rule 12b-2 under the U.S. Securities Exchange Act of 1934, as amended, or the Exchange Act, which would occur if the market value of our Ordinary Shares that is held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter, or (c) the date on which we have issued more than $1 billion in nonconvertible debt during the preceding three-year period.
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Risk Factor Summary
Our business is subject to numerous risks, as more fully described in the section entitled “Risk Factors” immediately following this prospectus summary. You should read these risks before you invest in our securities. In particular, our risks include, but are not limited to, the following:
Risks Related to Our Business
| ● | There is no assurance that wrist SNC will be the dominant input method in the wearable computing and consumer electronics industry. |
| ● | If we are unable to successfully develop and timely introduce new products and services or enhance existing products and services, our business may be adversely affected. |
| ● | If we are unable to develop and introduce new gesture input functions and improve existing functions in a cost-effective and timely manner, our business, results of operations and financial condition would be adversely affected. |
| ● | The failure to effectively manage the introduction of new or enhanced products may adversely affect our operating results. |
| ● | We invest effort and money into seeking validation of our technology and products with B2B companies, and there can be no assurance that we will enter into license agreements, which could adversely affect our future business, results of operations and financial condition. |
| ● | The period of time from a license agreement to implementation of our technology is long and we are subject to the risks of cancellation or postponement of the contract or unsuccessful implementation. |
| ● | Our current and future products and services may experience quality problems from time to time that can result in adverse publicity, product recalls, litigation, regulatory proceedings, and warranty claims resulting in significant direct or indirect costs, decreased revenue and operating margin, and harm to our brand. |
| ● | If we are unable to anticipate and satisfy consumer preferences in a timely manner, our business may be adversely affected. |
| ● | We rely on a limited number of suppliers, contract manufacturers, and logistics providers, and each of our products is manufactured by a single contract manufacturer. |
| ● | We collect, store, process, and use personal information and other customer data, which subjects us to governmental regulation and other legal obligations related to privacy, information security, and data protection, and our actual or perceived failure to comply with such obligations could harm our business. |
Risks Related to the Industry in Which We Operate
| ● | The forecasts of market growth included in this prospectus may prove to be inaccurate, and even if the markets in which we compete achieve the forecasted growth, we cannot assure you our business will grow at similar rates, if at all. |
| ● | The market for wearable computing devices is still in the early stages of growth and if it does not continue to grow, grows more slowly than we expect, or fails to grow as large as we expect, our business and operating results would be harmed. |
| ● | We operate in a highly competitive market. If we do not compete effectively, our prospects, operating results, and financial condition could be adversely affected. |
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Risks Related to Our Financial Condition and Operations
| ● | Our quarterly operating results or other operating metrics may fluctuate significantly, which could cause the trading price of our Ordinary Shares to decline. |
| ● | We may need to raise additional capital required to grow our business, and we may not be able to raise capital on terms acceptable to us or at all, and the sale of additional shares, equity or debt securities could result in additional dilution to our shareholders. |
| ● | Our operating results could be materially harmed if we are unable to accurately forecast consumer demand for our products and services and adequately manage our inventory. |
Risks Related to this Offering and the Ownership of our Ordinary Shares and Warrants
| ● | Our current five (5) percent shareholders, officers and directors currently beneficially own approximately 73.0% of our Ordinary Shares. Although this percentage will decrease after this offering, they will continue to be able to exert significant control over matters submitted to our shareholders for approval. |
| ● | If you purchase Ordinary Shares included as part of the Units in this offering, you will incur immediate and substantial dilution in the book value of your shares. |
| ● | The Warrants included in the Units and Pre-funded Units are expected to be listed on Nasdaq separately upon the pricing of this offering, and may provide investors with an arbitrage opportunity that could adversely affect the trading price of our Ordinary Shares. |
| ● | The Warrants and Pre-funded Warrants are speculative in nature. |
| ● | The Warrants will be subject to forced exercise by the Company under certain conditions. |
| ● | There is no established market for the Warrants and Pre-funded Warrants being offered in this offering. |
| ● | We do not know whether a market for the Ordinary Shares or Warrants will be sustained or what the trading price of the Ordinary Shares or Warrants will be and as a result it may be difficult for you to sell your securities. |
Risks Related to Our Intellectual Property
| ● | We may not be able to adequately protect or enforce our intellectual property rights, and our efforts to do so may be costly. |
| ● | If we are unable to protect our domain names, our brand, business, and operating results could be adversely affected. |
| ● | We may become subject to litigation brought by third parties claiming infringement by us of their intellectual property rights. |
| ● | Our use of “open source” software could negatively affect our ability to sell our products and subject us to possible litigation. |
Risks Related to Operations in Israel
| ● | Conditions in Israel affect our operations and may limit our ability to produce and sell our products. |
| ● | We received Israeli government grants for certain of our research and development activities, the terms of which may require us to pay royalties and to satisfy specified conditions in order to manufacture products and transfer technologies outside of Israel. If we fail to satisfy these conditions, we may be required to pay penalties and refund grants previously received. |
| ● | Provisions of Israeli law and our amended and restated articles of association may delay, prevent or otherwise impede a merger with, or an acquisition of, us, which could prevent a change of control, even when the terms of such a transaction are favorable to us and our shareholders. |
General Risk Factors
| ● | We will incur significant increased costs as a result of the listing of our securities for trading on Nasdaq. By becoming a public company in the United States, our management will be required to devote substantial time to new compliance initiatives as well as compliance with ongoing U.S. requirements. |
| ● | Even if we meet the initial listing requirements of Nasdaq, there can be no assurance that we will be able to comply with the continued listing standards of Nasdaq, which could result in a de-listing of our Ordinary Shares or Warrants. |
| ● | If we engage in future merger and acquisition activities or strategic partnerships, this could require significant management attention, may increase our capital requirements, dilute our shareholders, cause us to incur debt or assume contingent liabilities, and subject us to other risks. |
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THE OFFERING
| Issuer | Wearable Devices Ltd. | |
| Units offered by us | Up to 3,600,000 Units, each consisting of one Ordinary Share and one Warrant to purchase one Ordinary Share. The Units have no stand-alone rights and will not be certificated or issued as stand-alone securities. The Ordinary Shares and Warrants are immediately separable and will be issued separately in this offering.(1) | |
| Pre-funded Units offered by us | We are also offering to those purchasers, if any, whose purchase of Units in this offering would otherwise result in the purchaser, together with its affiliates and certain related parties, beneficially owning more than 4.99% of our outstanding Ordinary Shares immediately following the consummation of this offering, Pre-funded Units, each consisting of one Pre-funded Warrant to purchase one Ordinary Share and one Warrant to purchase one Ordinary Share. The Pre-funded Units have no stand-alone rights and will not be certificated or issued as stand-alone securities. The Pre-funded Warrants and Warrants are immediately separable and will be issued separately in this offering. For each Pre-funded Unit we sell, the number of Units we are offering will be decreased on a one-for-one basis. Because we will issue a Warrant as part of each Unit or Pre-funded Unit, the number of Warrants sold in this offering will not change as a result of a change in the mix of the Units and Pre-funded Units sold. | |
| Warrants | Each Warrant will have an exercise price of $6.20 (100% of the public offering price per Unit, based on an assumed public offering price of $6.20 per Unit, the midpoint of the range set forth on the cover page of this prospectus), per Ordinary Share, will be immediately exercisable and will expire five years from the date of issuance. To better understand the terms of the Warrants, you should carefully read the “Description of the Securities We are Offering” section of this prospectus. You should also read the form of Warrant, which is filed as an exhibit to the registration statement of which this prospectus forms a part. The Warrants will be subject to forced exercise commencing six months from issuance subject to the condition that the weighted average price of the Company’s Ordinary Shares exceeds 200% of the initial exercise price for ten consecutive trading days and subject to certain other conditions set forth in the Warrants. | |
| Pre-funded Warrants | Each Pre-funded Warrant will be immediately exercisable at an exercise price of $0.001 per Ordinary Share and may be exercised at any time until exercised in full. To better understand the terms of the Pre-funded Warrants, you should carefully read the “Description of the Securities We are Offering” section of this prospectus. You should also read the form of Pre-funded Warrant, which is filed as an exhibit to the registration statement of which this prospectus forms a part. | |
| Ordinary Shares issued and outstanding prior to the offering(2) | 11,136,850 Ordinary Shares. | |
| Ordinary Shares to be outstanding after this offering(2) | 14,837,656 Ordinary Shares (assuming the conversion of the SAFEs, which we have already entered into, no exercise of the underwriter’s over-allotment option, the exercise of any Pre-Funded Warrants and that none of the Warrants or Underwriter’s Warrants issued in this offering are exercised), or 15,377,656 Ordinary Shares if the underwriter exercises in full its over-allotment option to purchase additional Ordinary Shares. | |
| Over-allotment option | We have granted the underwriter an option for a period of up to 45 days following the date of this prospectus to purchase up to 540,000 additional Ordinary Shares and/or Pre-Funded Warrants, and/or up to an additional 540,000 Warrants, solely to cover over-allotments, if any. The purchase price to be paid per additional Ordinary Share or Pre-Funded Warrant will be equal to the public offering price of one Unit or Pre-Funded Unit (less $0.001 allocated to the Warrants), as applicable, less the underwriting discount, and the purchase price to be paid per additional Warrant will be $0.001. | |
| Underwriter’s Warrants | We will issue to Aegis Capital Corp., the underwriter, or its permitted designees Underwriter’s Warrants to purchase up to 180,000 Ordinary Shares. The Underwriter’s Warrants will have an exercise price of 125% of the per Ordinary Share public offering price, will be exercisable on the date of issuance and will expire five years from the effective date of the registration statement of which this prospectus forms a part. | |
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| Use of proceeds | We expect to receive approximately $18.8 million in net proceeds from the sale of Units offered by us in this offering (approximately $21.9 million if the underwriter exercises its over-allotment option in full), based upon an assumed public offering price of $6.20 per Unit, which is the midpoint of the price range set forth on the cover page of this prospectus, and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.
We currently expect to use the net proceeds from this offering for the following purposes:
● approximately $1.95 million to manufacture the Mudra Band for Apple Watch product, which includes the purchase of components, manufacturing of components, and assembly of the product;
● approximately $2.4 million to market the Mudra Band for Apple Watch and to market additional future consumer products of our B2C product line;
● approximately $3.3 million for the continued research and development of our Mudra technology, including the research and development of the Mudra XR wristband, and additional neural signals architecture, algorithms and User Experience, or UX;
● approximately $2.1 million for sales and support of our B2B customers, and for the integration and licensing our Mudra technology into our B2B customers’ products; and
● the remainder for working capital and general corporate purposes, including an aggregate of approximately $650 thousand payable to certain of our executive officers as bonuses as a result of completion of this offering. | |
| The amounts and schedule of our actual expenditures will depend on multiple factors. As a result, our management will have broad discretion in the application of the net proceeds of this offering. | ||
| Risk factors | Investing in our securities involves a high degree of risk. You should read the “Risk Factors” section starting on page 8 of this prospectus for a discussion of factors to consider carefully before deciding to invest in the Ordinary Shares. | |
| Proposed Nasdaq symbol: | We have applied to list the Ordinary Shares and Warrants to be issued in this offering on Nasdaq under the symbols “WLDS” and “WLDSW,” respectively. |
| (1) | The actual number of Units and Underwriter’s Warrants that we will offer and that will be outstanding after this offering will be determined based on the actual public offering price. |
| (2) | The number of the Ordinary Shares to be outstanding immediately after this offering as shown above assumes that all of the Units offered hereby are sold, and is based on 11,136,850 Ordinary Shares outstanding as of April 4, 2022. This number excludes: |
| ● | 1,162,689 Ordinary Shares issuable upon the exercise of options to directors, employees and consultants under our share incentive plan, outstanding as of April 4, 2022, at a weighted average exercise price of $0.53, of which 723,895 were vested as of April 4, 2022; | |
| ● | 22,205 Ordinary Shares issuable upon the exercise of options to a consultant at an exercise price of $2.25, which are all vested as of April 4, 2022, and additional options that will be granted upon closing of this offering to buy ordinary shares in the amount of $100,000, at an exercise price equal to the price per share in this offering. | |
| ● | 25,202 Ordinary Shares issuable upon the exercise of warrants to be issued in connection with certain equity investment agreements, which we refer to as Simple Agreements for Future Equity, or SAFEs; | |
| ● | 302,011 Ordinary Shares reserved for future issuance under our 2015 Share Option Plan, or the 2015 Plan; and | |
| ● | 671,687 Ordinary Shares issuable upon the exercise of warrants at an exercise price of 125% of the per share price in this offering. |
Unless otherwise indicated, all information in this prospectus assumes or gives effect to:
| ● | 100,806 Ordinary Shares issuable upon the conversion of the SAFEs, for $500 thousand under the SAFEs which we have already entered into, which will automatically convert upon the consummation of this offering (unless the investors choose cash payments equal to the amount of their investments), based on an offering price of $6.20, which is the midpoint of the price range set forth on the cover page of this prospectus. |
But does not assume or give effect to:
| ● | exercise of the underwriter’s over-allotment option; and | |
| ● | exercise of the Warrants or the Underwriter’s Warrants. |
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SUMMARY FINANCIAL DATA
The following table summarizes our financial data. We have derived the following statements of operations data for the years ended December 31, 2021 and 2020, from our audited consolidated financial statements included elsewhere in this prospectus. Our historical results are not necessarily indicative of the results that may be expected in the future. The following summary financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and related notes included elsewhere in this prospectus. Our consolidated financial statements included in this prospectus were prepared in accordance with U.S. GAAP.
| Year Ended December 31, | ||||||||
| U.S. dollars in thousands, except share and per share data | 2021 | 2020 | ||||||
| Revenues | 142 | 57 | ||||||
| Cost of materials | (10 | ) | (9 | ) | ||||
| Research and development expenses, net | (1,411 | ) | (743 | ) | ||||
| Selling and marketing expenses, net | (665 | ) | (287 | ) | ||||
| General and administrative expenses | (628 | ) | (174 | ) | ||||
| Prospective initial public offering expenses | (97 | ) | - | |||||
| Operating loss | (2,669 | ) | (1,156 | ) | ||||
| Finance income (expenses), net | 55 | (102 | ) | |||||
| Comprehensive and net loss | (2,614 | ) | (1,258 | ) | ||||
| Net loss per Ordinary Share, basic and diluted | (0.27 | ) | (0.19 | ) | ||||
| Weighted average number of ordinary shares outstanding basic and diluted | 9,709,590 | 6,459,910 | ||||||
| As of December 31, 2021 | ||||||||
| U.S. dollars in thousands | Actual | Pro
Forma As Adjusted (1) * | ||||||
| Consolidated Balance Sheet Data: | ||||||||
| Cash | 1,274 | 19,937 | ||||||
| Total assets | 1,445 | 20,108 | ||||||
| Accumulated losses | (6,913 | ) | (7,563 | ) | ||||
| Total shareholders’ equity | 807 | 19,470 | ||||||
| * | Unaudited |
| (1) | The pro forma data give effect to the additional issuance of Ordinary Shares as a result of conversion of the SAFEs upon consummation of this offering, and to the additional issuance of Units in this offering at an assumed public offering price of $6.20 per Unit, which is the midpoint of the price range set forth on the cover page of this prospectus, and after deducting underwriting discounts and commissions and estimated offering expenses, as if the sale of the Units had occurred on December 31, 2021. |
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An investment in our securities involves a high degree of risk. You should carefully consider the risks and uncertainties described below and the other information in this prospectus before making an investment in our securities. Our business, financial condition or results of operations could be materially and adversely affected if any of these risks occurs and, as a result, the market price of our securities could decline and you could lose all or part of your investment. This prospectus also contains forward-looking statements that involve risks and uncertainties. See “Cautionary Statement Regarding Forward-Looking Statements.” Our actual results could differ materially and adversely from those anticipated in these forward-looking statements as a result of certain factors.
Risks Related to Our Business
There is no assurance that wrist SNC will be the dominant input method in the wearable computing and consumer electronics industry.
Although we believe that SNC, the technology behind our Mudra gesture recognition system that tracks neural signals in the user’s wrist, will become the industry standard input method for wearable computing and consumer electronics, it is possible that other input methods, such as electroencephalography, electromyography voice or camera gestures—or a new, disruptive sensor based on new or existing technology—will achieve acceptance or dominance in the market. If wearable computing and consumer electronics based on other input methods gain acceptance by the market, consumer electronics companies, consumer electronics brands and consumers in place of or as a substitute to SNC, and we do not sign license and integration agreements to the same extent as we expect, our business, results of operations and financial condition would be adversely affected.
If we are unable to successfully develop and timely introduce new products and services or enhance existing products and services, our business may be adversely affected.
We must continually develop and introduce new products and services and improve and enhance our existing products and services to maintain or increase our sales. The success of new or enhanced products and services may depend on a number of factors, including anticipating and effectively addressing consumer preferences and demand, the success of our sales and marketing efforts, timely and successful research and development, effective forecasting and management of product demand, purchase commitments and inventory levels, effective management of manufacturing and supply costs, and the quality of or defects in our products.
The development of our products and services is a complex and costly process, and we typically have several products and services in development at the same time. Given the complexity, we occasionally have experienced, and could experience in the future, delays in completing the development and introduction of new and enhanced products, product features, and services. Problems in the design or quality of our products or services may also have an adverse effect on our business, financial condition, brand, and operating results. Unanticipated problems in developing products and services could also divert substantial research and development resources, which may impair our ability to develop new products and services and enhancements of existing products and services, and could substantially increase our costs. If new or enhanced product and service introductions are delayed or not successful, we may not be able to achieve an acceptable return, if any, on our research and development efforts, and our business may be adversely affected.
If we are unable to develop and introduce new gesture input functions and improve existing functions in a cost-effective and timely manner, our business, results of operations and financial condition would be adversely affected.
Our business and future operating results will depend on our ability to complete development of existing finger and hand gestures and to develop and introduce new and enhanced gesture functions that incorporate the latest technological advancements in user experience and user interaction, software, algorithms and electrode technologies and to satisfy our customers and consumers. This will require us to invest resources in research and development and also require that we:
| ● | design new innovative, intuitive natural and accurate gestures to suit a large variety of wearable computing devices, operating system platforms and form factors, that differentiate our products from those of our competitors; |
| ● | integrate successfully the hardware and the software into consumer electronics companies’ products; |
| ● | respond effectively to technological changes or product announcements by our competitors; and |
| ● | adjust to changing market conditions and consumer preferences quickly and cost-effectively. |
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If there are delays in or we fail to complete our existing and new development programs, we may not be able to meet the requirements, needs and preferences of our customers and consumers and our results of operations and financial condition would be adversely affected. In addition, we cannot assure you that our investment in research and development will lead to any corresponding revenue, in which case our business, results of operations and financial condition would also be adversely affected.
The failure to effectively manage the introduction of new or enhanced products may adversely affect our operating results.
We must successfully manage introductions of new consumer products or enhanced product features. Introductions of new consumer products could adversely impact the sales of our existing products to consumers. For instance, consumers may decide to purchase new products instead of existing products. Moreover, future consumer electronics customers may decide to integrate enhanced features which do not yet exist in our own consumer products. This could lead to excess inventory and discounting of our existing products. In addition, we anticipate incurring higher levels of sales and marketing expenses accompanying each product introduction. Accordingly, if we fail to effectively manage introductions of new consumer products or enhanced product features, our operating results would be harmed.
We invest effort and money into seeking validation of our technology and products with B2B companies, such as consumer electronics companies and consumer electronics brands, and there can be no assurance that we will enter into license agreements, which could adversely affect our future business, results of operations and financial condition.
We invest effort and money from the time of our initial contact with a B2B company, be it a consumer electronics company or a consumer electronics brand, to the date on which the B2B company chooses to integrate our technology into one or more of its products. The B2B company integrates our products and our proprietary software and hardware into a complete consumer electronics product that it manufactures. Successful validation of our technology will result in a signed commercial license agreement with the B2B company. However, we estimate there will be a three-to-five-year period from the time we are first introduced to such a customer to signing a licensing agreement and as of the date of this prospectus, we have not entered into any licensing agreements. This is a significant amount of time and negotiations may break down during the course of such negotiations. Accordingly, there is a possibility that we could expend our resources without success.
In addition, a B2B company’s current solution, internally developed or integrated with a third-party solution, may have an advantage with the company going forward because of the established trust and relationship between the parties, which could make it more difficult for competitors, like us, to integrate new solutions for other products or product lines. If we fail to sign a significant number of B2B license agreements in the future, our business, results of operations and financial condition would be adversely affected.
The period of time from a license agreement to implementation of our technology is long and we are subject to the risks of cancellation or postponement of the contract or unsuccessful implementation.
Our products are technologically complex, incorporate many technological innovations and are typically intended for use in interface input applications. Prospective consumer electronics customers generally must make significant commitments of resources to test and validate our technology before including it in any particular product device. The development cycles of our products with new consumer electronics customers may take approximately one to three years after an initial agreement is reached, depending on the customer and the complexity of the input solution. These development cycles result in our investment of our resources prior to realization of any revenues. Further, we are subject to the risk that a consumer electronics company cancels or postpones implementation of our technology, as well as that we may not be able to implement our technology successfully. Further, our sales could be less than forecast if the product device is unsuccessful, due to reasons related or unrelated to our technology. Long development cycles and product cancellations or postponements may adversely affect our business, results of operations and financial condition.
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Our current and future products and services may experience quality problems from time to time that can result in adverse publicity, product recalls, litigation, regulatory proceedings, and warranty claims resulting in significant direct or indirect costs, decreased revenue and operating margin, and harm to our brand.
We sell complex products and services that could contain design and manufacturing defects in their materials, hardware, software, and firmware. These defects could include defective materials or components, or “bugs” that can unexpectedly interfere with the products’ intended operations or cause injuries to users. Although we significantly and thoroughly test new and enhanced products and services before their release, there can be no assurance we will be able to detect, prevent, or fix all defects.
Failure to detect, prevent, or fix defects could result in a variety of consequences, including a greater number of returns of products than expected from our customers and consumers, or future retail customers, regulatory proceedings, product recalls, and litigation, which could harm our revenue and operating results. The occurrence of real or perceived quality problems or material defects in our current and future products could expose us to warranty claims. If we experience relatively large returns from our retail customers or our other customers and consumers, our business and operating results could be harmed. In addition, any negative publicity or lawsuits filed against us related to the perceived quality and safety of our products could also affect our brand and decrease demand for our products and services, and adversely affect our operating results and financial condition.
Furthermore, our products are used to monitor our users’ hand bio-potentials activity and to operate control functions on a large variety of digital devices which operate on different users’ wrist physiology and device operating system and model. It may happen that our products do not provide accurate measurements or correctly classify gestures to users, which may result in negative publicity, and, in some cases, may require us to expend time and resources to defend litigation. If our products fail to provide accurate measurements and control functions to users, or if there are reports or claims of inaccurate measurements or claims regarding the overall benefits of our products and services in the future, we may become the subject of negative publicity, litigation, including class action litigation, regulatory proceedings, and warranty claims, and our brand, operating results, and business could be harmed.
We are a growth company with limited operating history. We may never be able to effectuate our business plan or achieve sufficient revenue or reach profitability.
For some aspects of our technology, we are still a growth company, and are subject to all of the risks inherent in the establishment of a new business enterprise. We have a limited operating history and only a preliminary and unproven business plan upon which investors may evaluate our prospects. Although we have produced a working development kit, the Mudra Inspire, we have not mass produced any product planned for global consumers. Even if we are able to do so, we may not be able to manufacture the product at the low costs needed to support our business models. We have not yet entered into any commercial arrangement for the licensing of our technology under a licensing model.
Furthermore, even if our technology becomes commercially viable, our business models may not generate sufficient revenue necessary to support our business. The consumer electronics industry is highly competitive, and our technology, products, services or business models may not achieve widespread market acceptance. If we are unable to address any of the aforementioned issues, or encounter other problems, expenses, difficulties, complications, and delays in connection with the starting and expansion of our business, our entire business may fail.
Our ability to generate revenue from our operations and, ultimately, achieve profitability will depend on, among other things, whether we can complete the development and commercialization of our technology, our ability to integrate and license our technology into consumer electronic devices, our future products and our services, whether we can manufacture products on a commercial scale in such amounts and at such costs as we anticipate, and whether we can achieve market acceptance of our products, services and business models. We may never generate any revenue or operate on a profitable basis. Even if we achieve profitability, we may not be able to sustain it.
If we are unable to anticipate and satisfy consumer preferences in a timely manner, our business may be adversely affected.
Our success depends on our ability to anticipate and satisfy consumer preferences in a timely manner. All of our products are subject to changing consumer preferences that cannot be predicted with certainty. Consumers may decide not to choose our solutions or purchase our products and services as their preferences could shift rapidly to different types of input methods or away from these types of products and services altogether, and our future success depends in part on our ability to anticipate and respond to shifts in consumer preferences. In addition, future products may have higher prices than our current products and the products of some of our competitors, which may not appeal to consumers or only appeal to a smaller subset of consumers. It is also possible that competitors could introduce new products and services that negatively impact consumer preferences for our input method and technology, which could result in decreased sales of our products and services and a loss in market share. Accordingly, if we fail to anticipate and satisfy consumer preferences in a timely manner, our business may be adversely affected.
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If we are unable to successfully comply with Apple’s “Accessory Design Guidelines for Apple Devices”, our business, results of operation and financial condition may be adversely affected.
Our consumer product, the “Mudra Band”, is an aftermarket accessory band for the Apple Watch which allows touchless operation and control of the watch and iPhone. Apple enforces strict guidelines which address the physical design of cases, covers, screen overlays, and camera attachments for Apple devices and specifications for hardware accessories that use Bluetooth to communicate with Apple products including Mac, iPhone, iPad and iPod touch models. All accessories must meet requirements which include, and may not be limited to, compliance testing, integrated USB receptacles, user supplied cables and AC power adapters, attachments, magnetic interference, radio frequency performance, thermal management and tripod connections. In particular, watch bands, such as the Mudra Band, have to meet certain requirements with respect to lugs, magnetic chargers, band sizes and dimensions, band material, and environmental regulations. Accessories have to also comply with Bluetooth accessory identification, accessory power (lighting), app discovery, device power, power and communications protocols, Bluetooth, Bluetooth low energy and connectors.
Apple reserves the right to change specifications and the terms and conditions at its sole consideration, and, therefore, we may be required to change the Mudra Band specifications to comply with future Apple change requirements. Our company is investing significant resources to ensure that the Mudra Band is compatible with all the relevant guidelines. Therefore, a significant change in the Apple guidelines may cause our business, results of operations and financial condition to be adversely affected.
We rely on a limited number of suppliers, contract manufacturers, and logistics providers, and each of our products is manufactured by a single contract manufacturer.
We rely on a limited number of suppliers, contract manufacturers, and logistics providers. In particular, we use contract manufacturers located in Asia and Israel, and each of our products’ sub-components are manufactured by a different single contract manufacturer. Our reliance on single contract manufacturers for each of our products’ components increases our risks since we do not currently have any alternative or replacement manufacturers. In the event of an interruption from a contract manufacturer, we may not be able to develop alternate or secondary sources without incurring material additional costs and substantial delays. While component shortages have historically been immaterial, they could be material in the future. Furthermore, these risks could materially and adversely affect our business if one of our contract manufacturers is impacted by a natural disaster or other interruption at a particular location because each of our contract manufacturers produces our product’s components in a single location. In addition, some of our suppliers, contract manufacturers, and logistics providers may have more established relationships with our competitors and potential competitors, and as a result of such relationships, such suppliers, contract manufacturers, and logistics providers may choose to limit or terminate their relationship with us.
If we experience significantly increased demand, or if we need to replace an existing supplier, contract manufacturer, or logistics provider, we may be unable to supplement or replace such supply, contract manufacturing, or logistics capacity on terms that are acceptable to us, which may undermine our ability to deliver our products to customers in a timely manner. For example, for certain of our products, it may take a significant amount of time to identify a contract manufacturer that has the capability and resources to build the product to our specifications in sufficient volume. Identifying suitable suppliers, contract manufacturers, and logistics providers is an extensive process that requires us to become satisfied with their quality control, technical capabilities, responsiveness and service, financial stability, regulatory compliance, and labor and other ethical practices. Accordingly, a loss of any key supplier, contract manufacturer, or logistics provider could adversely impact our revenue and operating results.
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Because many of the key components in our products come from limited or sole sources of supply, we are susceptible to supply shortages, long lead times for components, and supply changes, any of which could disrupt our supply chain.
Many of the key components used to manufacture our products come from limited or sole sources of supply. Our contract manufacturers generally purchase these components on our behalf, subject to certain approved supplier lists, and we do not have any long-term arrangements with our suppliers. We are therefore subject to the risk of shortages and long lead times in the supply of these components and the risk that our suppliers discontinue or modify components used in our products. In addition, the lead times associated with certain components are lengthy and preclude rapid changes in quantities and delivery schedules. We have in the past experienced and may in the future experience component shortages, and the predictability of the availability of these components may be limited. While component shortages have historically been immaterial, they could be material in the future. In the event of a component shortage or supply interruption from suppliers of these components, we may not be able to develop alternate sources in a timely manner. Developing alternate sources of supply for these components may be time-consuming, difficult, and costly and we may not be able to source these components on terms that are acceptable to us, or at all, which may undermine our ability to meet our requirements or to fill our orders in a timely manner. Any interruption or delay in the supply of any of these parts or components, or the inability to obtain these parts or components from alternate sources at acceptable prices and within a reasonable amount of time, would harm our ability to meet our scheduled product deliveries to our customers and users. This could harm our relationships with our channel partners and users and could cause delays in shipment of our products and adversely affect our operating results. In addition, increased component costs could result in lower gross margins. If we are unable to buy these components in quantities sufficient to meet our requirements on a timely basis, we will not be able to deliver products and services to our customers and users.
We have limited control over our suppliers, contract manufacturers, and logistics providers, which subjects us to significant risks, including the potential inability to obtain or produce quality products on a timely basis or in sufficient quantity.
We have limited control over our suppliers, contract manufacturers, and logistics providers, including aspects of their specific manufacturing processes and their labor, environmental, or other practices, which subjects us to significant risks, including the following:
| ● | inability to satisfy demand for our products; |
| ● | reduced control over delivery timing and product reliability; |
| ● | reduced ability to oversee the manufacturing process and components used in our products; |
| ● | reduced ability to monitor compliance with our product manufacturing specifications; |
| ● | reduced ability to develop comprehensive manufacturing specifications that take into account materials shortages, materials substitutions, and variance in the manufacturing capabilities of our third-party contract manufacturers; |
| ● | price increases; |
| ● | the failure of a key supplier, contract manufacturer, or logistics provider to perform its obligations to us for technical, market, or other reasons; |
| ● | difficulties in establishing additional contract manufacturing relationships if we experience difficulties with our existing contract manufacturers; |
| ● | shortages of materials or components; |
| ● | misappropriation of our intellectual property; |
| ● | exposure to natural catastrophes, political unrest, terrorism, labor disputes, and economic instability resulting in the disruption of trade from foreign countries in which our products are manufactured; |
| ● | changes in local economic conditions in countries where our suppliers, contract manufacturers, or logistics providers are located; |
| ● | the imposition of new laws and regulations, including those relating to labor conditions, quality and safety standards, imports, duties, taxes, and other charges on imports, as well as trade restrictions and restrictions on currency exchange or the transfer of funds; and |
| ● | insufficient warranties and indemnities on components supplied to our contract manufacturers. |
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Our future success depends on the continuing efforts of our key employees, including our founders, Asher Dahan, Guy Wagner and Leeor Langer, and on our ability to attract and retain highly skilled personnel and senior management.
Our future success depends, in part, on our ability to continue to attract and retain highly skilled personnel. In particular, we are highly dependent on the contributions of our co-founders, Asher Dahan, Guy Wagner and Leeor Langer, as well as other members of our management team. The loss of any key personnel could make it difficult to manage our operations and research and development activities, reduce our employee retention and revenue, and impair our ability to compete. Although we have entered into employment agreements with our key personnel, these agreements have no specific duration and provide for at-will employment, which means they may terminate their employment relationship with us at any time.
Competition for highly skilled personnel is often intense, especially in Israel where we are located, and we may incur significant costs to attract them. We may not be successful in attracting, integrating, or retaining qualified personnel to fulfill our current or future needs. We have, from time to time, experienced, and we expect to continue to experience, difficulty in hiring and retaining highly skilled employees with appropriate qualifications. In addition, job candidates and existing employees often consider the value of the equity awards they receive in connection with their employment. If the perceived value of our equity or equity awards declines, it may adversely affect our ability to retain highly skilled employees. If we fail to attract new personnel or fail to retain and motivate our current personnel, our business and future growth prospects could be severely harmed.
We collect, store, process, and use personal information and other customer data, which subjects us to governmental regulation and other legal obligations related to privacy, information security, and data protection, and our actual or perceived failure to comply with such obligations could harm our business.
We collect, store, process, and use personal information and other user data, and we rely on third parties that are not directly under our control to do so as well. Our users’ neural finger and hand signals and movement-related data and other personal information may include, but is not limited to, names, addresses, phone numbers, email addresses, payment account information, wrist size and circumference, and biometric information such as neural signals, hand movement rotation and acceleration, GPS-based location, and hand activity patterns. Due to the volume and sensitivity of the personal information and data we manage and the nature of our products, the security features of our platform and information systems are critical. If our security measures, some of which are managed by third parties, are breached or fail, unauthorized persons may be able to obtain access to sensitive user data. If we or our third-party service providers, business partners, or third-party apps with which our users choose to share their data were to experience a breach of systems compromising our users’ sensitive data, use of our products and services could decrease, our brand and reputation could be adversely affected, and we could be exposed to a risk of loss, litigation, and regulatory proceedings. Depending on the nature of the information compromised, in the event of a data breach or other unauthorized access to our user data, we may also have obligations to notify users about the incident and we may need to provide some form of remedy for the individuals affected by the incident. A growing number of legislative and regulatory bodies have adopted consumer notification requirements in the event of unauthorized access to or acquisition of certain types of personal data. Such breach notification laws continue to evolve and may be inconsistent from one jurisdiction to another. Complying with these obligations could cause us to incur substantial costs and could increase negative publicity surrounding any incident that compromises user data. Our users may also accidentally disclose or lose control of their passwords, creating the perception that our systems are not secure against third-party access. Additionally, if third parties we work with, such as vendors, developers, or consumer electronics customers who licensed our technology, violate applicable laws, agreements, or our policies, such violations may also put our users’ information at risk and could in turn have an adverse effect on our business.
We rely on third-party application stores to distribute our mobile application.
We are dependent on third-party application stores that may prevent us from timely updating our applications, building new features, integrations, capabilities and enhancements or charging for access.
We distribute the mobile Mudra Inspire, Mudra Band application, and other future applications, through smartphone and tablet application stores managed by Apple and Google, among others. We cannot assure you that the third-party application stores through which we distribute our mobile applications will maintain their current structures or that such application stores will not charge us fees to list our application for download. We are also depending on these third-party application stores to enable us and our users to timely update our mobile applications and to incorporate new features, integrations, capabilities and enhancements. In addition, certain of these companies are now, and others may in the future become, competitors of ours and could stop allowing or supporting access to our platform through their products, could allow access for us only at an unsustainable cost, or could make changes to the terms of access in order to make our platform less desirable or harder to access, in each case for competitive reasons.
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Our management team has limited experience managing a public company.
Most members of our management team have limited experience managing a publicly-traded company, interacting with public company investors, and complying with the increasingly complex laws pertaining to public companies. Our management team may not successfully or efficiently manage our transition to being a public company subject to significant regulatory oversight and reporting obligations under the federal securities laws and the continuous scrutiny of securities analysts and investors. These new obligations and constituents will require significant attention from our senior management and could divert their attention away from the day-to-day management of our business, which could adversely affect our business, financial condition, and operating results.
If we experience a period of significant growth or expansion, it could place a substantial strain on our resources, and we may be unable to execute our business plan or maintain high levels of service and customer satisfaction.
We may experience rapid growth, which will place significant demands on our management and our operational and financial resources. We may also experience significant growth in the number of customers and organizations using our products, and in the amount of data that we collect and process. Additionally, our organizational structure and our operations may become more complex, requiring us to scale our operational, financial and management controls as well as our reporting systems and procedures.
As we continue to grow our business, we will face challenges in integrating, developing, training and motivating a growing employee base and maintaining our company culture. Moreover, our potential continued growth will require significant capital expenditures and the allocation of valuable management resources. Our growth could place a significant strain on our management, customer experience, research and development, sales and marketing, and other resources. In addition, as we expand our business and our customer base continues to grow, it is important that we continue to maintain a high level of customer service and satisfaction. As such, we will need to expand our account management, our customer service and other personnel so we can continue providing personalized account management and customer service as well as personalized features, integrations, capabilities and enhancements. If we fail to manage our growth in a manner that preserves high levels of customer service and the key aspects of our corporate culture, the quality of our products and services may suffer, which could negatively affect our reputation and harm our ability to attract employees, users and organizations.
We have recently begun to spend significant amounts on advertising and other marketing campaigns to acquire new users, and we expect to increase these advertising and marketing efforts after this offering, which may not be successful or cost effective.
We have recently begun to spend significant amounts on advertising and other marketing campaigns, such as online advertising and social media, to acquire new users and we expect our marketing expenses to increase in the future as we continue to spend significant amounts to acquire new users and increase awareness of our products and services. We expect to increase advertising and marketing efforts after this offering. While we seek to structure our advertising campaigns in the manner that we believe is most likely to encourage people to use our products and services, we may fail to identify advertising opportunities that satisfy our anticipated return on advertising spend as we scale our investments in marketing, accurately predict user acquisition, or fully understand or estimate the conditions and behaviors that drive user behavior. If for any reason any of our advertising campaigns prove less successful and/or cost effective than anticipated in attracting new users, we may not be able to recover our advertising spend, and our rate of user acquisition may fail to meet market expectations, either of which could have an adverse effect on our business. There can be no assurance that our advertising and other marketing efforts will result in increased sales of our products and services.
We depend on third-party data center service providers. Any disruption in the operation of the data center facilities or failure to renew the services could adversely affect our business.
Our services are hosted using data centers operated by third parties. We control neither the operation of the data centers nor our third-party data center service providers. The third-party data center service providers may have no obligation to renew their services with us on commercially reasonable terms, or at all. If we are unable to renew these services on commercially reasonable terms, we may be required to transfer our servers or data to new data center facilities or engage new service providers, and we may incur significant costs and a possible interruption in our platform in connection with doing so.
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Problems with our third-party data center service providers, the telecommunications network providers with whom they contract, or with the systems by which telecommunications providers allocate capacity among their users could adversely affect the experience of our users. Our third-party data center service providers could decide to close their facilities or cease to provide us services without adequate notice. In addition, any financial difficulties, such as bankruptcy, faced by our third-party data center service providers or parties they contract with may have negative effects on our business, the nature and extent of which are difficult to predict. Additionally, any failure of our data centers to meet our needs for capacity could have an adverse effect on our business. Any changes in third-party service levels at our data centers or any errors, defects, disruptions, or other performance problems with our platform could harm our brand and may damage the data of our users. Outages at our data centers, and future interruptions to our platform, might reduce our revenue, cause us to issue refunds, subject us to potential liability, or harm our ability to retain users and attract new customers.
Disruptions to our Information Technology, or IT, system may disrupt our operations and materially adversely affect our business and results of operations.
We depend on our IT systems, as well as those of third parties, to develop new products and services, operate our websites, host and manage our services, store data, process transactions, respond to user inquiries, and manage inventory and our supply chain. Our servers and equipment may be subject to cyber-security crimes, ransom hijacking, computer viruses, break-ins and similar disruptions from unauthorized tampering with computer systems. We can provide no assurance that our current IT system are fully protected against third-party intrusions, viruses, hacker attacks, information or data theft or other similar threats. A cyber-attack that bypasses our IT security systems causing an IT security breach may lead to a material disruption of our IT business systems and/or the loss of business information. Any such event could have a material adverse effect on our business until we recover using our back-up information. To the extent that such disruptions or uncertainties result in delays or cancellations of customer programs or misappropriation or release of our confidential data or our intellectual property, our business and results of operations could be materially and adversely affected.
Our business is subject to data security risks, and our data security measures may be inadequate to address these risks, making our systems susceptible to compromise, which could materially adversely affect our business, financial condition, results of operations, and prospects.
During the ordinary course of our business, we may collect, process, store and transmit substantial amounts of data and information, including users’ data. We have implemented measures to separate the data stored in our internet data centers and those stored with the third-party vendors. Security incidents may occur in the future, causing unauthorized access to, loss of, or unauthorized disclosure of such information, resulting in regulatory enforcement actions, litigation, indemnification obligations, and other potential liabilities, as well as negative publicity, which could materially adversely affect our business, reputation, financial condition, results of operations, and prospects. Cyberattacks, computer malware, and other compromises of information security measures or malicious internet-based activity continue to increase, and cloud-native platform providers of products and services have been targeted, resulting in breaches of their information security, and are expected to continue to be targeted. We and our third-party vendors are at risk of suffering from similar attacks and breaches.
Our products may also be subject to fraudulent usage and schemes, including third parties accessing customer accounts or viewing data from our platform without our authorization. While we undertake significant efforts to protect the security and integrity of the information we collect, process, store, and transmit, we cannot entirely mitigate these risks, and there is no guarantee that inadvertent or unauthorized use or disclosure of such information will not occur or that third-parties will not gain unauthorized access to such information despite our efforts. In addition, we rely on our third-party vendors to take appropriate measures to protect the security and integrity of the information on their information systems. We may not be able to anticipate or prevent all techniques that could be used to obtain unauthorized access or to compromise our systems because such techniques change frequently and are generally not detected until after an incident has occurred. Additionally, we cannot be certain that we will be able to address any vulnerabilities in our software that we may become aware of in the future. We expect similar issues to arise in the future as we continue to expand the features and functionality of our products and platform and introduce new products, and we expect to expend significant resources in an effort to protect against security incidents. In addition, any actual or suspected cybersecurity incident or other compromise of our security measures, or those of our third-party vendors, whether as a result of hacking efforts, denial-of-service attacks, viruses, malicious software, break-ins, phishing attacks, social engineering, or otherwise, could result in governmental investigations or enforcement actions, litigation, harm to our business, damage to our brand and reputation, significant costs for remediating the effects of such an incident and preventing future incidents, lost revenue due to network downtime, and a decrease in customer and user trust. Concerns regarding privacy, data protection, and information security may also cause some of our customers to stop using our products and platform and decline to renew their subscriptions, and make it harder to acquire new customers. To the extent we do not effectively address these risks, our business, financial condition, results of operations, and prospects could be materially adversely affected.
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Many governments have enacted laws requiring companies to provide notice of data security incidents involving certain types of personal data. We are also contractually required to notify certain customers of certain data security breaches. To protect customers’ information, we have adopted multiple security measures that address security risks associated with data transmission, usage, storage, export and presentation. We have adopted an access control policy that requires user authentication every time there is a request to access non-public data. In addition, we have implemented an encryption program that encrypts the sensitive and confidential information stored by us. Despite our efforts, security incidents experienced by us, or by others, such as our competitors or customers, may lead to public disclosures and widespread negative publicity for us, our customers, or the construction software industry generally.
Regulatory requirements regarding the protection of personal information are constantly evolving and can be subject to differing interpretations, making the extent of our responsibilities in that regard uncertain. We currently adopt a data privacy policy with respect to how we collect, store, process and use user data and information, and we may only use such data and information to provide and improve our services, content and advertising in strict compliance with such policy. Despite the absence of any material data breach or similar incidents and our continuous efforts to comply with our privacy policy as well as all applicable laws and regulations, any failure or perceived failure to comply with these laws, regulations or policy may result in inquiries and other proceedings or actions against us by governmental authorities or others, which could cause us to lose users and business partners.
There can be no assurance that any limitations of liability provisions in our subscriptions with customers would be enforceable or adequate or would otherwise protect us from any such liabilities or damages with respect to any particular claim. The successful assertion of one or more large claims against us could materially adversely affect our business, financial condition, results of operations, and prospects.
Risks Related to the Industry in Which We Operate
The forecasts of market growth included in this prospectus may prove to be inaccurate, and even if the markets in which we compete achieve the forecasted growth, we cannot assure you our business will grow at similar rates, if at all.
Growth forecasts are subject to significant uncertainty and are based on assumptions and estimates that may not prove to be accurate. The forecasts in this prospectus relating to the expected growth in the market for wearable computing devices, wearable devices, and consumer electronics industry may prove to be inaccurate. Even if these markets experience the forecasted growth described in this prospectus, we may not grow our business at similar rates, or at all. Our growth is subject to many factors, including our success in implementing our business strategy, which is subject to many risks and uncertainties. Accordingly, the forecasts of market growth included in this prospectus should not be taken as indicative of our future growth.
The market for wearable computing devices is still in the early stages of growth and if it does not continue to grow, grows more slowly than we expect, or fails to grow as large as we expect, our business and operating results would be harmed.
The market for wearable computing devices is relatively new and unproven, and it is uncertain whether wearable devices and wearable computers will sustain high levels of demand and wide market acceptance. Our success will depend to a substantial extent on the willingness of people to widely adopt these products and services. In part, adoption of our products and services will depend on the increasing prevalence of connected wearable computing devices as well as new entrants to the wearable computing device market to raise the profile of both the market as a whole and our own platform. Our input technology devices have largely been used to control the Apple Watch and explore input methods for wearable computers and consumer electronics. However, they have not been widely adopted for other consumer electronics devices such as AR glasses, VR headsets, and large displays for which other products are more often used. Furthermore, some individuals may be reluctant or unwilling to use wearable input devices because they have concerns regarding the risks associated with data privacy, security, accuracy and comfortability. If the wider public does not perceive the benefits of our neural input devices or chooses not to adopt them as a result of concerns regarding privacy, data security, accuracy, comfortability, or for other reasons, then the market for these products and services may not further develop, it may develop more slowly than we expect, or it may not achieve the growth potential we expect it to, any of which would adversely affect our operating results. The development and growth of this relatively new market may also prove to be a short-term trend.
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The COVID-19 pandemic could harm our business and results of operations.
In light of the uncertain and rapidly evolving situation relating to the spread of COVID-19, as well as government mandates, we implemented a hybrid work model, which combines office and remote work. We continue to monitor the situation and may adjust our current policies as more information and public health guidance becomes available. We may temporarily suspend travel and doing business in person or other measures that may negatively affect our customer success efforts, sales and marketing efforts, challenge our ability to enter into customer contracts in a timely manner, slow down our recruiting efforts, or create operational or other challenges, any of which could harm our business and results of operations.
In addition, COVID-19 has disrupted and may continue to disrupt the operations of our customers for an indefinite period of time, including as a result of travel restrictions and/or business shutdowns, all of which could negatively impact our business and results of operations. More generally, the COVID-19 pandemic has adversely affected economies and financial markets globally, leading to an economic downturn, which could decrease technology spending and adversely affect demand for our products and harm our business and results of operations. The increase in remote working may increase exposure vulnerabilities, resulting in privacy, data protection, data security and fraud risks, and our understanding of applicable legal and regulatory requirements, as well as the latest guidance from regulatory authorities in connection with the COVID-19 pandemic, may be subject to legal or regulatory challenge, particularly as regulatory guidance evolves in response to future developments.
To date, the main impact from COVID-19 on us has been on our B2B engagements. Due to the economic uncertainty, consumer electronics companies and consumer electronics brands halted new product releases. Additionally, it was more challenging for us to identify new B2B customers as many in-person conventions, tradeshows and conferences were cancelled. Therefore, COVID-19 prevented us from advancing with existing customers and acquiring new B2B customers.
COVID-19 has also impacted our manufacturing and production. Due to COVID-19, procurement of components has resulted in longer lead times and components shortages, with higher prices than before COVID-19. Manufacturing cycles are now longer. Additionally, our inability to be physically present in the manufacturing sites has resulted in longer communication and iteration cycles. We also witnessed an increase in shipment costs and longer shipment times.
While the duration and extent of the COVID-19 pandemic depends on future developments that cannot be accurately predicted at this time, such as the extent and effectiveness of containment and mitigation actions, including restrictions on economic activity and the continued rollout of an efficient worldwide vaccination campaign, it has already had an adverse effect on the global economy, and the ultimate societal and economic impact of the COVID-19 pandemic remains unknown. While we have developed and expect to continue to develop plans to help mitigate the potential negative impact of COVID-19, these efforts may not be effective, and any protracted economic downturn will likely limit the effectiveness of our efforts. Accordingly, it is not possible at this time to estimate the long-term impact that COVID-19 could have on our business, as the impact will depend on future developments, which are highly uncertain and cannot be predicted.
We operate in a highly competitive market. If we do not compete effectively, our prospects, operating results, and financial condition could be adversely affected.
The market of input methods and peripheral devices for digital computers is highly competitive, with companies offering a variety of competitive products and services. We plan to develop and offer additional consumer electronics products for controlling and interacting with computers and digital devices. Additional consumer offerings will include applications for a variety of devices which will add value to the consumer beyond hardware functions. However, if we are unable to successfully develop additional consumer products, our results of operation may suffer. We expect competition in our market to intensify in the future as new and existing competitors introduce new or enhanced products and services that are potentially more competitive than our products and services. The digital devices input methods market has a multitude of participants, including specialized consumer electronics companies, such as Apple Inc., or Apple, Facebook, Inc., or Facebook, and Google LLC, and traditional peripheral and input solutions companies, such as Microsoft Corporation, Logitech International S.A. and Razer. In addition, many large, broad-based consumer electronics companies either compete in our market or adjacent markets or have announced plans to do so, including Apple and Facebook. For example, in December 2021, Apple released the Apple Watch AssistiveTouch capability to users for controlling the Apple Watch, with gesture recognition functionalities that do not require any additional sensors. We also compete with a wide range of after-market periphery-related input devices that can be purchased in retail and online stores from a multitude of manufacturers. We believe that many of our competitors and potential competitors have significant competitive advantages, including longer operating histories, ability to leverage their sales efforts and marketing expenditures across a broader portfolio of products and services, larger and broader customer bases, more established relationships with a larger number of suppliers, contract manufacturers, and channel partners, greater brand recognition, ability to leverage app stores which they may operate, and greater financial, research and development, marketing, distribution, and other resources than we do. Our competitors and potential competitors may also be able to develop products or services that are equal or superior to ours, achieve greater market acceptance of their products and services, and increase sales by utilizing different distribution channels than we do. Some of our competitors may aggressively discount their products and services in order to gain market share, which could result in pricing pressures, reduced profit margins, lost market share, or a failure to grow market share for us. If we are not able to compete effectively against our current or potential competitors, our prospects, operating results, and financial condition could be adversely affected.
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An economic downturn or economic uncertainty may adversely affect consumer discretionary spending and demand for our products and services.
Our products and services may be considered discretionary items for consumers. Factors affecting the level of consumer spending for such discretionary items include general economic conditions, and other factors, such as consumer confidence in future economic conditions, fears of recession, the availability and cost of consumer credit, levels of unemployment, and tax rates. As global economic conditions continue to be volatile or economic uncertainty remains, trends in consumer discretionary spending also remain unpredictable and subject to reductions. Unfavorable economic conditions may lead consumers to delay or reduce purchases of our products and services and consumer demand for our products and services may not grow as we expect. Our sensitivity to economic cycles and any related fluctuation in consumer demand for our products and services may have an adverse effect on our operating results and financial condition.
Changes in laws and regulations related to the internet or changes in the internet infrastructure itself may diminish the demand for our services and have a negative impact on our business.
The future success of our business depends upon the continued use of the internet as a primary medium for commerce, communication and business solutions. We may be required to comply with laws or regulations regarding the use of the internet in foreign jurisdictions, such as the General Data Protection Regulation in the European Union, or the GDPR, and the California Consumer Privacy Act in the United States. Changes in these laws or regulations could require us to modify our products in order to comply with these changes. While we have implemented measures to promote compliance with applicable laws and regulations and track their developments, we cannot assure you that we will always be in compliance. In addition, the modification of our products to ensure compliance can be time-consuming, if not technically impossible. If we are unable to comply with these laws and regulations, or if we cannot modify our products in a timely fashion, our reputation, business, results of operations and financial condition could be materially adversely affected.
In addition, government agencies may begin to impose taxes, fees or other charges for accessing the internet. These laws and changes could limit the growth of internet-related commerce or communications generally and reduce the demand for internet-based services such as ours. As our suppliers also carry out their services on the internet, such measures could increase our operating costs and we may not be able to maintain our competitive pricing as compared to the legacy software. These effects combined could adversely affect our business, results of operations and financial condition.
In addition, use of the internet as a business tool could be adversely affected. The performance of the internet and its acceptance as a business tool has been adversely affected by “viruses,” “worms” and similar malicious programs and the internet has experienced a variety of outages and other delays as a result of damage to portions of its infrastructure. If the use of the internet is adversely affected by these issues, demand for our services could suffer.
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Our business is subject to a variety of U.S. and international laws and regulations, including those regarding privacy, cybersecurity and data protection. Any failure of our platform to comply with applicable laws and regulations could harm our business, operating results and financial condition.
Our operations may from time to time involve cross-border transfer of data, which may subject us and our customers that use our products to privacy, cybersecurity and data protection-related laws and regulations that impose obligations in connection with the collection, processing and use of personal data, financial data, health or other similar data and general cybersecurity. Multiple jurisdictions have adopted or proposed limitations on, or requirements regarding, the collection, distribution, use, security and storage of information, including personally identifiable information of individuals.
In the United States, the U.S. Federal Trade Commission and numerous state attorneys general are applying federal and state consumer protection laws to impose standards on the online collection, use and dissemination of data, and to the security measures applied to such data. We continue to see increased regulation of privacy cybersecurity and data protection, including the adoption of more stringent subject matter specific state laws in the United States. For example, in 2018, California enacted the CCPA, which took effect on January 1, 2020. The CCPA gives California residents expanded rights to access and delete their personal information, opt out of certain personal information sharing, and receive detailed information about how their personal information is used. The CCPA provides for civil penalties for violations, as well as a private right of action for data breaches that is expected to increase data breach litigation. The CCPA may increase our compliance costs and potential liability, and we may be required to modify our practices and take additional steps in an effort to comply with the CCPA. Some observers have noted that the CCPA could mark the beginning of a trend toward more stringent state privacy legislation in the United States, which could increase our potential liability and adversely affect our business.
Similarly, many other countries and governmental bodies, including the EU member states, have laws and regulations concerning the collection and use of personal data obtained from individuals located in the EU or by businesses operating within their jurisdiction, which are often more restrictive than those in the United States. Laws and regulations in these jurisdictions apply broadly to the collection, use, storage, disclosure and security of personal data that identifies or may be used to identify an individual, such as names, telephone numbers, email addresses and, in certain circumstances, IP addresses and other online identifiers. For example, the EU has adopted the GDPR, which took full effect on May 25, 2018. The GDPR enhances data protection obligations for businesses and requires service providers (data processors) processing personal data on behalf of customers to cooperate with European data protection authorities, implement security measures and keep records of personal data processing activities. Noncompliance with the GDPR can trigger fines equal to or greater of €20 million or 4% of global annual revenues. Given the breadth and depth of its obligations, working to meet the requirements of the GDPR has required significant time and resources, including a review of our technology and systems currently in use against the requirements of the GDPR. There are also additional EU laws and regulations (and member states implementations thereof) which govern the protection of consumers and of electronic communications. We have taken measures to address certain obligations under the GDPR and to make us GDPR compliant, but we may be required to take additional steps in order to comply with the GDPR. If our efforts to comply with GDPR or other applicable EU laws and regulations are not successful, we may be subject to penalties and fines that would adversely impact our business and operating results, and our ability to conduct business in the EU could be significantly impaired.
We also continue to see jurisdictions imposing data localization laws, which require personal information, or certain subcategories of personal information to be stored in the jurisdiction of origin. These regulations may inhibit our ability to expand into those markets or prohibit us from continuing to offer services in those markets without significant additional costs.
Additionally, although we endeavor to have our products and platform comply with applicable laws and regulations, these and other obligations may be modified, they may be interpreted and applied in an inconsistent manner from one jurisdiction to another, and they may conflict with one another, other regulatory requirements, contractual commitments or our practices. We expect that there will continue to be new proposed laws, rules of self-regulatory bodies, regulations and industry standards concerning privacy, data protection and information security in the United States, the EU and other jurisdictions, and we cannot yet determine the impact such future laws, rules, regulations and standards may have on our business. The uncertainty and changes in the requirements of multiple jurisdictions may increase the cost of compliance, delay or reduce demand for our services, restrict our ability to offer services in certain locations, impact our customers’ ability to deploy our products and solutions in certain jurisdictions, or subject us to claims and litigation from private actors and investigations, proceedings, and sanctions by data protection regulators, all of which could harm our business, financial condition and operating results.
We also may be bound by contractual obligations relating to our collection, use and disclosure of personal, financial and other data or may find it necessary or desirable to join industry or other self-regulatory bodies or other privacy, cybersecurity or data protection-related organizations that require compliance with their rules pertaining to privacy and data protection.
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Any failure or perceived failure by us, our products or our platform to comply with new or existing U.S., EU or other foreign privacy, cybersecurity or data protection laws, regulations, policies, industry standards or legal obligations, any failure to bind our suppliers and contractors to appropriate agreements or to manage their practices or any systems failure or security incident that results in the unauthorized access to, or acquisition, release or transfer of, personally identifiable information or other data relating to customers or individuals may result in governmental investigations, inquiries, enforcement actions and prosecutions, private claims and litigation, fines and penalties, adverse publicity or potential loss of business.
Our business is subject to the risk of earthquakes, fire, power outages, floods, and other catastrophic events, and to interruption by manmade problems such as terrorism.
In addition to and as evidenced by the COVID-19 global pandemic, our business is vulnerable to damage or interruption from earthquakes, fires, floods, power losses, telecommunications failures, terrorist attacks, acts of war, human errors, break-ins, and similar events. The third-party systems and operations and contract manufacturers we rely on, such as the data centers we lease, are subject to similar risks. For example, a significant natural disaster, such as an earthquake, fire, or flood, could have an adverse effect on our business, operating results, and financial condition, and our insurance coverage may be insufficient to compensate us for losses that may occur. Our corporate offices are located in Israel, a state that frequently experiences terrorist attacks and acts of war. In addition, the facilities at which our contract manufacturers manufacture our products are located in parts of Asia that frequently endure typhoons and earthquakes. Acts of terrorism, which may be targeted at metropolitan areas that have higher population density than rural areas, could also cause disruptions in our or our suppliers’, contract manufacturers’, and logistics providers’ businesses or the economy as a whole. Our servers may also be vulnerable to computer viruses, break-ins, denial-of-service attacks, and similar disruptions from unauthorized tampering with our computer systems, which could lead to interruptions, delays, and loss of critical data. We may not have sufficient protection or recovery plans in some circumstances, such as natural disasters affecting Israel or other locations where we have data centers or store significant inventory of our products. As we rely heavily on our data center facilities, computer and communications systems, and the Internet to conduct our business and provide high-quality customer service, these disruptions could negatively impact our ability to run our business and either directly or indirectly disrupt suppliers’ businesses, which could have an adverse effect on our business, operating results, and financial condition.
Regulations related to conflict minerals may cause us to incur additional expenses and could limit the supply and increase the costs of certain metals used in the manufacturing of our products.
As a public company, we will be subject to requirements under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, which will require us to conduct due diligence on and disclose whether or not our products contain conflict minerals. The implementation of these requirements could adversely affect the sourcing, availability, and pricing of the materials used in the manufacture of components used in our products. In addition, we will incur additional costs to comply with the disclosure requirements, including costs related to conducting diligence procedures to determine the sources of minerals that may be used or necessary to the production of our products and, if applicable, potential changes to products, processes, or sources of supply as a consequence of such due diligence activities. It is also possible that we may face reputational harm if we determine that certain of our products contain minerals not determined to be conflict free or if we are unable to alter our products, processes, or sources of supply to avoid such materials.
Risks Related to Our Financial Condition and Operations
Our quarterly operating results or other operating metrics may fluctuate significantly, which could cause the trading price of our securities to decline.
Our quarterly operating results and other operating metrics have fluctuated in the past and may continue to fluctuate from quarter to quarter. We expect that this trend will continue as a result of a number of factors, many of which are outside of our control and may be difficult to predict, including:
| ● | the level of demand for our neural input devices and our ability to maintain or increase the size and engagement of our users; |
| ● | the demand and volume of our licensing agreements with third-party companies such as computer electronics manufacturers; |
| ● | the continued market acceptance of, and the growth of the market for, neural input technology for wearable computing devices; |
| ● | the timing and success of new product and service introductions by us or our competitors or any other change in the competitive landscape of our market; |
| ● | pricing pressure as a result of competition or otherwise; |
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| ● | delays or disruptions in our supply, manufacturing, or distribution chain; |
| ● | errors in our forecasting of the demand for our products, which could lead to lower revenue or increased costs, or both; |
| ● | the mix of products sold in a quarter; |
| ● | seasonal buying patterns of consumers; |
| ● | increases in and timing of sales and marketing and other operating expenses that we may incur to grow and expand our operations and to remain competitive; |
| ● | insolvency, credit, or other difficulties confronting our suppliers, contract manufacturers, or logistics providers leading to disruptions in our supply or distribution chain; |
| ● | levels of product returns, stock rotation, and price protection rights; |
| ● | adverse litigation judgments, settlements, or other litigation-related costs; |
| ● | changes in the legislative or regulatory environment, such as with respect to privacy, information security, consumer product safety, and advertising; |
| ● | product recalls, regulatory proceedings, or other adverse publicity about our products; |
| ● | fluctuations in foreign exchange rates; |
| ● | costs related to the acquisition of businesses, talent, technologies, or intellectual property, including potentially significant amortization costs and possible write-downs; and |
| ● | general economic conditions in either domestic or international markets. |
Any one of the factors above or the cumulative effect of some of the factors above may result in significant fluctuations in our operating results.
The variability and unpredictability of our quarterly operating results or other operating metrics could result in our failure to meet our expectations or those of any analysts that cover us or investors with respect to revenue or other operating results for a particular period. If we fail to meet or exceed such expectations for these or any other reasons, the market price of our securities could fall substantially, and we could face costly lawsuits, including securities class action suits.
We may need to raise additional capital required to grow our business, and we may not be able to raise capital on terms acceptable to us or at all, and the sale of additional shares or equity or debt securities could result in additional dilution to our shareholders.
Growing and operating our business will require significant cash outlays and capital expenditures and commitments. If cash on hand and cash from operating activities are not sufficient to meet our cash requirements, we will need to seek additional capital, potentially through debt or equity financing, to fund our growth. We may not be able to raise needed cash on terms acceptable to us or at all. Financing may be on terms that are dilutive or potentially dilutive to our shareholders, as described below, and the prices at which new investors would be willing to purchase our securities may be lower than the current price per share. The holders of new securities may also have rights, preferences, or privileges which are senior to those of existing holders of Ordinary Shares. If new sources of financing are required, but are insufficient or unavailable, we will be required to modify our growth and operating plans based on available funding, if any, which would harm our ability to grow our business.
We may need to raise additional capital through a combination of private and public equity offerings, debt financings and collaborations, and strategic and licensing arrangements. To the extent that we raise additional capital through the issuance of equity (such as this offering) or convertible debt securities, your ownership interest will be diluted, and the terms may include liquidation or other preferences that adversely affect your rights as a holder of our Ordinary Shares. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take certain actions, such as incurring debt, making capital expenditures or declaring dividends. If we raise additional funds through strategic partnerships and alliances and licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies or product candidates or grant licenses on terms that are not favorable to us. If we are unable to raise additional funds through equity or debt financing when needed, we may be required to delay, limit, reduce or terminate our product development or commercialization efforts or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves.
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Our operating results could be materially harmed if we are unable to accurately forecast consumer demand for our products and services and adequately manage our inventory.
To ensure adequate inventory supply, we must forecast inventory needs and expenses and place orders with our suppliers and contract manufacturers sufficiently in advance based on our estimates of future demand for our products. Our ability to accurately forecast demand for our products could be affected by many factors, including an increase or decrease in customer demand for our products and services or for products and services of our competitors, product and service introductions by competitors, unanticipated changes in general market conditions, and the weakening of economic conditions or consumer confidence in future economic conditions. We may face challenges acquiring adequate and timely supplies of our products to satisfy the levels of demand, which we believe negatively affects our revenue. This risk may be exacerbated by the fact that we may not carry a significant amount of inventory, either directly or with our contract manufacturers or logistics providers, to satisfy short-term demand increases. If we fail to accurately forecast customer demand, we may experience excess inventory levels or a shortage of products available for sale.
Inventory levels in excess of customer demand may result in inventory write-downs or write-offs and the sale of excess inventory at discounted prices, which would cause our gross margin to suffer and could impair the strength of our brand. Conversely, if we underestimate customer demand for our products and services, our contract manufacturers may not be able to deliver products to meet our requirements, and this could result in damage to our brand and customer relationships and adversely affect our revenue and operating results.
Our financial statements contain an explanatory paragraph regarding substantial doubt about our ability to continue as a going concern, which could prevent us from obtaining new financing on reasonable terms or at all.
In part because we have incurred losses in each year since our inception, including net losses of approximately $2.6 million and $1.3 million for the years ended December 31, 2021 and 2020, respectively, our audited consolidated financial statements for the period ended December 31, 2021 contain an explanatory paragraph regarding substantial doubt about our ability to continue as a going concern. As of December 31, 2021, we had an accumulated deficit of approximately $6.9 million. These events and conditions, along with other matters, indicate that a material uncertainty exists that may cast significant doubt on our ability to continue as a going concern. The financial statements for the year ended December 31, 2021 do not include any adjustments that might result from the outcome of this uncertainty. This going concern opinion could materially limit our ability to raise additional funds through the issuance of equity or debt securities or otherwise. Further financial statements may include an explanatory paragraph with respect to our ability to continue as a going concern. Until we can generate significant recurring revenues, we expect to satisfy our future cash needs through debt or equity financing. In January 2022, our board of directors authorized us to enter into a series of SAFEs for aggregate proceeds of up to $3 million. As of April 4, 2022, we have received $500 thousand under the SAFEs we have entered into, we will require additional funding. We cannot be certain that additional funding will be available to us on acceptable terms, if at all. If funds are not available, we may be required to delay, reduce the scope of, or eliminate research or development plans for, or commercialization efforts with respect to our products. This may raise substantial doubts about our ability to continue as a going concern.
Our financial performance is subject to risks associated with changes in the value of the U.S. dollar, Israeli shekel, versus local currencies.
Our primary exposure to movements in foreign currency exchange rates relates to non-U.S. dollar denominated sales and operating expenses worldwide. Weakening of foreign currencies relative to the U.S. dollar adversely affects the U.S. dollar value of our foreign currency-denominated sales and earnings, and generally leads us to raise international pricing, potentially reducing demand for our products. In some circumstances, for competitive or other reasons, we may decide not to raise local prices to fully offset the dollar’s strengthening, or at all, which would adversely affect the U.S. dollar value of our foreign currency denominated sales and earnings. Conversely, a strengthening of the Israeli shekel or foreign currencies relative to the U.S. dollar will increase our Israeli operations costs, and could cause us to increase our international pricing and become less competitive. Additionally, strengthening of foreign currencies may also increase our cost of product components denominated in those currencies, thus adversely affecting gross margins.
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We may not be able to sustain our revenue growth rate or profitability in the future.
Our recent revenue growth should not be considered indicative of our future performance. As we grow our business, we expect our revenue growth rates to slow in future periods due to a number of reasons, which may include increasing competition, slowing demand for our products and services, a decrease in the growth of our overall market, our failure, for any reason, to continue to capitalize on growth opportunities, or the maturation of our business.
We have not achieved profitability on a quarterly or annual basis. We expect our expenses to increase substantially in the near term, particularly as we make significant investments in our research and development and sales and marketing organizations, expand our operations and infrastructure internationally, develop new products and services, and enhance our existing products and services. In addition, in connection with operating as a public company, we will incur additional significant legal, accounting, and other expenses that we did not incur as a private company. If our revenue does not increase to offset these increases in our operating expenses, we may not be profitable in future periods.
Risks Related to this Offering and the Ownership of the Ordinary Shares and Warrants
Our current five percent shareholders, officers and directors currently beneficially own approximately 73.0% of our Ordinary Shares. Although this percentage will decrease after this offering, they will continue to be able to exert significant control over matters submitted to our shareholders for approval.
As of the date of this prospectus, our current five percent shareholders, officers and directors beneficially own approximately 73.0% of our Ordinary Shares. Although this percentage will decrease after this offering, they will continue to be able to exert significant control over matters submitted to our shareholders for approval. This significant concentration of share ownership may adversely affect the trading price for our Ordinary Shares because investors often perceive disadvantages in owning shares in companies with controlling shareholders. As a result, these shareholders, if they acted together, could significantly influence or even unilaterally approve matters requiring approval by our shareholders, including the election of directors and the approval of mergers or other business combination transactions. The interests of these shareholders may not always coincide with our interests or the interests of other shareholders.
If you purchase securities in this offering, you will incur immediate and substantial dilution in the book value of your shares.
The assumed public offering price of the Ordinary Shares included as part of the Units or that may be issued upon the exercise of any Pre-funded Warrants included in the Pre-funded Units being offered hereby is substantially higher than the net tangible book value per share of our outstanding Ordinary Shares. Therefore, if you purchase securities in this offering, you will pay a price per Ordinary Share that substantially exceeds our net tangible book value per Ordinary Share after this offering. To the extent outstanding options or warrants are exercised, you will incur further dilution. Based on an assumed offering price of $6.20 per Unit, which is the midpoint of the price range set forth on the cover page of this prospectus, you will experience immediate dilution of $4.89 per Ordinary Share, representing the difference between our pro forma net tangible book value per Ordinary Share after giving effect to this offering and the offering price. See “Dilution” for further information.
We do not know whether a market for the Ordinary Shares or Warrants will be sustained or what the trading price of the Ordinary Shares or Warrants will be and as a result it may be difficult for you to sell your securities.
Although we intend to list the Ordinary Shares and Warrants on Nasdaq, an active trading market for the Ordinary Shares or Warrants may not be sustained. It may be difficult for you to sell your Ordinary Shares or Warrants without depressing the market price for the Ordinary Shares or Warrants at all. As a result of these and other factors, you may not be able to sell your securities at or above the offering price or at all. Further, an inactive market may also impair our ability to raise capital through the sale of additional equity securities and may impair our ability to enter into strategic partnerships or acquire companies, products, or services by using our equity securities as consideration.
We have never paid cash dividends on our share capital, and we do not anticipate paying any cash dividends in the foreseeable future.
We have never declared or paid cash dividends, and we do not anticipate paying cash dividends in the foreseeable future. Therefore, you should not rely on an investment in Ordinary Shares as a source for any future dividend income. Our board of directors has complete discretion as to whether to distribute dividends. Even if our board of directors decides to declare and pay dividends, the timing, amount and form of future dividends, if any, will depend on our future results of operations and cash flow, our capital requirements and surplus, the amount of distributions, if any, received by us from our subsidiaries, our financial condition, contractual restrictions and other factors deemed relevant by our board of directors.
Management will have broad discretion as to the use of the proceeds from this offering.
Our management will have broad discretion in the allocation of the net proceeds and could use them for purposes other than those contemplated at the time of this offering and as described in the section titled “Use of Proceeds.” Our shareholders may not agree with the manner in which our management chooses to allocate and spend the net proceeds.
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The Warrants included in the Units and Pre-funded Units are expected to be listed on Nasdaq separately upon the pricing of this offering, and may provide investors with an arbitrage opportunity that could adversely affect the trading price of our Ordinary Shares.
Because the Units and Pre-funded Units will never trade as a unit, and the Warrants are expected to be traded on Nasdaq, investors may be provided with an arbitrage opportunity that could depress the price of our Ordinary Shares.
The Warrants and Pre-funded Warrants are speculative in nature.
Except as otherwise set forth therein, the Warrants and Pre-funded Warrants offered in this offering do not confer any rights of Ordinary Share ownership on their holders, such as voting rights, but rather merely represent the right to acquire Ordinary Shares at a fixed price for a limited period of time. Specifically, commencing on the date of issuance, holders of the Warrants may exercise their right to acquire Ordinary Shares and pay an exercise price of $6.20 (based on an assumed public offering price of $6.20 per Unit, the midpoint of the range set forth on the cover page of this prospectus) per Ordinary Share, 100% of the public offering price per Unit, prior to five years from the date of issuance, after which date any unexercised Warrants will expire and have no further value. In addition, commencing on the date of issuance, holders of the Pre-funded Warrants may exercise their right to acquire Ordinary Shares and pay an exercise price of $0.001 per Ordinary Share, subject to adjustment upon certain events. There can be no assurance that the market price of our Ordinary Shares will ever equal or exceed the exercise price of the Warrants offered by this prospectus. In the event that our Ordinary Shares price does not exceed the exercise price of such Warrants during the period when such Warrants are exercisable, the Warrants may not have any value.
The Warrants will be subject to forced exercise by the Company under certain conditions.
The Warrants will be subject to forced exercise commencing six months from issuance subject to the condition that the weighted average price of the Company’s Ordinary Shares exceeds 200% of the initial exercise price for ten consecutive trading days and subject to certain other conditions set forth in the Warrants. This forced exercise provision may reduce the value of the Warrants because such forced exercise, if it occurs, will result in the holders no longer having the opportunity to benefit from further increases in the price of our Ordinary Shares.
There is no established market for the Warrants and Pre-funded Warrants being offered in this offering.
There is no established trading market for the Warrants and Pre-funded Warrants offered in this offering. We do not intend to apply for listing of the Pre-funded Warrants on any securities exchange or other nationally recognized trading system. Although we have applied to list the Warrants on Nasdaq there can be no assurance that the application will be approved or that there will be an active trading market for the Warrants. Without an active trading market, the liquidity of the Warrants will be limited.
The JOBS Act will allow us to postpone the date by which we must comply with some of the laws and regulations intended to protect investors and to reduce the amount of information we provide in our reports filed with the SEC, which could undermine investor confidence in our company and adversely affect the market price of our securities.
For so long as we remain an “emerging growth company” as defined in the JOBS Act, we intend to take advantage of certain exemptions from various requirements that are applicable to public companies that are not “emerging growth companies” including:
| ● | the provisions of the Sarbanes-Oxley Act requiring that our independent registered public accounting firm provide an attestation report on the effectiveness of our internal control over financial reporting; | |
| ● | Section 107 of the JOBS Act, which provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. This means that an “emerging growth company” can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. However, we are electing not to delay such adoption of new or revised accounting standards. Our election not to use this extended transition period for complying with new or revised accounting standards is irrevocable; | |
| ● | exemption from compliance with any requirement that may be adopted by the Public Company Accounting Oversight Board with respect to mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements (i.e., critical audit matters); and | |
| ● | our ability to present only two years of audited financial statements and only two years of related disclosure in this prospectus. |
We intend to take advantage of some of these exemptions until we are no longer an “emerging growth company.” We will remain an emerging growth company until the earlier of (1) the last day of the fiscal year (a) following the fifth anniversary of the date of our first sale of ordinary equity securities pursuant to an effective registration statement under the Securities Act, (b) in which we have total annual gross revenue of at least $1.07 billion, or (c) in which we are deemed to be a large accelerated filer, which means the market value of our Ordinary Shares that is held by non-affiliates exceeds $700 million as of the prior June 30, and (2) the date on which we have issued more than $1.0 billion in non-convertible debt during the prior three-year period.
We cannot predict if investors will find our securities less attractive because we may rely on these exemptions. If some investors find our securities less attractive as a result, there may be a less active trading market for our securities, and our market prices may be more volatile and may decline.
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As a “foreign private issuer” we are subject to less stringent disclosure requirements than domestic registrants and are permitted, and may in the future elect to follow certain home country corporate governance practices instead of otherwise applicable SEC and Nasdaq requirements, which may result in less protection than is accorded to investors under rules applicable to domestic U.S. registrants.
As a foreign private issuer and emerging growth company, we may be subject to different disclosure and other requirements than domestic U.S. registrants and non-emerging growth companies. For example, as a foreign private issuer, in the United States, we are not subject to the same disclosure requirements as a domestic U.S. registrant under the Exchange Act, including the requirements to prepare and issue quarterly reports on Form 10-Q or to file current reports on Form 8-K upon the occurrence of specified significant events, the proxy rules applicable to domestic U.S. registrants under Section 14 of the Exchange Act or the insider reporting and short-swing profit rules applicable to domestic U.S. registrants under Section 16 of the Exchange Act. In addition, we intend to rely on exemptions from certain U.S. rules which will permit us to follow Israeli legal requirements rather than certain of the requirements that are applicable to U.S. domestic registrants.
We will follow Israeli laws and regulations that are applicable to Israeli companies. However, Israeli laws and regulations applicable to Israeli companies do not contain any provisions comparable to the U.S. proxy rules, the U.S. rules relating to the filing of reports on Form 10-Q or 8-K or the U.S. rules relating to liability for insiders who profit from trades made in a short period of time, as referred to above.
Furthermore, foreign private issuers are required to file their annual report on Form 20-F within 120 days after the end of each fiscal year, while U.S. domestic registrants that are non-accelerated filers are required to file their annual report on Form 10-K within 90 days after the end of each fiscal year. Foreign private issuers are also exempt from Regulation Fair Disclosure, aimed at preventing issuers from making selective disclosures of material information, although we will be subject to Israeli laws and regulations having substantially the same effect as Regulation Fair Disclosure. As a result of the above, even though we are required to file reports on Form 6-K disclosing the limited information which we have made or are required to make public pursuant to Israeli law, or are required to distribute to shareholders generally, and that is material to us, you may not receive information of the same type or amount that is required to be disclosed to shareholders of a U.S. registrant.
These exemptions and leniencies will reduce the frequency and scope of information and protections to which you are entitled as an investor.
The determination of foreign private issuer status is made annually on the last business day of an issuer’s most recently completed second fiscal quarter and, accordingly, the next determination will be made with respect to us on June 30, 2022. In the future, we would lose our foreign private issuer status if a majority of our shareholders, directors or management are U.S. citizens or residents and we fail to meet additional requirements necessary to avoid loss of foreign private issuer status. The regulatory and compliance costs to us under U.S. securities laws as a U.S. domestic registrant may be significantly higher.
We may be a “passive foreign investment company,” or PFIC, for U.S. federal income tax purposes in the current taxable year or may become one in any subsequent taxable year. There generally would be negative tax consequences for U.S. taxpayers that are holders of the Ordinary Shares if we are or were to become a PFIC.
We may be considered a PFIC or become a PFIC in the future. The determination of whether we are a PFIC is made on an annual basis and will depend on the composition of our income and assets from time to time. We will be treated as a PFIC for U.S. federal income tax purposes in any taxable year in which either (1) at least 75% of our gross income is “passive income” or (2) on average at least 50% of our assets by value produce passive income or are held for the production of passive income. Passive income for this purpose generally includes, among other things, certain dividends, interest, royalties, rents and gains from commodities and securities transactions and from the sale or exchange of property that gives rise to passive income. Passive income also includes amounts derived by reason of the temporary investment of funds, including those raised in a public offering. In determining whether a non-U.S. corporation is a PFIC, a proportionate share of the income and assets of each corporation in which it owns, directly or indirectly, at least a 25% interest (by value) is taken into account. The tests for determining PFIC status are applied annually, and it is difficult to make accurate projections of future income and assets which are relevant to this determination. In addition, our PFIC status may depend in part on the market value of the Ordinary Shares. Accordingly, there can be no assurance that we currently are not or will not become a PFIC in the future. If we are a PFIC in any taxable year during which a U.S. taxpayer holds the Ordinary Shares, such U.S. taxpayer would be subject to certain adverse U.S. federal income tax rules. A U.S. taxpayer that holds our warrants is taxed in a manner similar to a U.S. taxpayer owning Ordinary Shares if such taxpayer realizes gain on the sale of the warrants. If the U.S. taxpayer holding the warrants exercises the warrants to purchase common shares, the holding period over which any income realized is allocated includes the holding period of the warrants. The U.S. warrant holder is treated as a holder of PFIC stock taxable under the ordinary income allocation and interest charge regime described above. If the U.S. taxpayer did not make an election to treat us as a “qualified electing fund”, or QEF, or make a “mark-to-market” election, then “excess distributions” to the U.S. taxpayer, and any gain realized on the sale or other disposition of the Ordinary Shares and Warrants by the U.S. taxpayer: (1) would be allocated ratably over the U.S. taxpayer’s holding period for the Ordinary Shares and Warrants; (2) the amount allocated to the current taxable year and any period prior to the first day of the first taxable year in which we were a PFIC would be taxed as ordinary income; and (3) the amount allocated to each of the other taxable years would be subject to tax at the highest rate of tax in effect for the applicable class of taxpayer for that year, and an interest charge for the deemed deferral benefit would be imposed with respect to the resulting tax attributable to each such other taxable year. In addition, if the U.S. Internal Revenue Service, or the IRS, determines that we are a PFIC for a year with respect to which we have determined that we were not a PFIC, it may be too late for a U.S. taxpayer to make a timely QEF or mark-to-market election. U.S. taxpayers that have held the Ordinary Shares and Warrants during a period when we were a PFIC will be subject to the foregoing rules, even if we cease to be a PFIC in subsequent years, subject to exceptions for U.S. taxpayer who made a timely QEF or mark-to-market election. A U.S. taxpayer can make a QEF election by completing the relevant portions of and filing IRS Form 8621 in accordance with the instructions thereto. We do not intend to notify U.S. taxpayers that hold the Ordinary Shares and Warrants if we believe we will be treated as a PFIC for any taxable year in order to enable U.S. taxpayers to consider whether to make a QEF election. In addition, we do not intend to furnish such U.S. taxpayers annually with information needed in order to complete IRS Form 8621 and to make and maintain a valid QEF election for any year in which we or any of our subsidiaries are a PFIC. U.S. taxpayers that hold the Ordinary Shares and Warrants are strongly urged to consult their tax advisors about the PFIC rules, including tax return filing requirements and the eligibility, manner, and consequences to them of making a QEF or mark-to-market election with respect to the Ordinary Shares and Warrants in the event that we are a PFIC. See “Taxation—U.S. Federal Income Tax Considerations—Passive Foreign Investment Companies” for additional information.
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Risks Related to Our Intellectual Property
We may not be able to adequately protect or enforce our intellectual property rights throughout the world, and our efforts to do so may be costly.
If we are not able to adequately protect or enforce the proprietary aspects of our technology, competitors may be able to access our proprietary technology and our business, results of operations and financial condition could be adversely affected. We currently attempt to protect our technology through a combination of patent, copyright, trademark and trade secret laws, unfair competition laws, employee and third party nondisclosure agreements and similar means. Despite our efforts, other parties may attempt to disclose, obtain or use our technologies or systems. Our competitors may also be able to independently develop similar products or design around our patents. In addition, the laws of some countries do not protect our proprietary rights as fully as do the laws of other countries. As a result, we may not be able to protect our proprietary rights adequately in the United States, China or abroad.
Filing, prosecuting, and defending patents on products and services, as well as monitoring their infringement in all countries throughout the world would be prohibitively expensive, and our intellectual property rights in some countries can be less extensive than those according to federal and state laws in the United States or laws in China. Competitors may use our technologies to develop their own products or services in jurisdictions where we have not obtained patent protection and may export infringing products or services to territories where we have patent protection, but where patents are not enforced as strictly as they are in the United States. These products or services may compete with our products or services. Future patents or other intellectual property rights may not be effective or sufficient to prevent them from competing.
Many companies have encountered significant problems in protecting and defending intellectual property rights in some jurisdictions. The legal systems of certain countries, particularly certain developing countries, do not favor the enforcement of patents, trade secrets, and other intellectual property protection, which could make it difficult for us to stop the marketing of competing products or services in violation of our proprietary rights generally. Proceedings to enforce our patent rights in foreign jurisdictions, whether or not successful, could result in substantial costs and divert our efforts and attention from other aspects of our business, could put our future patents at risk of being invalidated or interpreted narrowly, put the issuance of our patent applications at risk, and could provoke third parties to assert claims against us. We may not prevail in any lawsuits that we initiate, and any damages or other remedies that we may be awarded, may not be commercially meaningful. Accordingly, our efforts to monitor and enforce our intellectual property rights around the world may be inadequate to obtain a significant commercial advantage from the intellectual property that we develop or license.
In addition, any litigation initiated by us concerning the violation by third parties of our intellectual property rights is likely to be expensive and time-consuming and could lead to the invalidation of, or render unenforceable, our intellectual property, or could otherwise have negative consequences for us. In the future, we may be a party to claims and litigation as a result of alleged infringement by third parties of our intellectual property. Even when we sue other parties for such infringement, that suit may have adverse consequences for our business. Any such suit may be time-consuming and expensive to resolve and may divert our management’s time and attention from our business. Furthermore, such a lawsuit could result in a court or governmental agency invalidating or rendering unenforceable our patents or other intellectual property rights upon which the suit is based, which would seriously harm our business.
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If we are unable to protect our domain names, our brand, business, and operating results could be adversely affected.
We have registered domain names for websites, or URLs, that we use in our business, such as wearabledevices.co.il, getmudra.com, and mudra-band.com. We have registered digital names for social media handlers, that we use in our business, such as Facebook and LinkedIn. If we are unable to maintain our rights in these domain and digital names, our competitors or other third parties could capitalize on our brand recognition by using these domain names for their own benefit. In addition, we might not be able to, or may choose not to, acquire or maintain other country-specific versions of the “Wearable Devices” or “Mudra” domain and digital names or other potentially similar URLs. The regulation of domain and digital names in the United States and elsewhere is generally conducted by Internet regulatory bodies and is subject to change. If we lose the ability to use a domain or digital name in a particular country, we may be forced to either incur significant additional expenses to market our solutions within that country, including the development of a new brand and the creation of new promotional materials, or elect not to sell our solutions in that country. Either result could substantially harm our business and operating results. Regulatory bodies could establish additional top-level domains, appoint additional domain or digital name registrars, or modify the requirements for holding domain or digital names. As a result, we may not be able to acquire or maintain the domain or digital names that utilize the name “Wearable Devices” or “Mudra” in all of the countries in which we currently conduct or intend to conduct business. Further, the relationship between regulations governing domain and digital names and laws protecting trademarks and similar proprietary rights varies among jurisdictions and is unclear in some jurisdictions. Domain and digital names similar to ours have already been registered in the United States and elsewhere, and we may be unable to prevent third parties from acquiring and using domain or digital names that infringe, are similar to, or otherwise decrease the value of, our brand or our trademarks. Protecting and enforcing our rights in our domain and digital names and determining the rights of others may require litigation, which could result in substantial costs, divert management attention, and not be decided favorably to us.
We may become subject to litigation brought by third parties claiming infringement by us of their intellectual property rights.
The industry in which our business operates is characterized by a large number of patents, some of which may be of questionable scope, validity or enforceability, and some of which may appear to overlap with other issued patents. As a result, there is a significant amount of uncertainty in the industry regarding patent protection, enforcement and infringement. In recent years, there has been significant litigation globally involving patents and other intellectual property rights. We could become subject to claims and litigation alleging infringement by us of third-party patents and other intellectual property generally. These claims and any resulting lawsuits, if resolved adversely to us, could subject us to significant liability for damages, impose temporary or permanent injunctions against our products or business operations, or invalidate or render unenforceable our intellectual property. In addition, because patent applications can take many years until the patents are issued, there currently may be pending applications of which we are unaware, which may later result in issued patents that our products may infringe. If any of our products infringes a valid and enforceable patent, or if we wish to avoid potential intellectual property litigation on any alleged infringement of such products, we may be prevented from selling, or elect not to sell, such products unless we obtain a license, which may be unavailable. Alternatively, we may be forced to pay substantial royalties or to redesign one or more of our products to avoid any infringement or allegations thereof. Additionally, we may face liability to our customers, business partners or third parties for indemnification or other remedies in the event that they are sued for infringement in connection with their use of our products.
We also may not be successful in any attempt to redesign our products to avoid any alleged infringement. A successful claim of infringement against us, or our failure or inability to develop and implement non-infringing technology, or license the infringed technology, on acceptable terms and on a timely basis, could materially adversely affect our business and results of operations. Furthermore, such lawsuits, regardless of their success, would likely be time-consuming and expensive to resolve and would divert management’s time and attention from our business, which could seriously harm our business. Also, such lawsuits, regardless of their success, could seriously harm our reputation with our consumer electronics customers and in the industry at large.
Our use of “open source” software could negatively affect our ability to sell our products and subject us to possible litigation.
A portion of the technologies we use incorporates “open source” software, and we may incorporate open source software in the future. Such open source software is generally licensed by its authors or other third parties under open source licenses. These licenses may subject us to certain unfavorable conditions, including requirements that we offer our products and services that incorporate the open source software for no cost, that we make publicly available source code for modifications or derivative works we create based upon, incorporating, or using the open source software, or that we license such modifications or derivative works under the terms of the particular open source license, or limitations on intellectual property protection and enforcement. Additionally, if a third-party software provider has incorporated open source software into software that we license from such provider, we could be required to disclose or provide at no cost any of our source code that incorporates or is a modification of such licensed software. If an author or other third party that distributes open source software that we use or license were to allege that we had not complied with the conditions of the applicable license, we could be required to incur significant legal expenses defending against such allegations and could be subject to significant damages and enjoined from the sale of our products and services that contained the open source software. Any of the foregoing could disrupt the distribution and sale of our products and services and harm our business.
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Patent policy and rule changes could increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of any issued patents.
Changes in either the patent laws or interpretation of the patent laws in the United States and other countries may diminish the value of any patents that may issue from our patent applications or narrow the scope of our patent protection. The laws of foreign countries may not protect our rights to the same extent as the laws of the United States. Publications of discoveries in the scientific literature often lag behind the actual discoveries, and patent applications in the United States and other jurisdictions are typically not published until 18 months after filing, or in some cases not at all. We therefore cannot be certain that we were the first to file the invention claimed in our owned and licensed patent or pending applications, or that we or our licensor were the first to file for patent protection of such inventions. Assuming all other requirements for patentability are met, in the United States prior to March 15, 2013, the first to make the claimed invention without undue delay in filing, is entitled to the patent, while generally outside the United States, the first to file a patent application is entitled to the patent. After March 15, 2013, under the Leahy-Smith America Invents Act, or the Leahy-Smith Act, enacted on September 16, 2011, the United States has moved to a first to file system. The Leahy-Smith Act also includes a number of significant changes that affect the way patent applications will be prosecuted and may also affect patent litigation. In general, the Leahy-Smith Act and its implementation could increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of any issued patents, all of which could have a material adverse effect on our business and financial condition.
We may be subject to claims challenging the inventorship of our intellectual property.
We may be subject to claims that former employees, collaborators or other third parties have an interest in, or right to compensation, with respect to our current patent and patent applications, future patents or other intellectual property as an inventor or co-inventor. For example, we may have inventorship disputes arise from conflicting obligations of consultants or others who are involved in developing our products or services. Litigation may be necessary to defend against these and other claims challenging inventorship or claiming the right to compensation. If we fail in defending any such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights, such as exclusive ownership of, or right to use, valuable intellectual property. Such an outcome could have a material adverse effect on our business. Even if we are successful in defending against such claims, litigation could result in substantial costs and be a distraction to management and other employees.
Risks Related to Operations in Israel
Conditions in Israel affect our operations and may limit our ability to produce and sell our products.
Our headquarters, executive offices and research and development offices are located in Yokne’am Illit, Israel. In addition, the majority of our key employees, officers and directors are residents of Israel. 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 groups in its neighboring countries. In addition, several countries, principally in the Middle East, restrict doing business with Israel, and additional countries may impose restrictions on doing business with Israel and Israeli companies whether as a result of hostilities in the region or otherwise. Any hostilities involving Israel, terrorist activities, political instability or violence in the region or the interruption or curtailment of trade or transport between Israel and its trading partners could adversely affect our operations and results of operations and the market price of our securities.
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Our insurance does not cover losses that may occur as a result of an event associated with the security situation in the Middle East. Although the Israeli government is currently committed to covering the reinstatement value of direct damages that are caused by terrorist attacks or acts of war, we cannot assure 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, financial condition and results of operations.
Further, many Israeli citizens are obligated to perform several days, and in some cases more, of annual military reserve duty each year until they reach the age of 40 (or older for certain reservists) and, in the event of a military conflict, may be called to active duty. In response to increases in terrorist activity, there have been periods of significant call-ups of military reservists. It is possible that there will be military reserve duty call-ups in the future. Our operations could be disrupted by such call-ups, which may include the call-up of members of our management. Such disruption could materially adversely affect our business, prospects, financial condition and results of operations.
We may be required to pay monetary remuneration to our Israeli employees for their inventions, even if the rights to such inventions have been duly assigned to us.
We enter into agreements with our Israeli employees pursuant to which such individuals agree that any inventions created in the scope of their employment are either owned exclusively by us or are assigned to us, depending on the jurisdiction, without the employee retaining any rights. A portion of our intellectual property has been developed by our Israeli employees during their employment for us. Under the Israeli Patent Law, 5727-1967, or the Patent Law, inventions conceived by an employee during the course of his or her employment and within the scope of said employment are considered “service inventions”. Service inventions belong to the employer by default, absent a specific agreement between the employee and employer otherwise. The Patent Law also provides that if there is no agreement regarding the remuneration for the service inventions, even if the ownership rights were assigned to the employer, the Israeli Compensation and Royalties Committee, or the Committee, a body constituted under the Patent Law, shall determine whether the employee is entitled to remuneration for these inventions. The Committee has not yet determined the method for calculating this Committee-enforced remuneration. While it has previously been held that an employee may waive his or her rights to remuneration in writing, orally or by conduct, litigation is pending in the Israeli labor court is questioning whether such waiver under an employment agreement is enforceable. Although our Israeli employees have agreed that we exclusively own any rights related to their inventions, we may face claims demanding remuneration in consideration for employees’ service inventions. As a result, we could be required to pay additional remuneration or royalties to our current and/or former employees, or be forced to litigate such claims, which could negatively affect our business.
We received Israeli government grants for certain of our research and development activities, the terms of which may require us to pay royalties and to satisfy specified conditions in order to manufacture products and transfer technologies outside of Israel. If we fail to satisfy these conditions, we may be required to pay penalties and refund grants previously received.
Our research and development efforts have been financed in part through royalty-bearing and non-royalty-bearing grants in an aggregate amount of approximately $1.8 million that we accrued or received from the IIA as of December 31, 2021. With respect to the royalty-bearing grants we are committed to pay royalties at a rate of 3.0%-3.5% on sales proceeds from our products that were developed under the Israeli Innovation Authority, or the IIA, programs up to the total amount of grants received, linked to the U.S. dollar and bearing interest at an annual rate of LIBOR applicable to U.S. dollar deposits. As of December 31, 2021, our contingent liabilities regarding IIA grants accrued or received by us were in an aggregate amount of approximately $1.8 million. We are further required to comply with the requirements of the Israeli Encouragement of Industrial Research, Development and Technological Innovation Law, 5744-1984, as amended, and related regulations, or the Research Law, with respect to those past grants. When a company develops know-how, technology or products using IIA grants, the terms of these grants and the Research Law restrict the transfer or license of such know-how, and the transfer of manufacturing or manufacturing rights of such products, technologies or know-how outside of Israel, without the prior approval of the IIA. Our obligations in regard to know-how, technology or products that may be subject to these restrictions are not to transfer to anyone the information, rights thereon and production rights to be derived from the research and development, in whole or part, of our Mudra Inspire product and our Mudra Band product, without the IIA Research Committee approval. Therefore, the discretionary approval of an IIA committee would be required for any transfer or license to third parties inside or outside of Israel of know how or for the transfer outside of Israel of manufacturing or manufacturing rights related to those aspects of such technologies. We may not receive those approvals. Furthermore, the IIA may impose certain conditions on any arrangement under which it permits us to transfer technology or development.
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The transfer or license of IIA-supported technology or know-how outside of Israel and the transfer of manufacturing of IIA-supported products, technology or know-how outside of Israel may involve the payment of significant amounts, depending upon the value of the transferred or licensed technology or know-how, our research and development expenses, the amount of IIA support, the time of completion of the IIA-supported research project and other factors. These restrictions and requirements for payment may impair our ability to sell, license or otherwise transfer 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.
We may not be able to enforce covenants not-to-compete under current Israeli law that might result in added competition for our products.
We have non-competition agreements with all of our employees, all of which are governed by Israeli law. These agreements prohibit our employees from competing with or working for our competitors, generally during their employment and for up to 12 months after termination of their employment. However, Israeli courts are reluctant to enforce non-compete undertakings of former employees and tend to enforce those provisions for relatively brief periods of time in restricted geographical areas, if at all, and only when the employee has provided unique value to the employer specific to that employer’s business and not just regarding the professional development of the employee. If we are not able to enforce non-compete covenants, we may be faced with added competition.
Provisions of Israeli law may delay, prevent or otherwise impede a merger with, or an acquisition of, us, which could prevent a change of control, even when the terms of such a transaction are favorable to us and our shareholders.
Israeli corporate law regulates mergers, requires tender offers for acquisitions of shares above specified thresholds, requires special approvals for transactions involving directors, officers or significant shareholders and regulates other matters that may be relevant to such types of transactions. For example, a merger may not be consummated unless at least 50 days have passed from the date on which a merger proposal is filed by each merging company with the Israel Registrar of Companies and at least 30 days have passed from the date on which the shareholders of both merging companies have approved the merger. In addition, a majority of each class of securities of the target company must approve a merger. Moreover, a tender offer for all of a company’s issued and outstanding shares can only be completed if the acquirer receives positive responses from the holders of at least 95% of the issued share capital. Completion of the tender offer also requires approval of a majority of the offerees that do not have a personal interest in the tender offer, unless, following consummation of the tender offer, the acquirer would hold at least 98% of the Company’s outstanding shares. Furthermore, the shareholders, including those who indicated their acceptance of the tender offer, may, at any time within six months following the completion of the tender offer, claim that the consideration for the acquisition of the shares does not reflect their fair market value, and petition an Israeli court to alter the consideration for the acquisition accordingly, unless the acquirer stipulated in its tender offer that a shareholder that accepts the offer may not seek such appraisal rights, and the acquirer or the company published all required information with respect to the tender offer prior to the tender offer’s response date.
Furthermore, Israeli tax considerations may make potential transactions unappealing to us or to our shareholders whose country of residence does not have a tax treaty with Israel exempting such shareholders from Israeli tax. For example, Israeli tax law does not recognize tax-free share exchanges to the same extent as U.S. tax law. With respect to mergers, Israeli tax law allows for tax deferral in certain circumstances but makes the deferral contingent on the fulfillment of a number of conditions, including, in some cases, a holding period of two years from the date of the transaction during which sales and dispositions of shares of the participating companies are subject to certain restrictions. Moreover, with respect to certain share swap transactions, the tax deferral is limited in time, and when such time expires, the tax becomes payable even if no disposition of the shares has occurred. These provisions could delay, prevent or impede an acquisition of us or our merger with another company, even if such an acquisition or merger would be beneficial to us or to our shareholders.
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It may be difficult to enforce a judgment of a U.S. court against us and our executive officers and directors in Israel or the United States, to assert U.S. securities laws claims in Israel or to serve process on our executive officers and directors and these experts.
We were incorporated in Israel. Substantially all of our executive officers and directors reside outside of the United States, and all of our assets and most of the assets of these persons are located outside of the United States. Therefore, a judgment obtained against us, or any of these persons, 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. Additionally, it may be difficult for an investor, or any other person or entity, to initiate an action with respect to U.S. securities laws in Israel. Israeli courts may refuse to hear a claim based on an alleged violation of U.S. securities laws reasoning 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.
Our amended and restated articles of association to be effective upon the closing of this offering may be deemed to have an anti-takeover effect.
Certain provisions of our amended and restated articles of association to be effective upon the closing of this offering may make a change in control of us more difficult to effect. Our amended and restated articles of association will provide for a staggered board of directors consisting of three classes of directors. Directors of each class are chosen for three-year terms upon the expiration of their current terms and each year one class of our directors will be elected by our shareholders. This classified board provision could have the effect of making the replacement of incumbent directors more time consuming and difficult. At least two annual meetings of shareholders, instead of one, will generally be required to effect a change in a majority of our board of directors. Thus, the classified board provision could increase the likelihood that incumbent directors will retain their positions. The staggered terms of directors may delay, defer or prevent an attempt to change control of us, even though a change in control might be considered by our shareholders to be in their best interest.
Your rights and responsibilities as a shareholder will be governed in key respects by Israeli laws, which differs in some material respects from the rights and responsibilities of shareholders of U.S. companies.
The rights and responsibilities of the holders of our Ordinary Shares are governed by our amended and restated articles of association and by Israeli law. These rights and responsibilities differ in some material respects from the rights and responsibilities of shareholders in U.S. companies. 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 such company, including, among other things, in voting at a general meeting of shareholders on matters such as amendments to a company’s amended and restated articles of association, increases in a company’s authorized share capital, mergers and acquisitions and related party transactions requiring shareholder approval, as well as a general duty to refrain from discriminating against other shareholders. In addition, a shareholder who is aware that it possesses the power to determine the outcome of a vote at a meeting of the shareholders or to appoint or prevent the appointment of a director or executive officer in the company has a duty of fairness toward the company. However, Israeli law does not define the substance of this duty of fairness. There is limited case law available to assist us in understanding the nature of these duties or the implications of these provisions. These provisions may be interpreted to impose additional obligations and liabilities on holders of our Ordinary Shares that are not typically imposed on shareholders of U.S. companies (see “Description of Share Capital – Provisions Restricting Change in Control of Our Company” for additional information).
General Risk Factors
We will incur significant increased costs as a result of the listing of our securities for trading on Nasdaq. By becoming a public company in the United States, our management will be required to devote substantial time to new compliance initiatives as well as compliance with ongoing U.S. requirements.
Upon the listing of securities on Nasdaq, we will become a publicly traded company in the United States. As a public company in the United States, we will incur additional significant accounting, legal and other expenses that we did not incur before the offering. We also anticipate that we will incur costs associated with corporate governance requirements of the SEC, as well as requirements under Section 404 and other provisions of the Sarbanes-Oxley Act. We expect these rules and regulations to increase our legal and financial compliance costs, introduce new costs such as investor relations, stock exchange listing fees and shareholder reporting, and to make some activities more time consuming and costly. The implementation and testing of such processes and systems may require us to hire outside consultants and incur other significant costs. Any future changes in the laws and regulations affecting public companies in the United States, including Section 404 and other provisions of the Sarbanes-Oxley Act, and the rules and regulations adopted by the SEC, for so long as they apply to us, will result in increased costs to us as we respond to such changes. These laws, rules and regulations could make it more difficult or more costly for us to obtain certain types of insurance, including director and officer liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. The impact of these requirements could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, our board committees, or as executive officers.
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Even if we meet the initial listing requirements of Nasdaq, there can be no assurance that we will be able to comply with the continued listing standards of Nasdaq. Our failure to meet the continued listing requirements of Nasdaq could result in a de-listing of our Ordinary Shares or Warrants.
Even if we meet the initial listing requirements of Nasdaq, we cannot assure you that we will be able to comply with the other standards that we are required to meet in order to maintain a listing of our Ordinary Shares or Warrants on Nasdaq. If after listing we fail to satisfy the continued listing requirements of Nasdaq, such as the corporate governance requirements or the minimum stockholder’s equity requirement, Nasdaq may take steps to de-list our Ordinary Shares or Warrants. Such a de-listing would likely have a negative effect on the price of our securities and would impair our shareholders’ ability to sell or purchase our securities when they wish to do so. In the event of a de-listing, we would take actions to restore our compliance with Nasdaq’s listing requirements, but we can provide no assurance that any action taken by us would result in our Ordinary Shares or Warrants becoming listed again, or that any such action would stabilize the market price or improve the liquidity of our securities.
If we engage in future merger and acquisition activities or strategic partnerships, this could require significant management attention, may increase our capital requirements, dilute our shareholders, cause us to incur debt or assume contingent liabilities, and subject us to other risks.
As part of our business strategy, we may make investments in other companies, products, or technologies. We may not be able to find suitable acquisition candidates and we may not be able to complete acquisitions on favorable terms, if at all. If we do complete acquisitions, we may not ultimately strengthen our competitive position or achieve our goals, and any acquisitions we complete could be viewed negatively by users or investors. In addition, if we fail to successfully integrate such acquisitions, or the technologies associated with such acquisitions, into our company, the revenue and operating results of the combined company could be adversely affected.
Additionally, we may evaluate various strategic partnerships, including licensing or acquiring complementary products, intellectual property rights, technologies or businesses. Any potential acquisition or strategic partnership may entail numerous risks, including:
| ● | increased operating expenses and cash requirements; |
| ● | the assumption of additional indebtedness or contingent liabilities; |
| ● | the issuance of our equity securities; |
| ● | assimilation of operations, intellectual property and products of an acquired company, including difficulties associated with integrating new personnel; |
| ● | the diversion of our management’s attention from our existing product programs and initiatives in pursuing such a strategic merger or acquisition; |
| ● | retention of key employees, the loss of key personnel and uncertainties in our ability to maintain key business relationships; |
| ● | risks and uncertainties associated with the other party to such a transaction, including the prospects of that party and their existing products or product candidates and marketing approvals; and |
| ● | our inability to generate revenue from acquired technology and/or products sufficient to meet our objectives in undertaking the acquisition or even to offset the associated acquisition and maintenance costs. |
We are subject to risks associated with doing business globally.
Our operations are subject to risks inherent in conducting business globally and under the laws, regulations and customs of various jurisdictions and geographies. In addition to risks related to currency exchange rates, these risks include changes in exchange controls, changes in taxation, importation limitations, export control restrictions, changes in or violations of applicable laws, including the U.S. Foreign Corrupt Practices Act and the U.K. Bribery Act of 2010, economic and political instability, disputes between countries, diminished or insufficient protection of intellectual property, and disruption or destruction of operations in a significant geographic region regardless of cause, including war, terrorism, riot, civil insurrection or social unrest. Failure to comply with, or material changes to, the laws and regulations that affect our global operations could have an adverse effect on our business, results of operations and financial condition.
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Our operating margins may decline as a result of increasing product costs.
Our business is subject to significant pressure on pricing and costs caused by many factors, including intense competition, the cost of components used in our products, labor costs, constrained sourcing capacity, inflationary pressure, pressure from users to reduce the prices we charge for our products and services, and changes in consumer demand. Costs for the raw materials used in the manufacture of our products are affected by, among other things, energy prices, consumer demand, fluctuations in commodity prices and currency, global pandemic slowing down manufacturing capacity, and other factors that are generally unpredictable and beyond our control. Increases in the cost of raw materials used to manufacture our products or in the cost of labor and other costs of doing business in the United States and internationally could have an adverse effect on, among other things, the cost of our products, gross margins, operating results, financial condition, and cash flows.
Sales of a significant number of shares of our Ordinary Shares in the public markets or significant short sales of our Ordinary Shares, or the perception that such sales could occur, could depress the market price of our Ordinary Shares and impair our ability to raise capital.
Sales of a substantial number of shares of our Ordinary Shares or other equity-related securities in the public markets, could depress the market price of our Ordinary Shares. If there are significant short sales of our Ordinary Shares, the price decline that could result from this activity may cause the share price to decline more so, which, in turn, may cause long holders of the Ordinary Shares to sell their shares, thereby contributing to sales of Ordinary Shares in the market. Such sales also may impair our ability to raise capital through the sale of additional equity securities in the future at a time and price that our management deems acceptable, if at all.
The market price of our Ordinary Shares and Warrants may be highly volatile, and you could lose all or part of your investment.
The market price of our Ordinary Shares and Warrants is likely to be volatile. This volatility may prevent you from being able to sell your securities at or above the price you paid for your securities. The market price of our Ordinary Shares and Warrants may fluctuate significantly in response to numerous factors, some of which are beyond our control, which include:
| ● | whether we achieve our anticipated corporate objectives; | |
| ● | actual or anticipated fluctuations in our quarterly or annual operating results; | |
| ● | changes in our financial or operational estimates or projections; | |
| ● | our ability to implement our operational plans; | |
| ● | termination of the lock-up agreement or other restrictions on the ability of our shareholders to sell shares after this offering; | |
| ● | changes in the economic performance or market valuations of companies similar to ours; and | |
| ● | general economic or political conditions in the United States or elsewhere. |
In addition, the stock market in general has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of these companies. Broad market and industry factors may negatively affect the market price of our securities, regardless of our actual operating performance, and we have little or no control over these factors.
We may be subject to securities litigation, which is expensive and could divert management attention.
In the past, companies that have experienced volatility in the market price of their stock have been subject to securities class action litigation. We may be the target of this type of litigation in the future. Litigation of this type could result in substantial costs and diversion of management’s attention and resources, which could seriously hurt our business. Any adverse determination in litigation could also subject us to significant liabilities.
If securities or industry analysts do not publish or cease publishing research or reports about us, our business or our market, or if they adversely change their recommendations or publish negative reports regarding our business or the Ordinary Shares, our share price and trading volume could decline.
The trading market for the Ordinary Shares and/or Warrants will be influenced by the research and reports that industry or securities analysts may publish about us, our business, our market or our competitors. We do not have any control over these analysts and we cannot provide any assurance that analysts will cover us or provide favorable coverage. If any of the analysts who may cover us adversely change their recommendation regarding the Ordinary Shares, or provide more favorable relative recommendations about our competitors, the price of our Ordinary Shares and/or Warrants would likely decline. If any analyst who may cover us were to cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause the price of our Ordinary Shares or trading volume to decline.
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Our internal control over financial reporting does not currently meet all of the standards contemplated by Section 404 of the Sarbanes-Oxley Act, and failure to achieve and maintain effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act could have a material adverse effect on our business. Further, a material weakness was noted in our financial reporting closing process.
Considering the size and the complexity of our operations and our early stage of generating revenues, we did not have a capable Chief Financial Officer during 2021, and we based our financial reporting process on an outsourced accounting firm while our Chief Executive Officer held the position of interim Chief Financial Officer.
As a result, we identified a material weakness in our internal control over financial reporting due to an insufficient knowledge of accounting principles generally accepted in the United States of America, or GAAP.
In January 2022, we engaged an experienced and capable Chief Financial Officer with sufficient U.S. GAAP knowledge and U.S. public company reporting experience and will begin the process of documenting our internal control procedures to satisfy the requirements of Section 404 (a) of the Sarbanes-Oxley Act, which requires an annual management assessment of the effectiveness of our internal control over financial reporting. The estimated incremental cost of the new Chief Financial Officer is not material as it will be balanced out by our decreased dependency on the services of the outsourced accounting firm.
We are in the process of addressing our internal control over financial reporting and we will establish formal policies, processes and practices related to financial reporting and identify key financial reporting risks, including an assessment of the potential impact and linkage of those risks to specific areas and activities within our organization.
We are not currently required to comply with Section 404 of the Sarbanes-Oxley Act and, therefore, are not required to make a formal assessment of the effectiveness of our internal control over financial reporting for that purpose. Upon completion of this offering, we will be required to comply with the requirements of Sections 302 and 404 of the Sarbanes-Oxley Act, which will require our management to certify financial and other information in our annual reports and provide an annual management report on the effectiveness of control over financial reporting. Though we will be required to disclose material changes in internal control over financial reporting on an annual basis, we will not be required to make our first annual assessment of our internal control over financial reporting pursuant to Section 404 until the year following our first filing of an annual report on Form 20-F. Additionally, while we remain an emerging growth company, we will not be required to include an attestation report on internal control over financial reporting issued by our independent registered public accounting firm. To achieve compliance with Section 404 within the prescribed period, we will be engaged in a process to document and evaluate our internal control over financial reporting, which is both costly and challenging. In this regard, we will need to continue to dedicate internal resources, potentially engage outside consultants and adopt a detailed work plan to assess and document the adequacy of internal control over financial reporting, continue steps to improve control processes as appropriate, validate through testing that controls are functioning as documented and implement a continuous reporting and improvement process for internal control over financial reporting. We expect to remediate this material weakness by the end of 2022.
As a public entity, we will be required to complete our initial assessment in a timely manner. If we are not able to implement and document the necessary policies, processes and controls to mitigate financial reporting risks, we may not be able to comply with the requirements of Sections 404(a) in a timely manner or with adequate compliance. Matters impacting our internal controls may cause us to be unable to report our financial information on a timely basis and thereby subject us to adverse regulatory consequences, including sanctions by the SEC or violations of applicable stock exchange listing rules. There could also be a negative reaction in the financial markets due to a loss of investor confidence in our company and the reliability of our financial statements. Confidence in the reliability of our financial statements could also suffer if we were to report a material weakness in our internal control over financial reporting. This could materially adversely affect us and lead to a decline in the price of our securities.
Our amended and restated articles of association to be in effect upon the consummation of this offering provide that, unless we consent to an alternative forum, the federal district courts of the United States shall be the exclusive forum for resolution of any complaint asserting a cause of action arising under the Securities Act, which could limit our shareholders’ ability to choose the judicial forum for disputes with us, our directors, shareholders, or other employees.
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Our amended and restated articles of association to be in effect upon the consummation of this offering provide that, unless we consent in writing to the selection of an alternative forum, the federal district courts of the United States shall be the exclusive forum for the resolution of any complaint asserting a cause of action arising under the Securities Act. Section 22 of the Securities Act creates concurrent jurisdiction for U.S. federal and state courts over all such Securities Act actions. Accordingly, both U.S. state and federal courts have jurisdiction to entertain such claims. To prevent having to litigate claims in multiple jurisdictions and the threat of inconsistent or contrary rulings by different courts, among other considerations, our amended and restated articles of association to be in effect upon the consummation of this offering provide that, unless we consent in writing to the selection of an alternative forum, the federal district courts of the United States shall be the exclusive forum for the resolution of any complaint asserting a cause of action arising under the Securities Act. This exclusive forum provision will not apply to suits brought to enforce any liability or duty created by the Exchange Act, and our shareholders cannot and will not be deemed to have waived our compliance with the U.S. federal securities laws and the rules and regulations promulgated under the Securities Act or the Exchange Act as a result of our exclusive forum provision.
Any person or entity purchasing or otherwise acquiring any interest in any of our securities shall be deemed to have notice of and consented to the foregoing provision of our amended and restated articles of association. However, the enforceability of similar forum provisions (including exclusive federal forum provisions for actions, suits, or proceedings asserting a cause of action arising under the Securities Act) in other companies’ organizational documents has been challenged in legal proceedings, and there is uncertainty as to whether courts would enforce the exclusive forum provision in our amended and restated articles of association. If a court were to find the exclusive forum provision contained in our amended and restated articles of association to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could materially adversely affect our business, financial condition, and results of operations.
Although we believe the exclusive forum provision benefit us by providing increased consistency in the application of U.S. federal securities laws or the Companies Law, as applicable, in the types of lawsuits to which they apply, such exclusive forum provision may limit a shareholder’s ability to bring a claim in the judicial forum that they find favorable and may increase certain litigation costs for disputes with us or any of our directors, shareholders, officers, or other employees, which may discourage lawsuits with respect to such claims against us and our current and former directors, shareholders, officers, or other employees.
We may be subject to liability claims if we breach our contracts, and our insurance may be inadequate to cover our losses.
We are subject to numerous obligations in our contracts with organizations and our partners. Despite the procedures, systems and internal controls we have implemented to comply with our contracts, we may breach these commitments, whether through a weakness in these procedures, systems and internal controls, negligence or the willful act of an employee or contractor. Our insurance policies may be inadequate to compensate us for the potentially significant losses that may result from claims arising from breaches of our contracts, disruptions in our services, failures or disruptions to our infrastructure, catastrophic events, and disasters or otherwise. Further, our insurance may not cover all claims made against us and defending a suit, regardless of its merit, could be costly and divert management’s attention. In addition, such insurance may not be available to us in the future on economically reasonable terms, or at all.
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements made under “Prospectus Summary,” “Risk Factors,” “Use of Proceeds,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Business” and elsewhere in this prospectus constitute forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential” “intends” or “continue,” or the negative of these terms or other comparable terminology.
These forward-looking statements may include, but are not limited to, statements relating to our objectives, plans and strategies, statements that contain projections of results of operations or of financial condition, expected capital needs and expenses, statements relating to the research, development, completion and use of our products, and all statements (other than statements of historical facts) that address activities, events or developments that we intend, expect, project, believe or anticipate will or may occur in the future.
Forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties. We have based these forward-looking statements on assumptions and assessments made by our management in light of their experience and their perception of historical trends, current conditions, expected future developments and other factors they believe to be appropriate.
Important factors that could cause actual results, developments and business decisions to differ materially from those anticipated in these forward-looking statements include, among other things:
| ● | SNC becoming the industry standard input method for wearable computing and consumer electronics; | |
| ● | our ability to maintain and expand our existing customer base; | |
| ● | our ability to maintain and expand compatibility of our devices with a broad range of mobile devices and operating systems; | |
| ● | our ability to maintain our business models; | |
| ● | our ability to correctly predict the market growth; | |
| ● | our ability to remediate material weaknesses in our internal control over financial reporting; | |
| ● | our ability to retain our founders; | |
| ● | our ability to maintain, protect, and enhance our intellectual property; | |
| ● | our ability to raise capital through the issuance of additional securities; | |
| ● | the impact of COVID-19 and resulting government actions on us; | |
| ● | the impact of competition and new technologies; | |
| ● | general market, political and economic conditions in the countries in which we operate; | |
| ● | projected capital expenditures and liquidity; | |
| ● | changes in our strategy; and | |
| ● | litigation. |
These statements are only current predictions and are subject to known and unknown risks, uncertainties, and other factors that may cause our or our industry’s actual results, levels of activity, performance or achievements to be materially different from those anticipated by the forward-looking statements. We discuss many of these risks in this prospectus in greater detail under the heading “Risk Factors” and elsewhere in this prospectus. You should not rely upon forward-looking statements as predictions of future events.
Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, or achievements. Except as required by law, we are under no duty to update or revise any of the forward-looking statements, whether as a result of new information, future events or otherwise, after the date of this prospectus.
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We have applied to list the Ordinary Shares and Warrants on Nasdaq under the symbols “WLDS” and “WLDSW,” respectively. This offering is contingent upon the Ordinary Shares and Warrants being listed; however, no assurance can be given that our application will be approved. All of our Ordinary Shares have the same rights and privileges. See “Description of Share Capital.”
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We expect to receive approximately $18.8 million in net proceeds from the sale of 3,600,000 Units offered by us in this offering (approximately $21.9 million if the underwriter exercises its over-allotment option in full), based upon an assumed public offering price of $6.20 per Unit, which is the midpoint of the price range set forth on the cover page of this prospectus.
A $1.00 increase or decrease in the assumed public offering price of $6.20 per Unit would increase or decrease the proceeds from this offering by approximately $3.3 million, assuming that the number of Units offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions. Similarly, each increase or decrease of 1,000,000 Units offered would increase or decrease our proceeds by approximately $5.7 million, assuming the assumed public offering price remains the same, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.
We currently expect to use the net proceeds from this offering for the following purposes:
| ● | Approximately $1.95 million to manufacture the Mudra Band for Apple Watch product, which includes the purchase of components, manufacturing of components, and assembly of the product; |
| ● | Approximately $2.4 million to market the Mudra Band for Apple Watch and to market additional future consumer products of our B2C product line; |
| ● | Approximately $3.3 million for the continued research and development of our Mudra technology, including the research and development of the Mudra XR wristband, and additional neural signals architecture, algorithms and UX; |
| ● | Approximately $2.1 million for sales and support of our B2B customers, and for the integration and licensing our Mudra technology into our B2B customers’ products; and |
| ● | The remainder for working capital and general corporate purposes, including an aggregate of approximately $650 thousand payable to certain of our executive officers as bonuses as a result of completion of this offering. |
Changing circumstances may cause us to consume capital significantly faster than we currently anticipate. The amounts and timing of our actual expenditures will depend upon numerous factors, including the progress of our global marketing and sales efforts, the development efforts and the overall economic environment. Therefore, our management will retain broad discretion over the use of the proceeds from this offering. We may ultimately use the proceeds for different purposes than what we currently intend. Pending any ultimate use of any portion of the proceeds from this offering, if the anticipated proceeds will not be sufficient to fund all the proposed purposes, our management will determine the order of priority for using the proceeds, as well as the amount and sources of other funds needed.
Pending our use of the net proceeds from this offering, we may invest the net proceeds in a variety of capital preservation investments, including short-term, investment grade, interest bearing instruments and U.S. government securities.
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We have never declared or paid any cash dividends on our Ordinary Shares and do not anticipate paying any cash dividends in the foreseeable future. Payment of cash dividends, if any, in the future will be at the discretion of our board of directors and will depend on then-existing conditions, including our financial condition, operating results, contractual restrictions, capital requirements, business prospects and other factors our board of directors may deem relevant.
Under the Israeli Companies Law 5759-2999, or the Companies Law, we may declare and pay dividends only if, upon the determination of our board of directors, there is no reasonable concern that the distribution will prevent us from being able to meet the terms of our existing and foreseeable obligations as they become due. Under the Companies Law, the distribution amount is further limited to the greater of retained earnings or earnings generated over the two most recent years legally available for distribution according to our then last reviewed or audited financial statements, provided that the end of the period to which the financial statements relate is not more than six months prior to the date of distribution. In the event that we do not meet such earnings criteria, we may seek the approval of the court in order to distribute a dividend. The court may approve our request if it is convinced that there is no reasonable concern that the payment of a dividend will prevent us from satisfying our existing and foreseeable obligations as they become due.
Payment of dividends may be subject to Israeli withholding taxes. See “Taxation—Israeli Tax Considerations and Government Programs” for additional information.
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The following table sets forth our cash and cash equivalents and our capitalization as of December 31, 2021:
| ● | on an actual basis; and |
| ● | on a pro forma as adjusted basis to give effect to the additional issuance of Units in this offering, at an assumed public offering price of $6.20 per Unit, which is the midpoint of the price range set forth on the cover page of this prospectus, and after deducting underwriting discounts and commissions and estimated offering expenses, as if the sale of the Units had occurred on December 31, 2021. |
The pro forma as adjusted information set forth in the table below is illustrative only and will be adjusted based on the actual public offering price and other terms of this offering determined at pricing.
You should read this table in conjunction with the sections titled “Selected Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and related notes included elsewhere in this prospectus.
| As of December 31, 2021 | ||||||||
| U.S. dollars in thousands | Actual | Pro Forma(1) * | ||||||
| Cash | 1,274 | 19,937 | ||||||
| Long term debt | - | |||||||
| Shareholders’ equity: | ||||||||
| Share capital | 31 | 43 | ||||||
| Additional paid in capital | 7,689 | 26,990 | ||||||
| Accumulated losses | (6,913 | ) | (7,563 | ) | ||||
| Total shareholders’ equity | 807 | 19,470 | ||||||
| Total capitalization | 807 | 19,470 | ||||||
*Unaudited
The number of Ordinary Shares held by existing shareholders is based on 11,136,850 Ordinary Shares outstanding as of April 4, 2022, and excludes as of such date:
| ● | 1,162,689 Ordinary Shares issuable upon the exercise of options to directors, employees and consultants under our share incentive plan, outstanding as of April 4, 2022, at a weighted average exercise price of $0.53, of which 723,895 were vested as of April 4, 2022; |
| ● | 22,205 Ordinary Shares issuable upon the exercise of options to a consultant at an exercise price of $2.25, which are all vested as of April 4, 2022, and additional options that will be granted upon closing of this offering to buy ordinary shares in the amount of $100,000, at an exercise price equal to the price per share in this offering; |
| ● | 25,202 Ordinary Shares issuable upon the exercise of warrants to be issued in connection with the SAFEs; |
| ● | exercise of the warrants to purchase 671,687 Ordinary Shares, at an exercise price of 125% of the per share price in this offering; and |
| ● | 302,011 Ordinary Shares reserved for future issuance under our 2015 Plan. |
Unless otherwise indicated, all information in this prospectus assumes or gives effect to:
| ● | 100,806 Ordinary Shares issuable upon the conversion of the SAFEs, which we have already entered into in exchange for $500 thousand, which will automatically convert upon the consummation of this offering (unless the investors choose cash payments equal to the amount of their investments), based on an offering price of $6.20, which is the midpoint of the price range set forth on the cover page of this prospectus. |
But does not assume or give effect to:
| ● | exercise of the underwriters’ over-allotment option; and | |
| ● | exercise of the Warrants or the Underwriter’s Warrants. |
| (1) | A $1.00 increase or decrease in the assumed public offering price of $6.20 per Unit would increase or decrease the amount of each of cash and cash equivalents and total stockholders’ equity by approximately $3.3 million, assuming that the number of Units offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. A 1,000,000 Unit increase or decrease in the number of Units offered by us would increase or decrease each of cash and cash equivalents and total shareholders’ equity by approximately $5.7 million after deducting estimated underwriting discounts and commissions and any estimated offering expenses payable by us. |
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If you invest in our securities, your interest will be diluted immediately to the extent of the difference between the public offering price per Ordinary Share included as part of the Units and or that may be issued upon the exercise of any Pre-funded Warrants included in the pre-funded Units and the pro forma net tangible book value per Ordinary Share after this offering. On December 31, 2021, we had a net tangible book value of $807 thousand, corresponding to a net tangible book value of $0.07 per Ordinary Share. Net tangible book value per share or per Ordinary Share represents the amount of our total tangible assets less our total liabilities, divided by 11,136,850, the total number of Ordinary Shares issued and outstanding on December 31, 2021.
After giving effect to the sale of the securities offered by us in this offering, assuming the exercise of any Pre-Funded Warrants that are sold in the offering, no exercise of the underwriter’s over-allotment option and no exercise of any of the Warrants or Underwriter’s Warrants issued pursuant to this offering, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us, our as adjusted net tangible book value estimated at December 31, 2021 would have been approximately $19.5 million, representing $1.31 per Ordinary Share. At the assumed public offering price for this offering of $6.20 per Unit and Pre-funded Unit, which is the midpoint of the price range set forth on the cover page of this prospectus, this represents an immediate increase in historical net tangible book value of $1.24 per Ordinary Share to existing shareholders and an immediate dilution in net tangible book value of $4.89 per Ordinary Share to purchasers of Ordinary Shares in this offering. Dilution for this purpose represents the difference between the price per Ordinary Share paid by these purchasers and net tangible book value per Ordinary Share immediately after the completion of this offering.
The following table illustrates this dilution on a per Ordinary Share basis to investors in this offering:
| Assumed public offering price per Ordinary Share | $ | 6.20 | ||
| Net tangible book value per Ordinary Share as of December 31, 2021 | $ | 0.07 | ||
| Increase in net tangible book value per Ordinary Share attributable to new investors | $ | 1.24 | ||
| As adjusted net tangible book value per Ordinary Share after this offering | $ | 1.31 | ||
| Dilution per Ordinary Share to new investors | $ | 4.89 | ||
| Percentage of dilution in net tangible book value per Ordinary Share for new investors | 78.8 | % |
The dilution information set forth in the table above is illustrative only and will be adjusted based on the actual public offering price and other terms of this offering determined at pricing.
A $1.00 increase or decrease in the assumed initial public offering price of $6.20 per Unit would increase or decrease our net tangible book value per Ordinary Share after this offering by $0.22 and the dilution per Ordinary Share to new investors by $0.78, assuming the number of Units offered by us, as set forth on the cover page of this prospectus, remains the same, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. We may also increase or decrease the number of Units we are offering.
An increase or decrease of 1,000,000 Units in the number of Units offered by us would increase or decrease our net tangible book value after this offering by approximately $5.7 million. An increase of 1,000,000 Units in the number of Ordinary Shares offered by us would increase the net tangible book value per Ordinary Share after this offering and would decrease the dilution per Ordinary Share to new investors by $0.28, after deducting estimated underwriting discounts and estimated offering expenses payable by us. A decrease of 1,000,000 Ordinary Shares in the number of Ordinary Shares offered by us would decrease the net tangible book value per Ordinary Share after this offering and would increase the dilution per Ordinary Share to new investors by $0.32, after deducting estimated underwriting discounts and estimated offering expenses payable by us.
The following table summarizes, on an as adjusted basis as of December 31, 2021, the differences between the number of Ordinary Shares acquired from us as part of the Units and that may be issued upon the exercise of any Pre-funded Warrants included in the Pre-funded Units, the total amount paid and the average price per Ordinary Share paid by the existing holders of our Ordinary Shares and by investors in this offering and based upon an assumed public offering price of $6.20 per Unit, which is the midpoint of the price range set forth on the cover page of this prospectus.
| Shares | Total Consideration(1) | Average Price Per Ordinary | ||||||||||||||||||
| Number | Percent | Amount | Percent | Share | ||||||||||||||||
| Existing shareholders | 11,136,850 | 75.0 | % | $ | 6,597,370 | 22.4 | % | $ | 0.59 | |||||||||||
| SAFE conversion to Ordinary Shares | 100,806 | 0.7 | % | $ | 500,000 | 1.7 | % | $ | 4.96 | |||||||||||
| New investors | 3,600,000 | 24.3 | % | $ | 22,320,000 | 75.9 | % | $ | 6.20 | |||||||||||
| Total | 14,837,656 | 100.0 | % | $ | 29,417,370 | 100 | % | $ | 1.98 | |||||||||||
| (1) | Represents gross proceeds, before issuance expenses. |
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The number of Ordinary Shares held by existing shareholders is based on 11,136,850 Ordinary Shares outstanding as of April 4, 2022, and excludes as of such date:
| ● | 1,162,689 Ordinary Shares issuable upon the exercise of options to directors, employees and consultants under our share incentive plan, outstanding as of April 4, 2022, at a weighted average exercise price of $0.53, of which 723,895 were vested as of April 4, 2022; |
| ● | 22,205 Ordinary Shares issuable upon the exercise of options to a consultant at an exercise price of $2.25, which are all vested as of April 4, 2022, and additional options that will be granted upon closing of this offering to buy ordinary shares in the amount of $100,000, at an exercise price equal to the price per share in this offering; |
| ● | 25,202 Ordinary Shares issuable upon the exercise of warrants to be issued in connection with the SAFEs; |
| ● | exercise of the warrants to purchase 671,687 Ordinary Shares, at an exercise price of 125% of the per share price in this offering; and |
| ● | 302,011 Ordinary Shares reserved for future issuance under our 2015 Plan. |
Unless otherwise indicated, all information in this prospectus assumes or gives effect to:
| ● | 100,806 Ordinary Shares issuable upon the conversion of SAFEs, which we have already entered into in exchange for $500 thousand, which SAFEs will automatically convert upon the consummation of this offering, based on an offering price of $6.20 (unless the investors choose cash payment equal to the amount of their investments), which is the midpoint of the price range set forth on the cover page of this prospectus. |
But does not assume or give effect to:
| ● | exercise of the underwriter’s over-allotment option; and | |
| ● | exercise of the Warrants or the Underwriter’s Warrants. |
If all of such issued and outstanding options and warrants had been exercised as of December 31, 2021, the number of Ordinary Shares held by existing shareholders would increase to 12,993,431, or 77.7% (excluding the Ordinary Shares issuable upon the conversion of SAFEs) of the total number of Ordinary Shares outstanding after this offering, and the average price per Ordinary Share paid by the existing shareholders would be $0.88.
If the underwriter exercises its option to purchase additional Ordinary Shares in full in this offering, the number of Ordinary Shares held by new investors will increase to 4,140,000, or 26.9% of the total number of Ordinary Shares issued and outstanding after this offering, and the percentage of Ordinary Shares held by existing shareholders and shareholders as a result of the SAFEs conversion will decrease to 73.1% of the total Ordinary Shares issued and outstanding.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this prospectus. The discussion below contains forward-looking statements that are based upon current expectations and are subject to uncertainty and changes in circumstances. You should review the sections titled “Cautionary Note Regarding Forward-Looking Statements” and “Risk Factors” for a discussion of forward-looking statements and important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.
Overview
Our company develops a non-invasive neural input interface for controlling digital devices. Since our founding in 2014, we have developed the Mudra technology, that allows digital devices to be controlled through a neural input interface.
We are in a growth stage and at an early stage of revenues. We are currently in the transition phase from research and development to commercialization of our technology into B2B and B2C products.
We are finalizing the manufacturing of our first B2C consumer product, the “Mudra Band” and expect it to be shipped to early-booking orders in the second quarter of 2022. Selling directly to consumers will allow us to learn, improve and enhance our consumer product offerings, and enable us to mine meta-data to build a large hand and finger movements and gestures database, which presents significant monetization opportunities.
Impact of COVID-19
The COVID-19 pandemic has created, and may continue to create, significant uncertainty in macroeconomic conditions, and the extent of its impact on our operational and financial performance will depend on certain developments, including the duration and spread of the outbreak. We considered the impact of COVID-19 on our estimates and assumptions and determined that there were no material adverse impacts on our consolidated financial statements as of December 31, 2021 and December 31, 2020.
Components of Results of Operations
Revenues
Revenue is recognized when (or as) control of the promised goods or services is transferred to the customer, and in an amount that reflects the consideration we are contractually due in exchange for those services or goods. We follow five steps to record revenue: (i) identify the contract with a customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract, and (v) recognize revenue when (or as) we satisfy our performance obligations.
A pilot transaction has multiple performance obligations and it generally takes a few months but less than one year.
Each Mudra Inspire development kit sale also has multiple performance obligations.
In those transactions, each obligation: hardware and API (for Mudra Inspire development kit) and tailor-made software application and technical support (for a pilot transaction) is distinct and separately identifiable.
The amount allocated to the delivered items is recognized upon delivery, the amount allocated to API is recognized over the API period and the amount allocated to the technical support is recognized over the service period (a pilot period).
The payment terms of the Mudra Inspire development kits are upon delivery of the hardware, while the payment terms of the pilot transactions are within the pilot period.
Operating Expenses
Our current operating expenses consist of four components—cost of materials, research and development expenses, sales and marketing expenses and general and administrative expenses. Labor costs are the most significant component of operating expenses and consist of salaries (including benefits) and share-based compensation.
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Cost of materials
Cost of materials consists primarily of cost of component parts of our products sold.
Research and Development Expenses, net
Research and development expenses consist primarily of labor cost, subcontractors and materials. Costs are expensed as incurred, net of governmental grants from the IIA. We expect that our research and development expenses will materially increase as we continue to develop products and recruit additional research and development employees.
Sales and Marketing Expenses, net
Sales and marketing expenses consist primarily of labor cost, consultants, and digital advertising. Costs are net from governmental grants from the Israeli Ministry of Economy and Industry, or the IMEI.
General and Administrative Expenses
General and administrative expenses consist primarily of labor cost, professional service fees and facilities.
Prospective Initial Public Offering Expenses
Prospective initial public offering expenses consist of professional service fees relating to the prospective initial public offering.
Finance Income and Expense
Financial income consists of net currency exchange rate differences, while financial expenses consist of accrued interest on convertible securities, net of currency exchange rate differences and bank charges.
Results of Operations
The results of operations presented below should be reviewed in conjunction with the consolidated financial statements and notes included elsewhere in this prospectus. The following table summarizes our results of operations for the years ended December 31, 2021 and 2020 (U.S. dollars in thousands):
| Year Ended December 31, | ||||||||
| U.S. dollars in thousands | 2021 | 2020 | ||||||
| Revenues | 142 | 57 | ||||||
| Cost of materials | (10 | ) | (9 | ) | ||||
| Research and development expenses, net | (1,411 | ) | (743 | ) | ||||
| Sales and marketing expenses, net | (665 | ) | (287 | ) | ||||
| General and administrative expenses | (628 | ) | (174 | ) | ||||
| Prospective initial public offering expenses | (97 | ) | - | |||||
| Operating loss | (2,669 | ) | (1,156 | ) | ||||
| Finance income (expense), net | 55 | (102 | ) | |||||
| Comprehensive and net loss | (2,614 | ) | (1,258 | ) | ||||
Revenues
Revenues increased by approximately $85 thousand, or 149%, to approximately $142 thousand for the year ended December 31, 2021 from approximately $57 thousand for the year ended December 31, 2020. The increase was mainly attributable to $84 thousand received with respect to a pilot transaction with a Japanese company (that is not a related party) for hardware, tailor-made software application and technical support to demonstrate the ability of the Mudra Inspire to classify Industry 4.0 gestures of hand and finger movement on assembly line. This pilot transaction is a part of our regular course of business of piloting the Mudra Inspire and was completed in the year ended December 31, 2021, with no further obligations.
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Cost of materials
Cost of materials increased by approximately $1 thousand, or 11%, to approximately $10 thousand for the year ended December 31, 2021 from approximately $9 thousand for the year ended December 31, 2020. The increase was primarily due to higher expenses of royalties owed to IIA due to higher revenues in 2021 in comparison to 2020.
Research and development expenses, net
Research and development expenses, net increased by approximately $668 thousand, or 90%, to approximately $1.4 million for the year ended December 31, 2021 from approximately $743 thousand for the year ended December 31, 2020. The increase was primarily due to an increase of approximately $299 thousand in labor costs and subcontractors, mainly due to the increase in numbers of employees and the growth of our research and development activity in 2021. In addition, during 2021, share-based compensation expenses increased in approximately $50 thousand. Furthermore, material costs increased by $111 thousand in 2021, mainly due to purchases of electronic components and materials for the development of the Mudra Band product. In addition, the IIA grant received for our research and development expenses decreased by $84 thousand during 2021.
Sales and marketing expenses, net
Sales and marketing expenses, net increased by approximately $378 thousand, or 132%, to approximately $665 thousand for the year ended December 31, 2021 from approximately $287 thousand for the year ended December 31, 2020. The increase was primarily due to an increase of approximately $110 thousand in labor and subcontractors cost associated with our marketing efforts, an increase of approximately $100 thousand in share-based compensation, as well as approximately $145 thousand attributable to the start of activity of our subsidiary in the United States, Mudra Wearable Inc., or Mudra Wearable, in 2021.
General and administrative expenses
General and administrative expenses increased by approximately $454 thousand, or 261%, to approximately $628 thousand for the year ended December 31, 2021, from approximately $174 thousand for the year ended December 31, 2020. The increase was primarily due to an increase of approximately $299 thousand in professional services, as part of our preparation towards an initial public offering, an increase of approximately $80 thousand in payroll expenses, and an increase of approximately $82 thousand in share-based compensation expenses.
Finance income (expense), net
Finance income, net was approximately $55 thousand for the year ended December 31, 2021, compared to finance expenses, net of approximately ($102) thousand for the year ended December 31, 2020. Finance income, net was primarily due to lower interest accrued for the convertible securities due to their conversion in April 2021, as well as to currency exchange rate differences between the NIS and USD.
Comprehensive and net loss
As a result of the foregoing, our total comprehensive and net loss for the year ended December 31, 2021 was approximately $2.61 million, compared to approximately $1.26 million for the same period ended December 31, 2020, an increase of approximately $1.35 million, or 107%.
Liquidity and Capital Resources
Overview
We are still in our development stage and at an early stage of generating revenues. Therefore, we have suffered recurring losses from operations and negative cash flows from operations since inception. Our operations have been funded substantially through issuance of convertible securities to certain investors which were converted to equity, issuance of shares and warrants and through Israeli governmental grants. Considering the above, our dependency on external funding for our operations raises a substantial doubt about our ability to continue as a going concern.
Since our inception, we have financed our operations primarily through issuances of shares and issuances of convertible securities for aggregate proceeds of approximately $6.3 million (net of issuance expenses) and through Israeli governmental grants for aggregate gross proceeds of approximately $1.8 million. As of December 31, 2021, our principal source of liquidity was cash, totaling $1.3 million. In January 2022, we began entering into SAFEs for aggregate proceeds of up to $3 million. As of April 4, 2022, we had received $500 thousand under the SAFEs we had entered into. As of December 31, 2020, our principal source of liquidity was cash, totaling $475 thousand.
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We believe that our existing cash, together with the proceeds from the sale of SAFEs which we have already received, will be sufficient to support working capital and capital expenditure requirements through May 2022, without using the net proceeds from this offering and/or the net proceeds from exercise of existing warrants. Our future capital requirements will depend on many factors, including:
| ● | the progress and costs of our research and development activities; | |
| ● | the costs of manufacturing our products; | |
| ● | the costs of filing, prosecuting, enforcing and defending patent claims and other intellectual property rights; | |
| ● | the potential costs of contracting with third parties to provide marketing and distribution services for us or for building such capacities internally; and | |
| ● | the magnitude of our general and administrative expenses. |
We believe the proceeds of this offering, together with our current cash, including the proceeds from the sale of the SAFEs in January and February 2022, will be sufficient to meet our working capital and capital expenditure requirements for at least the next 24 months through April 2024.
Until we can generate significant recurring revenues, profit and cash flow provided by operating activity we expect to satisfy future cash needs through debt or equity financings as well as governmental grants and proceeds from exercises of options and warrants. In the event that we require additional financing, we may not be able to raise such financing on terms acceptable to us or at all. If we are unable to raise additional capital or generate cash flows necessary to expand our operations and invest in continued innovation, we may not be able to compete successfully, which would harm its business, results of operations, and financial condition.
The following table presents our cash flows for the periods indicated:
| Year Ended December 31, | ||||||||
| U.S. dollars in thousands | 2021 | 2020 | ||||||
| Net cash used in operating activities | (2,103 | ) | (1,089 | ) | ||||
| Net cash used in investing activities | (36 | ) | (16 | ) | ||||
| Net cash provided by financing activities | 2,938 | - | ||||||
| Net increase (decrease) in cash and cash equivalents | 799 | (1,105 | ) | |||||
Operating Activities
We have generated negative cash flows. Our primary uses of cash from operating activities are for labor cost, sales and marketing expenses and office facilities related expenses.
Cash used in operating activities mainly consists of our net loss adjusted for certain non-cash items, including share-based compensation, accrued interest on convertible securities, depreciation expenses and changes in operating assets and liabilities during each period.
During the years ended December 31, 2021 and 2020, net cash used in operating activities was approximately $2.1 million and approximately $1.1 million, respectively. The primary factors affecting operating cash flows during these periods were net losses of approximately $2.6 million and approximately $1.3 million during the years ended December 31, 2021 and 2020, respectively, partially offset by non-cash adjustments of approximately $511 thousand and approximately $169 thousand, respectively.
Net cash used in investing activities
Cash used in investing activities for the years ended December 31, 2021 and 2020 was $36 thousand and $16 thousand, respectively, which was used for the purchase of computer and other lab equipment.
Net cash provided by financing activities
Cash provided by financing activities during the year ended December 31, 2021 totaled to approximately $2.9 million, mainly as a result of the issuance of 1,343,374 Ordinary Shares and warrants to purchase 671,687 Ordinary Shares for total consideration of $2.925 million, net of issuance expenses.
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In January 2022, our board of directors authorized us to enter into a series of SAFEs for aggregate proceeds of up to $3 million. As of April 4, 2022, we had received $500 thousand under the SAFEs we had entered into. Any amounts received under the SAFEs entered into by us will be automatically converted into our Ordinary Shares in the event we close an Equity Financing (as defined hereinafter) at a discount of 20% from the per share purchase price in such Equity Financing. An Equity Financing is a transaction or series of transactions with the principal purpose of raising capital in an aggregate amount of at least $5,000,000, excluding all outstanding (i) SAFEs, and (ii) other convertible securities (if any), pursuant to which we issue and sell Ordinary Shares at a fixed pre-money valuation. In case of an initial public offering or a Change of Control transaction (as defined hereinafter), the SAFE amount shall, at the election of the investor thereunder, either (i) convert into our Ordinary Shares at a discount of 20% from the per share price at such event, or (ii) be repaid to the investor (subject to adjustments in case there are insufficient funds for such repayment to all SAFE investors) at the closing thereof. The conversion of the SAFE amounts into the Ordinary Shares in case of an initial public offering, is also subject to certain lock-up periods and other restrictions on transfer. In the event of a dissolution event (e.g., a voluntary or involuntary termination of operations, dissolution or our winding-up), the SAFE amount shall be repaid to the investors prior to or concurrently with the consummation of such an event. In addition, we agreed to issue to each SAFE investor a warrant to purchase our Ordinary Shares with an exercise price equal to 150% of the public offering price in such offering for an aggregate amount of up to 25% of such investor’s SAFE amount. The warrants shall be exercisable until the earlier of: (i) eighteen (18) months from January 2022; or (ii) in a Change of Control event, which generally covers (a) transaction in which any person or group becomes the beneficial owner, directly or indirectly, of more than 50% of our outstanding voting securities with the right to vote for the election of members of our board of directors, or (b) any reorganization, merger or our consolidation, or (c) a sale, lease or other disposition of all or substantially all of our assets.
Off-Balance Sheet Arrangements
We have headquarters which are located at Ha-Ta’asiya St 2 Yokne’am Illit, Israel. This facility comprises approximately 200 square meters, or 2,140 square feet, of space. Our current lease, which we entered into on July 1, 2018, expires on September 30, 2022. Our monthly rent payment as of December 31, 2021, was approximately NIS 14,950 (approximately $4,800).
We have off-balance sheet arrangements in connection with our research and development agreements with the IIA. Under the applicable laws, we are required to pay royalties at the rate of 3%-3.5% of sales of products developed with the funds provided by the IIA, up to an amount equal to 100% of the IIA research and development grants received, linked to the dollar including accrued interest at the LIBOR rate. We obligated to repay the Israeli government for the grants received only to the extent that there are revenues of the funded products. The LIBOR accrued interest of the total IIA grants is approximately $84 thousand, which we do not consider to be a material liability. In September 2021, the Bank of Israel, which determines annual interest rates, published a directive which stated that annual interest at a variable rate linked to the LIBOR rate for loans in U.S. dollars will be replaced by the Secured Overnight Financing Rate, or the SOFR, in June 2023. We believe that this change would not have a material impact on our results or our financial position.
As December 31, 2021, we had a contingent obligation to pay royalties to the IIA in the principal amounted of $1.8 million.
We also have off-balance sheet arrangements in connection with our sales and marketing agreement with the IMEI. Under the applicable laws, if the export revenues in the defined target market increase by $311 thousand compared to the base year, the Company would be required to pay royalties at the rate of 3% of the increase.
As of December 31, 2021, the maximum obligation with respect to the grant received from the IMEI, contingent upon entitled future sales, was $95 thousand.
We do not believe that off-balance sheet arrangements and commitments are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.
Quantitative and Qualitative Disclosures about Market Risk
We are exposed to market risks in the ordinary course of our business. Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. Our market risk exposure is primarily the result of foreign currency exchange rates, which is discussed in detail in the following paragraph.
Foreign Currency Exchange Risk
Currency Fluctuations
Our reporting currency and the functional currency is the U.S. dollar. Our funding was in U.S. dollars and our sales are currently denominated in U.S. dollars. Our operating expenses are denominated mainly in NIS, and therefore, our NIS denominated operating expenses are currently subject to foreign currency risk. To date, we have been affected by changes in the rate of inflation and NIS currency compared to the U.S. dollar, as shown below.
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The NIS revaluated against the U.S. dollar by approximately 3.3% in 2021 and 7% in 2020.
A decrease of 10% in the U.S. dollar/NIS exchange rate would have increased our cost of revenue and operating expenses by approximately $76 thousand and $127 thousand, for the years ended December 31, 2020 and 2021, respectively. If the NIS fluctuates significantly against the U.S. dollar, it may have a negative impact on our results of operations.
During the years ended December 31, 2020 and 2021, we did not hedge our foreign currency exchange risk. If we were to determine that it is in our best interests to enter into hedging transactions in the future in order to protect ourselves in part from currency fluctuations, we may not be able to do so, or such transactions, if entered into, may not materially reduce the effect of fluctuations in foreign currency exchange rates on our results of operations and may result in additional expenses.
We cannot assure you that we will not be adversely affected by currency fluctuations in the future.
Critical Accounting Policies and Estimates
The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Critical accounting policies are those that are the most important to the portrayal of the Company’s financial condition and results of operations, and that require the most difficult, subjective and complex judgments. The most critical accounting policies, discussed below, pertain to areas where judgment of management, historical factors and estimates require a high degree of involvement when determining the final reported balance in the Company’s consolidated financial statements.
Revenue recognition
Revenue is recognized when (or as) control of the promised goods or services is transferred to the customer, and in an amount that reflects the consideration we are contractually due in exchange for those services or goods. We follow five steps to record revenue: (i) identify the contract with a customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract, and (v) recognize revenue when (or as) we satisfy our performance obligations.
A pilot transaction has multiple performance obligations and it generally takes a few months but less than one year.
Each Mudra Inspire development kit sale has multiple performance obligations.
In those transactions, each obligation: hardware and API (for Mudra Inspire development kit) and tailor-made software application and technical support (for a pilot transaction) is distinct and separately identifiable:
| ● | the amount allocated to the delivered items is recognized upon delivery, | |
| ● | the amount allocated to API is recognized over the API period, and | |
| ● | the amount allocated to the technical support is recognized over the service period (pilot period). |
The payment terms of Mudra Inspire development kit sales are upon delivery of the hardware and of pilot transactions within the pilot period.
Convertible Securities
The convertible securities were presented as current liabilities as they were not mandatorily redeemable, nor redeemable at the option of the holder after a specified date, but a change of control event (constituting a redemption event outside of the Company’s control). The beneficial conversion features of the convertible securities were valued at zero.
Share-based compensation
Share-based compensation expenses related to employees and consultants options are recognized based on their fair values and amortized on a straight-line basis over the requisite service period of the options. The fair values of options with de-minimis exercise prices were determined based on the underlying ordinary share prices, while the underlying share prices were determined based on implied share prices of the nearest Company's convertible security agreements reached or equity transactions, as applicable. The fair values of the other options were determined using the Black-Scholes option pricing model taking into consideration, in addition to the underlying ordinary share prices described above, the following estimates: dividend yields, expected volatilities, risk-free interest rates and expected life periods
Going Concern
The consolidated financial statements have been prepared assuming that the Company will continue as a going concern. The Company is still in its development stage and at an early stage of generating revenues. Therefore, the Company has suffered recurring losses from operations and negative cash flows from operations since inception. The Company’s operations have been funded substantially through issuance of convertible securities to certain investors which were converted to equity, issuance of shares and warrants and through Israeli governmental grants. Considering the above, the consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties.
Governmental grants
The Company receives royalty-bearing grants from the Israeli government for approved research and development projects and marketing efforts. These grants are recognized at the time the Company is entitled to such grants based on the costs incurred or milestones achieved as provided by the relevant agreement and included as a deduction from research and development or sales and marketing expenses, respectively.
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Company Overview
We are a growth company developing a non-invasive neural input interface in the form of a wrist wearable band for controlling digital devices using subtle finger movements. Since our technology was introduced to the market in 2014, we have been working with both B2B and B2C customers as part of our push-pull strategy. We are now in the transition phase from research and development to commercialization of our technology into B2B products. At the same time, we are in the final stage of manufacturing our first B2C consumer product, the “Mudra Band” wristband, an aftermarket accessory band for the Apple Watch which allows touchless operation and control of the watch and iPhone.
Our company’s vision is to create a world in which the user’s hand becomes a universal input device for touchlessly interacting with technology. We believe that our technology is setting the standard input interface for the Metaverse. According to an article “CES 2021: The Mudra Band and How Wearable Devices Defining the Future of Immersive Customer Experiences,” published in January 2021 by Futurum Research, the Mudra Band has the potential to bring a whole new level of accessibility and immersive experiences to the wearer of the device. Moreover, according to the article, what sets the Mudra Band apart from similar technology is its add-on approach to interface with existing commands, as opposed to fixing the technology into the controlled device. Further, we have generated insights based on dozens of feedbacks we have received for our technology and learned about the preferred methods of users to produce commands with multiple digital devices, and the Mudra Band incorporates those preferred methods. We intend to transform interaction and control of digital devices to be as natural and intuitive as real-life experiences. We imagine a future in which humans can share skills, thoughts, emotions, and movements with each other and with computers, using wearable interfaces and devices. We believe that neural-based interfaces will become as ubiquitous to interact with wearable computing and digital devices in the near future as the touchscreen is a universal input method for smartphones.
Combining our own proprietary sensors and AI algorithms into a stylish wristband, our Mudra platform enables users to control digital devices through subtle finger movements and hand gestures, without physical touch or contact. These digital devices include consumer electronics, smart watches, smartphones, AR glasses, VR headsets, televisions, personal computers and laptop computers, drones, robots, etc.
Mudra Inspire, our B2B development kit product, started selling to B2B customers in 2018 as the first point of business engagement and contributed to our early-stage revenues. At CES 2021, the Mudra Band for Apple Watch, our flagship B2C product, won Innovation Award Honoree and the Best Wearable Award. The product is in its final stages of manufacturing.
Our early-stage revenues are composed of sales of our Mudra Inspire and from pilot transactions with several B2B customers. In 2021 and 2020, we had revenues of $142 thousand and $57 thousand, respectively, and comprehensive and net loss of $2.6 million and $1.3 million, respectively.
Over 100 companies have purchased our Mudra Inspire development kit, 30 of which are multinational technology companies. These companies are exploring various input and control use-cases for their products, ranging over multiple countries and industry sectors, including consumer electronics manufacturers, consumer electronics brands, electronic components manufacturers, IT services and software development companies, industrial companies, and utility providers. Our objective with these companies is to commercialize the Mudra technology by licensing it for integration in the hardware and software of these companies’ products and services. We estimate that there will be a three-to-five-year period from the time we are first introduced to a customer to signing a licensing agreement. As of the date of this prospectus, we have not signed a license agreement with any of these companies.
In addition to consumer electronics, we have recently expanded our brand to include neurotech and brain-computer interface sensors, with additional verticals that include Industry 4.0 – a new phase in the Industrial Revolution that focuses on interconnectivity, automation, machine learning, and real-time data, digital health, sport analytics, and more.
The core of our platform is Mudra, which means “gesture” in Sanskrit language. Mudra– our SNC technology and wristband—tracks neural signals on the user’s wrist skin surface, which our algorithms decipher to predict as gestures made by finger and hand movements. The interface binds each gesture with a specific digital function, allowing users to input commands without physical touch or contact. Mudra gestures are natural to perform, and gestures can be tailored per a user’s intent, desired function, and the controlled digital device. Mudra can detect multiple gesture types, including hand movements, finger movements, and fingertip pressure gradations. In addition to the control use-case, our Mudra technology and SNC sensor can be utilized in multiple monitoring use-cases where we can monitor neural and hand movements for digital health purposes, sport analytics performance, and Industry 4.0 solutions.
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Figure 1: Our Mudra Platform
Figure 1 above displays the appearance and major features of our current products—the Mudra Band for Apple Watch in black and white band color, and the Mudra Inspire (seen above from right to left). Our gestures are discrete or continuous hand and finger movements, deciphered from neural signals at the wrist. Our interface can control multiple digital devices using a single interface. In addition to consumer electronics, we have recently expanded our brand to include neurotech and brain/computer interface monitoring, with additional verticals including Industry 4.0, digital health, sport analytics, and more.
Our Strengths
We believe that our strengths include:
| ● | Direct relationships with the world’s leading multinational technology consumer electronics companies. Our B2B customers are seeking new, intuitive and natural methods for input and control of wearable computers, including smartwatches, AR glasses, VR headsets, smartphones, and other consumer entertainment devices (such as smart televisions, large displays, voice assistants, etc.). |
| ● | Vertically integrated platform that is difficult to replicate. We believe that we are setting the standard of using gestures to interact with wearable computers. Our technology is based on six layers which form three pillars – hardware, software and humanware, which is the method of adding a human facet into the development of hardware and software with the main goal of making it as functional as possible. Our hardware and software emphasize natural, intuitive, easy to use user-experience and user interface humanware. Our technologies are interdependent and are optimized to sense wrist area bio-potentials, which are electrical potentials generated in the tissues of the wrist. There is a very high interdependency between each layer, and we believe that we possess the expertise for all technology layers. |
| ● | Expanding our products to multiple market verticals. In addition to working with businesses and individual customers in the consumer electronics market, we have developed several use-cases for digital health, Industry 4.0, and sport analytics markets. These use-cases involve utilizing the Mudra SNC sensor as a platform to be used in additional verticals, such as frontline workers, patients, and athletes and sport enthusiasts. |
| ● | A Push-Pull strategy to win both B2B and B2C sales. Using a “Push-Pull” strategy and working directly with manufacturers of digital devices and with consumers using wearable computing devices, we have successfully created customer demand for consumer products and proved to manufacturers the validity of our solution to consumers. Working with both manufacturers and consumers allows us to develop products that are based on needs, inputs, demands, requests and behaviors of all stakeholders along the value chain. |
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| ● | World-class research, engineering and product teams. Our employees have a diverse set of skills and industry experience, including expertise in highly scalable distributed software systems, machine learning algorithms, artificial intelligence architecture, and user-centric product design. Our engineering, product, and design teams work together to bring our products to life, from conception to implementation. We are committed to leveraging data to continuously improve our customer experience by studying and understanding points of interaction and how our customers use our platform features. |
| ● | Strong, advantageous platform that contains: |
| - | A proprietary sensor to capture neural signals. Our proprietary Mudra SNC sensor can be utilized to decipher signal patterns for gesture control as input for digital devices, and it can also be utilized to monitor and track the neural activity of the hand motor neurons for short and long-term diagnosis. |
| - | Natural, intuitive operation using subtle finger movements. By making communication with computers much easier, we intend to empower users to interact with computers and work, enjoy entertainment, and live better. Our stylish, elegant devices have a small size and shape, and support natural, intuitive, and subtle finger movements and gestures. |
| - | Human-centered design that optimizes user experience. Our products are designed around our customers’ user experience. Our large global network of consumers and business customers provides highly useful feedback and insights, which we use to constantly improve our products and the value we offer to our users. |
| - | A large hand and finger gesture database. Through anonymized data from cloud-based calibrations and mobile apps, we are building a large database of finger and hand gestures. This will allow us to gain unparalleled insights on trends, behaviors, and usage. |
| - | Flexible gestures and user-interaction choices. Our platform supports the development and implementation of a large variety of new gestures. We can tailor gestures for each use-case per user requests or our own internal insights. Defining the right gesture and binding it with the correct function is important for high adoption of our input solution for wearable computing, and for our platform solution to become ubiquitous in multiple digital devices. |
Industry Overview and Market Opportunity
Total Addressable Market
Every digital device - whether worn on the body, placed on a desk, held in the hands, or hung on a wall - requires an interface. The Total Addressable Market, or TAM, of digital devices that we are targeting can be categorized into three segments—wearable computers, face computers and home digital devices. We view Mudra as an all-encompassing input, operation, and control interface for all digital devices, connecting the physical world with digital devices using subtle finger movements and gestures.
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The basic pillars of Human-Computer Interface, or HCI, input are text, navigation, and digital element interaction. The most common interface solutions include the keyboards and mice for PCs. Additional common interfaces are the touchscreens for mobile phones and tablet computers, handheld controllers for televisions, game consoles, VR headsets, and temple area touchpads and/or gesture cameras for AR glasses. Voice assistants are now commonly used with smart home devices.
The pace of technology advancements has always been dictated by user interfaces. With the future of computers tilting increasingly toward wearable devices, especially as smartwatches and smart glasses enter the market, HCI methods for wearable computing will need to be reinvented as well. We believe that the industry’s foreseeable future is based on wearable computers for different body parts, instead of computers that are restricted to lying on a desk.
The industry of digital computers peripherals and input devices has evolved dramatically in the past 70 years. It started in the 1950s with punch-cards as the major input method. Punch-cards were replaced by the QWERTY keyboard to input text and for two-dimensional navigation starting in the 1960s. The computer mouse, which allowed users to navigate and interact with digital elements on a Graphical User-Interface, was introduced in the 1980s. Touchpads became popular as a mouse replacement for laptop computers in the 1990s. Gesture recognition cameras to detect body, hand and finger movement were introduced in the early 2000s. Touchscreens as inputs for mobile smartphones became ubiquitous at the end of 2010.
Technologies which are used in all devices for input, interaction, control and operation, include:
| ● | Handheld devices such as computer mice, presentation clickers, gaming controllers, and styluses. |
| ● | Touch based devices such as the touchpad or touchscreen. |
| ● | Keyboard technology devices or digital displays which contain alphanumeric symbols to input text and for navigation. |
| ● | Voice assistant devices and services which interpret human speech to digital commands and speech-to-text input. |
| ● | Gesture detection sensors such as gesture detection cameras, LiDar, Radar and additional optional technologies that sense the finger and hand movements. |
| ● | Wearable input devices such as smart gloves, wearable keyboards, wearable computer mice, smart rings, and smart wearable clickers. |
| ● | Neural interface devices that are based on capturing bio-potential signals and transforming signal patterns to input commands, in invasive implant and in non-invasive wearable methods. |
According to an article “Worldwide Wearables Market Forecast to Maintain Double-Digit Growth in 2020 and Through 2024, According to IDC,” by International Data Corporation, or IDC, published in September 2020 by Bloomberg, in 2020, a total of 396 million units of wearable devices were shipped to consumers, of which 91.4 million were smartwatches and 67.7 million were smart wristbands. IDC forecasts the market for wearable devices will reach 631.7 million units shipped to consumers in 2024, of which 156.0 million will be smartwatches. This industry is expected to show a 14.30% compound annual growth rate, or CAGR. If we assume the average selling price of $160.00 per wrist wearable device, a price we believe to be a reasonable estimation based on our research, the wearables market represents over $128 billion in opportunity growth between 2021 to 2024.
According to an article “AR and VR Headsets Will See Shipments Decline in the Near Term Due to COVID-19, But Long-term Outlook Is Positive, According to IDC,” published in March 2020 by IDC, 2020 shipments of face computers reached a total of 7.1 million units shipped, of which 6.4 million were VR devices and 0.4 million were AR devices. IDC forecasts that the face computers market will reach 76.7 million shipped units in 2024, of which 41.1 million will be smart glasses. The category is expected to show a 81.5% CAGR. If we assume an average selling price of $499.00 per face computer, a price we believe to be a reasonable estimation based on our research, this market represents over $73 billion in growth opportunity of input solutions and services between 2021 to 2024. Face computers are considered devices that have a potential to replace smartphones by the end of the decade. This product category includes AR glasses and VR head-mounted devices.
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Smart computing devices include smartphones, tablets, desktop computers, and laptop computers. According to IDC, 2020 shipments of category products reached a total of 1.761 billion units shipped. IDC forecasts this market will reach 1.833 billion units shipped in 2024.
Smart home devices are expected to show high demand as consumers seek out additional conveniences brought about by home automation products and ambient computing. The smart home product category includes smart-TVs and large displays, gaming consoles, smart speakers, and home monitoring/security systems. According to an article “IDC Forecasts Double-Digit Growth for Smart Home Devices as Consumers Embrace Home Automation and Ambient Computing”, published in March 2021 by IDC, 2020 shipments of smart-TVs and smart-speakers reached a total of 427.0 million units shipped. According to IDC forecasts, this market will reach 559.2 million units shipped in 2024.
Taking the aforementioned figures into consideration, the TAM that we are targeting is 11.86 billion devices shipped between 2021 to 2024. The smart-computing and smart-home device categories present several challenges that need to be addressed before we will be able to take advantage of this opportunity. One of our major challenges is to determine whether consumers will be reluctant to adopt our products and services as an alternative to established, traditional devices, such as remote controls, touchscreens, keyboards and mice.
As a result, we plan to focus on delivering the greatest value to users by first focusing on the wearables and face computer device categories. We believe that as we continue to expand our platform and as consumers increasingly view a connected world of ambient computing and smart-home products and services as an alternative or complement to wearable devices, there will be an opportunity to extend our addressable market to the broader consumer electronics categories and markets.
Neural control interface market
The global neural control interface market is expanding due to several significant trends, including:
| ● | The pace of technology advancements is always dictated by user interfaces: Input methods have evolved in the past 70 years from paper printed punch-cards to touchscreens and gesture sensing technologies. The purpose of input is to lower the cognitive load of the user and provide a natural and intuitive method to communicate intentions and commands into a computer. The computer mouse helped place a personal computer in every home, and the touchscreen revolution put a smartphone in every pocket. Input technology is the enabler and herald of the next computing platform. We believe that the input method for wearable computing will have to be re-invented as well, with interactions beyond the touchscreen. |
| ● | The “Metaverse” is widely considered to become the future of the internet. Instead of just viewing content - users will be in it, experiencing it all around. Users will remotely create and explore with other users as if they are present with them - socialize, work, play, learn, shop, and more. Accessible across multiple computing platforms such as VR, AR, mobile devices and computers, the Metaverse will offer rich immersive experiences and reach content. Already termed as “the next computing platform,” it is becoming the major catalyst to adopting wearable computing. We believe that our technology is setting the standard input interface for the Metaverse. |
| ● | Wearable computing is reshaping business processes and consumer entertainment patterns: The use of wearable technology makes it easier for frontline and assembly line workers to operate more efficiently and provide better service. It boosts labor efficiency, reduces quality defects and revisions, and improves safety. Wearable consumer products are already an integral part of consumers’ lives. Wearables like the Fitbit and Apple watch monitor health and fitness metrics, are used as alarm clocks in the morning as a wrist band vibrates, and provide vast amounts of information quickly and efficiently, as well as virtual entertainment. |
| ● | The human wrist is a highly valuable tool for sensing the human body: Nerve bundles and arteries pass directly beneath the skin making it possible to sense the electrical conductance of nerves and other bodily functions and to collect valuable data. Today, physical tools are being replaced with digital accessories such as wristbands and smartwatches. These devices measure wrist movement, heartbeat, electroencephalography, rhythm, skin temperature, hydration, and blood oxygen. Recent advancements in sensors and signal processing combined with artificial intelligence algorithms have enabled the emergence of wrist-based wearable neural input technology, thus opening a wide range of applications in HCI and bio-potential signals monitoring. |
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| ● | Wearable computer devices are expanding now and are expected to continue to expand in the foreseeable future: According to an article “Wearable Technology Market Growth Analysis by Revenue, Size, Share, Scenario on Latest Trends & Types, Applications Forecast 2025,” published in May 2021 by MarketWatch, the number of connected wearable devices is expected to increase to 1,105 million in 2022 from 593 million in 2018. |
| ● | Neurotech market and brain-computer interfaces are gaining traction: The neurotech industry is based on connecting human brains to computers, so that brain-computer interfaces open up a new area of economic enterprise. Brain-computer interfaces and neural inputs are starting to move beyond the confines of academia and toward industry and the consumer market. The market includes head-worn devices and wrist-worn devices. Acumen Research and Consulting predicts, in its article “Brain Computer Interface by Market (By Product: Invasive BCI, Partially Invasive BCI, Non-Invasive BCI; By Application: Healthcare, Disabilities Restoration, Brain Function Repair, Smart Home Control, Communication and Control, Entertainment and Gaming) – Global Industry Analysis, Market Size, Opportunities And Forecast 2020-2027,” that the global brain-computer interface market will reach a market valuation of $3.48 billion by 2027. |
Our Technology
Our technology is based on six layers which form three pillars-- hardware, software and humanware. We develop the hardware and the software from the bottom up and define the user-experience. Using the domain expertise and the insights we have gathered and continue to gather as users provide feedback, we define the standard for interaction with wearables and digital devices. Our technology layers are interdependent and are optimized to the wrist area thus creating a significant protection moat - there is a very high interdependency between each layer to adjacent layers, and developing similar solutions requires expertise in each individual layer.
The first pillar is hardware, which includes electrodes, band design, including form factor and materials, the SNC sensor and the miniaturized flex-rigid electronics. We research and develop electrode materials and geometry to achieve a durable electrode that sustains its physical properties on wrist skin contact and endures thousands of wear/off cycles. Band design includes the modeling of the curvature of the band to snuggly fit the wrist area, and feel pleasant and comfortable to be worn on daily basis. The SNC sensors were developed specifically for the inner wrist area; therefore, they are able to sense low energy biopotentials and to maintain optimal bandwidth and minimize external interference sources. The miniaturized flex-rigid electronics design and manufacturing offer a flexible shell with semi flex-rigid printed circuit board, to meet strict bill of materials and design for assembly requirements, and consumer laws.
Figure 2: The Three Pillars of the Mudra Technology
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Figure 2 above displays the three pillars of our technology. The first pillar is hardware, which includes electrodes, band design, including form factor and materials, the SNC sensor and the miniaturized flex-rigid electronics.
The second pillar is software, which includes cross platform software engine, artificial intelligence learning algorithms and software applications. We developed a unique cross-platform software engine, which supports real-time signal processing and is capable of cross-platform algorithms mitigation on multiple operating systems. This allows us to run our software on low compute power wearables and digital devices, and to mitigate algorithms across platforms without the need to re-write the algorithms for each operating system. Our machine learning algorithms and deep learning neural networks artificial intelligence architecture leverages the most advanced approaches of few-shot learning algorithms, making classification based on a very small number of samples, on a unique bio-signal for which we create the unique, and non-available, training and validation sets. We achieved over 96% accuracy with a very short calibration procedure for multiple users. We develop software applications for mobile and desktop operating systems which integrate the algorithms and supply the users with the desired gestures and functions.
The third pillar is the humanware and user experience which is the hand and finger gestures that the user performs and the functions that bind with these gestures to input commands and control devices. We developed a set of gestures that create a natural interaction and are optimized for humans rather than for computers. As a result, we immerse users naturally to control their devices and increase the fidelity of intention.
Our gestures include discrete gestures, continuous gestures, and air-touch gestures:
| ● | Discrete gestures. Moving a single finger or softly tapping the finger or thumb. | |
| ● | Continuous gestures. Applying fingertip pressure to manipulate digital objects. | |
| ● | Air-touch gestures. Combining the above with hand and forearm movements, such as “slide-to-unlock”. |
Figure 3: The Mudra Platform Gestures
Figure 3 above displays the three types of Mudra gestures – discrete gestures, continuous gestures, and air-touch gestures.
We specifically tailor the set of gestures to each controlled device and scenario, as we deeply believe each device’s form factor and user input should be tailored specifically to the user’s intent, rather than having a set of pre-defined gestures for all devices and functions. Each electronics company or electronic brand may require different bundles of hardware, software, and humanware solutions, with integration interfaces for its device, system and design.
Our Core Products and Solutions
The Mudra Platform
Mudra, our neural interface platform, is designed to enable our customers and users to improve interaction and control of digital devices by:
| ● | Creating a natural and intuitive collaboration with computers. We empower users to interact, entertain, work, and live more natural, relaxed, and productive lifestyles by lowering the burden of communicating with computers and enabling an intuitive mode of interacting with computers. Our technology includes both a non-invasive neural input interface for the wrist that allows building innovative user experiences and applications for digital devices and a smart watch band that lets the user control the Apple Watch using subtle finger movements. These devices span over multiple styles, form factors, capabilities, and functions, addressing the needs of everyone – from consumers using their favorite wearable for infotainment and relaxation to business and enterprise customers serving their customers and helping their employees to maximize their performance. |
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| ● | Designing products with a human-centered design, focusing on optimizing the customer experience. Our products are designed bottom up from the user experience, through the gestures used and the device design and form factor. We have a global network of businesses customers and consumers who share their thoughts, insights, and activities with us, which allows us to aggregate the best solutions to interact with any wearable device. We are conducting extensive user-tests and observations to custom-tailor each gesture with the right control function. |
| ● | Learning through cloud-based calibrations and mobile apps. We are building a large hand and fingers gesture database. The information is stored anonymized on cloud-based servers, which allows us to gain meaningful insights on user trends, behaviors, and usage of our products. We then use transfer learning, a machine learning method for storing knowledge gained while solving one problem and applying it to a different but related problem, to implement new insights and wisdom into our next generation algorithms, devices, and user experiences. |
Our Products
We are offering both B2B and B2C products.
B2B products. We offer two ways for our business customers to access our technology: (i) purchase of a Mudra Inspire or research software to evaluate the experience and to validate the technology, and (ii) an SNC sensor module to integrate into a customer device (including AR/VR headsets, smartphones, smartwatches, televisions, and laptops) under a license agreement. Typically, after a B2B customer purchases a Mudra Inspire as the first phase of business engagement, we work with the customer on validating our technology with the goal of integrating our technology into the customer’s device. We also offer licensing of a SNC sensor module, with the option to license our operating system, or OS, software package and algorithm software package.
Our B2B product offerings include:
| ● | SNC sensor module. We provide the SNC sensor, OS software package and an algorithm package to customers. The customer can then integrate the SNC sensor in its own wrist-worn device, and use our OS software package and algorithm package to offer Mudra capabilities integrated in its own product. After the validation phase, we create a reference design for the SNC sensor and electronics that are built around our SNC sensor. The customer, based on our reference design, builds a module for the complete sensor system that includes the motherboard board, our proprietary SNC sensor, and our software and algorithm package. This complete sensor system with the required gesture functionalities is then integrated into the customer device. We also give the customer the option to develop its own OS software and algorithm software. |
| ● | Mudra Inspire. A smart band for the Apple Watch which allows users to control the watch and iPhone and to operate applications using same-hand touchless finger movements. The product was launched in June 2020 via an Indiegogo crowd funding campaign, and has been offered for booking directly to consumers since September 2020. The product is expected to start shipping in the second quarter of 2022. It has a U.S. manufacturer’s suggested retail price, or U.S. MSRP, of $179.00. |
We believe that offering our own consumer products presents vast monetization opportunities because we can utilize meta-data mining for the purpose of building a large hand and finger gestures database.
Our B2C product offerings include:
| ● | Mudra Band. A smart band for the Apple Watch which allows users to control the watch and operate applications using same-hand touchless finger movements. The product was launched in June 2020 via an Indiegogo crowd funding campaign, and has been offered for booking directly to consumers since September 2020. The product is expected to start shipping in the first quarter of 2022. It has a U.S. manufacturer’s suggested retail price, or U.S. MSRP, of $179.00. |
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| ● | Mudra XR wristband. A wearable controller for smart glasses which supports hands-free interaction. We introduced the concept in November 2019. We are now defining the product specification as we receive feedback from AR and VR experts. The product is planned to launch in the fourth quarter of 2022. |
What our platform devices track
Our products track the following signals which our algorithms decipher to classify the user intent hand and finger gestures:
| ● | SNC. Our sensors are placed in proximity to the ulnar, median and radial nerves close to the inner wrist skin surface area. These signals are directly correlated with the hand and finger movements and with fingertip pressure between fingers or on external objects. |
| ● | Acceleration and Rotation. We use an inertia measurement unit to measure the wrist acceleration in three-axes and to measure the wrist rotation on four quaternions. These measurements are used to estimate the direction the hand is moving and the palm orientation in relationship to the forearm and body. |
Compatibility and Wireless Syncing
In order to reach the widest set of corporate customers and customer users, we focus on ensuring that our devices are compatible with a broad range of mobile devices and OSs. Currently, our platform can sync with mobile devices operating with iOS8 and above, Android 8.0 and above, and Windows 10 and above.
Our Customers
Our customers include businesses and private consumers, as we operate in both the B2B and B2C sectors. We define “customer” as an individual or entity that has purchased our products. We consider individuals that are or could be interested in our products as “consumers.”
B2B Market
Our B2B customer market includes consumer electronics companies, consumer electronics brands, industrial manufacturing companies, IT and software solutions providers, software development studios, and academic institutions. As the rate of adoption for neural input solution among companies and users increases, the likelihood of our platform becoming universally compatible with any wearable device or computer also increases, creating positive network effects that enhance our growth. In addition, the data we accept from our large user and customer base enables us to enhance our product features, provide improved insights, and offer more valuable experiences for our users.
We explore a large variety of use-cases with our customers. A use-case is a well-defined scenario, which involves a user, a user objective or task, a controlled device, and the user’s environment. An example for a use-case is a bike-rider that controls the display of data layers on AR smart glasses designed for cycling, and uses touchless subtle finger movements to scroll, swipe and select data layers and digital items. While cycling, the rider wears gloves and has the fingers clenched on the bike steering wheel.
Figure 4: Number of Our B2B Customers and Use-Cases
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In Figure 4 above, the chart on the left illustrates the number of total business customers buying the Mudra Inspire, which was 27 in the second half of 2018 (all of which were new customers), 82 in 2019 (55 of which were new customers), 103 in 2020 (21 of which were new customers), and 121 in 2021 (18 of which were new customers). If a separate team from a company bought the Mudra Inspire, we consider such team as a new customer. If the same team bought the Mudra Inspire, we do not consider it as a new customer.
The chart on the right above illustrates the number of total business customer use-cases for integrating or implementing our Mudra technology into their devices, products or services: 21 in the second half of 2018 (all of which were new use-cases), 59 in 2019 (38 of which were new use-cases), 74 in 2020 (15 of which were new use-cases), and 89 in 2021 (15 of which were new use-cases).
Consumer Electronics Companies
We define consumer electronics companies as a B2B market, where these customers have all the resources needed to develop, manufacture and market a wide variety of consumer electronic devices. Our customers in this market are exploring our Mudra technology as an input-method for current and future products, which include AR glasses, smartwatches, VR headsets, gaming consoles, mobile phones, smart televisions, voice assistants, smart homes, and large displays.
We estimate there will be a three-to-five-year period from the time we are first introduced to a customer to signing a licensing agreement. Some of the following seven phases may be introduced earlier to qualify the customer.
The first phase of engagement usually occurs when the customer has bought the Mudra Inspire. In this phase, we educate the customer about our technology, including our cutting-edge algorithms, the product form factor, the gestures and binding functions, and the user experience. During this period, the customer usually evaluates these factors and validates the technology as a whole.
In the second phase the customer defines a use-case for evaluating our Mudra technology for its business goals. This includes defining user functions, and defining the gestures that will be used to control the device. The second phase is mostly focused on the end-user experience, or what we term as the “humanware” layer.
The third phase focuses on the customer’s needs, desires and “nice-to-have” features that it lists in a technical document. This phase has a prolonged direct interaction with the customer which includes support, conversations, and further explorations of our technology scope.
The fourth phase includes a detailed written pilot transaction scope and software requirement specification document. The outcome is, generally, a software or a mobile application which includes customer specific requests for which gestures perform certain functions on a specific device and operating system. This phase may also include defining new gestures, collecting new gesture data from users, developing algorithms, and writing the program.
In the fifth phase, upon successful completion of the customer’s pilot transaction, a full technical specification of the solution and the integration method are discussed, including: definition of the wrist device form factor, material, and design; definition of the software, and compute unit requirements; the full set of gestures and interactions; and finally, the complete product specification and integration methods.
In the sixth phase, we define the business model and revenue model, the licensing scope, the site license rights, and the license period. We offer a business model which includes a mix of fixed annual license fee and variable royalties per each device sold. The business model and pricing are dependent on the integration level required, the development period, the exclusivity rights, the scope of the reference engineering design, and the expected volume of units that the customer is expected to sell.
In the seventh and final phase, the commercial contract with the customer in signed. All necessary integration design information to start serial manufacturing and integration into the consumer electronics customer device are delivered.
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Consumer Electronics Brands
We define consumer electronics brands as a B2B market, where these customers have all the necessary resources to develop, manufacture and market a single product or product line of a consumer electronic device. Customers in this market are exploring our Mudra technology as an input method for current and future products. We are working with leading consumer electronics brands on integrating the Mudra technology into their products.
With this type of customer, we seek to get enter into a bulk purchase order or to create a co-branded device or a white label. We are in charge of the development and manufacturing of the wrist device, based on the customer’s specifications.
The business model with this customer segment is to charge for research and development costs to adjust our Mudra technology per customer specification. We sell a bulk order of the devices at an agreed price to the customer. The minimum order quantity for this customer segment is 10,000 units per year.
Industrial Companies
We define industrial companies as a B2B market segment, where the customer operates in various Industry 4.0 areas such as automotive, aircraft, energy, medical, infrastructure, and utilities, among others.
As explained briefly above, Industry 4.0 refers to a new phase in the Industrial Revolution that focuses heavily on interconnectivity, automation, machine learning, and real-time data. Industry 4.0, which encompasses the Industrial Internet of Things, or IoT, and smart manufacturing, unites physical production and operations with smart digital technology, machine learning, and big data to create a more holistic and better-connected ecosystem for companies that focus on manufacturing and supply chain management.
Customers in this market are seeking ways to increase profitability and reduce costs in production and assembly lines, optimize manufacturing processes, and make their employees more efficient and less vulnerable to mistakes or physical harm.
We conducted several evaluations of the Mudra technology with industrial companies, which included developing new gestures for monitoring manual activity of assembly line employees. The motivations of the customers are:
| ● | inadvertent error prevention for an equipment operator to avoid mistakes and defects by monitoring, correcting, drawing attention, or preventing human errors as they occur; and | |
| ● | process engineering and business activities to continuously improve all functions and involve all employees from senior management to the assembly line workers |
Manufacturing and assembly lines contain multiple manual tasks that employees perform repeatedly without being monitored with regard to accuracy or the employees’ physical conditions. Using our Mudra technology to monitor employee actions and the way they perform tasks can reduce mistakes on assembly lines, and continuously improve employee productivity and engineering processes. Principally, a manual hand operation on a production line or an assembly line can be defined as a gesture with our Mudra technology. We offer these customers wristbands that their employees can wear and monitor hand and finger movements. A local computer unit such as smartphone, tablet or PC, is connected to a cloud-based server to collect, analyze and identify if a certain manual task is performed accurately, thus preventing incurring losses on later stages of production. It can also monitor the movement frequency and infer stress of the employee to alert when performance is degrading during a work day, or over time.
Based on customer feedback and pilot transactions, the business model for this customer segment is SaaS. We supply the wrist devices, specific software, and the cloud and integration solution. The customer pays per site where the solution is implemented and on the number of users, on monthly or annual automatic renewable subscription.
Information Technology, Software Solutions Providers
We define information technology, or software solutions providers, as a B2B market, where the customers offer third-party clients with project management needs, from conception to installation. Customers in this market are traditionally hired as vendors for consumer electronics companies, consumer electronics brands, or industrial company segments, to integrate the Mudra technology as part of a solution to their clients. The common use-cases include defining new input methods for industrial robots, drones, and other machines or devices. The business model is similar to the business model we will use when directly facing the customer’s client, which can be a license agreement, a bulk order, or a SaaS model.
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Software Development Studios
We define software development studios as a B2B market, where the customers seek new opportunities in computer games and mobile applications. The customers can leverage their existing users and install-base with new innovative digital health, entertainment, and gaming applications. The business model is revenue sharing from the install base, based on monthly or annual revenues. The software segment includes developers, designers and artists, all working together towards delivering engaging, high visual and technical quality games.
Academia
We have a few customers from academia and research universities which explored the use of our Mudra technology to aid individuals with physical disabilities, and new alternative methods of input and interaction for individuals with limited hand movements.
B2C Market
We have started offering our products directly to consumers, in the form of pre-orders, or early bookings. The Mudra Band for Apple Watch is our first consumer product, launched in June 2020. The band connects to the Apple Watch and allows a user touchless operation and control of watch functions. We have over 1,300 backers who pre-ordered the Mudra Band units thorough our 2020 Indiegogo crowdfunding campaign and over 1,200 pre-orders, or early bookings, directly from our website www.mudra-band.com.
Establishing a direct connection with users enables us to learn, improve and enhance our product offerings. This also enables us to mine meta-data to build hand and finger movements and gestures database, which we believe has huge monetization opportunities. The Mudra Band for Apple Watch is aimed at four major consumer markets: (i) users who are Apple enthusiasts and like buying Apple related products; (ii) users who are technology early adopters and like purchasing innovative consumer gadgets; (iii) users who are active sport and fitness users, and (iv) crowd-funding backers who ordered the device in our Indiegogo crowdfunding campaign.
We plan to develop and offer additional consumer electronics products for controlling and interacting with computers and digital devices. We expect additional consumer offerings will include applications for a variety of devices which will add value to the consumer beyond hardware functions.
The value of Mudra Input Technology to Our Customers
Smartwatch operation methods include touchscreen, buttons, digital crown, bezel, and wrist gestures. By integrating our Mudra technology into a smartwatch, our business customers can:
| ● | Offer a touchless input operation method feature for the smartwatch; | |
| ● | Diversify their product line offering by introducing new hardware products, software applications, and user service; | |
| ● | Integrate touchless interaction into existing applications; | |
| ● | Enable developers to introduce exciting new applications in entertainment, gaming, fitness, digital health, using a gesture-based watch OS; and | |
| ● | Increase eco-system products connectivity by controlling multiple connected devices from the watch, using gestures. |
Our Mudra technology enables the smartwatch end-user to enjoy a touchless watch operation experience. The user can operate applications and watch OS functions without physical touch using same-hands subtle finger movements, while multi-tasking or on-the-go, keeping a visible display.
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Mobile phone usage has been limited by the touchscreen, an interface which requires constant physical touch. By linking a Mudra wristband with a mobile phone, our business customers can:
| ● | Turn the phone to a content-hub by streaming video, music, games and applications to larger screens, and input provided using a mudra wristband; | |
| ● | Establish a strong products eco-system integration, where connected devices work together and are controlled using a common interface; | |
| ● | Create an additional input method for mobile phones, with interactions beyond the touchscreen; and | |
| ● | Increase their market differentiation and add revenue streams by providing additional value to their phone users by providing ambient computing features. |
Our Mudra technology allows the mobile phone end-user to benefit from turning the phone into a stationary hub for work, video streaming, and gaming. The user can access a world of new experiences by integrating touchless interactions with connected eco-system devices to achieve more of the phone.
AR glasses use semi-transparent display lenses to overlay digital data and digital holograms into the user’s real-world view. AR glasses input solutions include gesture recognition cameras, temple area touchpads, wired remote, handheld clicker, handheld remote, and voice commands.
By integrating our Mudra technology with AR glasses, our business customers can:
| ● | Manufacture a stylish, light weight, and smaller form factor pair of glasses, by removing the gesture recognition hardware from the device; | |
| ● | Reduce research and development costs related to the development of hardware and software for the gesture camera; | |
| ● | Increase device battery life by eliminating central processing units and sensor gesture recognition related power consumption; | |
| ● | Offer a natural and intuitive interaction experience which does not block real-world view and is discrete and socially acceptable; and | |
| ● | Provide an input solution that works well indoors and outdoors, is not dependent on a line of sight or limited by field of view, not affected by ambient light conditions, and is robust to environmental conditions. |
When using our Mudra technology, the AR glasses end-user enjoys a natural, hands-free, and safer input method to interact with digital overlays. The user can operate the device using natural and intuitive hand postures and gestures along the waist, with less fatigue caused by waving the hands in mid-air. The user’s real-world environment is clear and not blocked by the hands.
VR headsets use digital displays which cover eyes to immerse the user in a fully computer-generated alternative environment, displaying computer-generated video capture which entirely occludes the user’s natural surroundings. VR headset input solutions include handheld controllers, a gesture camera, a keyboard, a mouse, input gloves, and voice commands.
By integrating our Mudra technology with VR glasses, our business customers can:
| ● | Diversify after-market input solutions, alongside existing controllers and input methods; | |
| ● | Support multiple additional natural and exciting interactions with video games, where the user can use the hands to grab, hold and manipulate digital objects; | |
| ● | Enrich digital content by turning daily simple physical objects to smart digital peripherals, for example, turn any pencil into a stylus to capture and input digital data such as handwriting; | |
| ● | Reduce the user’s loss of proprioception (kinesthesia) by using natural hand and finger movements where the finger is not clenched around handheld controllers; and | |
| ● | Reduce costs by integrating hand and finger tracking without developing expensive sensor hardware and the accompanying software and algorithms. |
When using our Mudra technology, the VR headset end-user is immersed in a real-life VR experience. Interaction with digital holograms such as grabbing, throwing, holding, and dragging is done using hand and finger movements instead of by pressing buttons. Using our Mudra technology allows the user to be fully immersed into an entertaining digital experience that feels like a real-life interaction.
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Competition
The basic input pillars of HCI are through text, navigation, and digital element interaction. The most common interface solutions include keyboard and mouse for PC, touchscreen for mobile phones and tablet computers, handheld controllers for television, game consoles, and VR headsets, temple area touchpads and/or gesture cameras for AR glasses, and voice recognition for smart home devices.
The market of input methods and peripheral for digital devices is both evolving and competitive, with companies offering a variety of competitive products in multiple price points. The established industry-standard technologies include physical or digital keyboards, PC-mice, handheld controllers, touch surfaces, voice assistants, and gesture cameras. These categories have a multitude of participants including specialized consumer electronics companies such as Logitech International S.A., Razer, and Microsoft. There is also a wide range of after-market products that can be purchased on retail and online stores from a multitude of manufacturers. Voice assistants are now available through multiple technology consumer companies such as Apple, Google, Amazon, Microsoft, and Samsung.
There are also many large, broad-based consumer electronics companies that either compete in our market or adjacent markets, or have announced plans to do so. For example, Apple released the Apple Watch AssistiveTouch capability to users for controlling the Apple Watch in December 2021, with same-hand gestures to control the Apple Watch, whereas Facebook acquired our former direct competitor CTRL-Labs in September 2019.
There are also multiple participants which utilize emerging wearable, sensor, and bio-potential signals to offer neural and wearable interfaces. Neural wrist area competitors include Pison Technology Inc. and CoolSo Inc., whereas Electroencephalogram-based companies include Neuralink Corporation and NextMind.
We believe that our competitive advantages include:
| o | Push-Pull strategy all along the value chain and creating a blue ocean business environment. We have strong relationships with consumer electronics companies, and we also communicate directly with consumers. Thus, we gain meaningful insights on the market and consumer needs, and constantly improve our products along the value chain. We aim towards a “blue ocean” strategy, where we do not compete with established market solutions, but rather we create a whole new arena where multiple input methods can co-exist together to provide the best user experience for the consumer. |
| o | We seek to work with multiple consumer electronics companies and consumer electronics brands. We seek to integrate elements of our Mudra technology – sensors, electronics, software, and user experience - with multiple consumer electronics manufacturers and companies. We believe in our Push-Pull strategy approach of working directly with consumers to validate demand and we are working with companies to customize our technology integrated into their specific needs. Because we provide the hardware specification and the actual software and user-experience, each company can tailor our technology to fit its own wrist-worn device or watch band, form factor, appearance and style, material, user experience and gesture set. We have a very strong track record of connecting with global leading companies and our positioning leverages us to familiarize ourselves with their needs, requirements, limitations, and use-cases; thus, we can tailor the right product specification and user-experience. |
| o | Advanced, purpose-built hardware and software technologies. Our devices leverage industry-standard technologies, such as Bluetooth low energy, as well as proprietary technologies, such as our SNC sensors, and our algorithms that more accurately track and decipher user intent and action. Our technology layers are interdependent and are optimized to the wrist area from the start, focusing first on device style, form factor, gestures, and user experience. Thus, we’ve created a significant moat – a key advantage that sets us apart from our competitors. There is a very high interdependency between each layer to adjacent layers, and developing similar solutions requires expertise in each individual layer. New entrants that move from the forearm or the wrist back to the inner wrist area will need to develop all these layers, reduce the number of sensors to fit the wrist area size, re-design device form factor and electronics, collect and train algorithms using new biopotential signals patterns, re-design their data communication protocol, and define the gestures and user interaction, as if they are developing a new device altogether. |
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| o | Broad mobile, API, and algorithms compatibility. Our broad mobile compatibility means our users will be able to sync their Mudra devices with multiple mobile phone models, including iOS, Android, and Windows products. Our API allows access and exploration of our Mudra technology to various industry sectors in consumer electronics, industry, IT and software solutions, academia, and software development. Our cross-platform software engine supports real-time signal processing and supports cross-platform algorithms mitigation on multiple operating systems. This allows us to activate our software on low compute power wearables and digital devices, and to mitigate algorithms across platforms without the need to re-write the algorithms for each operating system. |
| o | Agile go-to-market strategy for consumer products. We are launching our products after communicating product benefits, receiving meaningful and valuable feedback from our users and then implementing the feedback into the design phase, while generating demand to the product before it has been manufactured. This strategy ensures that we only produce and market products that are suitable to the market and to customers’ demand. |
| o | First mover advantage. We are in the final phases of serial production of the world’s first consumer wrist neural controller. This enables us to gain a competitive advantage by being the first to market with a neural input device. This supports us to establish strong brand recognition and customer loyalty before other competitors enter the market. This advantage also allows us additional time to perfect the product, define our interactions and gestures as industry standard, and set pricing points. We plan to establish sufficient market share and a solid customer base to maintain a majority of market share. |
Based on these variables, we believe that we compete favorably when compared with the global competition in this market, which will enable us to maintain and extend our leadership position.
Our Growth Strategy
We intend to achieve a leading position for neural input technology, and to expand our operations to digital and wearable computers. Key elements of our growth strategy include:
| ● | Offer a broad range of platform devices. We believe everyone’s needs are unique, so we will offer our users a wide range of connected devices to interact and control in multiple styles, form factors, and price points, to allow people to find the devices that fit their lifestyles and goals. We believe that we can leverage the growing public acceptance and awareness of wearable neural technologies and the rising adoption of wearable device to market multiple Mudra-based consumer products. |
| ● | Introduce new features, use-cases, software applications, and services. We plan to continue introducing new features and services to increase user engagement and revenue. For example, we are investing in building a diverse user-gesture data bank, which will enable us to develop additional new gestures. It is our belief that the gestures should be natural for the user and tailored based on the use-case and controlled device, instead of a “one size fits all” approach which forces the user to learn new interactions. In addition to the control use-case, our Mudra technology and SNC sensor can be utilized in multiple monitoring use-cases where we can monitor neural and hand movements for digital health purposes, sport analytics performance, and Industry solutions. The platform serves multiple corporations, businesses and individuals in the form of customized mobile and computer applications with a broad range of business models that include hardware sales, licensing, and SaaS model. |
| ● | Integrate our Mudra technology into existing devices. We intend to leverage our strong relationships with multiple consumer electronics companies and brands to sign software and hardware licenses and royalty contracts to make ourselves a fundamental input component for all digital devices and platforms. We also believe our superior software and hardware integration ability to work with companies will enable us to sign agreements with leading global and smaller companies for consumer devices and industry use-cases. |
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| ● | Further penetrate the additional markets. We intend to increase our focus on building relationships with corporations in Industry 4.0, wellness and digital health, and sports analytics. Our main advantage is the ability to continuously and securely track the user’s engagement over lengthened periods of times and supply meaningful insights for employee performance and safety and the user’s physiology. |
| ● | Expand brand awareness, global distribution and drive sales of our products and services. We intend to increase our marketing efforts to further expand global awareness of our brand and drive greater sales of our products and services. The international markets represent a significant growth opportunity for us, and we intend to expand sales of our products and services globally through select retailers and strategic partnerships. |
| ● | Data monetization. Once we have a sufficiently large database, we intend to monetize data derived from a combination of gestures that authenticates a user, identification of patterns of daily behavior, and monitoring of metrics and identification. This will expand our offerings related to data and user behavior, which can open multiple new markets and opportunities. |
Intellectual Property
Our ability to compete effectively depends in part on our ability to develop and maintain the proprietary aspects of our technology in hardware, software, sensors, and user experience. Our policy is to obtain appropriate proprietary rights protection for any potentially significant new technology acquired or developed by us. We currently hold two U.S. patents: the first patent concerns a wrist wearable gesture control system that uses bio-potential signals to control digital devices and provides user feedback, and the second patent is a continuation in part of the first patent, and adds the ability to detect user applied fingertip pressure for analog control of digital devices. In addition, we have one China patent application, and one U.S. patent application. As of the date of this prospectus, we do not conduct any material business in China.
In addition to patent laws, we rely upon a combination of designs, copyrights, trade secrets, domain names and trademark rights, and contractual restrictions such as confidentiality agreements, licenses, and intellectual property assignment agreements. We attempt to protect our trade secrets and other proprietary information through agreements with all our B2B customer segments, other customers and suppliers, distributors, proprietary information agreements with our employees and consultants, and other similar measures. Our primary U.S. registered trademark is for our product line name (“Mudra”). We cannot be certain that we will be successful in protecting our proprietary rights. While we believe our patents, patent applications, hardware, software and other proprietary know-how have value, changing technology makes our future success dependent principally upon our ability to successfully achieve continuing innovation.
Litigation may be necessary in the future to enforce our proprietary rights, to determine the validity and scope of the proprietary rights of others, or to defend us against claims of infringement or invalidity by others. An adverse outcome in such litigation or similar proceedings could subject us to significant liabilities to third parties, require disputed rights to be licensed from others or require us to cease marketing or using certain products, any of which could have a material adverse effect on our business, financial condition and results of operations. In addition, the cost of addressing any intellectual property litigation claim, both in legal fees and expenses, as well as from the diversion of management’s resources, regardless of whether the claim is valid, could be significant and could have a material adverse effect on our business, financial condition and results of operations.
At this time, we are not a party to any pending litigation for infringement of intellectual property rights.
Research and Development
We are passionate about developing innovative products and services that allow interaction and control of computers to become natural and intuitive as real-life experiences. We believe our future success depends on our ability to develop new products and features that expand the versatility and performance of our existing platform, and we plan to continue to invest significant resources to enhance performance, functionality, and convenience and style for our users.
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Our research and development team supports the design and development of our wrist-worn devices, proprietary sensors, firmware, algorithms, and mobile apps. The team is composed of dedicated research employees, electrical engineers, mechanical engineers, firmware engineers, site operations engineers, and mobile app developers. Our research and development team is primarily based at our headquarters in Yokne’am Illit, Israel.
Our research and development expenses, net were approximately $1.5 million and approximately $743 thousand for the years ended December 31, 2021 and 2020, respectively.
The increase in research and development expenses, net are is primarily attributable to an increase of $443 thousand in labor costs, share-based compensation expenses, and subcontractors, mainly due to the increase in the number of employees and the growth of our research and development activity in 2021. In addition, cost of materials increased by $111 thousand in 2021, mainly due to purchases of electronic components and materials for the development of the Mudra Band product. In addition, the participation of the IIA in our research and development expenses decreased by $84 thousand during 2021.
We believe that the receipt of these IIA grants in the years 2015 to 2021 is a positive signal that our technology is innovative and feasible. We received these grants for the purpose of developing the Mudra SNC core technology, and for developing the Mudra Band for Apple Watch hardware architecture.
We continue to pursue non-dilutive grants from the IIA as well as other organizations in Israel.
Manufacturing, Logistics and Fulfillment
We outsource the manufacturing of our products to several contract manufacturers. These contract manufacturers produce components of our products in their facilities located in Asia and Israel. The components used in our products are sourced either directly by us or on behalf of us by our contract manufacturers from a variety of component suppliers selected by us and located worldwide.
Our operations employees coordinate our relationships with our contract manufacturers and component suppliers. We believe that using outsourced manufacturing enables greater scale and flexibility at lower costs than establishing our own manufacturing facilities. We evaluate on an ongoing basis our current contract manufacturers and component suppliers, including, whether or not to utilize new or alternative contract manufacturers or component suppliers.
We use several suppliers from China for the Mudra Band for commercial off-the-shelf products, such as batteries, and customized mechanical parts, such as magnets, connectors, buckles and cables. With the exception of the aforementioned interactions, we do not have any China-based operations.
We work with third-party fulfillment partners to deliver our products from final manufacturing facilities worldwide, which allows us to reduce order fulfillment time, reduce shipping costs, and improve inventory flexibility.
Sales Channels
Direct to consumer channel. We market and offer our products directly to consumers in the United States and other countries through our online stores at Mudra-band.com and Getmudra.com. We drive consumers to our website through online and offline advertising as well as marketing promotions.
We plan to offer additional channels as we increase our production capability.
Retail channel. We plan to offer our products in retail stores and are currently focused on building close relationships with our retailers, working with them to merchandise our products in a compelling manner both in-store and on their e-commerce sites, promote our products through their marketing efforts, and educate their sales forces about our products. Retail channel stores may also include consumer electronics and specialty retailers, e-commerce retailers, mass merchant, department store, and club retailers, as well as wireless carriers’ stores.
Marketing and Advertising
Our marketing and advertising programs are focused on building global brand awareness, increasing product adoption, and driving sales. Our B2C marketing and advertising efforts target consumers primarily by digital marketing, channel marketing, newsletters, and public relations. We are also exploring opportunities of endorsements by micro-influencers and brand ambassadors. Our B2B marketing and advertising efforts target business customers by thought leadership content creation, inbound marketing, conferences, and tradeshows.
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Employees
As of the date of this prospectus, we have sixteen (16) full-time employees, including senior management positions. We have eight (8) part-time employees. In addition, we have several consultants and sub-contractors, some of whom are engaged on a part time basis. The majority of our employees are located in Israel. We have one additional employee located in the United States, engaged through our subsidiary company.
We have one (1) part-time consultant located in Japan, and one (1) part-time consultant located in Israel.
We have four (4) sub-contractors located in India, performing front end software application development.
None of our employees are represented by labor unions or covered by collective bargaining agreements. We believe that we maintain good relations with all of our employees. In Israel, we are subject to certain Israeli labor laws, regulations and national labor court precedent rulings, as well as certain provisions of collective bargaining agreements applicable to us by virtue of extension orders issued in accordance with relevant labor laws by the Israeli Ministry of Economy and which apply such agreement provisions to our employees even though they are not part of a union that has signed a collective bargaining agreement.
Facilities
Our corporate headquarters are located at Ha-Ta’asiya St 2 Yokne’am Illit, Israel. This facility comprises approximately 200 square meters, or 2,140 square feet, of space. Our current lease, which we entered into on July 1, 2018, expires on September 30, 2022. Our monthly rent payment as of December 31, 2021, was approximately NIS 14,950 (approximately $4,800).
We consider that our current office space is sufficient to meet our anticipated needs for the foreseeable future and is suitable for the conduct of our business.
Organizational Structure
We have one wholly-owned subsidiary – Mudra Wearable, which was incorporated in Delaware. Mudra Wearable has one employee that acts as executive Vice President of U.S. operations. Mudra Wearable is responsible for the marketing and distribution of the company’s products in the United States.
Legal Proceedings
We are not currently subject to any material legal proceedings.
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Directors and Senior Management
The following table sets forth information regarding our executive officers, key employees and directors as of April 4, 2022:
| Name | Age | Position | ||
| Asher Dahan | 43 | Chief Executive Officer, Chairman of the Board of Directors | ||
| Alon Mualem | 54 | Chief Financial Officer | ||
| Guy Wagner | 43 | Chief Scientific Officer, President and Director | ||
| Leeor Langer | 40 | Chief Technology Officer | ||
| Eli Bachar(1)(2)(3) | 39 | Director | ||
| Barry Kaplan | 49 | Director, Executive Vice President of the U.S. Operations | ||
| Yaacov Goldman(1)(2)(3) | 66 | Independent Director Nominee | ||
| Ilana Lurie(1)(2)(3) | 48 | Independent Director Nominee |
| (1) | Member of the Compensation Committee upon completion of this offering |
| (2) | Member of the Audit Committee and Financial Statement Examination Committee upon completion of this offering |
| (3) | Independent Director (as defined under Nasdaq Stock Market rules) upon completion of this offering |
Asher Dahan, Chief Executive Officer, Chairman of the Board of Directors
Mr. Asher Dahan has served as our director since March 2014 and as our Chief Executive Officer and as acting Chief Financial Officer since March 2016 and as the chairman of our board of directors since March 6, 2022. Mr. Dahan founded our company together with Mr. Guy Wagner and Mr. Leeor Langer in March 2014. From 2013 to 2015, Mr. Dahan worked as Electrical Validation Manager at Intel Haifa, Israel. He worked for Intel Haifa, Israel from 2006 to 2012 as Technical Leader and Engineer for High Speed Interfaces. Mr. Dahan has a BSc. in Electrical Engineering from Ort Braude College.
Alon Mualem, Chief Financial Officer
Mr. Alon Mualem has served as our Chief Financial Officer since January 7, 2022. Mr. Mualem previously served as the Chief Financial Officer of Eltek Ltd. (Nasdaq: ELTK), an Israeli public company, from January 2019 to January 2022. Mr. Mualem served as the Chief Financial Officer of SharpLink Gaming Ltd. (Nasdaq: SBET), formerly known as Mer Telemanagement Solutions Ltd., an Israeli public company, from 2007 to September 2018. Prior thereto, between 2005 and 2007, Mr. Mualem served as the Chief Financial Officer of Xfone, Inc. (AMEX and TASE: XFN), an international communications services company. Previously, Mr. Mualem served as a controller and Chief Financial Officer of hi-tech companies, and as an audit manager at Somekh Chaikin, a member firm of KPMG International. Mr. Mualem holds a B.A. degree in Accounting and Economics from Tel Aviv University and is a licensed CPA (Israel).
Guy Wagner, Chief Scientific Officer, President and Director
Mr. Guy Wagner has served as our director since March 2014 and as our Chief Scientific Officer and as Company President since March 2016. Mr. Wagner founded our company together with Mr. Asher Dahan and Mr. Leeor Langer in March 2014. From 2005 to 2014, Mr. Wagner worked as Hardware Engineer at Intel Haifa, Israel. Mr. Wagner has a BSc. in Electrical Engineering from Ort Braude College.
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Leeor Langer, Chief Technology Officer
Mr. Leeor Langer has served as our Chief Technology Officer since March 2016. Mr. Langer founded our company together with Mr. Asher Dahan and Mr. Guy Wagner in March 2014. From 2014 to 2015, Mr. Langer worked as an algorithms developer at CMT Medical Technologies Ltd., developing image processing techniques for medical x-ray applications. Prior to that, he worked for BrandShield Ltd. from 2012 to 2014 as an algorithms engineer, developing ranking algorithms for digital brand protection. From 2009 to 2012, Mr. Langer worked as a tools developer and algorithms engineer at Intel in Israel, developing signal processing methods for electrical validation labs. Mr. Langer has a BSc. in Electrical Engineering from the Technion - Israel Institute of Technology and an MSc. in Applied Mathematics from the Tel Aviv University. Mr. Langer graduated cum laude and published his thesis and papers on digital pathology in peer reviewed journals.
Eli Bachar, Director
Mr. Eli Bachar has served as our director since 2016. From 2013 to 2021, Mr. Bachar is a serial investor. He was a director of Xjet3D from 2014 to 2021. From 2015 to 2019, Mr. Bachar was a director of 6 Over 6 Vision Ltd. He was a director of GetSat Ltd. from 2014 to 2021. From 2013 to 2021, Mr. Bachar was a director of Silentium Ltd. He was a director of Cupixel Ltd. from 2017 to 2021. Mr. Bachar holds a BA in Business Administration and Management from the Reichman University (previously known as IDC Herzliya).
Barry Kaplan, Director, Executive Vice President of the U.S. Operations
Mr. Barry Kaplan has served as our director from April 2018. Mr. Kaplan will resign from our board of directors at the closing of this offering. Additionally, Mr. Kaplan has served as Executive Vice President of the U.S. operations since July 2021. From 2012 to 2021, Mr. Kaplan worked as Chief of Operations at Stuhrling Original Group of companies. From 2009 to 2014 he founded and worked as Chief Executive Officer at KIVA watch. He was Chief Executive Officer and Chief Designer of Alexander Watch LLC from 2014 to 2017. Mr. Kaplan has a Bachelor of Accounting (B.Acc.) in Accounting from University of the Witwatersrand (South Africa).
Yaacov Goldman, Independent Director Nominee
Mr. Yaacov Goldman has been nominated to serve as a director effective upon completion of the offering. He provides consulting services to companies in strategic-financial areas, through his wholly owned company, Maanit-Goldman Management & Investments (2002) Ltd. Mr. Goldman has served as external director for Can-Fite BioPharma Ltd. (NYSE:CANF) since August 2017. Mr. Goldman also serves as a director of Avgol Industries 1953 Ltd., Mivne Real Estate (K.D) Ltd., Fattal Properties (Europe) Ltd. and Prashkovsky Investments and Construction Ltd. Mr. Goldman served as the Professional Secretary of the Peer Review Institute of the Certified Public Accountants Institute in Israel from October 2004 until September 2008. Commencing in 1981, Mr. Goldman worked for Kesselman & Kesselman (Israeli member firm of PricewaterhouseCoopers) for 19 years, and from 1991 until 2000, as a partner and then senior partner of such firm. From September 2000 until November 2001, Mr. Goldman served as managing director of Argoquest Holdings, LLC. Mr. Goldman holds a B.A. degree in Economics and Accounting from Tel Aviv University and is a Certified Public Accountant (Israel).
Ilana Lurie, Independent Director Nominee
Ms. Ilana Lurie has been nominated to serve as a director effective upon completion of the offering. Ilana Lurie is a Chief Financial Officer, Chief Operations Officer, and Director with vast experience in international finance and operations, within both large technology companies as well as Start-Ups. In a course of last 10 years, Ilana led significant financing rounds, as well as debt restructuring processes. She has served as an external director for Eltek Ltd. (NASDAQ:ELTK) since September 2018. Ms. Lurie played a critical role in transition from R&D to production in NovelSat and she is currently leading this activity in IO Tech, in her capacity as Chief Financial Officer and Chief Operations Officer. During 2012 until 2020, Ms. Lurie has been Chief Financial Officer of NovelSat, Landa Ventures portfolio company. Prior to her tenure at NovelSat, Ms. Lurie served as Finance Manager for the Enterprise Services business unit (formerly EDS) of Hewlett Packard (NYSE:HPQ). From 2006 to 2011, Ms. Lurie held several financial management positions at Ness Technologies (NASDAQ/TASE:NSTC), which, at the time, was a public company. Ms. Lurie earned her B.A. degree and an MBA degree with a specialization in Finance and Marketing from Hebrew University of Jerusalem.
Family Relationships
There are no family relationships between any members of our executive management and our directors.
Arrangements for Election of Directors and Members of Management
There are no arrangements or understandings with major shareholders, customers, suppliers or others pursuant to which any of our executive management or our directors were selected.
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Compensation
The following table presents in the aggregate all compensation we paid to each of our directors and senior management as a group for the year ended December 31, 2021. The table does not include any amounts we paid to reimburse any of such persons for costs incurred in providing us with services during this period.
All amounts reported in the tables below reflect the cost to the Company, in thousands of U.S. dollars, for the year ended December 31, 2021.
| Salary, bonuses and Related Benefits | Pension, Retirement and Other Similar Benefits | Share Based Compensation | Options(2) | |||||||||||||
| All directors and senior management as a group, consisting of 5 persons (1) | $ | 436 | $ | 104 | $ | 105 | 418,853 | |||||||||
| (1) | Mr. Mualem joined the Company in January 2022. |
| (2) | Includes: (i) options granted Eli Bachar to purchase 184,427 Ordinary Shares under the 2015 Plan. The options expire on December 14, 2027 and have a weighted average exercise price of $0.003 per share; and (ii) options granted Barry Kaplan to purchase 234,426 Ordinary Shares under the 2015 Plan. The options have expiration dates ranging from April 26, 2028 to July 1, 2031, and an exercise price of $2.25 per share. |
For so long as we qualify as a foreign private issuer, we will not be required to comply with the proxy rules applicable to U.S. domestic companies regarding disclosure of the compensation of certain executive officers on an individual basis. Pursuant to the Companies Law, we will be required, after we become a public company, to disclose the annual compensation of our five most highly compensated officers on an individual basis. This disclosure will not be as extensive as that required of a U.S. domestic issuer. We intend to commence providing such disclosure, at the latest, in the annual proxy statement for our first annual meeting of shareholders following the closing of this offering, which will be filed under cover of a report on Form 6-K.
Employment Agreements with Executive Officers
We have entered into written employment agreements with each of our executive officers. All of these agreements contain customary provisions regarding noncompetition, confidentiality of information and assignment of inventions. However, the enforceability of the noncompetition provisions may be limited under applicable law. In addition, we intend to enter into agreements with each executive officer and director pursuant to which we will indemnify each of them up to a certain amount and to the extent that these liabilities are not covered by directors and officers insurance upon the consummation of this offering.
On March 6, 2022, our board of directors determined that it is in the best interest of our company to amend the employment agreements and approve new terms of compensation for each of our officers, subject to the approval of our shareholders. The amendments to the agreements were approved at the shareholders meeting, which took place on March 14, 2022.
For a description of the terms of our options and option plans, see “Management—Equity Incentive Plan” below.
Directors’ Service Contracts
Other than with respect to our directors who are also executive officers, we do not have written agreements with any director providing for benefits upon the termination of his employment with our company.
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Differences between the Companies Law and Nasdaq Requirements
The Sarbanes-Oxley Act, as well as related rules subsequently implemented by the SEC, require foreign private issuers, such as us, to comply with various corporate governance practices. In addition, following the listing of the Ordinary Shares and Warrants on Nasdaq, we will be required to comply with the Nasdaq rules. Under those rules, we may elect to follow certain corporate governance practices permitted under the Companies Law in lieu of compliance with corresponding corporate governance requirements otherwise imposed by the Nasdaq rules for U.S. domestic issuers.
In accordance with Israeli law and practice and subject to the exemption set forth in Rule 5615 of the Nasdaq rules, we have elected to follow the provisions of the Companies Law, rather than the Nasdaq rules, with respect to the following requirements:
| ● | Quorum. While the Nasdaq rules require that the quorum for purposes of any meeting of the holders of a listed company’s common voting stock, as specified in the company’s bylaws, be no less than 33 1/3% of the company’s outstanding common voting stock, under Israeli law, a company is entitled to determine in its articles of association the number of shareholders and percentage of holdings required for a quorum at a shareholders meeting. Our amended and restated articles of association, to be effective upon the closing of this offering, provide that a quorum of two or more shareholders holding at least 25% of the voting rights in person or by proxy is required for commencement of business at a general meeting. However, the quorum set forth in our amended and restated articles of association with respect to an adjourned meeting consists of at least one shareholders present in person or by proxy. |
| ● | Nomination of our directors. With the exception of directors elected by our board of directors and external directors, our directors are elected by an annual meeting of our shareholders (i) to hold office until the next annual meeting following his or her election or (ii) for three-year term, as described below under “Management—Board Practices—External Directors.” The nominations for directors, which are presented to our shareholders by our board of directors, are generally made by the board of directors itself, in accordance with the provisions of our amended and restated articles of association and the Companies Law. Nominations need not be made by a nominating committee of our board of directors consisting solely of independent directors, as required under the Nasdaq rules. |
| ● | Compensation of officers. Israeli law and our amended and restated articles of association do not require that the independent members of our board of directors (or a compensation committee composed solely of independent members of our board of directors) determine an executive officer’s compensation, as is generally required under the Nasdaq rules with respect to the chief executive officer and all other executive officers. Instead, compensation of executive officers is determined and approved by our compensation committee and our board of directors, and in certain circumstances by our shareholders, either in consistency with our office holder compensation policy or, in special circumstances in deviation therefrom, taking into account certain considerations stated in the Companies Law. See “Management—Board Practices—Approval of Related Party Transactions under Israeli Law” for additional information. |
| ● | Independent directors. Israeli law does not require that a majority of the directors serving on our board of directors be “independent,” as defined under Nasdaq Listing Rule 5605(a)(2), and rather requires we have at least two external directors who meet the requirements of the Companies Law, as described above under “Management—Board Practices—External Directors.” We are required, however, to ensure that all members of our Audit Committee are “independent” under the applicable Nasdaq and SEC criteria for independence (as we cannot exempt ourselves from compliance with that SEC independence requirement, despite our status as a foreign private issuer), and we must also ensure that a majority of the members of our Audit Committee are “independent directors” as defined in the Companies Law. We plan to establish an Audit Committee and appoint external directors compliant with applicable rules upon completion of this offering. Furthermore, Israeli law does not require, nor do our independent directors conduct, regularly scheduled meetings at which only they are present, which the Nasdaq rules otherwise require. |
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| ● | Shareholder approval. We will seek shareholder approval for all corporate actions requiring such approval under the requirements of the Companies Law, rather than seeking approval for corporation actions in accordance with Nasdaq Listing Rule 5635. In particular, under this Nasdaq Stock Market 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 in the target company or the consideration to be received; (ii) the issuance of shares leading to a change of control; (iii) adoption/amendment of equity compensation arrangements (although under the provisions of the Companies Law there is no requirement for shareholder approval for the adoption/amendment of the equity compensation plan); 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) below a specified minimum price. By contrast, under the Companies Law, shareholder approval is required for, among other things: (i) transactions with directors concerning the terms of their service or indemnification, exemption and insurance for their service (or for any other position that they may hold at a company), for which approvals of the compensation committee, board of directors and shareholders are all required, (ii) extraordinary transactions with controlling shareholders of publicly held companies, which require the special approval, and (iii) terms of employment or other engagement of the controlling shareholder of us or such controlling shareholder’s relative, which require special approval. In addition, under the Companies Law, a merger requires approval of the shareholders of each of the merging companies. |
| ● | Approval of Related Party Transactions. All related party transactions are approved in accordance with the requirements and procedures for approval of interested party acts and transaction as set forth in the Companies Law, which requires the approval of the audit committee, or the compensation committee, as the case may be, the board of directors and shareholders, as may be applicable, for specified transactions, rather than approval by the audit committee or other independent body of our board of directors as required under the Nasdaq rules. See “Management—Approval of Related Party Transactions under Israeli Law” for additional information. |
| ● | Annual Shareholders Meeting. As opposed to the Nasdaq Stock Market Rule 5620(a), which mandates that a listed company hold its annual shareholders meeting within one year of the company’s fiscal year-end, we are required, under the Companies Law, to hold an annual shareholders meeting each calendar year and within 15 months of the last annual shareholders meeting. |
| ● | Distribution of periodic reports to shareholders; proxy solicitation. As opposed to the Nasdaq rules, which require listed issuers to make such reports available to shareholders in one of a number of specific manners, Israeli law does not require us to distribute periodic reports directly to shareholders, and the generally accepted business practice in Israel is not to distribute such reports to shareholders but to make such reports available through a public website. In addition to making such reports available on a public website, we currently make our audited consolidated financial statements available to our shareholders at our offices and will only mail such reports to shareholders upon request. As a foreign private issuer, we are generally exempt from the SEC’s proxy solicitation rules. |
Board Practices
Introduction
Our board of directors presently consists of four members, excluding two external directors required to be appointed under the Companies Law. Upon the completion of this offering, we intend to add Yaacov Goldman and Ilana Lurie as directors, each of whom will qualify as independent for the purposes of the Nasdaq rules. Our amended and restated articles of association provide that the number of board of directors’ members (including external directors) shall be set by the general meeting of the shareholders provided that it will consist of not less than three and not more than twelve. Pursuant to the Companies Law, the management of our business is vested in our board of directors. Our board of directors may exercise all powers and may take all actions that are not specifically granted to our shareholders or to management. Our executive officers are responsible for our day-to-day management and have individual responsibilities established by our board of directors. Our Chief Executive Officer is appointed by, 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. Their terms of employment are subject to the terms of our compensation policy and are subject to the approval of the board of directors’ compensation committee and of the board of directors, and are subject to the terms of any applicable employment agreements that we may enter into with them. Our board of directors has established an audit committee, compensation committee, and a financial statement examination committee , to be effective upon consummation of this offering.
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Each director, except external directors, will hold office until the next annual general meeting of our shareholders following his or her appointment, or until he or she resigns or unless he or she is removed by a majority vote of our shareholders at a general meeting of our shareholders or upon the occurrence of certain events, in accordance with the Companies Law and our amended and restated articles of association.
In addition, under certain circumstances, our amended and restated articles of association allow our board of directors to appoint directors to fill vacancies on our board of directors or in addition to the acting directors (subject to the limitation on the number of directors), until the next annual general meeting or special general meeting in which directors may be appointed or terminated. External directors may be elected for up to two additional three-year terms after their initial three-year term under the circumstances described below, with certain exceptions as described in “External Directors” below. External directors may be removed from office only under the limited circumstances set forth in the Companies Law. See “Management—Board Practices—External Directors” below.
Under the Companies Law, any shareholder holding at least one percent of our outstanding voting power may nominate a director. However, any such shareholder may make such a nomination only if a written notice of such shareholder’s intent to make such nomination has been given to our board of directors. Any such notice must include certain information, including the consent of the proposed director nominee to serve as our director if elected, and a declaration that the nominee signed declaring that he or she possesses the requisite skills and has the availability to carry out his or her duties. Additionally, the nominee must provide details of such skills, and demonstrate an absence of any limitation under the Companies Law that may prevent his or her election, and affirm that all of the required election-information is provided to us, pursuant to the Companies Law.
Under the Companies Law, our board of directors must determine the minimum number of directors who are required to have accounting and financial expertise. 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.
The board of directors must elect one director to serve as the chairman of the board of directors to preside at the meetings of the board of directors, and may also remove that director as chairman. Pursuant to the Companies Law, neither the chief executive officer nor any of his or her relatives is permitted to serve as the chairman of the board of directors, and a company may not vest the chairman or any of his or her relatives with the chief executive officer’s authorities. In addition, a person who reports, directly or indirectly, to the chief executive officer may not serve as the chairman of the board of directors; the chairman may not be vested with authorities of a person who reports, directly or indirectly, to the chief executive officer; and the chairman may not serve in any other position in the company or a controlled company, but he or she may serve as a director or chairman of a controlled company. However, the Companies Law permits a company’s shareholders to determine, for a period not exceeding three years from each such determination, that the chairman or his or her relative may serve as chief executive officer or be vested with the chief executive officer’s authorities, and that the chief executive officer or his or her relative may serve as chairman or be vested with the chairman’s authorities. Such determination of a company’s shareholders requires either: (1) the approval of at least a majority of the shares of those shareholders present and voting on the matter (other than controlling shareholders and those having a personal interest in the determination) (shares held by abstaining shareholders shall not be considered); or (2) that the total number of shares opposing such determination does not exceed 2% of the total voting power in the company. Since March 6, 2022, Asher Dahan has served as the chairman of our board of directors.
The board of directors may, subject to the provisions of the Companies Law, delegate any or all of its powers to committees of the board, and it may, from time to time, revoke such delegation or alter the composition of any such committees, subject to certain limitations. Unless otherwise expressly provided by the board of directors, the committees shall not be empowered to further delegate such powers. The composition and duties of our audit committee, financial statement examination committee and compensation committee are described below.
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The board of directors oversees how management monitors compliance with our risk management policies and procedures, and reviews the adequacy of the risk management framework in relation to the risks faced by us. The board of directors is assisted in its oversight role by an internal auditor. The internal auditor undertakes both regular and ad hoc reviews of risk management controls and procedures, the results of which are reported to our audit committee.
We provided a board observer right to one of our beneficial shareholders, Alpha Capital Anstalt, or Alpha, pursuant to a share purchase agreement we entered into in April 2021. For more information, see “Related Party Transactions— Share Purchase Agreement with Alpha.” Alpha’s board observer right shall last until we conduct an initial public offering of our Ordinary Shares, registered pursuant to an effective registration statement under the Securities Act, or the securities laws of another jurisdiction as determined by our board of directors, raising a gross amount of at least $10,000,000 and resulting in the listing of our Ordinary Shares on a trading market (which shall not include any market operated by OTC Markets, Inc.), or Qualified IPO. We are also obligated to receive Alpha’s prior written consent for a Qualified IPO, which we intend to obtain prior to the closing of this offering, which we believe will constitute a Qualified IPO.
External Directors
Under the Companies Law, an Israeli company whose shares have been offered to the public or whose shares are listed for trading on a stock exchange in or outside of Israel is required to appoint at least two external directors to serve on its board of directors. External directors must meet stringent standards of independence. We expect to appoint and as our external directors upon completion of this offering.
According to regulations promulgated under the Companies law, at least one of the external directors is required to have “financial and accounting expertise,” unless another member of the audit committee, who is an independent director under the Nasdaq rules, has “financial and accounting expertise,” and the other external director or directors are required to have “professional expertise.” An external director may not be appointed to an additional term unless: (1) such director has “accounting and financial expertise;” or (2) he or she has “professional expertise,” and on the date of appointment for another term there is another external director who has “accounting and financial expertise” and the number of “accounting and financial experts” on the board of directors is at least equal to the minimum number determined appropriate by the board of directors. We expect that both and will have accounting and financial expertise.
A director with accounting and financial expertise is a director who, due to his or her education, experience and skills, possesses a high degree of proficiency in, and an understanding of, business – accounting matters and financial statements, such that he or she is able to understand the financial statements of the company in depth and initiate a discussion about the manner in which financial data is presented. A director is deemed to have “professional expertise” if he or she holds an academic degree in certain fields or has at least five years of experience in certain senior positions.
External directors are elected by a majority vote at a shareholders’ meeting, as long as either:
| ● | at least a majority of the shares held by shareholders who are not controlling shareholders and do not have personal interest in the appointment (excluding a personal interest that did not result from the shareholder’s relationship with the controlling shareholder) have voted in favor of the proposal (shares held by abstaining shareholders shall not be considered); or | |
| ● | the total number of shares voted by non-controlling shareholders and by shareholders who do not have a personal interest in the election of the external director, against the election of the external director, does not exceed 2% of the aggregate voting rights of the company. |
The term “control” is defined in the Companies Law as the ability to direct the activities of the company, other than by virtue of being an office holder. A shareholder is presumed to be a controlling shareholder if the shareholder “holds” (within the meaning of the Companies Law) 50% or more of the voting rights in a company or has the right to appoint 50% or more of the directors of the company or its general manager. With respect to certain matters, a controlling shareholder is deemed to include a shareholder that holds 25% or more of the voting rights in a public company if no other shareholder holds more than 50% of the voting rights in the company, but excludes a shareholder whose power derives solely from his or her position as a director of the company or from any other position with the company.
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The Companies Law provides for an initial three-year term for an external director. Thereafter, an external director may be reelected by shareholders to serve in that capacity for up to two additional three-year terms, provided that:
| (1) | his or her service for each such additional term is recommended by one or more shareholders holding at least one percent of the company’s voting rights and is approved at a shareholders meeting by a disinterested majority, where the total number of shares held by non-controlling, disinterested shareholders voting for such reelection exceeds two percent of the aggregate voting rights in the company and subject to additional restrictions set forth in the Companies Law with respect to the affiliation of the external director nominee as described below; |
| (2) | his or her service for each such additional term is recommended by the board of directors and is approved at a shareholders meeting by the same disinterested majority required for the initial election of an external director (as described above); or |
| (3) | the external director offered his or her service for each such additional term and was approved in accordance with the provisions of section (1) above. |
The term of office for external directors for Israeli companies traded on certain foreign stock exchanges, including Nasdaq, may be extended indefinitely in increments of additional three-year terms, in each case provided that the audit committee and the board of directors of the company confirm that, in light of the external director’s expertise and special contribution to the work of the board of directors and its committees, the reelection for such additional period(s) is beneficial to the company, and provided that the external director is reelected subject to the same shareholder vote requirements as if elected for the first time (as described above). Prior to the approval of the reelection of the external director at a general shareholders meeting, the company’s shareholders must be informed of the term previously served by him or her and of the reasons why the board of directors and audit committee recommended the extension of his or her term.
The Companies Law provides that a person is not qualified to serve as an external director if (i) the person is a relative of a controlling shareholder of the company, or (ii) if that person or his or her relative, partner, employer, another person to whom he or she was directly or indirectly subordinate, or any entity under the person’s control, has or had, during the two years preceding the date of appointment as an external director: (a) any affiliation or other disqualifying relationship with the company, with any person or entity controlling the company or a relative of such person, or with any entity controlled by or under common control with the company; or (b) in the case of a company with no shareholder holding 25% or more of its voting rights, had at the date of appointment as an external director, any affiliation or other disqualifying relationship with a person then serving as chairman of the board or chief executive officer, with a holder of 5% or more of the issued share capital or voting power in the company or with the most senior financial officer.
The term “relative” is defined under the Companies Law as a spouse, sibling, parent, grandparent or descendant; spouse’s sibling, parent or descendant; and the spouse of each of the foregoing persons.
Under the Companies Law, the term “affiliation” and the similar types of disqualifying relationships include (subject to certain exceptions):
| ● | an employment relationship; | |
| ● | a business or professional relationship even if not maintained on a regular basis (excluding insignificant relationships); | |
| ● | control; and | |
| ● | service as an office holder, excluding service as a director in a private company prior to the initial public offering of its shares if such director was appointed as a director of the private company in order to serve as an external director following the initial public offering. |
The term “office holder” is defined under the Companies Law as a general manager, chief business manager, deputy general manager, vice general manager, any other person assuming the responsibilities of any of these positions regardless of that person’s title, a director and any other manager directly subordinate to the general manager.
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In addition, no person may serve as an external director if that person’s position or professional or other activities create, or may create, a conflict of interest with that person’s responsibilities as a director or otherwise interfere with that person’s ability to serve as a director or if the person is an employee of the Israel Securities Authority or of an Israeli stock exchange. A person may furthermore not continue to serve as an external director if he or she received direct or indirect compensation from the company including amounts paid pursuant to indemnification and/or exculpation contracts or commitments and insurance coverage, other than for his or her service as an external director as permitted by the Companies Law and the regulations promulgated thereunder.
Following the termination of an external director’s service on a board of directors, such former external director and his or her spouse and children may not be provided a direct or indirect benefit by the company, its controlling shareholder or any entity under its controlling shareholder’s control. This includes engagement as an office holder or director of the company or a company controlled by its controlling shareholder or employment by, or provision of services to, any such company for consideration, either directly or indirectly, including through a corporation controlled by the former external director. This restriction extends for a period of two years with regard to the former external director and his or her spouse or child and for one year with respect to other relatives of the former external director.
External directors may be removed only by a special general meeting of shareholders called by the board of directors after the board has determined the occurrence of circumstances allow such dismissal, at the same special majority of shareholders required for their election or by a court, and in both cases only if the external directors cease to meet the statutory qualifications for their appointment or if they violate their duty of loyalty to our company. In the event of a vacancy created by an external director which causes the company to have fewer than two external directors, the board of directors is required under the Companies Law to call a shareholders meeting as soon as possible to appoint such number of new external directors in order that the company thereafter has two external directors.
External directors may be compensated only in accordance with regulations adopted under the Companies Law.
If at the time at which an external director is appointed all members of the board of directors who are not controlling shareholders or relatives of controlling shareholders of the company are of the same gender, the external director to be appointed must be of the other gender. A director of a company may not be appointed as an external director of another company if at the same time a director of such other company is acting as an external director of the first company.
Under regulations promulgated pursuant to the Companies Law, a company with no controlling shareholder whose shares are listed for trading on specified exchanges outside of Israel, including the Nasdaq Capital Market, may adopt exemptions from various corporate governance requirements of the Companies Law, so long as such company satisfies the requirements of applicable foreign country laws and regulations, including applicable stock exchange rules, that apply to companies organized in that country and relating to the appointment of independent directors and the composition of audit and compensation committees. Such exemptions include an exemption from the requirement to appoint external directors and the requirement that an external director be a member of certain committees, as well as exemption from limitations on directors’ compensation. We do not currently have a controlling shareholder. Following the closing of this offering, we also do not expect to have a controlling shareholder and, as such, subject to closing of this offering, we will use this exemption from the requirement described herein.
Independent Directors Under the Companies Law
An “independent director” is either an external director or a director who meets the same non-affiliation criteria as an external director (except for (i) the requirement that the director be an Israeli resident (which does not apply to companies such as ours whose securities have been offered outside of Israel or are listed outside of Israel) and (ii) the requirement for accounting and financial expertise or professional qualifications), as determined by the audit committee, and who has not served as a director of the company for more than nine consecutive years. For these purposes, ceasing to serve as a director for a period of two years or less would not be deemed to sever the consecutive nature of such director’s service.
Regulations promulgated pursuant to the Companies Law provide that a director in a public company whose shares are listed for trading on specified exchanges outside of Israel, including the Nasdaq Capital Market, who qualifies as an independent director under the relevant non-Israeli rules and who meets certain non-affiliation criteria, which are less stringent than those applicable to independent directors as set forth above, would be deemed an “independent” director pursuant to the Companies Law provided: (i) he or she has not served as a director for more than nine consecutive years; (ii) he or she has been approved as such by the audit committee; and (iii) his or her remuneration shall be in accordance with the Companies Law and the regulations promulgated thereunder. For these purposes, ceasing to serve as a director for a period of two years or less would not be deemed to sever the consecutive nature of such director’s service.
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Furthermore, pursuant to these regulations, such company may reappoint a person as an independent director for additional terms, beyond nine years, which do not exceed three years each, if each of the audit committee and the board of directors determine, in that order, that in light of the independent director’s expertise and special contribution to the board of directors and its committees, the reappointment for an additional term is in the company’s best interest.
Alternate Directors
Our amended and restated articles of association provide, as allowed by the Companies Law, that any director may, subject to the conditions set thereto including approval of the nominee by our board of directors, appoint a person as an alternate to act in his place, to remove the alternate and appoint another in his place and to appoint an alternate in place of an alternate whose office is vacated for any reason whatsoever. Under the Companies Law, a person who is not qualified to be appointed as a director, a person who is already serving as a director or a person who is already serving as an alternate director for another director, may not be appointed as an alternate director. Nevertheless, a director who is already serving as a director may be appointed as an alternate director for a member of a committee of the board of directors so long as he or she is not already serving as a member of such committee, and if the alternate director is to replace an external director, he or she is required to be an external director and to have either “financial and accounting expertise” or “professional expertise,” depending on the qualifications of the external director he or she is replacing. A person who does not have the requisite “financial and accounting experience” or the “professional expertise,” depending on the qualifications of the external director he or she is replacing, may not be appointed as an alternate director for an external director. A person who is not qualified to be appointed as an independent director, pursuant to the Companies Law, may not be appointed as an alternate director of an independent director qualified as such under the Companies Law. Unless the appointing director limits the time or scope of the appointment, the appointment is effective for all purposes until the appointing director ceases to be a director or terminates the appointment.
Committees of the Board of Directors
Our board of directors will establish three standing committees, the audit committee, the compensation committee and the Financial Statement Examination Committee.
Audit Committee
Under the Companies Law, we are required to appoint an audit committee. The audit committee must be composed of at least three directors, including all of the external directors (one of whom must serve as chairman of the committee). The audit committee may not include the chairman of the board; a controlling shareholder of the company or a relative of a controlling shareholder; a director employed by or providing services on a regular basis to the company, to a controlling shareholder or to an entity controlled by a controlling shareholder; or a director who derives most of his or her income from a controlling shareholder. Pursuant to the Companies Law, the members of the audit committee can choose their chairman during the first committee meeting following the offering. The members of the audit committee will elect a chairman during their first meeting that will take place after this offering.
In addition, a majority of the members of the audit committee of a publicly traded company must be independent directors under the Companies Law. The members of our audit committee are expected to include Mr. Eli Bachar, Mr. Yaacov Goldman and Ms. Ilana Lurie.
Under the Companies Law, our audit committee is responsible for:
| ● | determining whether there are deficiencies in the business management practices of our company, 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 Companies Law) and establishing the approval process for certain transactions with a controlling shareholder or in which a controlling shareholder has a personal interest (see “Management—Approval of Related Party Transactions under Israeli law”); |
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| ● | determining the approval process for transactions that are “non-negligible” (i.e., transactions with a controlling shareholder that are classified by the audit committee as non-negligible, even though they are not deemed extraordinary transactions), as well as determining which types of transactions would require the approval of the audit committee, optionally based on criteria which may be determined annually in advance by the audit committee; |
| ● | examining our internal controls and internal auditor’s performance, including whether the internal auditor has sufficient resources and tools to dispose of its responsibilities; |
| ● | examining the scope of our auditor’s work and compensation and submitting a recommendation with respect thereto to our board of directors or shareholders, depending on which of them is considering the appointment of our auditor; |
| ● | establishing procedures for the handling of employees’ complaints as to deficiencies in the management of our business and the protection to be provided to such employees; and |
| ● | where the board of directors approves the working plan of the internal auditor, examining such working plan before its submission to the board of directors and proposing amendments thereto. |
Our audit committee may not conduct any discussions or approve any actions requiring its approval (see “Management—Approval of Related Party Transactions under Israeli law”), unless at the time of the approval a majority of the committee’s members are present, which majority consists of independent directors under the Companies Law, including at least one external director.
Our board of directors intends to adopt an audit committee charter to be effective upon the listing of our Ordinary Shares on Nasdaq setting forth, among others, the responsibilities of the audit committee consistent with the rules of the SEC and Nasdaq rules (in addition to the requirements for such committee under the Companies Law), including, among others, 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 in accordance with Israeli law; |
| ● | recommending the engagement or termination of the person filling the office of our internal auditor, reviewing the services provided by our internal auditor and reviewing effectiveness of our system of internal control over financial reporting; |
| ● | 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; and |
| ● | reviewing and monitoring, if applicable, legal matters with significant impact, finding of regulatory authorities’ findings, receive reports regarding irregularities and legal compliance, acting according to “whistleblower policy” and recommend to our board of directors if so required. |
Nasdaq Requirements for Audit Committee
Under the Nasdaq rules, we are required to maintain an audit committee consisting of at least three members, all of whom are independent and are financially literate and one of whom has accounting or related financial management expertise.
As noted above, the members of our audit committee are expected to include and who are external directors, and who is an independent director, each of whom is “independent,” as such term is defined in under Nasdaq rules. Pursuant to the Companies Law, the members of the audit committee can choose their chairman during the first committee meeting following the offering. Therefore, the members of the financial statement examination committee will elect a chairman during their first meeting that will take place after this offering. All members of our audit committee meet the requirements for financial literacy under the Nasdaq rules. Our board of directors has determined that will be an audit committee financial expert as defined by the SEC rules and has the requisite financial experience as defined by the Nasdaq rules.
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Financial Statement Examination Committee
Under the Companies Law, the board of directors of a public company in Israel must appoint a financial statement examination committee, which consists of members with accounting and financial expertise or the ability to read and understand financial statements. Our financial statement examination committee is expected to include Mr. Eli Bachar, Mr. Yaacov Goldman, and Ms. Ilana Lurie.. The members of the financial statement examination committee will elect a chairman during their first meeting that will take place after this offering. The function of a financial statements examination committee is to discuss and provide recommendations to its board of directors (including the report of any deficiency found) with respect to the following issues: (1) estimations and assessments made in connection with the preparation of financial statements; (2) internal controls related to the financial statements; (3) completeness and propriety of the disclosure in the financial statements; (4) the accounting policies adopted and the accounting treatments implemented in material matters of the company; and (5) value evaluations, including the assumptions and assessments on which evaluations are based and the supporting data in the financial statements. Our independent registered public accounting firm and our internal auditor are invited to attend all meetings of our financial statements examination committee.
Compensation Committee
Under the Companies Law, the board of directors of any public company must establish a compensation committee. The compensation committee must be composed of at least three directors, including all of the external directors, who must constitute a majority of the members of the compensation committee. Each compensation committee member that is not an external director must be a director whose compensation does not exceed an amount that may be paid to an external director. The compensation committee is subject to the same Companies Law restrictions as the audit committee as to: (a) who may not be a member of the committee; and (b) who may not be present during committee deliberations as described above.
Our compensation committee will be acting pursuant to a written charter, and is expected to include Mr. Eli Bachar, Mr. Yaacov Goldman, and Ms. Ilana Lurie. Pursuant to the Companies Law, the members of the compensation committee can choose their chairman during the first committee meeting following the offering. The members of the compensation committee will elect a chairman during their first meeting that will take place after this offering. Our compensation committee will comply with the provisions of the Companies Law, the regulations promulgated thereunder, and our amended and restated articles of association, on all aspects referring to its independence, authorities and practice. Our compensation committee will follow home country practice as opposed to complying with the compensation committee membership and charter requirements prescribed under the Nasdaq rules.
Our compensation committee will review and recommend to our board of directors (and under the provisions of the our compensation policy): with respect to our executive officers’ and directors’: (1) annual base compensation (2) annual incentive bonus, including the specific goals and amounts; (3) equity compensation; (4) employment agreements, severance arrangements, and change in control agreements and provisions; (5) retirement grants and/or retirement bonuses; and (6) any other benefits, compensation, compensation policies or arrangements.
The duties of the compensation committee will include the recommendation to the company’s board of directors of a policy regarding the terms of engagement of office holders, to which we refer as a compensation policy. Such policy was adopted by our board of directors and was approved by the shareholders, subject to this offering (see “Management—Board Practices—Approval of Related Party Transactions under Israeli law”). Under the Companies Law, the board of directors may adopt the compensation policy if it is not approved by the shareholders, provided that after the shareholders oppose the approval of such policy, the compensation committee and the board of directors revisit the matter and determine that adopting the compensation policy would be in the best interests of the company. Under the Companies Law, we are required to adopt an office holder compensation policy no later than 9 months from the consummation of this offering.
The compensation policy must serve as the basis for decisions concerning the financial terms of employment or engagement of executive officers and directors, including exculpation, insurance, indemnification or any monetary payment or obligation of payment in respect of employment or engagement. The compensation policy must relate to certain factors, including advancement of the company’s objectives, the company’s business and its long-term strategy, and creation of appropriate incentives for executives. It must also consider, among other things, the company’s risk management, size and the nature of its operations. The compensation policy must furthermore consider the following additional factors:
| ● | the education, skills, expertise and accomplishments of the relevant director or executive; | |
| ● | the director’s or executive’s roles and responsibilities and prior compensation agreements with him or her; | |
| ● | the relationship between the cost of the terms of service of an office holder and the average median compensation of the other employees of the company (including those employed through manpower companies), including the impact of disparities in salary upon work relationships in the company; | |
| ● | 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 compensation; and | |
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| ● | as to severance compensation, the period of service of the director or executive, the terms of his or her compensation during such service period, the company’s performance during that period of service, the person’s contribution towards the company’s achievement of its goals and the maximization of its profits, and the circumstances under which the person is leaving the company. |
The compensation policy must also include the following principles:
| ● | with the exception of office holders who report directly to the chief executive officer, the link between variable compensation and long-term performance and measurable criteria; | |
| ● | the relationship between variable and fixed compensation, and the ceiling for the value of variable compensation at the time of its grant; | |
| ● | the conditions under which a director or executive would be required to repay compensation paid to him or her if it was later shown that the data upon which such compensation was based was inaccurate and was required to be restated in the company’s financial statements; | |
| ● | the minimum holding or vesting period for variable, equity-based compensation; and | |
| ● | maximum limits for severance compensation. |
The compensation policy must also consider appropriate incentives from a long-term perspective.
The compensation committee is responsible for: (1) recommending the compensation policy to a company’s board of directors for its approval (and subsequent approval by the shareholders); and (2) duties related to the compensation policy and to the compensation of a company’s office holders, including:
| ● | recommending 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); | |
| ● | recommending to the board of directors periodic updates to the compensation policy; | |
| ● | assessing implementation of the compensation policy; | |
| ● | determining whether the terms of compensation of certain office holders of the company need not be brought to approval of the shareholders; and | |
| ● | determining whether to approve the terms of compensation of office holders that require the committee’s approval. |
Our compensation policy is designed to promote our long-term goals, work plan and policy, retain, motivate and incentivize our directors and executive officers, while considering the risks that our activities involve, our size, the nature and scope of our activities and the contribution of an officer to the achievement of our goals and maximization of profits, and align the interests of our directors and executive officers with our long-term performance. To that end, a portion of an executive officer compensation package is targeted to reflect our short and long-term goals, as well as the executive officer’s individual performance. On the other hand, our compensation policy includes measures designed to reduce the executive officer’s incentives to take excessive risks that may harm us in the long-term, such as limits on the value of cash bonuses and equity-based compensation, limitations on the ratio between the variable and the total compensation of an executive officer and minimum vesting periods for equity-based compensation.
Our compensation policy also addresses our executive officer’s individual characteristics (such as his or her respective position, education, scope of responsibilities and contribution to the attainment of our goals) as the basis for compensation variation among our executive officers, and considers the internal ratios between compensation of our executive officers and directors and other employees. For example, the compensation that may be granted to an executive officer may include: base salary, annual bonuses, equity-based compensation, benefits and retirement and termination of service arrangements. All cash bonuses are limited to a maximum amount linked to the executive officer’s base salary. In addition, our compensation policy provides for maximum permitted ratios between the total variable (cash bonuses and equity-based compensation) and non-variable (base salary) compensation components, in accordance with an officer’s respective position with the company.
An annual cash bonus may be awarded to executive officers upon the attainment of pre-set periodic objectives and individual targets. The annual cash bonus that may be granted to executive officers other than our chairman or Chief Executive Officer may be based entirely on a discretionary evaluation. Our Chief Executive Officer will be entitled to recommend performance objectives to such executive officers, and such performance objectives will be approved by our compensation committee (and, if required by law, by our board of directors).
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The performance measurable objectives of our chairman and Chief Executive Officer will be determined annually by our compensation committee and board of directors. A less significant portion of the chairman’s and/or the Chief Executive Officer’s annual cash bonus may be based on a discretionary evaluation of the chairman’s or the Chief Executive Officer’s respective overall performance by the compensation committee and the board of directors based on quantitative and qualitative criteria.
The equity-based compensation under our compensation policy for our executive officers (including members of our board of directors) will be designed in a manner consistent with the underlying objectives in determining the base salary and the annual cash bonus, with its main objectives being to enhance the alignment between the executive officers’ interests with our long-term interests and those of our shareholders and to strengthen the retention and the motivation of executive officers in the long term. Our compensation policy provides for executive officer compensation in the form of share options or other equity-based awards, such as restricted shares, options, in accordance with our stock option plan then in place. Share options granted to executive officers shall be subject to vesting periods in order to promote long-term retention of the awarded executive officers. The equity-based compensation shall be granted from time to time and be individually determined and awarded according to the performance, educational background, prior business experience, qualifications, role and the personal responsibilities of the executive officer.
In addition, our compensation policy contains compensation recovery provisions which allows us under certain conditions to recover bonuses paid in excess, will enable our Chief Executive Officer to approve an immaterial change in the terms of employment of an executive officer (provided that the changes of the terms of employment are in accordance our compensation policy) and allows us to exculpate, indemnify and insure our executive officers and directors subject to certain limitations set forth thereto.
Our compensation policy also provides for compensation to the members of our board of directors either: (i) in accordance with the amounts provided in the Companies Regulations (Rules Regarding the Compensation and Expenses of an External Director) of 2000, as amended by the Companies Regulations (Relief for Public Companies Traded in Stock Exchange Outside of Israel) of 2000, as such regulations may be amended from time to time; or (ii) in accordance with the amounts determined in our compensation policy.
Nasdaq Requirements for Compensation Committee
Under the Nasdaq rules, we are required to maintain a compensation committee consisting of at least two members, each of whom are independent.
As noted above, the members of our compensation committee will include Mr. Eli Bachar, Mr. Yaacov Goldman, and Ms. Ilana Lurie, each of whom is “independent,” as such term is defined in under Nasdaq rules.
Internal Auditor
Under the Companies Law, the board of directors of an Israeli public company must appoint an internal auditor nominated by the audit committee. We intend to appoint our internal auditor within 90 days following the consummation of this offering. The role of the internal auditor is to examine, among other things, whether a company’s actions comply with the law and proper business procedure. The audit committee is required to oversee the activities, and to assess the performance of the internal auditor as well as to review the internal auditor’s work plan. An internal auditor may not be an interested party or office holder, or a relative of any interested party or office holder, and may not be a member of the company’s independent accounting firm or its representative. The Companies Law defines an interested party as a holder of 5% or more of the outstanding shares or voting rights of a company, any person or entity that has the right to appoint at least one director or the general manager of the company or any person who serves as a director or as the general manager of a company. Our internal auditor is not our employee, but partner of a firm which specializes in internal auditing.
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Remuneration of Directors
Under the Companies Law, remuneration of directors is subject to the approval of the compensation committee, thereafter by the board of directors and thereafter, unless exempted under the regulations promulgated under the Companies Law, by the general meeting of the shareholders. In case the remuneration of the directors is in accordance with regulations applicable to remuneration of the external directors then such remuneration shall be exempt from the approval of the general meeting. Where the director is also a controlling shareholder, the requirements for approval of transactions with controlling shareholders apply.
Fiduciary Duties of Office Holders
The Companies Law imposes a duty of care and a duty of loyalty on all office holders of a company.
The duty of care requires an office holder to act with the level of care with which a reasonable office holder in the same position would have acted under the same circumstances. The duty of care of an office holder includes a duty to use reasonable means to obtain:
| ● | information on the advisability of a given action brought for his approval or performed by him by virtue of his position; and | |
| ● | all other important information pertaining to these actions. |
The duty of loyalty of an office holder requires an office holder to act in good faith and for the benefit of the company, and includes a duty to:
| ● | refrain from any conflict of interest between the performance of his duties in the company and his performance of his other duties or personal affairs; | |
| ● | refrain from any action that is competitive with the company’s business; | |
| ● | refrain from exploiting any business opportunity of the company to receive a personal gain for himself or others; and | |
| ● | disclose to the company any information or documents relating to the company’s affairs which the office holder has received due to his position as an office holder. |
Insurance
Under the Companies Law, a company may obtain insurance for any of its office holders against the following liabilities incurred due to acts he or she performed as an office holder, if and to the extent provided for in the company’s articles of association:
| ● | breach of his or her duty of care to the company or to another person, to the extent such a breach arises out of the negligent conduct of the office holder; | |
| ● | a breach of his or her duty of loyalty to the company, provided that the office holder acted in good faith and had reasonable cause to assume that his or her act would not prejudice the company’s interests; and | |
| ● | a financial liability imposed upon him or her in favor of another person. |
We currently have directors’ and officers’ liability insurance, providing total coverage of $1,000,000 for the benefit of all of our directors and officers, in respect of which we paid a twelve-month premium of approximately $2,783, which expires on July 4, 2022. We intend to purchase additional insurance coverage prior to the consummation of this offering, subject to the completion of this offering. As approved by our board of directors and our shareholders, we expect that the directors’ and officers’ liability insurance will provide coverage of up to $15,000,000 for the benefit of all of our directors and officers, with an annual premium that shall not exceed $1,200,000. The new terms for the directors’ and officers' liability insurance were approved at the shareholders meeting.
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Indemnification
The Companies Law, and the Israeli Securities Law, 5728-1968, or the Securities Law, provide that a company may indemnify an office holder against 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 an 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 by any judgment concerning an act performed in his or her capacity as an office holder, including a settlement or arbitrator’s award approved by a court; | |
| ● | reasonable litigation expenses, including attorneys’ fees, expended by the office holder (a) 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 (1) no indictment (as defined in the Companies Law) was filed against such office holder as a result of such investigation or proceeding; and (2) no financial liability as a substitute for the criminal proceeding (as defined in the Companies Law) was imposed upon him or her 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; or (b) in connection with a monetary sanction; | |
| ● | reasonable litigation expenses, including attorneys’ fees, expended by the office holder or imposed on him or her by a court; (1) in proceedings that the company institutes, or that another person institutes on the company’s behalf, against him or her; (2) in a criminal proceeding of which he or she was acquitted; or (3) as a result of a conviction for a crime that does not require proof of criminal intent; and | |
| ● | expenses incurred by an office holder in connection with an Administrative Procedure under the Securities Law, including reasonable litigation expenses and reasonable attorneys’ fees. An “Administrative Procedure” is defined as a procedure pursuant to chapters H3 (Monetary Sanction by the Israeli Securities Authority), H4 (Administrative Enforcement Procedures of the Administrative Enforcement Committee) or I1 (Arrangement to prevent Procedures or Interruption of procedures subject to conditions) to the Securities Law. |
The Companies Law also permits a company to undertake in advance to indemnify an office holder, provided that if such indemnification relates to financial liability imposed on him or her, as described above, then the undertaking should be limited and shall detail the following foreseen events and amount or criterion:
| ● | to events that in the opinion of the board of directors can be foreseen based on the company’s activities at the time that the undertaking to indemnify is made; and | |
| ● | in amount or criterion determined by the board of directors, at the time of the giving of such undertaking to indemnify, to be reasonable under the circumstances. |
The board of directors has approved indemnification agreements with all of our directors and with all members of our senior management, which same must be approved by our shareholders at a general meeting. We expect our shareholders to approve the indemnification agreements at the upcoming general meeting.. We expect that each such indemnification agreement will provide the office holder with indemnification permitted under applicable law and up to a certain amount, and to the extent that these liabilities are not covered by directors and officers insurance.
Exculpation
Under the Companies Law, an Israeli company may not exculpate an office holder from liability for a breach of his or her duty of loyalty, but may exculpate in advance an office holder from his or her liability to the company, in whole or in part, for damages caused to the company as a result of a breach of his or her duty of care (other than in relation to distributions), but only if a provision authorizing such exculpation is included in its articles of association. Our amended and restated articles of association provide that we may exculpate, in whole or in part, any office holder from liability to us for damages caused to the company as a result of a breach of his or her duty of care, but prohibit an exculpation from liability arising from a company’s transaction in which our controlling shareholder or officer has a personal interest. Subject to the aforesaid limitations, under the indemnification agreements, we will exculpate and release our office holders from any and all liability to us related to any breach by them of their duty of care to us to the fullest extent permitted by law.
Limitations
The Companies Law provides that we may not exculpate or indemnify an office holder nor enter into an insurance contract that would provide coverage for any liability incurred as a result of any of the following: (1) a breach by the office holder of his or her duty of loyalty unless (in the case of indemnity or insurance only, but not exculpation) the office holder acted in good faith and had a reasonable basis to believe that the act would not prejudice us; (2) a breach by the office holder of his or her duty of care if the breach was carried out intentionally or recklessly (as opposed to merely negligently); (3) any act or omission committed with the intent to derive an illegal personal benefit; or (4) any fine, monetary sanction, penalty or forfeit levied against the office holder.
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Under the 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 certain office holders or under certain circumstances, also by the shareholders.
Our amended and restated articles of association permit us to exculpate (subject to the aforesaid limitation), indemnify and insure our office holders to the fullest extent permitted or to be permitted by the Companies Law.
The foregoing descriptions summarize the material aspects and practices of our board of directors. For additional details, we also refer you to the full text of the Companies Law, as well as of our amended and restated articles of association, which are exhibits to this registration statement of which this prospectus forms a part, and are incorporated herein by reference.
There are no service contracts between us or our Subsidiary, on the one hand, and our directors in their capacity as directors, on the other hand, providing for benefits upon termination of service.
Approval of Related Party Transactions under Israeli Law
General
Under the Companies Law, we may approve an action by an office holder from which the office holder would otherwise have to refrain, as described above, if:
| ● | the office holder acts in good faith and the act or its approval does not cause harm to the company; and | |
| ● | the office holder disclosed the nature of his or her interest in the transaction (including any significant fact or document) to the company at a reasonable time before the company’s approval of such matter. |
Disclosure of Personal Interests of an Office Holder
The Companies Law requires that an office holder disclose to the company, promptly, and, in any event, not later than the board meeting at which the transaction is first discussed, any direct or indirect personal interest that he or she may have and all related material information known to him or her relating to any existing or proposed transaction by the company. If the transaction is an extraordinary transaction, the office holder must also disclose any personal interest held by:
| ● | the office holder’s relatives; or | |
| ● | any corporation in which the office holder or his or her relatives holds 5% or more of the shares or voting rights, serves as a director or general manager or has the right to appoint at least one director or the general manager. |
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 Companies Law, an extraordinary transaction is a transaction:
| ● | not in the ordinary course of business; | |
| ● | not on market terms; or | |
| ● | that is likely to have a material effect on the company’s profitability, assets or liabilities. |
The Companies Law does not specify to whom within us nor the manner in which required disclosures are to be made. We require our office holders to make such disclosures to our board of directors.
Under the Companies Law, once an office holder complies with the above disclosure requirement, the board of directors may approve a transaction between the company and an office holder, or a third party in which an office holder has a personal interest, unless the articles of association provide otherwise and provided that the transaction is in the company’s interest. If the transaction is an extraordinary transaction in which an office holder has a personal interest, first the audit committee and then the board of directors, in that order, must approve the transaction. Under specific circumstances, shareholder approval may also be required. 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 may not be present at such a meeting unless the chairman of the audit committee or board of directors (as applicable) determines that he or she should be present in order to present the transaction that is subject to approval. A director who has a personal interest in a transaction, which is considered at a meeting of the board of directors or the audit committee, may not be present at this meeting or vote on this matter, unless a majority of members of the board of directors or the audit committee, as the case may be, has a personal interest. If a majority of the board of directors has a personal interest, then shareholder approval is generally also required.
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Disclosure of Personal Interests of a Controlling Shareholder
Under the Companies Law, the disclosure requirements that apply to an office holder also apply to a controlling shareholder of a public company. 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, as well as transactions for the provision of services whether directly or indirectly by a controlling shareholder or his or her relative, or a company such controlling shareholder controls, and transactions concerning the terms of engagement and compensation of a controlling shareholder or a controlling shareholder’s relative, whether as an office holder or an employee, require the approval of the audit committee or the compensation committee, as the case may be, the board of directors and a majority of the shares voted by the shareholders of the company participating and voting on the matter in a shareholders’ meeting. In addition, the shareholder approval must fulfill one of the following requirements:
| ● | at least a majority of the shares held by shareholders who have no personal interest in the transaction and are voting at the meeting must be voted in favor of approving the transaction, excluding abstentions; or | |
| ● | the shares voted by shareholders who have no personal interest in the transaction who vote against the transaction represent no more than 2% of the voting rights in the company. |
In addition, any extraordinary transaction with a controlling shareholder or in which a controlling shareholder has a personal interest with a term of more than three years requires the abovementioned approval every three years; however, such transactions not involving the receipt of services or compensation can be approved for a longer term, provided that the audit committee determines that such longer term is reasonable under the circumstances.
The Companies Law requires that every shareholder that participates, in person, by proxy or by voting instrument, in a vote regarding a transaction with a controlling shareholder, must indicate in advance or in the ballot whether or not that shareholder has a personal interest in the vote in question. Failure to so indicate will result in the invalidation of that shareholder’s vote.
The term “controlling shareholder” is defined in the Companies Law as a shareholder with the ability to direct the activities of the company, other than by virtue of being an office holder. A shareholder is presumed to be a controlling shareholder if the shareholder holds 50% or more of the voting rights in a company or has the right to appoint 50% or more of the directors of the company or its general manager. 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.
Approval of the Compensation of Directors and Executive Officers
The compensation of, or an undertaking to indemnify, insure or exculpate, an office holder who is not a director requires the approval of the company’s compensation committee, followed by the approval of the company’s board of directors, and, if such compensation arrangement or an undertaking to indemnify, insure or exculpate is inconsistent with the company’s stated compensation policy, or if the said office holder is the chief executive officer of the company (subject to a number of specific exceptions), then such arrangement is subject to the approval of our shareholders, subject to a special majority requirement.
Directors. Under the Companies Law, the compensation of our directors requires the approval of our compensation committee, the subsequent approval of the board of directors and, unless exempted under the regulations promulgated under the Companies Law, the approval of the general meeting of our shareholders. If the compensation of our directors is inconsistent with our stated compensation policy, then, provided that those provisions that must be included in the compensation policy according to the Companies Law have been considered by the compensation committee and board of directors, shareholder approval by a special majority will be required.
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Executive officers other than the chief executive officer. The Companies Law requires the approval of the compensation of a public company’s executive officers (other than the chief executive officer) in the following order: (i) the compensation committee, (ii) the company’s board of directors, and (iii) only if such compensation arrangement is inconsistent with the company’s stated compensation policy, the company’s shareholders by a special majority. However, if the shareholders of the company do not approve a compensation arrangement with an executive officer that is inconsistent with the company’s stated compensation policy, the compensation committee and board of directors may override the shareholders’ decision if each of the compensation committee and the board of directors provide detailed reasons for their decision.
Chief executive officer. Under the Companies Law, the compensation of a public company’s chief executive officer is required to be approved by: (i) the company’s compensation committee; (ii) the company’s board of directors, and (iii) the company’s shareholders by a special majority. However, if the shareholders of the company do not approve the compensation arrangement with the chief executive officer, the compensation committee and board of directors may override the shareholders’ decision if each of the compensation committee and the board of directors provides detailed reasons for their decision. In addition, the compensation committee may exempt the engagement terms of a candidate to serve as the chief executive officer from shareholders’ approval, if the compensation committee determines that the compensation arrangement is consistent with the company’s stated compensation policy, that the chief executive officer did not have a prior business relationship with the company or a controlling shareholder of the company, and that subjecting the approval to a shareholder vote would impede the company’s ability to attain the candidate to serve as the company’s chief executive officer (and provide detailed reasons for the latter).
The approval of each of the compensation committee and the board of directors, with regard to the office holders and directors above, must be in accordance with the company’s stated compensation policy; however, under special circumstances, the compensation committee and the board of directors may approve compensation terms of a chief executive officer that are inconsistent with the company’s compensation policy provided that they have considered those provisions that must be included in the compensation policy according to the Companies Law and that shareholder approval was obtained by a special majority requirement.
Duties of Shareholders
Under the Companies Law, a shareholder has a duty to refrain from abusing his power in the company and to act in good faith and in an acceptable manner in exercising his rights and performing his obligations toward the company and other shareholders, including, among other things, in voting at general meetings of shareholders (and at shareholder class meetings) on the following matters:
| ● | amendment of the articles of association; | |
| ● | increase in the company’s authorized share capital; | |
| ● | merger; and | |
| ● | the approval of related party transactions and acts of office holders that require shareholder approval. |
A shareholder also has a general duty to refrain from oppressing other shareholders. The remedies generally available upon a breach of contract will also apply to a breach of the above mentioned duties, and in the event of oppression of other shareholders, additional remedies are available to the injured shareholder.
In addition, any controlling shareholder, any shareholder that knows that its vote can determine the outcome of a shareholder vote and any shareholder that, under a company’s articles of association, has the power to appoint or prevent the appointment of an office holder, or has another power with respect to a company, is under a duty to act with fairness towards the company. The Companies Law does not describe the substance of this duty except to state that the remedies generally available upon a breach of contract will also apply in the event of a breach of the duty to act with fairness, taking the shareholder’s position in the company into account.
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Equity Incentive Plan
In September 2015, our board of directors adopted the 2015 Plan, pursuant to the provisions of the Israeli Income Tax Ordinance, or the Tax Ordinance. Upon the adoption of the 2015 Plan, our board of directors was provided with the discretion to grant options, or Options, to purchase Ordinary Shares of our company from a pool of up to 500,000 Ordinary Shares, or the Pool. The Pool was reserved as a part of our authorized share capital for this purpose.
Pursuant to the 2015 Plan, the Options may be granted to employees, consultants and service providers, directors and non-employees of our company and/or our affiliates, or the Optionees; provided however, that the Optionees who are Israeli employees or directors (who are not controlling shareholders of our company) may only receive Options pursuant to Section 102 of the Tax Ordinance, or Section 102, and non-employees (and/or employees who are also controlling shareholders), may receive Options pursuant to Section 3(i) of the Tax Ordinance. Section 102 Options may be either approved Options or unapproved Options. Approved Section 102 Options are: (1) required to be held by a trustee appointed by our board of directors pursuant to the 2015 Plan, or Trustee; (2) require a holding period as set forth in Section 102; and (3) are subject to an irrevocable proxy provided to the Trustee. Section 102 Options may either be subject to a capital gains track or ordinary income track, as elected and designated by us.
Our board of directors has the discretion to determine the terms of the Options for each option grant, including the exercise price and vesting dates of the Options. If not earlier exercised, the Options expire upon the earlier of (i) 10 years from the date of grant; (ii) depending on the circumstances, following a pre-determined time period after the termination of the Optionees employment or engagement with us, as applicable; or (iii) as provided in the Optionee’s option agreement. Any Ordinary Shares underlying Options which are forfeited, expired or canceled before expiration of the 2015 Plan, become available for future grants thereunder. Our board of directors has discretion to change the terms of existing Options, including the acceleration of vesting periods in connection with a change of control transaction.
Following its adoption in 2015 and until December 31, 2020, our board of directors has approved from time to time the increase of the Pool (and the corresponding number of reserved shares in our authorized share capital) by an additional 532,805 Ordinary Shares, to a total of 1,032,805 Ordinary Shares.
On April 22, 2021, our board of directors increased the Pool by an additional 200,000 Ordinary Shares, to a total of 1,232,805 Ordinary Shares. As of April 4, 2022, 368,105 Ordinary Shares had been issued upon the exercise of Options, 1,162,689 Options had been allocated and/or granted but had not been exercised, and 302,011 Ordinary Shares remained available for future grants. The number of Ordinary Shares in the Pool is also subject to adjustment under certain circumstances (e.g., reorganization of our equity capital). On November 9, 2021, our shareholders approved the increase in the number of Ordinary Shares reserved for future grants to 1,832,805 and approved additional issuances of Options in the aggregate amount of 600,000.
On March 6, 2022, our board of directors decided to recommend that the shareholders increase our authorized share capital by an additional NIS 300,000 divided into 30,000,000 Ordinary Shares, such that following such increase, the authorized share capital shall be NIS 500,000 divided into 50,000,000 Ordinary Shares. Such increase of our authorized share capital was approved by a meeting of our shareholders on March 14, 2022.
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BENEFICIAL OWNERSHIP OF PRINCIPAL SHAREHOLDERS AND MANAGEMENT
The following table sets forth information regarding beneficial ownership of our Ordinary Shares as of April 4, 2022 by:
| ● | each person, or group of affiliated persons, known to us to be the beneficial owner of more than 5% of our outstanding Ordinary Shares; | |
| ● | each of our directors and executive officers; and | |
| ● | all of our directors and executive officers as a group. |
Beneficial ownership is determined in accordance with the rules of the SEC, and includes voting or investment power with respect to Ordinary Shares. Ordinary Shares issuable under share options or warrants that are exercisable within 60 days after April 4, 2022, are deemed outstanding for the purpose of computing the percentage ownership of the person holding the options or warrants but are not deemed outstanding for the purpose of computing the percentage ownership of any other person. Percentage of shares beneficially owned before this offering is based on 11,136,850 shares outstanding on April 4, 2022. The number of Ordinary Shares deemed outstanding after this offering is based on Ordinary Shares as part of the Units and Pre-funded Units, assuming the exercise of any Pre-Funded Units and no exercise of the underwriter’s over-allotment option.
We are not controlled by another corporation, by any foreign government or by any natural or legal persons except as set forth herein, and there are no arrangements known to us which would result in a change in control of our company at a subsequent date. 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 beneficial owner’s address is: c/o Wearable Devices Ltd., 2 Ha-Ta’asiya St., Yokne’am Illit, 2069803 Israel.
| No. of Shares Beneficially Owned Prior to this Offering | Percentage Owned Before this Offering | Percentage Owned After this Offering | ||||||||||
| Holders of more than 5% of our voting securities: | ||||||||||||
| Asher Dahan * | 1,350,000 | 11.4 | % | % | ||||||||
| Guy Wagner * | 1,800,000 | 15.1 | % | % | ||||||||
| Leeor Langer | 1,350,000 | 11.4 | % | % | ||||||||
| Alumot (1) | 1,198,774 | 10.1 | % | % | ||||||||
| OurCrowd General Partner, L.P. (2) | 1,226,442 | 10.3 | % | |||||||||
| Mudra CEO LLC (3) | 912,235 | 7.7 | % | |||||||||
| Eli Bachar * (4) | 829,921 | 7.0 | % | |||||||||
| Directors and senior management who are not 5% holders: | ||||||||||||
| % | % | |||||||||||
| Barry Kaplan *(5) | 219,842 | 1.8 | % | |||||||||
| Alon Mualem | 0 | 0 | % | |||||||||
| % | ||||||||||||
| All directors and senior management as a group (6 persons) | 5,549,763 | 46.7 | % | % | ||||||||
| * | Indicates director of the Company. |
| (1) | Alumot is a private Cayman Islands company. Alexandr Khamidullin has the sole voting and investment control over the shares. |
| (2) | OurCrowd General Partner, L.P. is a private Cayman Islands company, which is owned by OurCrowd General Partner Limited. Jonathan Medved holds 80% voting interest and Steven Blumgart holds 20% voting interest in OurCrowd General Partner Limited. |
| (3) | Mudra CEO LLC is a private American company. Chaim Fischer has the sole voting and investment control over the shares. |
| (4) | Certain of our shareholders have provided an irrevocable proxy to our director Eli Bachar to act on their behalf in connection with these shareholders’ ownership of 553,281 of our Ordinary Shares. This irrevocable proxy will expire upon completion of this offering. |
| (5) | Includes options to purchase 2,083 Ordinary Shares that are exercisable within 60 days, at an exercise price of $2.25 per share. |
Record Holders
As of April 4, 2022, there were 26 shareholders of record of our Ordinary Shares. These numbers are not representative of the number of beneficial holders of our shares nor is it representative of where such beneficial holders reside, since many of these shares were held of record by brokers or other nominees.
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Employment Agreements
We have entered into written employment agreements with each of our executive officers. All of these agreements contain customary provisions regarding noncompetition, confidentiality of information and assignment of inventions. However, the enforceability of the noncompetition provisions may be limited under applicable law. In addition, we have entered into agreements with each executive officer and director pursuant to which we have agreed to indemnify each of them up to a certain amount and to the extent that these liabilities are not covered by directors and officers insurance. Members of our senior management are eligible for bonuses each year. The bonuses are payable upon meeting objectives and targets that are set by our Chief Executive Officer and approved annually by our board of directors that also set the bonus targets for our Chief Executive Officer.
On March 6, 2022, our board of directors approved new terms of compensation for each of our officers, subject to the approval of our shareholders. The new terms of compensation were approved by our shareholders in a meeting that took place on March 14, 2022.
Options
Since our inception, we have granted options to purchase our Ordinary Shares to our officers and certain of our directors. Such option agreements may contain acceleration provisions upon certain merger, acquisition, or change of control transactions. We describe our option plans under “Management—Equity Incentive Plan.” If the relationship between us and an executive officer or a director is terminated, except for cause (as defined in the various option plan agreements), options that are vested will generally remain exercisable for three months after such termination.
Employment Agreement with Barry Kaplan
In July 2021, effective as of July 1, 2021, our subsidiary, Mudra Wearable Inc., entered into an employment agreement with Barry Kaplan. Pursuant to the terms of his employment agreement, Mudra Wearable Inc. pays Mr. Kaplan a gross annual salary of $200,000 for his services as the Executive Vice President of the U.S. Operations. In addition to options received for service as one of our directors, on July 1, 2021, we also issued Mr. Kaplan options to purchase 50,000 Ordinary Shares under our 2015 Plan, at an exercise price of $2.25 per share. Pursuant to the employment agreement, we or Mr. Kaplan may terminate the employment agreement by providing 30 days’ prior written notice.
On March 6, 2022, our board of directors approved and ratified the employment agreement by and between the Company and Mr. Kaplan. This amendment was subsequently approved by our shareholders on March 14, 2022. As of the effective date of the agreement, subject to the completion of this offering, our board and shareholders have approved a grant payment to Mr. Kaplan for the completion of the offering, in a total amount equal to three monthly salaries.
Share Purchase Agreement with Alpha
In April 2021, we entered into a share purchase agreement with one of our beneficial shareholders, Alpha, for a subscription amount of $1 million. We issued to Alpha for their subscription amount 444,091 Ordinary Shares and 222,045 warrants to purchase additional Ordinary Shares for an aggregate amount equal to 50% of Alpha’s subscription amount. Alpha’s warrants are exercisable until the earlier of: (i) eighteen (18) months from Qualified IPO; (ii) change of control event, such as sale of all or substantially all of our assets or the majority of shares, merger, consolidation or other business combination of us into another company or sale, lease, transfer, or exclusive license or disposition of all or substantially all of our intellectual property, or (iii) three (3) years from April 22, 2021. Pursuant to the share purchase agreement, we provided Alpha with a board observer right to designate one person, reasonably acceptable to us, to attend all our board of directors meetings and conference calls as an observer, with no right to vote on any matter. Such observer shall receive all information, written or oral, which our management provides to the other directors our company from time to time. Alpha’s board observer right shall last until we conduct a Qualified IPO. We are also obligated to receive Alpha’s prior written consent for a Qualified IPO.
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The following descriptions of our share capital and provisions of our amended and restated articles of association which will be effective upon the closing of this offering are summaries and do not purport to be complete. A form of our amended and restated articles of association will be filed with the SEC as an exhibit to our registration statement, of which this prospectus forms a part. The description of the Ordinary Shares reflects changes to our capital structure that will occur upon the closing of this offering.
General
On March 6, 2022, our board of directors recommended that the shareholders increase our authorized share capital by an additional NIS 300,000 divided into 30,000,000 Ordinary Shares, such that following the increase, our authorized share capital shall be NIS 500,000 divided into 50,000,000 Ordinary Shares. Such increase was approved by our shareholders at the general meeting held on March 14, 2022.
Our authorized share capital thus consists of 50,000,000 Ordinary Shares, of which Ordinary Shares will be issued and outstanding (assuming that the underwriter does not exercise its option to purchase additional Ordinary Shares prior thereto). All of our outstanding Ordinary Shares are validly issued, fully paid and non-assessable. Our Ordinary Shares are not redeemable and do not have any preemptive rights. All Ordinary Shares have identical voting and other rights in all respects.
In the last three years, we have issued an aggregate of 6,510,277 Ordinary Shares in several private placements, in several convertible loan agreement conversions, in conversion of ordinary A shares, and upon employees’ exercise of options, for aggregate net proceeds of $5.825 million.
In addition to Ordinary Shares, in the last three years, we have issued warrants to investors to purchase an aggregate of 671,687 warrants exercisable into Ordinary Shares in consideration of 125% of the per share purchase price in our initial public offering, and granted options to purchase an aggregate of 647,853 Ordinary Shares, of which 23,971 were exercised and 18,029 where forfeited, to directors, officers and employees with exercise prices ranging from $0.003 to $2.251 per share.
Our registration number with the Israeli Registrar of Companies is 515056117.
Purposes and Objects of the Company
Our purpose is set forth in our articles of association and includes every lawful purpose.
Simple Agreements for Future Equity
In January 2022, our board of directors authorized us to enter into a series of SAFEs for aggregate proceeds of up to $3 million. As of April 4, 2022, we had received $500 thousand under the SAFEs we have entered into. Any amounts received under the SAFEs will be automatically converted into our Ordinary Shares in the event we close an Equity Financing (as defined hereinafter) at a discount of 20% from the per share purchase price in such Equity Financing. An Equity Financing is a transaction or series of transactions with the principal purpose of raising capital in an aggregate amount of at least $5,000,000, excluding all outstanding (i) SAFEs, and (ii) other convertible securities (if any), pursuant to which we issue and sell Ordinary Shares at a fixed pre-money valuation. In case of an initial public offering or a Change of Control transaction (as defined hereinafter), the SAFE amount shall, at the election of the investor thereunder, either (i) convert into our Ordinary Shares at a discount of 20% from the per share price at such event, or (ii) be repaid to the investor (subject to adjustments in case there are insufficient funds for such repayment to all SAFE investors) at the closing thereof. The conversion of the SAFE amounts into the Ordinary Shares in case of an initial public offering, is also subject to certain lock-up periods and other restrictions on transfer. In the event of a dissolution event (e.g., a voluntary or involuntary termination of operations, dissolution or our winding-up), the SAFE amount shall be repaid to the investors prior to or concurrently with the consummation of such an event. In addition, we agreed to issue to each SAFE investor a warrant to purchase our Ordinary Shares with an exercise price equal to 150% of the public offering price in such offering for an aggregate amount of up to 25% of such investor’s SAFE amount. The warrants shall be exercisable until the earlier of: (i) eighteen (18) months from January 2022; or (ii) in a Change of Control event, which generally covers (a) transaction in which any person or group becomes the beneficial owner, directly or indirectly, of more than 50% of our outstanding voting securities with the right to vote for the election of members of our board of directors, or (b) any reorganization, merger or our consolidation, or (c) a sale, lease or other disposition of all or substantially all of our assets.
The Powers of the Directors
Our board of directors shall direct our policy and shall supervise the performance of our Chief Executive Officer and his actions. Our board of directors may exercise all powers that are not required under the Companies Law or under our amended and restated articles of association to be exercised or taken by our shareholders.
Rights Attached to Shares
Our Ordinary Shares shall confer upon the holders thereof:
| ● | equal right to attend and to vote at all of our general meetings, whether regular or special, with each Ordinary Share entitling the holder thereof, which attend the meeting and participate at the voting, either in person or by a proxy or by a written ballot, to one vote; | |
| ● | equal right to participate in distribution of dividends, if any, whether payable in cash or in bonus shares, in distribution of assets or in any other distribution, on a per share pro rata basis; and | |
| ● | equal right to participate, upon our dissolution, in the distribution of our assets legally available for distribution, on a per share pro rata basis. |
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Certain of our shareholders have provided an irrevocable proxy to our director Eli Bachar to act on their behalf in connection with these shareholders’ ownership of 553,281 of our Ordinary Shares. Mr. Bachar shall (i) receive, instead of the shareholders and on their behalf, any notice otherwise delivered to the shareholder; (ii) waive any preemptive right, right of first refusal, right of first offer, co-sale right or any other similar participation right to which the shareholders are entitled by the virtue of their shares ownership. This proxy shall remain in force until the earlier of (1) the closing of our initial public offering or (2) upon our acquisition.
Election of Directors
Pursuant to our amended and restated articles of association, our directors are elected at an annual general meeting of our shareholders and serve on the board of directors until the next annual general meeting (except for external directors) or until he or she resigns or unless he or she is removed by a majority vote of our shareholders at a general meeting of our shareholders or upon the occurrence of certain events, in accordance with the Companies Law and our amended and restated articles of association. The directors are classified, with respect to the term for which they each severally hold office, into three classes, as nearly equal in number as practicable, and designated as Class I, Class II and Class III. The Board may assign members of the Board already in office to such classes at the time such classification becomes effective. If the number of directors is changed, any newly created directors or decrease in directors must be apportioned by the board among the classes to make them equal in number. Pursuant to our amended and restated articles of association, other than the external directors, for whom special election requirements apply under the Companies Law, the vote required to appoint a director is a simple majority vote of holders of our voting shares, participating and voting at the relevant meeting. In addition, our amended and restated articles of association allow our board of directors to appoint directors to fill vacancies and/or as an addition to the board of directors (subject to the maximum number of directors) to serve until the next annual general meeting. External directors are elected for an initial term of three years, may be elected for additional terms of three years each under certain circumstances, and may be removed from office pursuant to the terms of the Companies Law. See “Management—Board Practices—External Directors.”
Under our amended and restated articles of association to be effective upon the closing of this offering, the approval of the holders of at least 70% of the total voting power of our shareholders is generally required to remove any of our directors from office or amend the provision requiring the approval of at least 70% of the total voting power of our shareholders to remove any of our directors from office, or certain other provisions regarding our staggered board, shareholder proposals, the size of our board and plurality voting in contested elections.
Annual and Special Meetings
Under the Israeli law, we are required to hold an annual general meeting of our shareholders once every calendar year, at such time and place which shall be determined by our board of directors, that must be 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 as special general meetings. Our board of directors may call special meetings whenever it sees fit and upon the request of: (a) any two of our directors or such number of directors equal to one quarter of the directors then at office; and/or (b) one or more shareholders holding, in the aggregate, (i) 5% or more of our outstanding issued shares and 1% of our outstanding voting power or (ii) 5% or more of our outstanding voting power.
Subject to the provisions of the Companies Law and the regulations promulgated thereunder, shareholders entitled to participate and vote at general meetings are the shareholders of record on a date to be decided by the board of directors, which may be between four and forty days prior to the date of the meeting. Resolutions regarding the following matters must be passed at a general meeting of our shareholders:
| ● | amendments to our amended and restated articles of association;
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| ● | the exercise of our board of directors’ powers by a general meeting if our board of directors is unable to exercise its powers and the exercise of any of its powers is required for our proper management;
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| ● | appointment or termination of our auditors;
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| ● | appointment of directors, including external directors;
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| ● | approval of acts and transactions requiring general meeting approval pursuant to the provisions of the Companies Law (mainly certain related party transactions) and any other applicable law;
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| ● | increases or reductions of our authorized share capital; and
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| ● | a merger (as such term is defined in the Companies Law). |
Notices
The Companies Law and our amended and restated articles of association require that a notice of any annual or special shareholders meeting be provided at least 21 days prior to the meeting, and if the agenda of the meeting includes the appointment or removal of directors, the approval of transactions with office holders or interested or related parties, approval of the company’s general manager to serve as the chairman of the board of directors or an approval of a merger, notice must be provided at least 35 days prior to the meeting.
Quorum
As permitted under the Companies Law, the quorum required for our general meetings consists of at least two shareholders present in person, by proxy, written ballot or voting by means of electronic voting system, who hold or represent between them at least 25% of the total outstanding voting rights. If within half an hour of the time set forth for the general meeting a quorum is not present, the general meeting shall stand adjourned the same day of the following week, at the same hour and in the same place, or to such other date, time and place as prescribed in the notice to the shareholders and in such adjourned meeting, if no quorum is present within half an hour of the time arranged, any number of shareholders participating in the meeting, shall constitute a quorum.
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If a special general meeting was summoned following the request of a shareholder, and within half an hour a legal quorum shall not have been formed, the meeting shall be canceled.
Adoption of Resolutions
Our amended and restated articles of association provide that all resolutions of our shareholders require a simple majority vote, unless otherwise required under the Companies Law or our amended and restated articles of association. A shareholder may vote in a general meeting in person, by proxy, by a written ballot.
Changing Rights Attached to Shares
Unless otherwise provided by the terms of the shares and subject to any applicable law, any modification of rights attached to any class of shares must be adopted by the holders of a majority of the shares of that class present a general meeting of the affected class or by a written consent of all the shareholders of the affected class.
The enlargement of an existing class of shares or the issuance of additional shares thereof, shall not be deemed to modify the rights attached to the previously issued shares of such class or of any other class, unless otherwise provided by the terms of the shares.
Limitations on the Right to Own Securities in Our Company
There are no limitations on the right to own our securities.
Provisions Restricting Change in Control of Our Company
There are no specific provisions of our amended and restated articles of association that would have an effect of delaying, deferring or preventing a change in control of the Company or that would operate only with respect to a merger, acquisition or corporate restructuring involving us (or our Subsidiary). However, as described below, certain provisions of the Companies Law may have such effect.
The Companies Law includes provisions that allow a merger transaction and requires that each company that is a party to the merger have the transaction approved by its board of directors and, unless certain requirements described under the Companies Law are met, a vote of the majority of shareholders, and, in the case of the target company, also a majority vote of each class of its shares. For purposes of the shareholder vote of each party, unless a court rules otherwise, the merger will not be deemed approved if shares representing a majority of the voting power present at the shareholders meeting and which are not held by the other party to the merger (or by any person or group of persons acting in concert who holds 25% or more of the voting power or the right to appoint 25% or more of the directors of the other party) vote against the merger. If, however, the merger involves a merger with a company’s own controlling shareholder or if the controlling shareholder has a personal interest in the merger, then the merger is instead subject to the same Special Majority approval that governs all extraordinary transactions with controlling shareholders. Upon the request of a creditor of either party to the proposed merger, the court may delay or prevent the merger if it concludes that there exists a reasonable concern that as a result of the merger the surviving company will be unable to satisfy the obligations of any of the parties to the merger, and may further give instructions to secure the rights of creditors. If the transaction would have been approved by the shareholders of a merging company but for the separate approval of each class or the exclusion of the votes of certain shareholders as provided above, a court may still approve the merger upon the petition of holders of at least 25% of the voting rights of a company. For such petition to be granted, the court must find that the merger is fair and reasonable, taking into account the value of the parties to the merger and the consideration offered to the shareholders. In addition, a merger may not be completed unless at least (1) 50 days have passed from the time that the requisite proposals for approval of the merger were filed with the Israeli Registrar of Companies by each merging company and (2) 30 days have passed since the merger was approved by the shareholders of each merging company.
The Companies Law also provides that, subject to certain exceptions, an acquisition of shares in an Israeli public company must be made by means of a “special” tender offer if as a result of the acquisition (1) the purchaser would become a holder of 25% or more of the voting rights in the company, unless there is already another holder of at least 25% or more of the voting rights in the company or (2) the purchaser would become a holder of 45% or more of the voting rights in the company, unless there is already a holder of more than 45% of the voting rights in the company. These requirements do not apply if, in general, the acquisition (1) was made in a private placement that received shareholders’ approval, subject to certain conditions, (2) was from a holder of 25% or more of the voting rights in the company which resulted in the acquirer becoming a holder of 25% or more of the voting rights in the company, or (3) was from a holder of more than 45% of the voting rights in the company which resulted in the acquirer becoming a holder of more than 45% of the voting rights in the company. A “special” tender offer must be extended to all shareholders. In general, a “special” tender offer may be consummated only if (1) at least 5% of the voting power attached to the company’s outstanding shares will be acquired by the offeror and (2) the offer is accepted by a majority of the offerees who notified the company of their position in connection with such offer (excluding the offeror, controlling shareholders, holders of 25% or more of the voting rights in the company or anyone on their behalf, or any person having a personal interest in the acceptance of the tender offer). If a special tender offer is accepted, then the purchaser or any person or entity controlling it or under common control with the purchaser or such controlling person or entity may not make a subsequent tender offer for the purchase of shares of the target company and may not enter into a merger with the target company for a period of one year from the date of the offer, unless the purchaser or such person or entity undertook to effect such an offer or merger in the initial special tender offer.
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If, as a result of an acquisition of shares, the acquirer will hold more than 90% of an Israeli company’s outstanding shares or of certain class of shares, the acquisition must be made by means of a tender offer for all of the outstanding shares, or for all of the outstanding shares of such class, as applicable. In general, if less than 5% of the outstanding shares, or of applicable class, are not tendered in the tender offer and more than half of the offerees who have no personal interest in the offer tendered their shares, all the shares that the acquirer offered to purchase will be transferred to it by operation of law. However, a tender offer will also be accepted if the shareholders who do not accept the offer hold less than 2% of the issued and outstanding share capital of the company or of the applicable class of shares. Any shareholders that was an offeree in such tender offer, whether such shareholder accepted the tender offer or not, may request, by petition to an Israeli court, (i) appraisal rights in connection with a full tender offer, and (ii) that the fair value should be paid as determined by the court, for a period of six months following the acceptance thereof. However, the acquirer is entitled to stipulate, under certain conditions, that tendering shareholders will forfeit such appraisal rights.
Lastly, Israeli tax law treats some acquisitions, such as stock-for-stock exchanges between an Israeli company and a foreign company, less favorably than U.S. tax laws. For example, Israeli tax law may, under certain circumstances, subject a shareholder who exchanges his Ordinary Shares for shares in another corporation to taxation prior to the sale of the shares received in such stock-for-stock swap.
Changes in Our Capital
The general meeting may, by a simple majority vote of the shareholders attending the general meeting:
| ● | increase our registered share capital by the creation of new shares from the existing class or a new class, as determined by the general meeting;
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| ● | cancel any registered share capital which have not been taken or agreed to be taken by any person;
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| ● | consolidate and divide all or any of our share capital into shares of larger nominal value than our existing shares;
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| ● | subdivide our existing shares or any of them, our share capital or any of it, into shares of smaller nominal value than is fixed; and
| |
| ● | reduce our share capital and any fund reserved for capital redemption in any manner, and with and subject to any incident authorized, and consent required, by the Companies Law. |
Anti-Takeover Measures
As disclosed under “Description of Share Capital—Election of Directors,” we will have a classified board structure upon the closing of this offering, which will effectively limit the ability of any investor or potential investor or group of investors or potential investors to gain control of our board of directors.
Exclusive Forum
Our amended and restated articles of association to be in effect upon the closing of this offering will provide that, unless we consent in writing to the selection of an alternative forum, the federal district courts of the United States shall be the sole and exclusive forum for any claim asserting a cause of action arising under the Securities Act. Section 22 of the Securities Act creates concurrent jurisdiction for federal and state courts over all such Securities Act actions. Accordingly, both U.S. state and federal courts have jurisdiction to entertain such claims. Such exclusive forum provision in our amended and restated articles of association to be in effect upon the closing of this offering will not relieve us of our duties to comply with federal securities laws and the rules and regulations thereunder, and our shareholders will not be deemed to have waived our compliance with these laws, rules and regulations. This choice of forum provision may limit a shareholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers or other employees and may increase the costs associated with such lawsuits, which may discourage such lawsuits against us and our directors, officers and employees. Alternatively, if a court were to find these provisions of our amended and restated articles of association inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings, we may incur additional costs associated with resolving such matters in other jurisdictions, which could adversely affect our business and financial condition. Any person or entity purchasing or otherwise acquiring any interest in our share capital shall be deemed to have notice of and to have consented to the choice of forum provisions of our amended and restated articles of association described above. This provision would not apply to suits brought to enforce a duty or liability created by the Exchange Act or any other claim for which the U.S. federal courts have exclusive jurisdiction.
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DESCRIPTION OF THE SECURITIES WE ARE OFFERING
Units
We are offering the Units at the initial assumed public offering price of $6.20 per Unit. Each Unit consists of one Ordinary Share and a Warrant to purchase one Ordinary Share at an exercise price equal to $6.20 (based on an assumed public offering price of $6.20 per Unit, the midpoint of the range set forth on the cover page of this prospectus), which is 100% of the public offering price of the Units. The Ordinary Shares and Warrants may be transferred separately immediately upon issuance.
Pre-funded Units
We are offering the Pre-funded Units at a price equal to the price per Unit, minus $0.001, and the exercise price of each Pre-funded Warrant included in the Pre-funded Unit will be $0.001 per Ordinary Share. Each Pre-funded Unit consists of one Pre-funded Warrant to purchase one Ordinary Share and one Warrant to purchase one Ordinary Share. The Pre-funded Warrants and Warrants may be transferred separately immediately upon issuance.
Ordinary Shares
The material terms of our Ordinary Shares are described under the caption “Description of Share Capital” in this prospectus.
Warrants
Warrants Included in the Units and Pre-funded Units
The following summary of certain terms and provisions of the Warrants offered hereby is not complete and is subject to, and qualified in its entirety by, the provisions of the warrant agent agreement between us and VStock Transfer, LLC, as warrant agent, and the form of Warrant, both of which are filed as exhibits to the registration statement of which this prospectus forms a part. Prospective investors should carefully review the terms and provisions set forth in the warrant agent agreement, including the annexes thereto, and form of Warrant.
Exercisability. The Warrants are exercisable at any time after their original issuance and at any time up to the date that is five years after their original issuance. The Warrants will be exercisable, at the option of each holder, in whole or in part by delivering to us a duly executed exercise notice and, at any time a registration statement registering the issuance of the Ordinary Shares underlying the warrants under the Securities Act is effective and available for the issuance of such shares, by payment in full in immediately available funds for the number of Ordinary Shares purchased upon such exercise. If a registration statement registering the issuance of the Ordinary Shares underlying the Warrants under the Securities Act is not effective or available the holder may, in its sole discretion, elect to exercise the Warrant through a cashless exercise, in which case the holder would receive upon such exercise the net number of Ordinary Shares determined according to the formula set forth in the Warrant. No fractional shares will be issued in connection with the exercise of a Warrant. In lieu of fractional shares, we will pay the holder an amount in cash equal to the fractional amount multiplied by the exercise price.
Exercise Limitation. A holder will not have the right to exercise any portion of the warrant if the holder (together with its affiliates) would beneficially own in excess of 4.99% of the number of Ordinary Shares outstanding immediately after giving effect to the exercise, as such percentage ownership is determined in accordance with the terms of the Warrants. However, any holder may increase or decrease such percentage to any other percentage not in excess of 9.99%, provided that any increase in such percentage shall not be effective until 61 days following notice from the holder to us.
Exercise Price. The exercise price per whole Ordinary Share purchasable upon exercise of the Warrants is $6.20 per share, which is 100% of the public offering price of the Units. The exercise price is subject to appropriate adjustment in the event of certain stock dividends and distributions, stock splits, stock combinations, reclassifications or similar events affecting our Ordinary Shares and also upon any distributions of assets, including cash, stock or other property to our shareholders.
Forced Exercise. The Warrants will be subject to forced exercise commencing six months from issuance subject to the condition that the volume weighted average price of the Company’s Ordinary Shares exceeds 200% of the initial exercise price for ten consecutive trading days and subject to certain other conditions set forth in the Warrants.
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Transferability. Subject to applicable laws, the Warrants may be offered for sale, sold, transferred or assigned without our consent.
Exchange Listing. The Ordinary Shares have been approved for listing, and we have applied to list the Warrants, on the Nasdaq under the symbol “WLDS ” and “WLDSW,” respectively. No assurance can be given that a trading market will develop.
Warrant Agent. The Warrants will be issued in registered form under a warrant agent agreement between VStock Transfer, LLC, as warrant agent, and us. The Warrants shall initially be represented only by one or more global warrants deposited with the warrant agent, as custodian on behalf of The Depository Trust Company, or DTC, and registered in the name of Cede & Co., a nominee of DTC, or as otherwise directed by DTC.
Fundamental Transactions. In the event of a fundamental transaction, as described in the Warrants and generally including any reorganization, recapitalization or reclassification of our Ordinary Shares, the sale, transfer or other disposition of all or substantially all of our properties or assets, our consolidation or merger with or into another person, the acquisition of more than 50% of our outstanding Ordinary Shares, or any person or group becoming the beneficial owner of 50% of the voting power represented by our outstanding Ordinary Shares, the holders of the Warrants will be entitled to receive upon exercise of the Warrants the kind and amount of securities, cash or other property that the holders would have received had they exercised the Warrants immediately prior to such fundamental transaction without regard to any limitations on exercised contained in the Warrants.
Rights as a Shareholder. Except as otherwise provided in the Warrants or by virtue of such holder’s ownership of our Ordinary Shares, the holder of a Warrant does not have the rights or privileges of a holder of our Ordinary Shares, including any voting rights, until the holder exercises the Warrant.
Governing Law. The Warrants and the warrant agent agreement are governed by New York law.
Underwriter’s Warrants. see “Underwriting — Underwriter’s Warrants” for a description of the Underwriter’s Warrants we have agreed to issue to the underwriter in this offering, subject to the completion of the offering.
Pre-funded Warrants Included in the Pre-funded Units
The following summary of certain terms and provisions of the Pre-funded Warrants offered hereby is not complete and is subject to, and qualified in its entirety by, the provisions of the warrant agent agreement between us and VStock Transfer, LLC, as warrant agent, and the form of Pre-funded Warrant, both of which are filed as exhibits to the registration statement of which this prospectus forms a part. Prospective investors should carefully review the terms and provisions set forth in the warrant agent agreement, including the annexes thereto, and form of Pre-funded Warrant.
The term “pre-funded” refers to the fact that the purchase price of our Ordinary Shares in this offering includes almost the entire exercise price that will be paid under the Pre-funded Warrants, except for a nominal remaining exercise price of $0.001. The purpose of the Pre-funded Warrants is to enable investors that may have restrictions on their ability to beneficially own more than 4.99% (or, upon election of the holder, 9.99%) of our outstanding Ordinary Shares following the consummation of this offering the opportunity to make an investment in the Company without triggering their ownership restrictions, by receiving Pre-funded Warrants in lieu of our Ordinary Shares which would result in such ownership of more than 4.99% (or 9.99%), and receive the ability to exercise their option to purchase the shares underlying the Pre-funded Warrants at such nominal price at a later date.
Exercise of Pre-funded Warrants. Each Pre-funded Warrant is exercisable for one Ordinary Share, with an exercise price equal to $0.001 per Ordinary Share, at any time that the Pre-funded Warrant is outstanding. There is no expiration date for the Pre-funded Warrants. The holder of a Pre-funded Warrant will not be deemed a holder of our underlying Ordinary Shares until the Pre-funded Warrant is exercised.
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Subject to limited exceptions, a holder of Pre-funded Warrants will not have the right to exercise any portion of its Pre-funded Warrants if the holder (together with such holder’s affiliates, and any persons acting as a group together with such holder or any of such holder’s affiliates) would beneficially own a number of Ordinary Shares in excess of 4.99% (or, at the election of the purchaser prior to the date of issuance, 9.99%) of the Ordinary Shares then outstanding after giving effect to such exercise.
The exercise price and the number of Ordinary Shares issuable upon exercise of the Pre-funded Warrants is subject to appropriate adjustment in the event of recapitalization events, stock dividends, stock splits, stock combinations, reclassifications, reorganizations or similar events affecting our Ordinary Shares. The Pre-funded Warrant holders must pay the exercise price in cash upon exercise of the Pre-funded Warrants, unless such Pre-funded Warrant holders are utilizing the cashless exercise provision of the Pre-funded Warrants.
Upon the holder’s exercise of a Pre-funded Warrant, we will issue the Ordinary Shares issuable upon exercise of the Pre-funded Warrant within two trading days following our receipt of a notice of exercise, provided that payment of the exercise price has been made (unless exercised to the extent permitted via the “cashless” exercise provision). Prior to the exercise of any Pre-funded Warrants to purchase Ordinary Shares, holders of the Pre-funded Warrants will not have any of the rights of holders of Ordinary Shares purchasable upon exercise, including the right to vote, except as set forth therein.
The Pre-funded Warrant holders must pay the exercise price in cash upon exercise of the Pre-funded Warrants unless there is not an effective registration statement covering the issuance of the shares underlying the Pre-funded Warrants (in which case, the Pre-funded Warrants may only be exercised via a “cashless” exercise provision).
The Pre-funded Warrant holder will not have the right to exercise any portion of the Pre-funded Warrant if the holder (together with its affiliates) would beneficially own in excess of 4.99% of the number of Ordinary Shares outstanding immediately after giving effect to the exercise, as such percentage ownership is determined in accordance with the terms of the Pre-funded Warrants. However, any Pre-funded Warrant holder may increase or decrease such percentage to any other percentage not in excess of 9.99%, provided that any increase in such percentage shall not be effective until 61 days following notice from the holder to us.
Fundamental Transaction. In the event of a fundamental transaction, as described in the Pre-funded Warrants and generally including any reorganization, recapitalization or reclassification of our Ordinary Shares, the sale, transfer or other disposition of all or substantially all of our properties or assets, our consolidation or merger with or into another person, the acquisition of more than 50% of our outstanding Ordinary Shares, or any person or group becoming the beneficial owner of 50% of the voting power represented by our outstanding Ordinary Shares, the holders of the Pre-funded Warrants will be entitled to receive upon exercise of the Pre-funded Warrants the kind and amount of securities, cash or other property that the holders would have received had they exercised the Pre-funded Warrants immediately prior to such fundamental transaction without regard to any limitations on exercised contained in the Pre-funded Warrants.
Warrant Agent. The Pre-funded Warrants will be issued in registered form under a warrant agent agreement between VStock Transfer, LLC, as warrant agent, and us. The Pre-Funded Warrants shall initially be represented only by one or more global warrants deposited with the warrant agent, as custodian on behalf of DTC, and registered in the name of Cede & Co., a nominee of DTC, or as otherwise directed by DTC.
Exchange Listing. We do not intend to apply to list the Pre-funded Warrants on any securities exchange or other trading system.
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SHARES ELIGIBLE FOR FUTURE SALE
In connection with this offering, we have applied to list our Ordinary Shares and Warrants on Nasdaq, under the symbols “WLDS” and “WLDS,” respectively. No assurance can be given that our application will be approved. Sales of substantial amounts of our Ordinary Shares or Warrants in the public market, or the perception that such sales could occur, could adversely affect prevailing market prices of our Ordinary Shares or Warrants. Upon completion of this offering, we will have 14,837,656 outstanding Ordinary Shares, assuming the exercise of any Pre-funded Warrants and no exercise of the Warrants or the underwriter’s over-allotment option. Of these shares, the Ordinary Shares and Warrants sold in this offering will be freely tradable without restriction or further registration under the Securities Act, unless purchased by “affiliates” (as that term is defined under Rule 144 of the Securities Act), who may sell only the volume of shares described below and whose sales would be subject to additional restrictions described below.
The remaining Ordinary Shares will be held by our existing shareholders. Because substantially all of these shares were sold outside the United States to persons residing outside the United States at the time, they also will be freely tradable without restriction or further registration, except that shares acquired upon any conversion of the SAFEs and shares held by affiliates must be sold pursuant to Rule 144 or another available exemption, and except for the lock-up restrictions described below.
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Lock-up Agreements
Subject to certain exceptions, we and our executive officers, directors, and certain shareholders have agreed not to offer, sell, agree to sell, directly or indirectly, or otherwise dispose of any Ordinary Shares or any other securities convertible into or exchangeable for Ordinary Shares except for the Ordinary Shares offered in this offering without the prior written consent of the representative for a period of 180 days after the consummation of this offering.
Additionally, our shareholders, who participated in our April 2021 financing and are not otherwise subject to lock-up agreements with the representative, have agreed not to, without our prior written consent, directly or indirectly, offer for sale, sell, assign, pledge, issue, distribute, grant any option or any contract for the sale of, or otherwise of the Ordinary Shares that such shareholders received for their investments in the April 2021 financing, for a period of 180 days after the consummation of this offering.
Rule 144
In general, under Rule 144 under the Securities Act as in effect on the date hereof, beginning 90 days after the date hereof, a person who holds restricted Ordinary Shares (assuming there are any restricted shares) and is not one of our affiliates at any time during the three months preceding a sale, and who has beneficially owned these restricted shares for at least six months, would be entitled to sell an unlimited number of our Ordinary Shares, provided current public information about us is available. In addition, under Rule 144, a person who holds restricted shares in us and is not one of our affiliates at any time during the three months preceding a sale, and who has beneficially owned these restricted shares for at least one year, would be entitled to sell an unlimited number of shares immediately upon the closing of this offering without regard to whether current public information about us is available. Beginning 90 days after the date hereof, our affiliates who have beneficially owned our Ordinary Shares for at least six months will be entitled to sell within any three-month period a number of shares that does not exceed the greater of:
| ● | 1% of the number of Ordinary Shares then outstanding; or | |
| ● | the average weekly trading volume of our or Ordinary Shares on Nasdaq during the four calendar weeks preceding the filing of a notice on Form 144 with respect to the sale; provided that current public information about us is available and the affiliate complies with the manner of sale requirements imposed by Rule 144. |
Affiliates are also subject to additional restrictions on the manner of sales under Rule 144 and notice filing requirements. We cannot estimate the number of our Ordinary Shares that our existing shareholders will elect to sell.
Regulation S
Regulation S under the Securities Act provides that securities owned by any person may be sold without registration in the United States, provided that the sale is effected in an offshore transaction and no directed selling efforts are made in the United States (as these terms are defined in Regulation S), subject to certain other conditions. In general, this means that our Ordinary Shares may be sold in some manner outside the United States without requiring registration in the United States.
Rule 701
In general, under Rule 701 of the Securities Act as currently in effect, each of our employees, consultants or advisors who purchases our Ordinary Shares from us in connection with a compensatory share plan or other written agreement executed prior to the completion of this offering is eligible to resell such Ordinary Shares in reliance on Rule 144, but without compliance with some of the restrictions, including the holding period, contained in Rule 144.
THE DISCUSSION ABOVE IS A GENERAL SUMMARY. IT DOES NOT COVER ALL SHARE TRANSFER RESTRICTION MATTERS THAT MAY BE OF IMPORTANCE TO A PROSPECTIVE INVESTOR. EACH PROSPECTIVE INVESTOR SHOULD CONSULT ITS OWN LEGAL ADVISOR REGARDING THE PARTICULAR SECURITIES LAWS AND TRANSFER RESTRICTION CONSEQUENCES OF PURCHASING, HOLDING, AND DISPOSING OF THE ORDINARY SHARES, INCLUDING THE CONSEQUENCES OF ANY PROPOSED CHANGE IN APPLICABLE LAWS.
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The following description is not intended to constitute a complete analysis of all tax consequences relating to the ownership or disposition of our Ordinary Shares. You should consult your own tax advisor concerning the tax consequences of your particular situation, as well as any tax consequences that may arise under the laws of any state, local, foreign, including Israeli, or other taxing jurisdiction.
ISRAELI TAX CONSIDERATIONS AND GOVERNMENT PROGRAMS
The following is a description of the material Israeli income tax consequences of the ownership of our Ordinary Shares. The following also contains a description of material relevant provisions of the current Israeli income tax structure applicable to companies in Israel, with reference to its effect on us. To the extent that the discussion is based on new tax legislation which has not been subject to judicial or administrative interpretation, there can be no assurance that the tax authorities will accept the views expressed in the discussion in question. The discussion is not intended, and should not be taken, as legal or professional tax advice and is not exhaustive of all possible tax considerations.
The following description is not intended to constitute a complete analysis of all tax consequences relating to the ownership or disposition of our Ordinary Shares. Shareholders should consult their own tax advisors concerning the tax consequences of their particular situation, as well as any tax consequences that may arise under the laws of any state, local, foreign or other taxing jurisdiction.
General Corporate Tax Structure in Israel
Israeli companies are generally subject to corporate tax, currently at the rate of 23%. However, the effective tax rate payable by a company that derives income from a Preferred Enterprise or Preferred Technological Enterprise (as discussed below) may be considerably less.
Capital gains derived by an Israeli resident company are subject to tax at the regular corporate tax rate. Under Israeli tax legislation, a corporation will be considered as an “Israeli resident company” if it meets one of the following criteria: (i) it was incorporated in Israel; or (ii) the control and management of its business are exercised in Israel.
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 an Israeli resident-company, which has 90% or more of its income in any tax year, other than income from defense loans, derived from an “Industrial Enterprise” owned by it. 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 of the cost to purchase a patent, rights to use a patent, and know-how, which are used for the development or advancement of the company, over an eight-year period, commencing on the year in which such rights were first exercised; |
| ● | under limited conditions, an election to file consolidated tax returns with related Israeli Industrial Companies; and |
| ● | expenses related to a public offering are deductible in equal amounts over three years. |
Eligibility for benefits under the Industry Encouragement Law is not contingent upon approval of any governmental authority, but it quite common to maintain preapproval from the Israeli Tax Authority, or the ITA.
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Tax Benefits and Grants for Research and Development
General. The IIA, an independent publicly funded agency, was created to provide a variety of practical tools and funding platforms aimed at effectively addressing the dynamic and changing needs of the local and international innovation ecosystem. The IIA acts under the Law for the Encouragement of Research, Development and Technological Innovation in the Industry 1984 and the related IIA rules and regulations, or the Innovation Law. Companies that receive funding from the IIA are subject to certain liabilities of the Innovation Law, mainly pertaining to the know-how that was developed with the support of the IIA within the framework of an R&D funding program, and/or its derivatives, or the IIA-supported Know-how, and/or to the products derived from the technology that was developed with the support of the IIA within the framework of an R&D funding program, and/or its derivatives, or IIA-supported products.
Ownership Structure. Any change of ownership must be reported to the IIA prior to the execution of the acquisition. A change in the company’s ownership, in which a foreign entity becomes a shareholder in the company, requires the IIA approval and the new shareholder signature on an undertaking letter acknowledging the company’s liabilities to the Innovation Law.
Royalty payment. Companies supported by the IIA are required to pay royalties on income yielded from the IIA-supported products, until full refund of the grant, which is linked to the US dollar and carries interest (the annual LIBOR interest for annual dollar deposits, as published on the first day of trading of each year, or in an alternate publication according to the Bank of Israel’s announcement). Until July 2017, the rate of the royalties refund was 3% of related income in the first three years, and 3.5% from the 4th year, onward. As of July 2017, the rate of the royalties refund for companies with total revenues of under $70 million at the year preceding the application date, has changed to 3%.
Manufacturing location. Until 2003, manufacturing was considered to be done completely in Israel, and after this date, the manufacturing location (including assembly) is determined based on the manufacturing declaration located in the grant application submitted for supporting R&D, or the Manufacturing Declaration. The transfer of manufacturing activity outside Israel may be subject to the prior approval of the IIA and may result in an increased royalty payment rate and an increased total royalty payment, which will be calculated based on the deviation from the company’s Manufacturing Declaration. Cumulative deviation of under 10% requires notification of the IIA, while 10% or more requires pre-approval.
The rate of royalty payment due to overseas manufacturing is increased as follows: If the foreign company will be given the rights to only manufacture the IIA-supported products, an additional 1% will be incurred (e.g., instead of paying 3%, the company will pay 4%). However, if the foreign company will be given the rights to both manufacture and distribute the IIA-supported products, the royalties rate may be higher. The increased royalty rate will apply for revenues associated with manufacturing outside of Israel only. In general, royalties will be paid from the final sale price to the client and not from the inter-company transfer price. The company will have to keep paying royalties until it reaches the new royalty liability ceiling.
The increased repayment is calculated according to the percentage of the manufacturing activities that are carried out outside of Israel out of the total cumulative manufacturing activities both in Israel and abroad, as described in the following table:
| Percentage
of manufacturing activities performed outside of Israel, cumulatively |
The increased payment to the IIA | |
| Up to 50% | 120% of the received grants + interest | |
| Between 50% and 90% | 150% of the received grants + interest | |
| 90% and more | 300% of the received grants + interest |
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Know-how location. To the extent a company wishes to transfer its IIA-supported Know-how outside of Israel, the transfer must be preapproved by the IIA and the company may be required to pay an additional payment to the IIA, or the Fee, as described below. This Fee (which also relates to programs that are absolved of royalty payment) is calculated according to the ratio between the total grants received from the IIA and the total financial R&D expenses invested in the related know-how (including the received grants), multiplied by the transaction price of the IIA-supported Know-how, or the Basic Amount.
The Basic Amount minus the received grants is depreciated at a rate of 1/7 per annum, as of the fourth year from the end of the last supported file in each program. As a result, when transferring IIA-supported Know-how after 10 years or more, the maximum payment to the IIA will be only the total sum of the received grants plus interest, minus paid royalties.
However, the aforementioned formula has a minimum and a maximum limits. The minimum amount of the payment is the total sum of grants
received plus interest. The maximum amount shall be no higher than 6 times the total sum of grants received plus interest. In the case
that the IIA-supported company retains its R&D center in Israel for at least 3 consecutive years, following the year of transferring
the IIA-supported Know-how outside of Israel, while maintaining at least 75% of its R&D employment in Israel – the payment
will be limited to 3 times the total sum of grants received plus interest.
Transferring IIA-supported Know-how outside of Israel according to the Innovation Law (including paying the Fee where necessary) releases the IIA-supported company from all liabilities to the IIA.
Transfer of know-how to another Israeli entity is subject to signature of the recipient Israeli entity on a formal IIA issued undertaking document, to comply with the provisions of the Innovation Law, including the restrictions on the transfer of know-how and the obligation to pay royalties.
According to the above, these liabilities should be taken into account when we consider to outsource manufacturing, engage in change of control transactions or otherwise transfer our know-how outside of Israel, and may require us to obtain the pre-approval of the IIA for certain actions and transactions and pay additional payments to the IIA. In particular, any change of control and any change of ownership of our Ordinary Shares that would make a non-Israeli citizen or resident an “interested party,” as defined in the Innovation Law, requires a prior written notice to the IIA in addition to any payment that may be required of us for transfer of manufacturing or know-how outside of Israel. If we fail to comply with the Innovation Law, we may be subject to criminal charges.
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Tax Benefits for Research and Development
Israeli tax law allows, under certain conditions, a tax deduction for expenditures, including capital expenditures, for the year in which they are incurred. Expenditures are deemed related to scientific research and development projects, if:
| ● | The expenditures are approved by the relevant Israeli government ministry, determined by the field of research; |
| ● | The research and development must be for the promotion of the company; and |
| ● | The research and development is carried out by or on behalf of the company seeking such tax deduction. |
The amount of such deductible expenses is reduced by the sum of any funds received through government grants for the finance of such scientific research and development projects. No deduction under these research and development deduction rules is allowed if such deduction is related to an expense invested in an asset depreciable under the general depreciation rules of the Tax Ordinance. Expenditures not so approved are deductible in equal amounts over three years.
From time to time we may apply the Office of the Chief Scientist for approval to allow a tax deduction for all research and development expenses during the year incurred. There can be no assurance that such application will be accepted.
Law for the Encouragement of Capital Investments, 5719-1959
The Law for the Encouragement of Capital Investments, 5719-1959, generally referred to as the Investment Law, provides certain incentives for capital investments in production facilities (or other eligible assets).
The Investment Law was significantly amended effective as of as of January 1, 2011, or the 2011 Amendment, and as of January 1, 2017, or the 2017 Amendment. The 2011 Amendment introduced new benefits to replace those granted in accordance with the provisions of the Investment Law in effect prior to the 2011 Amendment. The 2017 Amendment introduces new benefits for Technological Enterprises, alongside the existing tax benefits.
Tax benefits under the 2011 Amendment
The 2011 Amendment canceled the availability of the benefits granted 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 fully owned by a governmental entity, and that has, among other things, Preferred Enterprise status and is controlled and managed from Israel. Pursuant to the 2011 Amendment, a Preferred Company is entitled to a reduced corporate tax rate of 16% with respect to its income derived from its Preferred Enterprise, unless the Preferred Enterprise is located in a specified development zone, in which case the rate will be 7.5%. Income derived by a Preferred Company from a “Special Preferred Enterprise” (as such term is defined in the Investment Law) would be entitled, during a benefits period of 10 years, to further reduced tax rates of 8%, or 5% if the Special Preferred Enterprise is located in a certain development zone.
Dividends distributed from income which is attributed to a “Preferred Enterprise” should generally be subject to withholding tax at source at the following rates: (i) Israeli resident corporations - 0%, (although, if such dividends are subsequently distributed to individuals or a non-Israeli company the below rates detailed in sub sections (ii) and (iii) shall apply), (ii) Israeli resident individuals - 20% and (iii) non-Israeli residents (individuals and corporations) - subject to the receipt in advance of a valid certificate from the ITA allowing for a reduced tax rate, 20% or such lower rate as may be provided under the provisions of any applicable double tax treaty.
We currently do not intend to implement the 2011 Amendment.
Tax benefits under the 2017 Amendment that became effective on January 1, 2017
The 2017 Amendment was enacted as part of the Economic Efficiency Law that was published on December 29, 2016, and is effective as of January 1, 2017. The 2017 Amendment provided 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.
The 2017 Amendment provides that a technology company satisfying certain conditions should qualify as a Preferred Technological Enterprise, or PTE, and thereby enjoy a reduced corporate tax rate of 12% on income that qualifies as “Preferred Technological Income”, as defined in the Investment Law. The tax rate is further reduced to 7.5% for a PTE located in development zone “A”. In addition, a PTE will enjoy a reduced corporate tax rate of 12% on capital gain derived from the sale of certain “Benefited Intangible Assets” (as defined in the Investment Law) to a related foreign company if the Benefited Intangible Assets were acquired from a foreign company on or after January 1, 2017 for at least NIS 200 million, and the sale received prior approval from the National Authority for Technological Innovation previously known as the Israeli Office of the Chief Scientist), to which we refer as IIA.
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The 2017 Amendment further provides that a technology company satisfying certain conditions (group turnover of at least NIS 10 billion) should qualify as a “Special Preferred Technological Enterprise” and will thereby enjoy a reduced corporate tax rate of 6% on “Preferred Technological Income” regardless of the company’s geographic location within Israel. In addition, a Special Preferred Technological Enterprise should enjoy a reduced corporate tax rate of 6% on capital gain derived from the sale of certain “Benefited Intangible Assets” to a related foreign company if the Benefited Intangible Assets were either developed by the Special Preferred Enterprise or acquired from a foreign company on or after January 1, 2017, and the sale received prior approval from IIA. A Special Preferred Technological Enterprise that acquires Benefited Intangible Assets from a foreign company for more than NIS 500 million should be eligible for these benefits for at least ten years, subject to certain approvals as specified in the Investment Law.
Dividends distributed out of Preferred Technological Income to Israeli shareholders by a PTE or a Special Preferred Technology Enterprise, paid out of Preferred Technological Income, should generally subject to withholding tax at source at the rate of 20% (in the case of non-Israeli shareholders, a lower rate may be provided in an applicable tax treaty) but in either case, subject to the receipt in advance of a valid certificate from the ITA allowing for a reduced tax rate. However, if such dividends are paid to an Israeli company, no tax is generally 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, should apply). If such dividends are distributed to a foreign company that holds solely or together with other foreign companies 90% or more in the Israeli company and other conditions are met, the withholding tax rate should be 4% (or such lower rate as may be provided in an applicable tax treaty, in either case, subject to the receipt in advance of a valid certificate from the ITA allowing for such reduced tax rate).
We are examining the potential impact of the 2017 Amendment and the degree to which we may qualify as a PTE, the amount of Preferred Technological Income that we may have and other benefits that we may receive from the 2017 Amendment in the future.
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 shares in an Israeli resident company will be exempt from Israeli tax so long as the shares were not held through a permanent establishment that the non-resident maintains in Israel. 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 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, or the United States-Israel Tax Treaty, the sale, exchange or other disposition of shares by a shareholder who is a United States resident (for purposes of the treaty) holding the shares as a capital asset and is entitled to claim the benefits afforded to such a resident by the U.S.- Israel Tax Treaty, or a Treaty U.S. Resident, is generally exempt from Israeli capital gains tax unless: (i) the capital gain arising from such sale, exchange or disposition is attributed to real estate located in Israel; (ii) the capital gain arising from such sale, exchange or disposition is attributed to royalties; (iii) the capital gain arising from the such sale, exchange or disposition is attributed to a permanent establishment in Israel, under certain terms; (iv) such Treaty U.S. Resident holds, directly or indirectly, shares representing 10% or more of the voting capital during any part of the 12-month period preceding the disposition, subject to certain conditions; or (v) such Treaty U.S. Resident is an individual and was present in Israel for 183 days or more during the relevant taxable year.
In some instances where our shareholders may be liable for Israeli tax on the sale of their Ordinary Shares, the payment of the consideration may be subject to the withholding of Israeli tax at source. Shareholders may be required to demonstrate that they are exempt from tax on their capital gains in order to avoid withholding at source at the time of sale.
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Taxation of Non-Israeli Shareholders on Receipt of Dividends. Non-Israeli residents are generally subject to Israeli income tax on the receipt of dividends paid on our Ordinary Shares at the rate of 25%, which tax will be withheld at source, unless relief is provided in a treaty between Israel and the shareholder’s country of residence. With respect to a person who is a “substantial shareholder” at the time of receiving the dividend or at any time during the preceding twelve months, the applicable tax rate is 30%. A “substantial shareholder” is generally a person who alone or together with such person’s relative 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 at the time of receiving the dividend or at any time during the preceding twelve months. “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 20% if the dividend is distributed from income attributed to a Preferred Enterprise or PTE, unless a reduced tax rate is provided under an applicable tax treaty. For example, 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 Treaty U.S. Resident is 25%. However, generally, the maximum rate of withholding tax on dividends, not generated by a Preferred Enterprise or PTE, that are paid to a United States corporation holding 10% or more of the outstanding voting capital throughout the tax year in which the dividend is distributed as well as during the previous tax year, is 12.5%, provided that not more than 25% of the gross income for such preceding year consists of certain types of dividends and interest. Notwithstanding the foregoing, dividends distributed from income attributed to an Preferred Enterprise or PTE are not entitled to such reduction under the tax treaty but are subject to a withholding tax rate of 15% for a shareholder that is a U.S. corporation, provided that the condition related to our gross income for the previous year (as set forth in the previous sentence) is met. If the dividend is attributable partly to income derived from a Preferred Enterprise or PTE, and partly to other sources of income, the withholding rate will be a blended rate reflecting the relative portions of the two types of income. We cannot assure you that we will designate the profits that we may distribute in a way that will reduce shareholders’ tax liability.
U.S. FEDERAL INCOME TAX CONSIDERATIONS
THE FOLLOWING SUMMARY IS INCLUDED HEREIN FOR GENERAL INFORMATION AND IS NOT INTENDED TO BE, AND SHOULD NOT BE CONSIDERED TO BE, LEGAL OR TAX ADVICE. EACH U.S. HOLDER SHOULD CONSULT WITH HIS OR HER OWN TAX ADVISOR AS TO THE PARTICULAR U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE PURCHASE, OWNERSHIP AND SALE OF ORDINARY SHARES, the Warrants, the Pre-funded Warrants and the Ordinary Shares issued or issuable upon exercise of the Warrants and Pre-funded Warrants, INCLUDING THE EFFECTS OF APPLICABLE STATE, LOCAL, FOREIGN OR OTHER TAX LAWS AND POSSIBLE CHANGES IN THE TAX LAWS.
Subject to the limitations described in the next paragraph, the following discussion summarizes the material U.S. federal income tax consequences to a “U.S. Holder” arising from the purchase, ownership and sale of the Ordinary Shares, the Warrants, the Pre-funded Warrants and the Ordinary Shares issued or issuable upon exercise of the Warrants and Pre-funded Warrants, collectively, the “securities”. For this purpose, a “U.S. Holder” is a holder of Ordinary Shares that is: (1) an individual citizen or resident of the United States, including an alien individual who is a lawful permanent resident of the United States or meets the substantial presence residency test under U.S. federal income tax laws; (2) a corporation (or entity treated as a corporation for U.S. federal income tax purposes) or a partnership (other than a partnership that is not treated as a U.S. person under any applicable U.S. Treasury regulations) created or organized under the laws of the United States or the District of Columbia or any political subdivision thereof; (3) an estate, the income of which is includable in gross income for U.S. federal income tax purposes regardless of source; (4) a trust if a court within the United States is able to exercise primary supervision over the administration of the trust and one or more U.S. persons have authority to control all substantial decisions of the trust; or (5) a trust that has a valid election in effect to be treated as a U.S. person to the extent provided in U.S. Treasury regulations.
This summary is for general information purposes only and does not purport to be a comprehensive description of all of the U.S. federal income tax considerations that may be relevant to a decision to purchase our securities. This summary generally considers only U.S. Holders that will own our securities as capital assets. Except to the limited extent discussed below, this summary does not consider the U.S. federal tax consequences to a person that is not a U.S. Holder, nor does it describe the rules applicable to determine a taxpayer’s status as a U.S. Holder. This summary is based on the provisions of the Internal Revenue Code of 1986, as amended, or the Code, final, temporary and proposed U.S. Treasury regulations promulgated thereunder, administrative and judicial interpretations thereof, (including with respect to the Tax Cuts and Jobs Act of 2017), and the U.S.-Israel Income Tax Treaty, all as in effect as of the date hereof and all of which are subject to change, possibly on a retroactive basis, and all of which are open to differing interpretations. We will not seek a ruling from the IRS with regard to the U.S. federal income tax treatment of an investment in our securities by U.S. Holders and, therefore, can provide no assurances that the IRS will agree with the conclusions set forth below.
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This discussion does not address all of the aspects of U.S. federal income taxation that may be relevant to a particular U.S. holder based on such holder’s particular circumstances and in particular does not discuss any estate, gift, generation-skipping, transfer, state, local, excise or foreign tax considerations. In addition, this discussion does not address the U.S. federal income tax treatment of a U.S. Holder who is: (1) a bank, life insurance company, regulated investment company, or other financial institution or “financial services entity;” (2) a broker or dealer in securities or foreign currency; (3) a person who acquired our securities in connection with employment or other performance of services; (4) a U.S. Holder that is subject to the U.S. alternative minimum tax; (5) a U.S. Holder that holds our securities as a hedge or as part of a hedging, straddle, conversion or constructive sale transaction or other risk-reduction transaction for U.S. federal income tax purposes; (6) a tax-exempt entity; (7) real estate investment trusts or grantor trusts; (8) a U.S. Holder that expatriates out of the United States or a former long-term resident of the United States; or (9) a person having a functional currency other than the U.S. dollar. This discussion does not address the U.S. federal income tax treatment of a U.S. Holder that owns, directly or constructively, at any time, securities representing 10% or more of our voting power. Additionally, the U.S. federal income tax treatment of partnerships (or other pass-through entities) or persons who hold securities through a partnership or other pass-through entity are not addressed.
Each prospective investor is advised to consult his or her own tax adviser for the specific tax consequences to that investor of purchasing, holding or disposing of our securities, including the effects of applicable state, local, foreign or other tax laws and possible changes in the tax laws.
Tax Treatment of the Pre-Funded Warrants
We intend to treat our Pre-funded Warrants as a class of our common stock for U.S. federal income tax purposes. However, our position is not binding on IRS and the IRS may treat the Pre-funded Warrants as warrants to acquire our common shares. Accordingly, you should consult your tax adviser regarding the U.S. federal tax consequences of an investment in the pre-funded warrants. The following discussion assumes our Pre-funded Warrants are properly treated as a class of our common stock.
Exercise or Expiry of Pre-Funded Warrants and Warrants
No gain or loss will be realized on the exercise of a Pre-funded Warrant or Warrant. When a Pre-funded Warrant or Warrant is exercised, the U.S. Holder’s cost of the common share acquired thereby will be equal to the U.S. Holder’s adjusted cost basis of the Pre-funded Warrant and Warrant plus the exercise price paid for the common share. The expiry of an unexercised Pre-funded Warrant and Warrant will generally give rise to a capital loss equal to the adjusted cost basis to the U.S. Holder of the expired Pre-funded Warrant and Warrant. The holding period of the common share acquired thru the exercise of a Pre-Funded Warrant and Warrant includes the holding period of the Pre-funded Warrant and Warrant.
Taxation of Dividends Paid on Securities
We do not intend to pay dividends in the foreseeable future and U.S. Holders of Warrants and Pre-Funded Warrants are not entitled to dividends. In the event that we do pay dividends, and subject to the discussion under the heading “Passive Foreign Investment Companies” below and the discussion of “qualified dividend income” below, a U.S. Holder, other than certain U.S. Holder’s that are U.S. corporations, will be required to include in gross income as ordinary income the amount of any distribution paid on securities (including distributions paid on Pre-funded Warrants and Warrants if such warrants were to become entitled to dividends and the amount of any Israeli tax withheld on the date of the distribution), to the extent that such distribution does not exceed our current and accumulated earnings and profits, as determined for U.S. federal income tax purposes. The amount of a distribution which exceeds our earnings and profits will be treated first as a non-taxable return of capital, reducing the U.S. Holder’s tax basis for the securities to the extent thereof, and then capital gain. We do not expect to maintain calculations of our earnings and profits under U.S. federal income tax principles and, therefore, U.S. Holders should expect that the entire amount of any distribution generally will be reported as dividend income.
In general, preferential tax rates for “qualified dividend income” and long-term capital gains are applicable for U.S. Holders that are individuals, estates or trusts. For this purpose, “qualified dividend income” means, inter alia, dividends received from a “qualified foreign corporation.” A “qualified foreign corporation” is a corporation that is entitled to the benefits of a comprehensive tax treaty with the United States which includes an exchange of information program. The IRS has stated that the U.S.-Israel Tax Treaty satisfies this requirement and we believe we are eligible for the benefits of that treaty.
In addition, our dividends will be qualified dividend income if our securities are readily tradable on the Nasdaq Capital Market or another established securities market in the United States. Dividends will not qualify for the preferential rate if we are treated, in the year the dividend is paid or in the prior year, as a PFIC, as described below under “Passive Foreign Investment Companies.” A U.S. Holder will not be entitled to the preferential rate: (1) if the U.S. Holder has not held our securities for at least 61 days of the 121 day period beginning on the date which is 60 days before the ex-dividend date, or (2) to the extent the U.S. Holder is under an obligation to make related payments on substantially similar property. Any days during which the U.S. Holder has diminished its risk of loss on our securities are not counted towards meeting the 61-day holding period. Finally, U.S. Holders who elect to treat the dividend income as “investment income” pursuant to Code section 163(d)(4) will not be eligible for the preferential rate of taxation.
The amount of a distribution with respect to our securities will be measured by the amount of the fair market value of any property distributed, and for U.S. federal income tax purposes, the amount of any Israeli taxes withheld therefrom. Cash distributions paid by us in NIS will be included in the income of U.S. Holders at a U.S. dollar amount based upon the spot rate of exchange in effect on the date the dividend is includible in the income of the U.S. Holder, and U.S. Holders will have a tax basis in such NIS for U.S. federal income tax purposes equal to such U.S. dollar value. If the U.S. Holder subsequently converts the NIS into U.S. dollars or otherwise disposes of it, any subsequent gain or loss in respect of such NIS arising from exchange rate fluctuations will be U.S. source ordinary exchange gain or loss.
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Taxation of the Disposition of Securities
Except as provided under the PFIC rules described below under “Passive Foreign Investment Companies,” upon the sale, exchange or other disposition of our securities, a U.S. Holder will recognize capital gain or loss in an amount equal to the difference between such U.S. Holder’s tax basis for the securities in U.S. dollars and the amount realized on the disposition in U.S. dollar (or its U.S. dollar equivalent determined by reference to the spot rate of exchange on the date of disposition, if the amount realized is denominated in a foreign currency). The gain or loss realized on the sale, exchange or other disposition of securities will be long-term capital gain or loss if the U.S. Holder has a holding period of more than one year at the time of the disposition. Individuals who recognize long-term capital gains may be taxed on such gains at reduced rates of tax. The deduction of capital losses is subject to various limitations.
Passive Foreign Investment Companies
Special U.S. federal income tax laws apply to U.S. taxpayers who own shares of a corporation that is a PFIC. We will be treated as a PFIC for U.S. federal income tax purposes for any taxable year that either:
| ● | 75% or more of our gross income (including our pro rata share of gross income for any company, in which we are considered to own 25% or more of the shares by value), in a taxable year is passive; or | |
| ● | At least 50% of our assets, averaged over the year and generally determined based upon fair market value (including our pro rata share of the assets of any company in which we are considered to own 25% or more of the shares by value) are held for the production of, or produce, passive income. |
For this purpose, passive income generally consists of dividends, interest, rents, royalties, annuities and income from certain commodities transactions and from notional principal contracts. Cash is treated as generating passive income.
Based on the projected composition of our income and valuation of our assets, we cannot determine if we will become a PFIC for 2021 or in the future. The tests for determining PFIC status are applied annually, and it is difficult to make accurate projections of future income and assets which are relevant to this determination. In addition, our PFIC status may depend in part on the market value of our securities.
If we currently are or become a PFIC, each U.S. Holder who has not elected to mark the shares to market (as discussed below), would, upon receipt of certain distributions by us and upon disposition of our securities at a gain: (1) have such distribution or gain allocated ratably over the U.S. Holder’s holding period for the securities, as the case may be; (2) the amount allocated to the current taxable year and any period prior to the first day of the first taxable year in which we were a PFIC would be taxed as ordinary income; and (3) the amount allocated to each of the other taxable years would be subject to tax at the highest rate of tax in effect for the applicable class of taxpayer for that year, and an interest charge for the deemed deferral benefit would be imposed with respect to the resulting tax attributable to each such other taxable year. In addition, when shares of a PFIC are acquired by reason of death from a decedent that was a U.S. Holder, the tax basis of such shares would not receive a step-up to fair market value as of the date of the decedent’s death, but instead would be equal to the decedent’s basis if lower, unless all gain were recognized by the decedent. Indirect investments in a PFIC may also be subject to these special U.S. federal income tax rules.
The PFIC rules described above would not apply to a U.S. Holder who makes a QEF election for all taxable years that such U.S. Holder has held the securities while we are a PFIC, provided that we comply with specified reporting requirements. Instead, each U.S. Holder who has made such a QEF election is required for each taxable year that we are a PFIC to include in income such U.S. Holder’s pro rata share of our ordinary earnings as ordinary income and such U.S. Holder’s pro rata share of our net capital gains as long-term capital gain, regardless of whether we make any distributions of such earnings or gain. In general, a QEF election is effective only if we make available certain required information. The QEF election is made on a shareholder-by-shareholder basis and generally may be revoked only with the consent of the IRS. We do not intend to notify U.S. Holders if we believe we will be treated as a PFIC for any tax year. In addition, we do not intend to furnish U.S. Holders annually with information needed in order to complete IRS Form 8621 and to make and maintain a valid QEF election for any year in which we or any of our subsidiaries are a PFIC. Therefore, the QEF election will not be available with respect to our securities.
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In addition, the PFIC rules described above would not apply if we were a PFIC and a U.S. Holder made a mark-to-market election. A U.S. Holder of our securities which are regularly traded on a qualifying exchange, including the Nasdaq Capital Market, can elect to mark the securities to market annually, recognizing as ordinary income or loss each year an amount equal to the difference as of the close of the taxable year between the fair market value of the securities and the U.S. Holder’s adjusted tax basis in the securities. Losses are allowed only to the extent of net mark-to-market gain previously included income by the U.S. Holder under the election for prior taxable years.
U.S. Holders who hold our securities during a period when we are a PFIC will be subject to the foregoing rules, even if we cease to be a PFIC. U.S. Holders are strongly urged to consult their tax advisors about the PFIC rules.
Tax on Net Investment Income
U.S. Holders who are individuals, estates or trusts will generally be required to pay a 3.8% Medicare tax on their net investment income (including dividends on and gains from the sale or other disposition of our securities), or in the case of estates and trusts on their net investment income that is not distributed. In each case, the 3.8% Medicare tax applies only to the extent the U.S. Holder’s total adjusted income exceeds applicable thresholds.
Information Reporting and Withholding
A U.S. Holder may be subject to backup withholding at a rate of 24% with respect to cash dividends and proceeds from a disposition of securities. In general, backup withholding will apply only if a U.S. Holder fails to comply with specified identification procedures. Backup withholding will not apply with respect to payments made to designated exempt recipients, such as corporations and tax-exempt organizations. Backup withholding is not an additional tax and may be claimed as a credit against the U.S. federal income tax liability of a U.S. Holder, provided that the required information is timely furnished to the IRS.
Pursuant to recently enacted legislation, a U.S. Holder with interests in “specified foreign financial assets” (including, among other assets, our securities, unless such securities are held on such U.S. Holder’s behalf through a financial institution) may be required to file an information report with the IRS if the aggregate value of all such assets exceeds $50,000 on the last day of the taxable year or $75,000 at any time during the taxable year (or such higher dollar amount as may be prescribed by applicable IRS guidance); and may be required to file a Report of Foreign Bank and Financial Accounts if the aggregate value of the foreign financial accounts exceeds $10,000 at any time during the calendar year. You should consult your own tax advisor as to the possible obligation to file such information report.
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Aegis Capital Corp., or Aegis, is acting as the sole book-running manager of this offering. Under the terms of an underwriting agreement, which is filed as an exhibit to the registration statement, of which this prospectus forms a part, the underwriter has agreed to purchase from us the number of Units and Pre-funded Units shown opposite its name below:
| Underwriter | Number of Units | Number of Pre-Funded Units | ||||||
| Aegis Capital Corp. | ||||||||
The underwriting agreement provides that the underwriter’s obligation to purchase Units and Pre-funded Units depends on the satisfaction of the conditions contained in the underwriting agreement including:
| ● | the representations and warranties made by us to the underwriter are true; | |
| ● | there is no material change in our business or the financial markets; and | |
| ● | we deliver customary closing documents to the underwriter. |
Underwriting Commissions and Discounts and Expenses
The following table shows the per Unit and Pre-funded Unit and total underwriting discounts and commissions we will pay to the underwriter in this offering. These amounts are shown assuming both no exercise and full exercise of the underwriter’s option to purchase additional securities.
| Total | ||||||||||||||||
| Per Unit | Per Pre-Funded Unit | No Exercise | Full Exercise | |||||||||||||
| Public offering price | $ | $ | $ | $ | ||||||||||||
| Underwriting discounts and commissions to be paid by us (7.0%) | $ | $ | $ | $ | ||||||||||||
| Non-accountable expense allowance (1.0%)(1) | $ | $ | $ | $ | ||||||||||||
| Proceeds, before expenses, to us | $ | $ | $ | $ | ||||||||||||
| (1) | We have agreed to pay a non-accountable expense allowance to Aegis equal to 1.0% of the gross proceeds received in this offering. |
We estimate that the total expenses of the offering payable by us, excluding underwriting discounts and commissions, will be approximately $ , including a 1.0% non-accountable expense allowance. We have also agreed to reimburse the underwriter for certain of its expenses, including “roadshow”, diligence, and reasonable legal fees and disbursements, in an amount not to exceed $100,000 in the aggregate.
As additional compensation to Aegis, upon consummation of this offering, we will issue to Aegis or its designees warrants to purchase an aggregate number of shares of our Ordinary Shares equal to 5.0% of the number of Ordinary Shares issued in this offering, at an exercise price per share equal to 125.0% of the public offering price, or the Underwriter Warrants. The Underwriter Warrants and the underlying Ordinary Shares will not be sold, transferred, assigned, pledged, or hypothecated, or be the subject of any hedging, short sale, derivative, put, or call transaction that would result in the effective economic disposition of the Underwriter Warrants by any person for a period of 180 days beginning on the date of commencement of sales of the offering in compliance with FINRA Rule 5110.
The Underwriter Warrants will be exercisable from the date that is six months from the commencement of the sales of the offering, and will expire four years and six months after such date in compliance with FINRA Rule 5110(g)(8)(A). Furthermore, such Underwriter’s Warrants shall be exercisable on a cash basis, provided that if a registration statement registering the ordinary shares underlying the Underwriter’s Warrants is not effective, the Underwriter’s Warrants may be exercised on a cashless basis and have anti-dilution terms that are consistent with FINRA Rule 5110(g)(8)(E) and (F).
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Over-Allotment Option
We have granted to the underwriter an option to purchase up to 540,000 additional Ordinary Shares and/or Pre-Funded Warrants, and/or up to an additional Warrants (15% of the securities sold in the offering) at the public offering price less underwriting discounts and commissions. The underwriter may exercise this option in whole or in part at any time within forty-five (45) days after the date of the offering. The underwriter may exercise the over-allotment option with respect to Ordinary Shares only, Pre-Funded Warrants only, Warrants only, or any combination thereof. The purchase price to be paid per additional Ordinary Share or Pre-Funded Warrant will be equal to the public offering price of one Unit or Pre-Funded Unit (less $0.001 allocated to the Warrants), as applicable, less the underwriting discount, and the purchase price to be paid per additional Warrant will be $0.001. We will be obligated, pursuant to the option, to sell these additional Ordinary Shares, Pre-Funded Warrants or Warrants to the underwriter to the extent the option is exercised. If any additional Ordinary Shares, Pre-Funded Warrants or Warrants are purchased, the underwriter will offer the additional Ordinary Shares, Pre-Funded Warrants and Warrants on the same terms as those on which the other Ordinary Shares, Pre-Funded Warrants and Warrants are being offered hereunder.
Right of First Refusal
If, for the period ending eighteen (18) months from the closing of the offering, we or any of our subsidiaries (a) decides to finance or refinance any indebtedness, Aegis (or any affiliate designated by Aegis) shall have the right to act as sole book-runner, sole manager, sole placement agent or sole agent with respect to such financing or refinancing; or (b) decides to raise funds by means of a public offering or a private placement or any other capital raising financing of equity, equity-linked or debt securities, Aegis (or any affiliate designated by Aegis) shall have the right to act as sole book-running manager, sole underwriter or sole placement agent for such financing. If Aegis or one of its affiliates decides to accept any such engagement, the agreement governing such engagement will contain, among other things, provisions for customary fees for transactions of similar size and nature.
Stabilization
In accordance with Regulation M under the Exchange Act, the underwriter may engage in activities that stabilize, maintain or otherwise affect the price of our Ordinary Shares, including short sales and purchases to cover positions created by short positions, stabilizing transactions, syndicate covering transactions, penalty bids and passive market making.
| ● | Short positions involve sales by the underwriter of shares in excess of the number of shares the underwriter is obligated to purchase, which creates a syndicate short position. The short position may be either a covered short position or a naked short position. In a covered short position, the number of shares involved in the sales made by the underwriter in excess of the number of shares they are obligated to purchase is not greater than the number of shares that they may purchase by exercising their option to purchase additional shares. In a naked short position, the number of shares involved is greater than the number of shares in their option to purchase additional shares. The underwriter may close out any short position by either exercising their option to purchase additional shares or purchasing shares in the open market. |
| ● | Stabilizing transactions permit bids to purchase the underlying security as long as the stabilizing bids do not exceed a specific maximum price. |
| ● | Syndicate covering transactions involve purchases of our Ordinary Shares in the open market after the distribution has been completed to cover syndicate short positions. In determining the source of shares to close out the short position, the underwriter will consider, among other things, the price of shares available for purchase in the open market as compared to the price at which they may purchase shares through the underwriter’s option to purchase additional shares. If the underwriter sells more shares than could be covered by the underwriter’s option to purchase additional shares, thereby creating a naked short position, the position can only be closed out by buying shares in the open market. A naked short position is more likely to be created if the underwriter is concerned that there could be downward pressure on the price of the shares in the open market after pricing that could adversely affect investors who purchase in the offering. |
| ● | Penalty bids permit the representative to reclaim a selling concession from a syndicate member when the Ordinary Shares originally sold by the syndicate member is purchased in a stabilizing or syndicate covering transaction to cover syndicate short positions. |
| ● | In passive market making, market makers in our Ordinary Shares who are underwriters or prospective underwriters may, subject to limitations, make bids for or purchase our Ordinary Shares until the time, if any, at which a stabilizing bid is made. |
These activities may have the effect of raising or maintaining the market price of our Ordinary Shares or preventing or retarding a decline in the market price of our Ordinary Shares. As a result of these activities, the price of our Ordinary Shares may be higher than the price that might otherwise exist in the open market. These transactions may be effected on Nasdaq or otherwise and, if commenced, may be discontinued at any time.
Neither we nor the underwriter makes any representation or prediction as to the direction or magnitude of any effect that the transactions described above may have on the price of our Ordinary Shares. In addition, neither we nor the underwriter makes any representation that Aegis will engage in these stabilizing transactions or that any transaction, once commenced, will not be discontinued without notice.
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Offering Price Determination
The public offering price was negotiated between Aegis and us. In determining the public offering price of our Ordinary Shares, Aegis considered:
| ● | the history and prospects for the industry in which we compete; | |
| ● | our financial information; | |
| ● | the ability of our management and our business potential and earning prospects; | |
| ● | the prevailing securities markets at the time of this offering; and | |
| ● | the recent market prices of, and the demand for, publicly traded shares of generally comparable companies, as well as the recent market price of our Ordinary Shares. |
The public offering price stated on the cover page of this prospectus should not be considered an indication of the actual value of the securities sold in this offering. The values of such securities are subject to change as a result of market conditions and other factors.
Indemnification
We have agreed to indemnify Aegis, its affiliates, and each person controlling Aegis against any losses, claims, damages, judgments, assessments, costs, and other liabilities, as the same are incurred (including the reasonable fees and expenses of counsel), relating to or arising out of the offering, undertaken in good faith.
Discretionary Accounts
The underwriter has informed us that they do not expect to make sales to accounts over which they exercise discretionary authority in excess of five (5)% of the securities being offered in this offering.
Lock-Up Agreements
Pursuant to certain “lock-up” agreements, the Company’s executive officers, directors, employees and holders of at least 10% of the Company’s Ordinary Shares and securities exercisable for or convertible into its Ordinary Shares outstanding immediately upon the closing of this offering, have agreed, subject to certain exceptions, not to offer, sell, assign, transfer, pledge, contract to sell, or otherwise dispose of or announce the intention to otherwise dispose of, or enter into any swap, hedge or similar agreement or arrangement that transfers, in whole or in part, the economic risk of ownership of, directly or indirectly, engage in any short selling of any Ordinary Shares or securities convertible into or exchangeable or exercisable for any Ordinary Shares, whether currently owned or subsequently acquired, without the prior written consent of the underwriter, for a period of one hundred eighty (180) days from the closing date of the offering.
109
Other Relationships
Aegis may in the future provide us and our affiliates with such services. Aegis may release, or authorize us to release, as the case may be, the Ordinary Shares and other securities subject to the lock-up agreements described above in whole or in part at any time with or without notice.
In connection with our initial public offering, we will enter into an underwriting agreement with Aegis pursuant to which we will pay Aegis an aggregate of $ in commissions and non-accountable expenses. In addition, we issued Aegis warrants to purchase five percent (5%) of the Ordinary Shares issued in this offering at an exercise price per share equal to 125% of the public offering price.
Offer restrictions outside the United States
Other than in the United States, no action has been taken by us or the underwriter that would permit a public offering of the securities offered by this prospectus in any jurisdiction where action for that purpose is required. The securities offered by this prospectus may not be offered or sold, directly or indirectly, nor may this prospectus or any other offering material or advertisements in connection with the offer and sale of any such securities be distributed or published in any jurisdiction, except under circumstances that will result in compliance with the applicable rules and regulations of that jurisdiction. Persons who come into possession of this prospectus are advised to inform themselves about and to observe any restrictions relating to the offering and the distribution of this prospectus. This prospectus does not constitute an offer to sell or a solicitation of an offer to buy any securities offered by this prospectus in any jurisdiction in which such an offer or a solicitation is unlawful.
Securities Issuance Standstill
We have agreed, for a period of one hundred twenty (120) days after the closing date of this offering, that we will not, without the prior written consent of the underwriter, issue, enter into any agreement to issue or announce the issuance or proposed issuance of any Ordinary Shares or share equivalents except for the adoption of an equity incentive plan and the grant of awards or equity pursuant to any equity incentive plan, and the filing of a registration statement on Form S-8 and the issuance of equity securities in connection with an acquisition or a strategic relationship, which may include the sale of equity securities. In no event should any equity transaction within this period result in the sale of equity at an offering price to the public less than that of the offering referred herein.
Electronic Distribution
A prospectus in electronic format may be made available on the websites maintained by one or more of the underwriters or selling group members, if any, participating in the offering. Aegis may allocate a number of shares to the underwriters and selling group members, if any, for sale to their online brokerage account holders. Any such allocations for online distributions will be made by Aegis on the same basis as other allocations.
110
Set forth below is an itemization of the total expenses, excluding underwriting discounts and expenses of the offering payable by us, expected to be incurred in connection with the offer and sale of the securities by us. With the exception of the SEC registration fee and the FINRA filing fee, all amounts are estimates:
| SEC registration fee | $ | 3,593.84 | ||
| Nasdaq listing fee | $ | 50,000.00 | ||
| FINRA filing fee | $ | 3,369.00 | ||
| Transfer agent fees and expenses | $ | 3,000.00 | ||
| Directors and officers insurance(1) | $ | 560,000.00 | ||
| Printer fees and expenses | $ | 15,000.00 | ||
| Legal fees and expenses | $ | 600,000.00 | ||
| Accounting and professional fees and expenses | $ | 410,000.00 | ||
| Miscellaneous | $ | 80,000.00 | ||
| Total | $ | 1,724,962.84 |
| (1) | This amount represents the approximate amount of annual director and officer liability insurance premiums we anticipate to pay following the completion of this offering. |
Certain legal matters concerning the legality of the issuance of the securities offered by this prospectus and other legal matters concerning this offering will be passed upon for us by Sullivan & Worcester LLP, New York, New York. Certain legal matters with respect to the legality of the issuance of the securities offered by this prospectus and other legal matters concerning this offering relating to Israeli law will be passed upon for us by Sullivan & Worcester Tel Aviv (Har-Even & Co.), Tel Aviv, Israel. Certain legal matters related to the offering will be passed upon for the underwriter by Kaufman & Canoles, P.C., Richmond, Virginia.
The consolidated financial statements as of December 31, 2021 and 2020 and for the years then ended included in this prospectus have been so included in reliance on the report of Ziv Haft, Certified Public Accountants, Isr., BDO Member Firm, an independent registered public accounting firm, appearing elsewhere herein, given on the authority of said firm as experts in auditing and accounting. The report on the consolidated financial statements contains an explanatory paragraph regarding the Company’s ability to continue as a going concern.
ENFORCEABILITY OF CIVIL LIABILITIES
We are incorporated under the laws of the State of Israel. Service of process upon us and upon our directors and officers and the Israeli experts named in the registration statement of which this prospectus forms a part, a substantial majority of whom reside outside of the United States, may be difficult to obtain within the United States. Furthermore, because substantially all of our assets and a substantial of our directors and officers are located outside of the United States, any judgment obtained in the United States against us or any of our directors and officers may not be collectible within the United States.
We have been informed by our legal counsel in Israel, Sullivan & Worcester Tel Aviv (Har-Even & Co.), that it may be difficult to assert U.S. securities law claims in original actions instituted in Israel. Israeli courts may refuse to hear a claim based on a violation of U.S. securities laws because Israel is not the most appropriate forum to bring such a claim. In addition, even if an Israeli court agrees to hear a claim, it may determine that Israeli law and not 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 proved as a fact which can be a time-consuming and costly process. Certain matters of procedure will also be governed by Israeli law.
111
Subject to specified time limitations and legal procedures, Israeli courts may enforce a U.S. judgment in a civil matter which, subject to certain exceptions, is non-appealable, including judgments based upon the civil liability provisions of the Securities Act and the Exchange Act and including a monetary or compensatory judgment in a non-civil matter, provided that among other things:
| ● | the judgment is obtained after due process before a court of competent jurisdiction, according to the laws of the state in which the judgment is given and the rules of private international law currently prevailing in Israel;
| |
| ● | the judgment is final and is not subject to any right of appeal;
| |
| ● | the prevailing law of the foreign state in which the judgment was rendered allows for the enforcement of judgments of Israeli courts;
| |
| ● | adequate service of process has been effected and the defendant has had a reasonable opportunity to be heard and to present his or her evidence;
| |
| ● | the liabilities under the judgment are enforceable according to the laws of the State of Israel and the judgment and the enforcement of the civil liabilities set forth in the judgment is not contrary to the law or public policy in Israel nor likely to impair the security or sovereignty of Israel;
| |
| ● | the judgment was not obtained by fraud and does not conflict with any other valid judgments in the same matter between the same parties;
| |
| ● | an action between the same parties in the same matter is not pending in any Israeli court at the time the lawsuit is instituted in the foreign court; and
| |
| ● | the judgment is enforceable according to the laws of Israel and according to the law of the foreign state in which the relief was granted. |
If a foreign judgment is enforced by an Israeli court, it generally will be payable in Israeli currency, which can then be converted into non-Israeli currency and transferred out of Israel. The usual practice in an action before an Israeli court to recover an amount in a non-Israeli currency is for the Israeli court to issue a judgment for the equivalent amount in Israeli currency at the rate of exchange in force on the date of the judgment, but the judgment debtor may make payment in foreign currency. Pending collection, the amount of the judgment of an Israeli court stated in Israeli currency ordinarily will be linked to the Israeli CPI plus interest at the annual statutory rate set by Israeli regulations prevailing at the time. Judgment creditors must bear the risk of unfavorable exchange rates.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the SEC a registration statement on Form F-1 under the Securities Act relating to this offering of our Ordinary Shares. This prospectus does not contain all of the information contained in the registration statement. The rules and regulations of the SEC allow us to omit certain information from this prospectus that is included in the registration statement. Statements made in this prospectus concerning the contents of any contract, agreement or other document are summaries of all material information about the documents summarized, but are not complete descriptions of all terms of these documents. If we filed any of these documents as an exhibit to the registration statement, you may read the document itself for a complete description of its terms. The SEC maintains an Internet website that contains reports and other information regarding issuers that file electronically with the SEC. Our filings with the SEC are also available to the public through the SEC’s website at www.sec.gov.
We are subject to the information reporting requirements of the Exchange Act that are applicable to foreign private issuers, and under those requirements are filing reports with the SEC. Those other reports or other information may be inspected without charge at the locations described above. As a foreign private issuer, we are exempt from the rules under the Exchange Act related to the furnishing and content of proxy statements, and our officers, directors and principal shareholders are exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the Exchange Act. In addition, we are not required under the Exchange Act to file annual, quarterly and current reports and financial statements with the SEC as frequently or as promptly as U.S. companies whose securities are registered under the Exchange Act. However, we will file with the SEC, within 120 days after the end of each fiscal year, or such applicable time as required by the SEC, an annual report on Form 20-F containing financial statements audited by an independent registered public accounting firm, and will submit to the SEC, on Form 6-K, unaudited quarterly financial information.
We maintain a corporate website at www.wearabledevices.co.il. Information contained on, or that can be accessed through, our website does not constitute a part of this prospectus. We have included our website address in this prospectus solely as an inactive textual reference. We will post on our website any materials required to be so posted on such website under applicable corporate or securities laws and regulations, including, posting any XBRL interactive financial data required to be filed with the SEC and any notices of general meetings of our shareholders.
112
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Shareholders
and Board of Directors
of WEARABLE DEVICES LTD.
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Wearable Devices Ltd. and its subsidiary (“the Company”) as of December 31, 2021 and 2020, and the related consolidated statements of comprehensive loss, changes in shareholders’ equity (deficit) and cash flows for each of the two years in the period ended December 31, 2021, and the related notes (collectively, the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America.
Going Concern
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company is still at its development stage and early stage of generating revenues, therefore, it has suffered recurring losses and negative cash flows from operations since inception. As of December 31, 2021, the Company had incurred accumulated losses of $6,913 thousand. The Company’s operations have been funded substantially through issuance of convertible securities to certain investors (which were converted to equity), issuance of shares and warrants, Israeli governmental grants and issuance of Simple Agreements for Future Equity. The Company is in the process of an initial public offering in the United States. Considering the above, the Company’s dependency on external funding for its operations raises a substantial doubt about the Company’s ability to continue as a going concern. Management’s evaluation of the events and conditions and management’s plans regarding these matters are described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties.
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 we are required to be independent with respect to the Company in accordance with the United States federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
| /s/ Ziv Haft | |
| Ziv Haft | |
| Certified Public Accountants (Isr.) | |
| BDO Member Firm |
We have served as the Company’s auditor since July, 2021.
April 6, 2022,
Tel Aviv, Israel
F-2
WEARABLE DEVICES LTD. AND ITS SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
| December 31 | ||||||||
| 2021 | 2020 | |||||||
U.S. dollars in thousands | ||||||||
| Assets | ||||||||
| CURRENT ASSETS: | ||||||||
| Cash | 1,274 | 475 | ||||||
| Trade receivables | 8 | - | ||||||
| Governmental grant receivable | 62 | 51 | ||||||
| Other receivables and prepaid expenses | 47 | 17 | ||||||
| Inventories | 11 | 20 | ||||||
| TOTAL CURRENT ASSETS | 1,402 | 563 | ||||||
| PROPERTY AND EQUIPMENT, net (Note 3) | 43 | 18 | ||||||
| TOTAL ASSETS | 1,445 | 581 | ||||||
| Liabilities and Shareholders’ Equity (Deficit) | ||||||||
| CURRENT LIABILITIES: | ||||||||
| Accounts payable | 72 | 32 | ||||||
| Advance payments | 273 | 210 | ||||||
| Deferred revenues | 24 | 15 | ||||||
| Accrued payroll and other employment related accruals | 222 | 103 | ||||||
| Advance payments on governmental grants | - | 42 | ||||||
| Accrued expenses | 47 | 15 | ||||||
| Convertible securities (Note 5) | - | 3,052 | ||||||
| TOTAL CURRENT LIABILITIES | 638 | 3,469 | ||||||
| COMMITMENTS AND CONTINGENCIES (Note 4) | ||||||||
| SHAREHOLDERS’ EQUITY (DEFICIT) (Note 6): | ||||||||
| Ordinary shares, NIS 0.01 par value: Authorized 20,000,000 as of December 31, 2021 and 8,000,000 shares as of December 31, 2020; Issued and outstanding 11,136,850 shares as of December 31, 2021 and 4,626,572 as of December 31, 2020. | 31 | 12 | ||||||
| Ordinary A shares, NIS 0.01 par value: Authorized 0 as of December 31, 2021 and 2,000,000 as of December 31, 2020; Issued and outstanding 0 as of December 31, 2021 and 1,844,268 as of December 31, 2020. | - | 5 | ||||||
| Subscription receivables (ordinary shares) | - | (12 | ) | |||||
| Additional paid-in capital | 7,689 | 1,406 | ||||||
| Accumulated losses | (6,913 | ) | (4,299 | ) | ||||
| TOTAL SHAREHOLDERS’ EQUITY (DEFICIT) | 807 | (2,888 | ) | |||||
| TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT) | 1,445 | 581 | ||||||
The accompanying notes are an integral part of the consolidated financial statements.
F-3
WEARABLE DEVICES LTD. AND ITS SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
| Year ended December 31 | ||||||||
| 2021 | 2020 | |||||||
U.S. dollars in thousands (except per share amounts) | ||||||||
| Revenues | 142 | 57 | ||||||
| Cost of materials | (10 | ) | (9 | ) | ||||
| Research and development, net (Note 4a) | (1,411 | ) | (743 | ) | ||||
| Sales and marketing expenses, net (Note 4b) | (665 | ) | (287 | ) | ||||
| General and administrative expenses | (628 | ) | (174 | ) | ||||
| Prospective initial public offering expenses | (97 | ) | - | |||||
| OPERATING LOSS | (2,669 | ) | (1,156 | ) | ||||
| FINANCING INCOME (EXPENSES), net | 55 | (102 | ) | |||||
| COMPREHENSIVE AND NET LOSS | (2,614 | ) | (1,258 | ) | ||||
| Net loss per ordinary shares, basic and diluted | (0.27 | ) | (0.19 | ) | ||||
| Weighted average number of ordinary shares outstanding basic and diluted * | 9,709,590 | 6,459,910 | ||||||
| * | In April 2021, the Company completed a 1:1 conversion of all its issued and outstanding ordinary A shares into ordinary shares, NIS 0.01 par value, which was applied retroactively for the calculation of the basic and diluted loss per share. |
The accompanying notes are an integral part of the consolidated financial statements.
F-4
WEARABLE DEVICES LTD. AND ITS SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (DEFICIT)
| Ordinary shares | Ordinary A shares | Subscription receivables | Additional | |||||||||||||||||||||||||||||
| Number of shares | Amount | Number of shares | Amount | (ordinary shares) | paid-in capital | Accumulated losses | Total | |||||||||||||||||||||||||
| U.S. dollars in thousands | U.S. dollars in thousands | |||||||||||||||||||||||||||||||
| BALANCE AS OF DECEMBER 31, 2019 | 4,611,142 | 12 | 1,844,268 | 5 | (12 | ) | 1,339 | (3,041 | ) | (1,697 | ) | |||||||||||||||||||||
| CHANGES DURING THE YEAR 2020: | ||||||||||||||||||||||||||||||||
| Share-based compensation | - | - | - | - | - | 67 | - | 67 | ||||||||||||||||||||||||
| Exercise of options | 15,430 | * | - | - | - | - | - | - | ||||||||||||||||||||||||
| Comprehensive loss | - | - | - | - | - | - | (1,258 | ) | (1,258 | ) | ||||||||||||||||||||||
| BALANCE AS OF DECEMBER 31, 2020 | 4,626,572 | 12 | 1,844,268 | 5 | (12 | ) | 1,406 | (4,299 | ) | (2,888 | ) | |||||||||||||||||||||
| CHANGES DURING THE YEAR 2021: | ||||||||||||||||||||||||||||||||
| Issuance of ordinary shares and warrants, net of issuance cost | 1,343,375 | 4 | - | - | - | 2,921 | - | 2,925 | ||||||||||||||||||||||||
| Conversion of convertible securities (including accrued interest) to ordinary shares | 3,081,102 | 9 | - | - | - | 3,063 | - | 3,072 | ||||||||||||||||||||||||
| Conversion of ordinary A shares to ordinary shares | 1,844,268 | 5 | (1,844,268 | ) | (5 | ) | - | - | - | - | ||||||||||||||||||||||
| Share-based compensation | - | - | - | - | - | 299 | - | 299 | ||||||||||||||||||||||||
| Exercise of options | 241,533 | 1 | - | - | - | - | - | 1 | ||||||||||||||||||||||||
| Payment on behalf of issued shares | - | - | - | - | 12 | - | - | 12 | ||||||||||||||||||||||||
| Comprehensive loss | - | - | - | - | - | - | (2,614 | ) | (2,614 | ) | ||||||||||||||||||||||
| BALANCE AS OF DECEMBER 31, 2021 | 11,136,850 | 31 | - | - | - | 7,689 | (6,913 | ) | 807 | ) | ||||||||||||||||||||||
| * | Represent an amount less than $500 |
The accompanying notes are an integral part of the consolidated financial statements.
F-5
WEARABLE DEVICES LTD. AND ITS SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
| Year ended December 31 | ||||||||
| 2021 | 2020 | |||||||
U.S. dollars in thousands | ||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net loss | (2,614 | ) | (1,258 | ) | ||||
| Adjustments required to reconcile net loss to net cash used in operating activities | ||||||||
| Depreciation | 11 | 7 | ||||||
| Accrued interest on convertible securities | 20 | 56 | ||||||
| Share based compensation expenses | 299 | 67 | ||||||
| Changes in operating assets and liabilities items: | ||||||||
| Increase in trade receivables | (8 | ) | - | |||||
| Decrease (increase) in inventories | 9 | (12 | ) | |||||
| Increase in governmental grants receivables | (11 | ) | (51 | ) | ||||
| Increase in other receivables and prepaid expenses | (30 | ) | (11 | ) | ||||
| Increase in advance payments | 63 | 210 | ||||||
| Increase in deferred revenues | 9 | 4 | ||||||
| Increase (decrease) in accounts payable | 40 | (41 | ) | |||||
| Increase (decrease) in accrued payroll and other employment related accruals | 119 | (72 | ) | |||||
| Increase (decrease) in advance payments on governmental grant | (42 | ) | 42 | |||||
| Increase (decrease) in accrued expenses | 32 | (30 | ) | |||||
| Net cash used in operating activities | (2,103 | ) | (1,089 | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Purchase of property and equipment | (36 | ) | (16 | ) | ||||
| Net cash used in investing activities | (36 | ) | (16 | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Proceeds from issuance of ordinary shares and warrants, net of issuance cost | 2,925 | - | ||||||
| Exercise of options | 1 | - | ||||||
| Payment on behalf of issued shares | 12 | - | ||||||
| Net cash provided by financing activities | 2,938 | - | ||||||
| NET INCREASE (DECREASE) IN CASH | 799 | (1,105 | ) | |||||
| CASH AT BEGINNING OF YEAR | 475 | 1,580 | ||||||
| CASH AT END OF YEAR | 1,274 | 475 | ||||||
The accompanying notes are an integral part of these financial statements.
F-6
WEARABLE DEVICES LTD. AND ITS SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - GENERAL:
| a. | Wearable Devices Ltd. (the “Company”) was incorporated in Israel in March 2014. The Company develops a non-invasive neural input interface for controlling digital devices. The Company is in a growth stage and at an early stage of revenues. The Company is currently in the transition phase from research and development to commercialization of its technology into Business to Business (B2B) and Business to Consumers (B2C) products. The Company is finalizing the manufacturing of its first B2C product, “Mudra Band” to be shipped to early-booking orders. |
The Company’s revenues were derived from:
| 1) | The sales of Mudra Inspire development kits composed of multiple performance obligations including tangible parts (“Hardware”) and a limited period (generally one year) application programming interface (“API”) with no commercial rights, to enable the costumer to evaluate the Company’s solution with its own products. |
| 2) | The sales of pilot transactions to evaluate the integration of the Company’s solution with customer’s products composed of multiple performance obligations including Hardware, tailor-made software applications and technical support during the pilot period. |
In 2021, most of the Company’s revenues were derived from a pilot transaction in the amount of $84 thousand, which was fully completed in 2021 and from the sales of Mudra Inspire development kits to multinational technology companies. In 2020, most of the Company’s revenues were derived from the sales of Mudra Inspire development kits to multinational technology companies.
| b. | In 2018, the Company established a wholly owned subsidiary in the United States of America for the purpose of marketing and distribution of its solutions – Mudra Wearable, Inc. (the “Subsidiary”) – which commenced its operations in 2020. |
| c. | The novel coronavirus (“COVID-19”) pandemic has created, and may continue to create, significant uncertainty in macroeconomic conditions, and the extent of its impact on the Company’s operational and financial performance will depend on certain developments, including the duration and spread of the outbreak. The Company considered the impact of COVID-19 on the estimates and assumptions and determined that there were no material adverse impacts on the consolidated financial statements as of December 31, 2021. |
| d. | The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1(a) to the consolidated financial statements, the Company is still in its development stage and at an early stage of generating revenues. Therefore, the Company has suffered recurring losses from operations and negative cash flows from operations since inception. As of December 31, 2021, the Company had incurred accumulated losses of $6.9 million. The Company’s operations have been funded substantially through issuance of convertible securities to (which were converted to equity) (see Note 5), through issuance of shares and warrants (see Note 6a) and through Israeli governmental grants (see Note 4). In 2022, the Company issued Simple Agreements for Future Equity (“SAFEs”) in consideration of $500 thousand (see Note 9.b). The Company is in the process of an initial public offering in the United States. Considering the above, the Company’s dependency on external funding for its operations raises a substantial doubt about the Company’s ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties. |
F-7
WEARABLE DEVICES LTD. AND ITS SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (cont.)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES:
The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The significant accounting policies followed in the preparation of the financial statements are as follows:
| a. | Principles of consolidation |
The accompanying consolidated financial statements include the accounts of the Company and the Subsidiary. All intercompany transactions have been eliminated in consolidation.
| b. | Use of estimates |
The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, as well as to disclose contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting years. On an ongoing basis, management evaluates its estimates, judgments and assumptions. Management bases its estimates, judgments and assumptions on historical experience and on various other factors that are believed to be reasonable under the circumstances. Actual results could differ from those estimates.
| c. | Foreign Currency |
The currency of the primary economic environment in which the operations of the Company are conducted is the USD. The Company’s funding and revenues are mostly in USD. Thus, the functional currency of the Company is the USD.
Transactions and balances originally denominated in USD are presented at their original amounts. Balances in non-USD currencies are translated into USD using historical and current exchange rates for non-monetary and monetary balances, respectively. For non-USD transactions and other items (stated below) reflected in the statements of operations, the following exchange rates are used: (i) for transactions – exchange rates at transaction dates or average rates; and (ii) for other items (derived from non-monetary balance sheet items such as depreciation etc.) – historical exchange rates. Currency transaction gains or losses are recorded to financing income or expenses, as appropriate.
| d. | Inventories: |
Inventories are composed of parts of the Company’s products as well as completed products and are stated at the lower of cost or net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation.
| e. | Property and equipment |
Property and equipment are stated at cost. Depreciation is computed based on the straight-line method, over the estimated useful life of the assets.
Annual rates of depreciation are as follows:
| % | ||||
| Office furniture and electronic equipment | 7-15 | |||
| Computers and software | 33 | |||
F-8
WEARABLE DEVICES LTD. AND ITS SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (cont.)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (cont.):
| f. | Revenue recognition |
Revenue is recognized when (or as) control of the promised goods or services is transferred to the customer, and in an amount that reflects the consideration the Company is contractually due in exchange for those services or goods. The Company follows five steps to record revenue: (i) identify the contract with a customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract, and (v) recognize revenue when (or as) the Company satisfies its performance obligations.
A pilot transaction has multiple performance obligations and it generally takes a few months but less than one year.
Each Mudra Inspire development kit sale has also multiple performance obligations.
The payment terms of the Mudra Inspire development kit sales are upon delivery of the Hardware, while the payment terms of the pilot transactions are within the pilot period.
In those transactions, each obligation: Hardware and API (for Mudra Inspire development kit) and tailor-made software application and technical support (for a pilot transaction) is distinct and separately identifiable.
The amount allocated to the delivered items is recognized upon delivery, the amount allocated to API is recognized over the API period and the amount allocated to the technical support is recognized over the service period (a pilot period).
| g. | Cost of materials |
Cost of materials consists primarily of expenses related to the purchase of parts of products sold.
| h. | Research and development |
Research and development expenses consist primarily of payroll, payroll related expenses, subcontractors, and materials. Costs are expensed as incurred.
| i. | Governmental grants |
The Company receives royalty-bearing grants from the Israeli government for approved research and development projects and marketing efforts. These grants are recognized at the time the Company is entitled to such grants based on the costs incurred or milestones achieved as provided by the relevant agreement and included as a deduction from research and development or sales and marketing expenses, respectively.
| j. | Finance income and expenses |
Finance income is composed of net currencies exchange rates differences, while finance expenses are composed of accrued interest on convertible securities, net of currencies exchange rates differences and banks charges.
F-9
WEARABLE DEVICES LTD. AND ITS SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (cont.)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (cont.):
| k. | Income taxes |
The Company accounts for income taxes in accordance with ASC 740 (Income Taxes) (“ASC 740”). Deferred taxes are determined utilizing the assets and liabilities method, which is based on the estimated future tax effects of the differences between the financial accounting and tax bases of assets and liabilities under the applicable tax laws. Deferred tax balances are computed using the tax rates expected to be in effect when those differences reverse. A valuation allowance in respect of deferred tax assets is provided if, based upon the weight of available evidence, it is more likely than not that some or all the deferred tax assets will not be realized. The measurement of deferred tax assets is reduced, if necessary, by the amount of any tax benefits that, based on available evidence, are not expected to be realized.
The Company applies ASC 740, which clarifies the accounting and reporting for uncertainties with respect to income taxes. ASC 740 prescribes a comprehensive model for the financial statement recognition, measurement, presentation, and disclosure of uncertain tax positions taken or expected to be taken in income tax returns.
| l. | Share based compensation |
Share-based compensation expenses related to employees and consultants options are recognized based on their fair values, which are based on the fair value of the underlying ordinary shares whereby the exercise price is de-minimis or using the Black-Scholes option pricing model, on a straight-line basis over the requisite service period of the awards.
| m. | Warrants |
The warrants’ mechanism does not create any obligation to transfer cash to the investors but a fixed amount of Ordinary Shares upon exercise. Therefore, the Company accounts for the warrants as equity-classified instruments (as part of additional paid in capital), based on an assessment of the applicable U.S. GAAP authoritative guidance. The assessment considers whether the warrants are freestanding financial instruments, meet the definition of a liability or whether the warrants meet all of the requirements for equity classification, including whether the warrants are indexed to the Company’s own shares, among other conditions for equity classification.
| n. | Severance |
Israeli labor law generally requires payment of severance pay upon dismissal of an employee or upon termination of employment in certain other circumstances. The Company’s pension and severance pay liabilities are covered mainly by insurance policies. Pursuant to section 14 of the Israeli Severance Compensation Act, 1963 (“section 14”), the Company’s employees are entitled 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 relieve the Company from any future severance payments in respect of those employees and, as such, the Company may only utilize the insurance policies for the purpose of paying severance pay.
| o. | Basic and diluted loss per share |
Basic and diluted loss per share is calculated by dividing the loss attributable to equity holders of the Company by the weighted average number of ordinary shares outstanding during the financial year, adjusted for ordinary shares issued during the year, if applicable.
F-10
WEARABLE DEVICES LTD. AND ITS SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (cont.)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (cont.):
| p. | Fair Value Measurements |
The Company measures and discloses fair value in accordance with the Financial Accounting Standards Board (“FASB”), ASC 820, Fair Value Measurements and Disclosures (“ASC 820”). ASC 820 defines fair value, establishes a framework and gives guidance regarding the methods used for measuring fair value, and expands disclosures about fair value measurements. 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 at the measurement date. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, there exists a three-tier fair-value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
Level 1 – unadjusted quoted prices are available in active markets for identical assets or liabilities that the Company has the ability to access as of the measurement date
Level 2 – pricing inputs are other than quoted prices in active markets that are directly observable for the asset or liability or indirectly observable through corroboration with observable market data.
Level 3 – pricing inputs are unobservable for the non-financial asset or liability and only used when there is little, if any, market activity for the non-financial asset or liability at the measurement date. The inputs into the determination of fair value require significant management judgment or estimation. Level 3 inputs are considered as the lowest priority within the fair value hierarchy.
This hierarchy requires the Company to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value.
The fair value of cash is based on its demand value, which is equal to its carrying value. Additionally, the carrying value of all other short-term monetary assets and liabilities except for the convertible securities are estimated to be equal to their fair value due to the short-term nature of these instruments.
| q. | Concentration of Credit Risk |
The Company maintains certain cash balances in a well-known Israeli bank.
| r. | Subsequent Events |
In connection with the preparation of these consolidated financial statements, the Company and management evaluated subsequent events through April 6, 2022, the date these consolidated financial statements were available to be issued.
F-11
WEARABLE DEVICES LTD. AND ITS SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (cont.)
NOTE 3 - PROPERTY AND EQUIPMENT, net
| December 31 | ||||||||
| 2021 | 2020 | |||||||
| U.S. dollars in thousands | ||||||||
| Cost: | ||||||||
| Computers and software | 32 | 20 | ||||||
| Office furniture and equipment | 7 | 4 | ||||||
| Electronic equipment | 53 | 32 | ||||||
| 92 | 56 | |||||||
| Less - accumulated depreciation | 49 | 38 | ||||||
| 43 | 18 | |||||||
NOTE 4 - COMMITMENTS AND CONTINGENCIES
| a. | Royalties to the Israel Innovation Authority (“IIA”): |
The Company receives royalty-bearing grants from the IIA, for approved research and development projects. The programs include grants for: wages, materials, subcontractors and miscellaneous. The Company is required to pay royalties at the rate of 3%-3.5% on sales of products developed with the funds provided by the IIA, up to an amount equal to 100% of the IIA research and development grants received, linked to the dollar including accrued interest at the LIBOR rate.
As of December 31, 2018, two IIA programs were completed, while the amounts received for them aggregated to $1.224 million. In addition, another IIA approved plan commenced on May 1, 2020 and was completed on July 31, 2021 for a total of $640 thousand of which $578 thousand was received as of December 31, 2021.
Research and development grants deducted from research and development expenses amounted to $289 thousand and $373 thousand for the years ended December 31, 2021 and 2020, respectively. As of December 31, 2021, the maximum obligation with respect to the grants received from the IIA, contingent upon entitled future sales, is $1.8 million, while the LIBOR accrued interest of the total IIA grants is approximately $84 thousand. The Company has obligations in regard to know-how, technology or products, not to transfer the information, rights thereon and production rights which derive from the research and development, in whole or part, of its Mudra Inspire product and its Mudra Band product, without the IIA Research Committee approval.
| b. | Royalties to the Israeli Ministry of Economy and Industry (“IMEI”): |
During 2020, the Company received a grant from the IMEI, for approved marketing expenses amounting to $95 thousand. The program includes participation in expenses for: consulting for marketing, advertising and online marketing, flights to exhibitions and miscellaneous.
Sales and marketing grants deducted from sales and marketing expenses amounted to $17 thousand and $51 thousand for the years ended December 31, 2021 and 2020, respectively.
Under the agreement with the IMEI, if the export revenues in the defined target market increase by $311 thousand compared to the base year, the Company would be required to pay royalties at the rate of 3% of the increase.
As of December 31, 2021, the maximum obligation with respect to the grant received from the IMEI, contingent upon entitled future sales, is $95 thousand.
F-12
WEARABLE DEVICES LTD. AND ITS SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (cont.)
NOTE 4 - COMMITMENTS AND CONTINGENCIES (cont.):
| c. | Office rent - lease agreements |
On July 1, 2018, the Company entered into a lease agreement for a period which expires on September 30, 2022. The monthly lease payment totaled to approximately $5 thousand.
NOTE 5 - CONVERTIBLE SECURITIES
During 2017, 2018, January 2019, April 2019 and November 2019 the Company entered into convertible security agreements with certain investors, according to which the Company received an aggregate amount of $400 thousand, $600 thousand, $100 thousand, $200 thousand and $100 thousand, respectively, bearing interest at the rate of 4% per annum. Such amounts including the accrued interest were converted into the Company’s ordinary shares, NIS 0.01 par value (the “Ordinary Shares”), based on a share price agreed upon in the respective agreement of $0.79, $0.79 $0.92, $0.92 and $1.69, respectively, in April 2021.
In December 2019, the Company entered into additional convertible security agreements with an aggregate principal amount of $1.5 million, which was converted into the Company’s Ordinary Shares based on a share price agreed upon in the agreement of $1.22 in April 2021.
Those convertible security agreements, including accrued interest, were not mandatorily redeemable, nor redeemable at the option of the holder after a specified date, but a change of control event as described in the agreements would constitute a redemption event outside of the Company’s control. Therefore, all the convertible securities were presented as current liabilities. The beneficial conversion feature of each one of convertible security was valued at zero.
NOTE 6 – SHAREHOLDERS’ EQUITY (DEFICIT):
| a. | Share capital |
The share capital as of December 31, 2021 and 2020, is composed of as follows:
| Number of shares | |||||||||||||||||
Authorized | Issued and outstanding | ||||||||||||||||
| December
31, 2021 | December
31, 2020 | December
31, 2021 | December
31, 2020 | ||||||||||||||
| Ordinary shares, NIS 0.01 par value | 20,000,000 | 8,000,000 | 11,136,850 | 4,626,572 | |||||||||||||
| Ordinary A shares, NIS 0.01 par value | - | 2,000,000 | - | 1,844,268 | |||||||||||||
The Ordinary Shares entitle their holders: to receive notices of, and to attend, general meetings where each Ordinary Share shall have one vote for all purposes; to share distributions as may be declared by the Board of Directors of the Company and approved by the shareholders, if required; and, upon liquidation or dissolution - to participate in the distribution of the assets of the Company after payment of all debts and other liabilities of the Company, in accordance with the terms of the Company’s Articles of Association.
F-13
WEARABLE DEVICES LTD. AND ITS SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (cont.)
NOTE 6 – SHAREHOLDERS’ EQUITY DEFICIT (cont.):
The ordinary A shares, NIS 0.01 par value, of the Company (“Ordinary A Shares”) conferred on the holders all rights to holders of Ordinary Shares in the Company and, in addition, bear preferred rights primarily advanced in return of their investments plus 2% per year, in a liquidation event as described in the Company’s Articles of Association.
In 2021, the Company’s authorized share capital of 2,000,000 Ordinary A Shares was reclassified into 2,000,000 Ordinary Shares and the issued and outstanding Ordinary A Shares were converted into Ordinary Shares, and further the Company increased its authorized share capital by 10,000,000 Ordinary Shares.
On inception, the Company issued 4,500,000 Ordinary Shares to its three co-founders for a total consideration equal to their par value (approximately $12 thousand) which was paid in October 2021.
On March 10, 2016, the Company issued to certain investors 1,844,268 Ordinary A shares (which were converted in 2021 to Ordinary Shares) for a total consideration of $500 thousand.
During 2018, 2020 and 2021, the Company issued 111,142, 15,430 and 241,533 Ordinary Shares, upon exercise of employees’ options, respectively.
During 2017, 2018 and 2019, the Company entered into convertible security agreements with certain investors, in consideration for an aggregate amount of $2.9 million, of which certain bear interest at the rate of 4% per annum. Such amounts including the accrued interest were converted into 3,081,102 Ordinary Shares in April 2021 (see also Note 5).
In April 2021, the Company issued to new investors 1,343,374 Ordinary Shares, and 671,687 warrants exercisable into Ordinary Shares in consideration of 125% of the per share purchase price in an initial public offering of the Company, if and when it shall occur, for total gross consideration of $3.025 million, before $100 thousand of issuance expenses.
| b. | Share-based compensation |
In 2015, the Company’s Board of Directors adopted the 2015 Stock Incentive Plan (the “2015 Plan”), with 1,032,805 options available for grant, and through December 31, 2021, the Company’s Board of Directors approved, in the aggregate, an increase of 800,000 options available for grant, for allocation to existing and future employees, consultants and directors of the Company and/or its Subsidiary, such that, there are 1,832,805 Ordinary Shares reserved under the 2015 Plan (including those that were exercised into Ordinary Shares).
The options expire after 10 years from date of grant.
F-14
WEARABLE DEVICES LTD. AND ITS SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (cont.)
NOTE 6 – SHAREHOLDERS’ EQUITY (DEFICIT) (cont.):
Options to employees
Below is a summary of the Company’s options activity and related information with respect to options granted to employees and director during the years ended December 31, 2021 and 2020.
| Year
ended December 31, | Year
ended December 31, | |||||||||||||||
| 2021 | 2020 | |||||||||||||||
| Amount of options | Weighted average exercise price | Amount of options | Weighted
average exercise price | |||||||||||||
| Outstanding - beginning of the year | 765,576 | $ | 0.55 | 766,330 | $ | 0.55 | ||||||||||
| Granted | 351,000 | $ | 0.323 | 24,000 | $ | 0.003 | ||||||||||
| Exercised | (241,533 | ) | $ | 0.003 | (15,430 | ) | $ | 0.003 | ||||||||
| Expired or forfeited | (11,779 | ) | $ | 0.003 | (9,324 | ) | $ | 0.003 | ||||||||
| Outstanding - end of the year | 863,264 | $ | 0.133 | 765,576 | $ | 0.55 | ||||||||||
| Exercisable at end of year | 564,846 | $ | 0.92 | 513,334 | $ | 0.81 | ||||||||||
Considering the de-minimis exercise price, the fair values of the 2020 grants were determined based on the Company’s share price of $1.22. Such grants vest over 3 years. The share price was determined based on implied share price of the December 2019 convertible security agreement. The share price was determined based on the highest possible conversion share price of the December 2019 convertible security agreement which is in line with the Company’s valuation stated within it and best approximates the Company’s share price at the said grants period.
On November 1, 2021 the Company’s Board of Directors approved the issuance of 397,885 options with an exercise price range between $0.003 and $2.25 to the Company’s employees, directors and consultants on terms and conditions specified in and subject to the provisions of the 2015 Plan and an additional 22,205 options to the Company’s legal counsel at an exercise price of $2.25, which were all fully vested upon grant. The options will expire at the earlier of (i) 10 years from the date of grant or (ii) 90 days following a termination of employment or services. The 420,090 options valued at $932 thousand are to be expensed over their vesting periods of up to 3 years. The fair values of the options were determined, as of the grant date, using the Black-Scholes option pricing model, taking into consideration the following assumptions: Company’s share price of $2.53 (considering the implied share price of $2.25 of the April 2021 share purchase agreement (see Note 6.a) and the likelihood of a successful initial public offering at the expected target price back then), expected volatility of 39%, dividend yield 0%, risk free interest rate of 1.6% and expected life of 10 years.
F-15
WEARABLE DEVICES LTD. AND ITS SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (cont.)
NOTE 6 – SHAREHOLDERS’ EQUITY (DEFICIT) (cont.):
Options to consultants
The Company’s outstanding (and exercisable) options to consultants as of December 31, 2021 were as follows:
| Issuance date | In connection with | No.
of options issued | Exercise price | ||||||||
| 2015 | Rendered services | 110,655 | $ | 0.003 | |||||||
| 2017 | Rendered services | 36,885 | $ | 0.003 | |||||||
| 2021 | Rendered services | 69,090 | $ | 0.003-$2.25 | |||||||
The share-based compensation expenses are recognized in the following line items in the consolidated statements of comprehensive loss in the years ended:
| December 31 | ||||||||
| 2021 | 2020 | |||||||
| U.S. dollars in thousands | ||||||||
| Research and development expenses | 105 | 56 | ||||||
| Sales and marketing expenses | 111 | 11 | ||||||
| General and administrative expenses | 83 | - | ||||||
| 299 | 67 | |||||||
F-16
WEARABLE DEVICES LTD. AND ITS SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (cont.)
NOTE 7 – INCOME TAXES:
| A. | The Company is taxed under the Israeli law. |
| B. | Income of an Israeli company is subject to corporate tax. The corporate tax rate in Israel is 23%. |
| C. | Tax assessments - In accordance with the Israeli Income Tax Ordinance, tax assessments of the Company through tax year 2015 are considered final. |
| D. | Carryforward tax losses of the Company as of December 31, 2021, amounted to approximately $4.8 million; however, a full valuation allowance of $1.1 million was recorded against the potential future tax benefits. |
| E. | The Subsidiary is taxed under the U.S. tax law. The federal tax rate applicable thereto starting from 2020 and thereafter is 21%. |
NOTE 8 – RELATED PARTIES
| A. | The employment expenses of Asher Dahan, a co-founder, Chairman of the Board of Directors, the Chief Executive Officer and owner of more than 5% of the Company’s Ordinary Shares, for the years ended December 31, 2021 and 2020 amounted to $145 thousand and $109 thousand, respectively, and are included within general and administrative expenses. In 2021, his monthly salary was NIS 30 thousand ((approximately $9 thousand) plus social benefits). |
| B. | The employment expenses for Guy Wanger, President and Director of the Company, and owner of more than 5% of the Company’s Ordinary Shares, for the years ended December 31, 2021 and 2020 amounted to $145 thousand and $109 thousand, respectively, and are included within research and development expenses. In 2021, his monthly salaries were NIS 30 thousand ((approximately $9 thousand) plus social benefits). |
| C. | The employment expenses for Leeor Langer, a co-founder, the Chief Technology Officer and owner of more than 5% of the Company’s Ordinary Shares, for the years ended December 31, 2021 and 2020 amounted to $143 thousand and $109 thousand, respectively, and are included within research and development expenses. In 2021, his monthly salary was increased to NIS 30 thousand ((approximately $9 thousand) plus social benefits). |
| D. | On March 6, 2022, the Company’s Board of Directors recommended that the shareholders increase the monthly salary of each of the co-founders to NIS 70 thousand ((approximately $22 thousand) plus social benefits) and approve a one-time bonus equal to 6 salaries, upon the closing Company’s initial public offering. The changes to the co-founders’ compensation terms were approved at the Company’ shareholders meeting held on March 14, 2022. |
F-17
WEARABLE DEVICES LTD. AND ITS SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (cont.)
NOTE 9 - SUBSEQUENT EVENTS:
| a. | In January 2022, the Company granted 105,000 options to the Company’s new Chief Financial Officer and another employee, with an exercise price of $0.003 per share, which were approved by the Company’s Board of Directors on January 23, 2022. The options will expire at the earlier of (i) 10 years from the date of grant or (ii) 90 days following a termination of employment. Considering the de-minimis exercise price, the fair values as of the grant date, were determined, based on the Company’s share price of $2.80 (considering the implied share price of $2.25 of the April 2021 share purchase agreement (see Note 6.a) and the likelihood of a successful initial public offering at the expected target price back then) at $294 thousand to be expensed over their vesting periods of 3 years. | |
| b. | In January 2022, the Company began entering into Simple Agreements for Future Equity (“SAFEs”) for aggregate proceeds of up to $3 million. As of April 6, 2022, the Company had received $500 thousand under the SAFEs the Company has entered into. Any amounts received under the SAFEs will be automatically converted into Ordinary Shares of the Company in the event the Company closes an Equity Financing (as defined hereinafter) at a discount of 20% from the per share purchase price in such Equity Financing. An Equity Financing is a transaction or series of transactions with the principal purpose of raising capital in an aggregate amount of at least $5,000,000, excluding all outstanding (i) SAFEs, and (ii) other convertible securities (if any), pursuant to which the Company issues and sells Ordinary Shares at a fixed pre-money valuation. In case of an initial public offering or a Change of Control transaction (as defined hereinafter), the SAFE amount shall, at the election of the investor thereunder, either (i) convert into Ordinary Shares of the Company at a discount of 20% from the per share price at such event, or (ii) be repaid to the investor (subject to adjustments in case there are insufficient funds for such repayment to all SAFE investors) at the closing thereof. The conversion of the SAFE amounts into the Ordinary Shares in case of an initial public offering, is also subject to certain lock-up periods and other restrictions on transfer. In the event of a dissolution event (e.g., a voluntary or involuntary termination of operations, dissolution or winding-up of the Company), the SAFE amount shall be repaid to the investors prior to or concurrently with the consummation of such an event. In addition, the Company agreed to issue to each SAFE investor a warrant to purchase Ordinary Shares of the Company with an exercise price equal to 150% of the public offering price in such offering for an aggregate amount of up to 25% of such investor’s SAFE amount. The warrants shall be exercisable until the earlier of: (i) eighteen (18) months from January 2022; or (ii) in a Change of Control event, which generally covers (a) a transaction in which any person or group becomes the beneficial owner, directly or indirectly, of more than 50% of the Company’s outstanding voting securities with the right to vote for the election of members of the Company’s Board of Directors, or (b) any reorganization, merger or consolidation of the Company, or (c) a sale, lease or other disposition of all or substantially all of the Company’s assets. | |
| c. | On March 6, 2022, the Company’s Board of Directors recommended that the shareholders increase the Company’s authorized share capital by an additional NIS 300,000 divided into 30,000,000 Ordinary Shares, such that following the increase, the authorized share capital of the Company shall be NIS 500,000 divided into 50,000,000 Ordinary Shares. Such increase was approved at the Company’ shareholders meeting held on March 14, 2022. |
F-18
Wearable Devices Ltd.
PROSPECTUS
Sole Book – Running Manager
Aegis Capital Corp.
, 2022
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 6. Indemnification of Directors, Officers and Employees
Indemnification
The Israeli Companies Law 5759-2999, or Companies Law, and the Israeli Securities Law, 5728-1968, or the Securities Law, provide that a company may indemnify an office holder against 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 an 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 by any judgment concerning an act performed in his or her capacity as an office holder, including a settlement or arbitrator’s award approved by a court; | |
| ● | reasonable litigation expenses, including attorneys’ fees, expended by the office holder (a) 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 (1) no indictment (as defined in the Companies Law) was filed against such office holder as a result of such investigation or proceeding; and (2) no financial liability as a substitute for the criminal proceeding (as defined in the Companies Law) was imposed upon him or her 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; or (b) in connection with a monetary sanction; | |
| ● | reasonable litigation expenses, including attorneys’ fees, expended by the office holder or imposed on him or her by a court; (1) in proceedings that the company institutes, or that another person institutes on the company’s behalf, against him or her; (2) in a criminal proceeding of which he or she was acquitted; or (3) as a result of a conviction for a crime that does not require proof of criminal intent; and | |
| ● | expenses incurred by an office holder in connection with an Administrative Procedure under the Securities Law, including reasonable litigation expenses and reasonable attorneys’ fees. An “Administrative Procedure” is defined as a procedure pursuant to chapters H3 (Monetary Sanction by the Israeli Securities Authority), H4 (Administrative Enforcement Procedures of the Administrative Enforcement Committee) or I1 (Arrangement to prevent Procedures or Interruption of procedures subject to conditions) to the Securities Law. |
The Companies Law also permits a company to undertake in advance to indemnify an office holder, provided that if such indemnification relates to financial liability imposed on him or her, as described above, then the undertaking should be limited and shall detail the following foreseen events and amount or criterion:
| ● | to events that in the opinion of the board of directors can be foreseen based on the company’s activities at the time that the undertaking to indemnify is made; and | |
| ● | in amount or criterion determined by the board of directors, at the time of the giving of such undertaking to indemnify, to be reasonable under the circumstances. |
We intend to enter into indemnification agreements with all of our directors and with all members of our senior management, subject to this offering. Each such indemnification agreement shall provide the office holder with indemnification permitted under applicable law and up to a certain amount, and to the extent that these liabilities are not covered by directors and officers insurance.
Exculpation
Under the Companies Law, an Israeli company may not exculpate an office holder from liability for a breach of his or her duty of loyalty, but may exculpate in advance an office holder from his or her liability to the company, in whole or in part, for damages caused to the company as a result of a breach of his or her duty of care (other than in relation to distributions), but only if a provision authorizing such exculpation is included in its articles of association. Our amended and restated articles of association provide that we may exculpate, in whole or in part, any office holder from liability to us for damages caused to the company as a result of a breach of his or her duty of care, but prohibit an exculpation from liability arising from a company’s transaction in which our controlling shareholder or officer has a personal interest. Subject to the aforesaid limitations, under the indemnification agreements, we exculpate and release our office holders from any and all liability to us related to any breach by them of their duty of care to us to the fullest extent permitted by law.
II-1
Limitations
The Companies Law provides that the Company may not exculpate or indemnify an office holder nor enter into an insurance contract that would provide coverage for any liability incurred as a result of any of the following: (1) a breach by the office holder of his or her duty of loyalty unless (in the case of indemnity or insurance only, but not exculpation) the office holder acted in good faith and had a reasonable basis to believe that the act would not prejudice us; (2) a breach by the office holder of his or her duty of care if the breach was carried out intentionally or recklessly (as opposed to merely negligently); (3) any act or omission committed with the intent to derive an illegal personal benefit; or (4) any fine, monetary sanction, penalty or forfeit levied against the office holder.
Under the 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 certain office holders or under certain circumstances, also by the shareholders.
Our amended and restated articles of association permit us to exculpate (subject to the aforesaid limitation), indemnify and insure our office holders to the fullest extent permitted or to be permitted by the Companies Law.
Item 7. Recent Sales of Unregistered Securities
Set forth below are the sales of all securities by the Company since March 2019, which were not registered under the Securities Act. The Company believes that each of such issuances was exempt from registration under the Securities Act in reliance on Section 4(a)(2) of the Securities Act, Rule 701 and/or Regulation S under the Securities Act. The conversions described below were exempt from registration under Securities Act in reliance on Section 3(a)(9) of the Securities Act.
In January, April and November of 2019, we entered into a series of convertible security agreements with certain investors, bearing interest at the rate of 4% per annum, according to which we received aggregate gross proceeds of $400,000. These securities were convertible into our Ordinary Shares pursuant to the terms and conditions of the agreements.
In December 2019, we entered into additional convertible security agreements with certain investors, bearing no interest, according to which we received aggregate proceeds of $1.50 million. These securities were convertible into our Ordinary Shares pursuant to the terms and conditions of the agreements.
In April 2021, the Company converted all of the above convertible securities into an aggregate of 3,081,102 Ordinary Shares, NIS 0.01 par value.
In April 2021, we issued to a group of investors 1,343,374 Ordinary Shares and warrants to purchase 671,687 Ordinary Shares, at an exercise price of 125% of the per share purchase price in our initial public offering, if and when it shall occur, for a total consideration of $3.025 million. Prior to the issuance, (i) we converted each one of our issued and outstanding ordinary A shares into one Ordinary Share; (ii) reclassified our authorized share capital of 2,000,000 ordinary A shares into 2,000,000 Ordinary Shares; (iii) increased our authorized share capital by 10,000,000 Ordinary Shares; and (iv) increased the number of Ordinary Shares under the 2015 Plan by an additional 200,000 Ordinary Shares.
In November 2021, we granted options to purchase 22,205 Ordinary Shares at an exercise price of $2.25 per share to a consultant, which all are vested as of April 4, 2022, and additional options will be granted upon closing of this offering to buy ordinary shares in the amount of $100,000, at an exercise price equal to the price per share in this offering.
In January 2022, we began entering into certain simple agreements for future equity, or the SAFEs for aggregate proceeds of up to $3 million. As of April 4, 2022, we received $500 thousand under the SAFEs which we have already entered into. Any amounts received under the SAFEs we enter into will be automatically converted into our Ordinary Shares in the event we close an Equity Financing (as defined hereinafter) at a discount of 20% from the per share purchase price in such Equity Financing. An Equity Financing is a transaction or series of transactions with the principal purpose of raising capital in an aggregate amount of at least $5,000,000, excluding all outstanding (i) SAFEs, and (ii) other convertible securities (if any), pursuant to which we issue and sell Ordinary Shares at a fixed pre-money valuation. In case of an initial public offering or a Change of Control transaction (as defined hereinafter), the SAFE amount shall, at the election of the investor thereunder, either (i) convert into our Ordinary Shares at a discount of 20% from the per share price at such event, or (ii) be repaid to the investor (subject to adjustments in case there are insufficient funds for such repayment to all SAFE investors) at the closing thereof. The conversion of the SAFE amounts into the Ordinary Shares in case of an initial public offering, is also subject to certain lock-up periods and other restrictions on transfer. In the event of a dissolution event (e.g., a voluntary or involuntary termination of operations, dissolution or our winding-up), the SAFE amount shall be repaid to the investors prior to or concurrently with the consummation of such an event. In addition, we agreed to issue to each SAFE investor a warrant to purchase our Ordinary Shares with an exercise price equal to 150% of the public offering price in such offering for an aggregate amount of up to 25% of such investor’s SAFE amount. The warrants shall be exercisable until the earlier of: (i) eighteen (18) months from January 2022; or (ii) in a Change of Control event, which generally covers (a) transaction in which any person or group becomes the beneficial owner, directly or indirectly, of more than 50% of our outstanding voting securities with the right to vote for the election of members of our board of directors, or (b) any reorganization, merger or our consolidation, or (c) a sale, lease or other disposition of all or substantially all of our assets.
Since April 2019, we have granted to our directors, consultants and service providers, officers, and employees options to purchase an aggregate of 647,853 Ordinary Shares under our 2015 Plan, with an exercise prices ranging between $0.003 and $2.251 per share. As of April 4, 2022, 368,105 options granted to directors, officers and employees were exercised, and 112,829 options forfeited, such that the total outstanding amount of options to directors, officers and employees as of April 4, 2022 is 1,162,689.
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Item 8. Exhibits and Financial Statement Schedules
Exhibits:
* |
To be filed by an amendment |
| ** | Previously filed |
| # | Certain schedules and exhibits have been omitted pursuant to Item 601(a)(5) of Regulation S-K. The Company agrees to furnish supplementally a copy of any omitted schedule or exhibit to the SEC upon request. |
Financial Statement Schedules:
All financial statement schedules have been omitted because either they are not required, are not applicable or the information required therein is otherwise set forth in the Company’s financial statements and related notes thereto.
Item 9. Undertakings
(a) The undersigned Registrant hereby undertakes:
| (1) | To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: |
| i. | To include any prospectus required by section 10(a)(3) of the Securities Act of 1933; |
| ii. | To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than 20% change in the maximum aggregate offering price set forth in the “Calculation of Registration Fee” table in the effective registration statement; |
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| iii. | To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement. |
| (2) | That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. |
| (3) | To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. |
| (4) | To file a post-effective amendment to the registration statement to include any financial statements required by Item 8.A. of Form 20-F at the start of any delayed offering or throughout a continuous offering. Financial statements and information otherwise required by Section 10(a)(3) of the Act need not be furnished, provided that the registrant includes in the prospectus, by means of a post-effective amendment, financial statements required pursuant to this paragraph (a)(4) and other information necessary to ensure that all other information in the prospectus is at least as current as the date of those financial statements. Notwithstanding the foregoing, with respect to registration statements on Form F-3, a post-effective amendment need not be filed to include financial statements and information required by Section 10(a)(3) of the Act or Item 8.A of Form 20-F if such financial statements and information are contained in periodic reports filed with or furnished to the Commission by the registrant pursuant to section 13 or section 15(d) of the Securities Exchange Act of 1934 that are incorporated by reference in the Form F-3. |
| (5) | That, for the purpose of determining liability under the Securities Act of 1933 to any purchaser: |
| i. | If the registrant is relying on Rule 430B: |
| A. | Each prospectus filed by the registrant pursuant to Rule 424(b)(3) shall be deemed to be part of the registration statement as of the date the filed prospectus was deemed part of and included in the registration statement; and |
| B. | Each prospectus required to be filed pursuant to Rule 424(b)(2), (b)(5), or (b)(7) as part of a registration statement in reliance on Rule 430B relating to an offering made pursuant to Rule 415(a)(1)(i), (vii), or (x) for the purpose of providing the information required by section 10(a) of the Securities Act of 1933 shall be deemed to be part of and included in the registration statement as of the earlier of the date such form of prospectus is first used after effectiveness of the date of the first contract or sale of securities in the offering described in the prospectus. As provided in Rule 430B, for liability purposes of the issuer and any person that is at that date and underwriter, such date shall be deemed to be a new effective date of the registration statement relating to the securities in the registration statement to which that prospectus relates, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. Provided, however, that no statement made in a registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of contract sale prior to such effective date, supersede or modify any statement that was made in the registration statement or prospectus that was part of the registration statement or made in any such document immediately prior to such effective date; or |
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| ii. | If the registrant is subject to Rule 430C, each prospectus filed pursuant to Rule 424(b) as part of a registration statement relating to an offering, other than registration statements relying on Rule 430B or other than prospectuses filed in reliance on Rule 430A, shall be deemed to be part of and included in the registration statement as of the date it is first used after effectiveness. Provided, however, that no statement made in a registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such first use, supersede or modify any statement that was made in the registration statement or prospectus that was part of the registration statement or made in any such document immediately prior to such date of first use. |
| (6) | That, for the purpose of determining liability of the registrant under the Securities Act of 1933 to any purchaser in the initial distribution of the securities, the undersigned registrant undertakes that in a primary offering of securities of the undersigned registrant pursuant to this registration statement, regardless of the underwriting method used to sell the securities to the purchaser, if the securities are offered or sold to such purchaser by means of any of the following communications, the undersigned registrant will be a seller to the purchaser and will be considered to offer or sell securities to such purchaser: |
| i. | Any preliminary prospectus or prospectus of the undersigned registrant relating to the offering required to be filed pursuant to Rule 424; |
| ii. | Any free writing prospectus relating to the offering prepared by or on behalf of the undersigned registrant or used or referred to by the undersigned registrant; |
| iii. | The portion of any other free writing prospectus relating to the offering containing material information about the undersigned registrant or its securities provided by or on behalf of the undersigned registrant; and |
| iv. | Any other communication that is an offer in the offering made by the undersigned registrant to the purchaser. |
| (b) | Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. |
| (c) | The undersigned registrant hereby undertakes that: |
| (1) | That for purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4), or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. |
| (2) | That for the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. |
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form F-1 and has duly caused this registration statement on Form F-1 to be signed on its behalf by the undersigned, thereunto duly authorized, in Yokne’am Illit, Israel, on April 6, 2022.
| WEARABLE DEVICES LTD. | ||
| By: | /s/ Asher Dahan | |
| Asher Dahan | ||
| Chief Executive Officer | ||
Pursuant to the requirements of the Securities Act of 1933, this amendment to the registration statement on Form F-1 has been signed by the following persons in the capacities and on the dates indicated.
| Signature | Title | Date | ||
| /s/ Asher Dahan | Chief Executive Officer, Director | April 6, 2022 | ||
| Asher Dahan | (Principal Executive Officer) | |||
| /s/ Alon Mualem | Chief Financial Officer | |||
| Alon Mualem | (Principal Financial and Accounting Officer) | April 6, 2022 | ||
| * | Director | April 6, 2022 | ||
| Eli Bachar | ||||
| * | Director | April 6, 2022 | ||
| Barry Kaplan | ||||
| * | Director | April 6, 2022 | ||
| Guy Wagner |
| *By: | /s/ Asher Dahan | April 6, 2022 | |||
| Name: | Asher Dahan | ||||
| Title: | Attorney-in-fact |
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SIGNATURE OF AUTHORIZED REPRESENTATIVE IN THE UNITED STATES
Pursuant to the Securities Act of 1933, as amended, the undersigned, Mudra Wearable, Inc., the duly authorized representative in the United States of Wearable Devices Ltd., has signed this registration statement on April 6, 2022.
| /s/ Mudra Wearable, Inc. | |
| Mudra Wearable, Inc. |
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Exhibit 4.1
THE REGISTERED HOLDER OF THIS PURCHASE WARRANT BY ITS ACCEPTANCE HEREOF, AGREES THAT IT WILL NOT SELL, TRANSFER OR ASSIGN THIS PURCHASE WARRANT EXCEPT AS HEREIN PROVIDED AND THE REGISTERED HOLDER OF THIS PURCHASE WARRANT AGREES THAT IT WILL NOT SELL, TRANSFER, ASSIGN, PLEDGE OR HYPOTHECATE THIS PURCHASE WARRANT FOR A PERIOD OF ONE HUNDRED EIGHTY DAYS FOLLOWING [●], 2022 (THE “EFFECTIVE DATE”) TO ANYONE OTHER THAN (I) AEGIS CAPITAL CORP. OR A SELECTED DEALER IN CONNECTION WITH THE OFFERING FOR WHICH THIS PURCHASE WARRANT WAS ISSUED TO THE UNDERWRITER AS CONSIDERATION (THE “OFFERING”), OR (II) A BONA FIDE OFFICER OR PARTNER OF AEGIS CAPITAL CORP.
THIS PURCHASE WARRANT IS NOT EXERCISABLE PRIOR TO [●], 2022. VOID AFTER 5:00 P.M., EASTERN TIME, [●], 2027.
Ordinary Share Purchase Warrant
For the Purchase of [●] Ordinary Shares
of
Wearable Devices Ltd.
1. Purchase Warrant. THIS CERTIFIES THAT, in consideration of funds duly paid by or on behalf of Aegis Capital Corp. (“Holder”), as registered owner of this Purchase Warrant, to Wearable Devices Ltd., an Israeli company (the “Company”), Holder is entitled, at any time or from time to time beginning [●], 2022 (the “Commencement Date”), and at or before 5:00 p.m., Eastern time, on [●], 2027 (the “Expiration Date”), but not thereafter, to subscribe for, purchase and receive, in whole or in part, up to [●] ordinary shares of the Company, no par value per share (the “Shares”), subject to adjustment as provided in Section 6 hereof. If the Expiration Date is not a Business Day, then this Purchase Warrant may be exercised on the next succeeding Business Day. During the period ending on the Expiration Date, the Company agrees not to take any action that would terminate this Purchase Warrant. This Purchase Warrant is initially exercisable at $[●] per Share; provided, however, that upon the occurrence of any of the events specified in Section 6 hereof, the rights granted by this Purchase Warrant, including the exercise price per Share and the number of Shares to be received upon such exercise, shall be adjusted as therein specified. The term “Exercise Price” shall mean the initial exercise price or the adjusted exercise price, depending on the context, and the term “Business Day” shall mean a day other than a Saturday, Sunday or any other day which is a federal legal holiday in the United States or any day on which the Federal Reserve Bank of New York is authorized or required by law or other governmental action to close, provided that the Federal Reserve Bank of New York shall not be deemed to be authorized or obligated to be closed due to a “shelter in place,” “non-essential employee” or similar closure of physical location at the direction of any governmental authority if the bank’s electronic funds transfer systems (including for wire transfers) are open for use by customers on such day.
2. Exercise.
2.1 Exercise Form. In order to exercise this Purchase Warrant, the exercise form attached hereto must be duly executed and completed and delivered to the Company, together with this Purchase Warrant and, subject to Section 2.2, payment of the Exercise Price for the Shares being purchased payable in cash by wire transfer of immediately available funds to an account designated by the Company or by certified check or official bank check. If the subscription rights represented hereby shall not be exercised at or before 5:00 p.m., Eastern time, on the Expiration Date, this Purchase Warrant shall become and be void without further force or effect, and all rights represented hereby shall cease and expire. Each exercise hereof shall be irrevocable.
2.2 Cashless Exercise. The Company shall use its best efforts to cause the Registration Statement to remain effective with a current prospectus and to maintain the registration of the Ordinary Shares and of the Warrants under the Exchange Act. If at any time on or after the Initial Exercise Date, there is no effective registration statement registering, or the prospectus contained therein is not available for the issuance of the Purchase Warrant to the Holder, then this Warrant may also be exercised, in whole or in part, at such time by means of a “cashless exercise” in which the Holder shall be entitled to receive the number of Purchase Warrants equal to the quotient obtained by dividing [(A-B) (X)] by (A), where:
| (A) = | as applicable: (i) the volume-weighted average price, or “VWAP,” defined below, on the Trading Day immediately preceding the date of the applicable Notice of Exercise if such Notice of Exercise is (1) both executed and delivered pursuant to Section 2(a) hereof on a day that is not a Trading Day or (2) both executed and delivered pursuant to Section 2.1 hereof on a Trading Day prior to the opening of “regular trading hours” (as defined in Rule 600(b)(64) of Regulation NMS promulgated under the federal securities laws) on such Trading Day, (ii) at the option of the Holder, either (y) the VWAP on the Trading Day immediately preceding the date of the applicable Notice of Exercise or (z) the Bid Price of the Ordinary Shares on the principal Trading Market as reported by Bloomberg L.P. as of the time of the Holder’s execution of the applicable Notice of Exercise if such Notice of Exercise is executed during “regular trading hours” on a Trading Day and is delivered within two (2) hours thereafter (including until two (2) hours after the close of “regular trading hours” on a Trading Day) pursuant to Section 2.1 hereof or (iii) the VWAP on the date of the applicable Notice of Exercise if the date of such Notice of Exercise is a Trading Day and such Notice of Exercise is both executed and delivered pursuant to Section 2.1 hereof after the close of “regular trading hours” on such Trading Day; |
| (B) = | the Exercise Price of this Warrant, as adjusted hereunder; and |
| (X) = | the number of Warrant Shares that would be issuable upon exercise of this Warrant in accordance with the terms of this Warrant if such exercise were by means of a cash exercise rather than a cashless exercise. |
If Purchase Warrants are issued in such a “cashless exercise,” the parties acknowledge and agree that in accordance with Section 3(a)(9) of the Securities Act, the Warrant Shares shall take on the registered characteristics of the Warrants being exercised, and the holding period of the Warrants being exercised may be tacked on to the holding period of the Purchase Warrants. The Company agrees not to take any position contrary to this Section 2.2.
For purposes of this Section 2.2, the fair market value of a Share is defined as follows:
“VWAP” means, for any date, the price determined by the first of the following clauses that applies: (a) if the Ordinary Shares then listed or quoted on a Trading Market, the daily volume weighted average price of the Ordinary Shares for such date (or the nearest preceding date) on the Trading Market on which the Ordinary Shares are then listed or quoted as reported by Bloomberg L.P. (based on a Trading Day from 9:30 a.m. (New York City time) to 4:02 p.m. (New York City time)), (b) if OTCQB or OTCQX is not a Trading Market, the volume weighted average price of a share of Ordinary Shares for such date (or the nearest preceding date) on the OTCQB or OTCQX as applicable, (c) if Ordinary Shares are not then listed or quoted for trading on the OTCQB or OTCQX and if prices for Ordinary Shares are then reported on the OTC Pink Open Market (or a similar organization or agency succeeding to its functions of reporting prices), the most recent bid price per Ordinary Share so reported, or (d) in all other cases, the fair market value of the Ordinary Shares as determined by an independent appraiser selected in good faith by the Holder and reasonably acceptable to the Company, the fees and expenses of which shall be paid by the Company.
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2.3 Legend. Each certificate for the securities purchased under this Purchase Warrant shall bear a legend as follows unless such securities have been registered under the Securities Act of 1933, as amended (the “Act”):
The securities represented by this certificate have not been registered under the Securities Act of 1933, as amended (the “Act”), or applicable state law. Neither the securities nor any interest therein may be offered for sale, sold or otherwise transferred except pursuant to an effective registration statement under the Act, or pursuant to an exemption from registration under the Act and applicable state law which, in the opinion of counsel to Wearable Devices Ltd., is available.
2.4 Resale of Shares. Holder and the Company acknowledge that as of the date hereof the Staff of the Division of Corporation Finance of the SEC has published Compliance & Disclosure Interpretation 528.04 in the Securities Act Rules section thereof, stating that the holder of securities issued in connection with a public offering may not rely upon Rule 144 promulgated under the Act to establish an exemption from registration requirements under Section 4(a)(1) under the Act, but may nonetheless apply Rule 144 constructively for the resale of such shares in the following manner: (a) provided that six months has elapsed since the last sale under the registration statement, an underwriter or finder may resell the securities in accordance with the provisions of Rule 144(c), (e), and (f), except for the notice requirement; (b) a purchaser of the shares from an underwriter receives restricted securities unless the sale is made with an appropriate, current prospectus, or unless the sale is made pursuant to the conditions contained in (a) above; (c) a purchaser of the shares from an underwriter who receives restricted securities may include the underwriter’s holding period, provided that the underwriter or finder is not an affiliate of the issuer; and (d) if an underwriter transfers the shares to its employees, the employees may tack the firm’s holding period for purposes of Rule 144(d), but they must aggregate sales of the distributed shares with those of other employees, as well as those of the underwriter or finder, for a six-month period from the date of the transfer to the employees. Holder and the Company also acknowledge that the Staff of the Division of Corporation Finance of the SEC has advised in various no-action letters that the holding period associated with securities issued without registration to a service provider commences upon the completion of the services, which the Company agrees and acknowledges shall be the final closing of the Offering, and that Rule 144(d)(3)(ii) provides that securities acquired from the issuer solely in exchange for other securities of the same issuer shall be deemed to have been acquired at the same time as the securities surrendered for conversion (which the Company agrees is the date of the initial issuance of this Purchase Warrant). In the event that following a reasonably-timed written request by Holder to transfer the Shares in accordance with Compliance & Disclosure Interpretation 528.04 counsel for the Company in good faith concludes that Compliance & Disclosure Interpretation 528.04 no longer may be relied upon as a result of changes in applicable laws, regulations, or interpretations of the SEC Division of Corporation Finance, or as a result of judicial interpretations not known by the Company or its counsel on the date hereof (either, a “Registration Trigger Event”), then the Company shall promptly, and in any event within five (5) Business Days following the request, provide written notice to Holder of such determination. As a condition to giving such notice, the parties shall negotiate in good faith a single demand registration right pursuant to an agreement in customary form reasonably acceptable to the parties; provided that notwithstanding anything to the contrary, the obligations of the Company pursuant to this Section 2 shall terminate on the fifth anniversary of the commencement of sales of the public offering. In the absence of such conclusion by counsel for the Company, the Company shall, upon such a request of Holder given no earlier than six months after the final closing of the Offering, instruct its transfer agent to permit the transfer of such shares in accordance with Compliance & Disclosure Interpretation 528.04, provided that Holder has provided such documentation as shall be reasonably be requested by the Company to establish compliance with the conditions of Compliance & Disclosure Interpretation 528.04. Notwithstanding anything to the contrary, pursuant to FINRA Rule 5110(g)(8)(A), the Holder shall not be entitled to more than one demand registration right hereunder and the duration of the registration rights hereunder shall not exceed five years from the commencement of sales of the public offering.
3. Transfer.
3.1 General Restrictions. The registered Holder of this Purchase Warrant agrees by such Holder’s acceptance hereof, that such Holder will not: (a) sell, transfer, assign, pledge or hypothecate this Purchase Warrant for a period of one hundred eighty (180) days following the Effective Date to anyone other than: (i) Holder or an underwriter, placement agent, or a selected dealer participating in the Offering, or (ii) a bona fide officer or partner of Holder or of any such underwriter, placement agent or selected dealer, in each case in accordance with FINRA Conduct Rule 5110(g)(1), or (b) for a period of one hundred eighty (180) days following the Effective Date cause this Purchase Warrant or the securities issuable hereunder to be the subject of any hedging, short sale, derivative, put or call transaction that would result in the effective economic disposition of this Purchase Warrant or the securities hereunder, except as provided for in FINRA Rule 5110(g)(2). After 180 days after the Effective Date, transfers to others may be made subject to compliance with or exemptions from applicable securities laws. In order to make any permitted assignment, the Holder must deliver to the Company the assignment form attached hereto duly executed and completed, together with the Purchase Warrant and payment of all transfer taxes, if any, payable in connection therewith. The Company shall within five (5) Business Days transfer this Purchase Warrant on the books of the Company and shall execute and deliver a new Purchase Warrant or Purchase Warrants of like tenor to the appropriate assignee(s) expressly evidencing the right to purchase the aggregate number of Shares purchasable hereunder or such portion of such number as shall be contemplated by any such assignment.
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3.2 Restrictions Imposed by the Act. The securities evidenced by this Purchase Warrant shall not be transferred unless and until: (i) if required by applicable law, the Company has received the opinion of counsel for the Company that the securities may be transferred pursuant to an exemption from registration under the Act and applicable state securities laws, or (ii) a registration statement or a post-effective amendment to the Registration Statement relating to the offer and sale of such securities has been filed by the Company and declared effective by the U.S. Securities and Exchange Commission (the “Commission”) and compliance with applicable state securities law has been established.
4. Piggyback Registration Rights.
4.1 Grant of Right. In the event that there is not an effective registration statement covering the Purchase Warrant or the underlying Shares, whenever the Company proposes to register any of its ordinary shares under the Act (other than (i) a registration effected solely to implement an employee benefit plan or a transaction to which Rule 145 of the Act is applicable, or (ii) a registration statement on Form S-4, S-8 or any successor form thereto or another form not available for registering the Shares issuable upon exercise of this Purchase Warrant for sale to the public, whether for its own account or for the account of one or more stockholders of the Company (a “Piggyback Registration”), the Company shall give prompt written notice (in any event no later than ten (10) Business Days prior to the filing of such registration statement) to the Holder of the Company’s intention to effect such a registration and, subject to the remaining provisions of this Section 4.1, shall include in such registration such number of Shares underlying this Purchase Warrant (the “Registrable Securities”) that the Holders have (within ten (10) Business Days of the respective Holder’s receipt of such notice) requested in writing (including such number) to be included within such registration. If a Piggyback Registration is an underwritten offering and the managing underwriter advises the Company that it has determined in good faith that marketing factors require a limit on the number of ordinary shares to be included in such registration, including all Shares issuable upon exercise of this Purchase Warrant (if the Holder has elected to include such shares in such Piggyback Registration) and all other ordinary shares proposed to be included in such underwritten offering, the Company shall include in such registration (i) first, the number of ordinary shares that the Company proposes to issue and sell pursuant to such underwritten offering and (ii) second, the number of ordinary shares, if any, requested to be included therein by selling stockholders (including the Holder) allocated pro rata among all such persons on the basis of the number of ordinary shares then owned by each such person. If any Piggyback Registration is initiated as a primary underwritten offering on behalf of the Company, the Company shall select the investment banking firm or firms to act as the managing underwriter or underwriters in connection with such offering. Notwithstanding anything to the contrary, the obligations of the Company pursuant to this Section 4.1 shall terminate on the earlier of (i) the fifth anniversary of the Effective Date and (ii) the date that Rule 144 would allow the Holder to sell its Registrable Securities during any ninety (90) day period, and shall not be applicable so long as the Company’s Registration Statement on Form F-1 (No. 333-262838 covering the Registrable Securities remains effective at such time. The duration of the piggyback registration right shall not exceed seven years from the commencement of sales of the public offering.
4.2 Indemnification. The Company shall indemnify the Holder(s) of the Registrable Securities to be sold pursuant to any registration statement hereunder and each person, if any, who controls such Holders within the meaning of Section 15 of the Act or Section 20 (a) of the Securities Exchange Act of 1934, as amended (“Exchange Act”), against all loss, claim, damage, expense or liability (including all reasonable attorneys’ fees and other out-of-pocket expenses reasonably incurred in investigating, preparing or defending against any claim whatsoever) to which any of them may become subject under the Act, the Exchange Act or otherwise, arising from such registration statement but only to the same extent and with the same effect as the provisions pursuant to which the Company has agreed to indemnify Holder contained in the Underwriting Agreement between Holder and the Company, dated as of [●], 2022. The Holder(s) of the Registrable Securities to be sold pursuant to such registration statement, and their successors and assigns, shall severally, and not jointly, indemnify the Company, against all loss, claim, damage, expense or liability (including all reasonable attorneys’ fees and other expenses reasonably incurred in investigating, preparing or defending against any claim whatsoever) to which they may become subject under the Act, the Exchange Act or otherwise, arising from information furnished by or on behalf of such Holders, or their successors or assigns, in writing, for specific inclusion in such registration statement to the same extent and with the same effect as the provisions contained in the Underwriting Agreement pursuant to which Holder has agreed to indemnify the Company.
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4.3 Exercise of Purchase Warrants. Nothing contained in this Purchase Warrant shall be construed as requiring the Holder(s) to exercise their Purchase Warrants prior to or after the initial filing of any registration statement or the effectiveness thereof.
4.4 Documents Delivered to Holders. The Company shall deliver promptly to each Holder participating in the offering requesting the correspondence and memoranda described below, copies of all correspondence between the Commission and the Company, its counsel or auditors and all memoranda relating to discussions with the Commission or its staff with respect to the registration statement and permit each Holder and underwriter to do such investigation, upon reasonable advance notice, with respect to information contained in or omitted from the registration statement as it deems reasonably necessary to comply with applicable securities laws or rules of FINRA. Such investigation shall include access to books, records and properties and opportunities to discuss the business of the Company with its officers and independent auditors, all to such reasonable extent and at such reasonable times, during normal business hours, as any such Holder shall reasonably request.
4.5 Underwriting Agreement. The Holders shall be parties to any underwriting agreement relating to a Piggyback Registration. Such Holders shall not be required to make any representations or warranties to or agreements with the Company or the underwriters except as they may relate to such Holders, their Shares and the amount and nature of their ownership thereof and their intended methods of distribution.
4.6 Documents to be Delivered by Holder(s). Each of the Holder(s) participating in any of the foregoing offerings shall furnish to the Company a completed and executed questionnaire provided by the Company requesting information customarily sought of selling security holders.
4.7 Damages. Should the Company fail to comply with such provisions, the Holder(s) shall, in addition to any other legal or other relief available to the Holder(s), be entitled to obtain specific performance or other equitable (including injunctive) relief against the threatened breach of such provisions or the continuation of any such breach, without the necessity of proving actual damages and without the necessity of posting bond or other security.
5. New Purchase Warrants to be Issued.
5.1 Partial Exercise or Transfer. Subject to the restrictions in Section 3 hereof, this Purchase Warrant may be exercised or assigned in whole or in part. In the event of the exercise or assignment hereof in part only, upon surrender of this Purchase Warrant for cancellation, together with the duly executed exercise or assignment form and funds sufficient to pay any Exercise Price and/or transfer tax if exercised pursuant to Section 2.1 hereto, the Company shall cause to be delivered to the Holder without charge a new Purchase Warrant of like tenor to this Purchase Warrant in the name of the Holder evidencing the right of the Holder to purchase the number of Shares purchasable hereunder as to which this Purchase Warrant has not been exercised or assigned.
5.2 Lost Certificate. Upon receipt by the Company of evidence satisfactory to it of the loss, theft, destruction or mutilation of this Purchase Warrant and of reasonably satisfactory indemnification or the posting of a bond, determined in the sole discretion of the Company, the Company shall execute and deliver a new Purchase Warrant of like tenor and date. Any such new Purchase Warrant executed and delivered as a result of such loss, theft, mutilation or destruction shall constitute a substitute contractual obligation on the part of the Company.
6. Adjustments.
6.1 Adjustments to Exercise Price and Number of Securities. The Exercise Price and the number of Shares underlying the Purchase Warrant shall be subject to adjustment from time to time as hereinafter set forth:
6.1.1 Share Dividends; Split Ups. If, after the date hereof, and subject to the provisions of Section 6.3 below, the number of outstanding Shares is increased by a stock dividend payable in Shares or by a split up of Shares or other similar event, then, on the effective day thereof, the number of Shares purchasable hereunder shall be increased in proportion to such increase in outstanding Shares, and the Exercise Price shall be proportionately decreased.
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6.1.2 Aggregation of Shares. If, after the date hereof, and subject to the provisions of Section 6.3 below, the number of outstanding Shares is decreased by a consolidation, combination or reclassification of Shares or other similar event, then, on the effective date thereof, the number of Shares purchasable hereunder shall be decreased in proportion to such decrease in outstanding Shares, and the Exercise Price shall be proportionately increased.
6.1.3 Replacement of Securities upon Reorganization, Etc. In case of any reclassification or reorganization of the outstanding Shares other than a change covered by Section 6.1.1 or 6.1.2 hereof or that solely affects the par value of such Shares, or in the case of any share reconstruction or amalgamation or consolidation or merger of the Company with or into another corporation (other than a consolidation or share reconstruction or amalgamation or merger in which the Company is the continuing company and that does not result in any reclassification or reorganization of the outstanding Shares), or in the case of any sale or conveyance to another corporation or entity of the property of the Company as an entirety or substantially as an entirety in connection with which the Company is dissolved, the Holder of this Purchase Warrant shall have the right thereafter (until the expiration of the right of exercise of this Purchase Warrant) to receive upon the exercise hereof, for the same aggregate Exercise Price payable hereunder immediately prior to such event, the kind and amount of shares or other securities or property (including cash) receivable upon such reclassification, reorganization, share reconstruction or amalgamation, or consolidation, or upon a dissolution following any such sale or transfer, by a Holder of the number of Shares of the Company obtainable upon exercise of this Purchase Warrant immediately prior to such event; and if any reclassification also results in a change in Shares covered by Section 6.1.1 or 6.1.2, then such adjustment shall be made pursuant to Sections 6.1.1, 6.1.2 and this Section 6.1.3. The provisions of this Section 6.1.3 shall similarly apply to successive reclassifications, reorganizations, share reconstructions or amalgamations, or consolidations, sales or other transfers.
6.1.4 Changes in Form of Purchase Warrant. This form of Purchase Warrant need not be changed because of any change pursuant to this Section 6.1, and Purchase Warrants issued after such change may state the same Exercise Price and the same number of Shares as are stated in the Purchase Warrants initially issued pursuant to this Agreement. The acceptance by any Holder of the issuance of new Purchase Warrants reflecting a required or permissive change shall not be deemed to waive any rights to an adjustment occurring after the Commencement Date or the computation thereof.
6.2 Substitute Purchase Warrant. In case of any consolidation of the Company with, or share reconstruction or amalgamation or merger of the Company with or into, another corporation (other than a consolidation or share reconstruction or amalgamation or merger which does not result in any reclassification or change of the outstanding Shares), the corporation formed by such consolidation or share reconstruction or amalgamation shall execute and deliver to the Holder a supplemental Purchase Warrant providing that the holder of each Purchase Warrant then outstanding or to be outstanding shall have the right thereafter (until the stated expiration of such Purchase Warrant) to receive, upon exercise of such Purchase Warrant, the kind and amount of shares and other securities and property receivable upon such consolidation or share reconstruction or amalgamation, by a holder of the number of Shares of the Company for which such Purchase Warrant might have been exercised immediately prior to such consolidation, share reconstruction or amalgamation or merger, sale or transfer. Such supplemental Purchase Warrant shall provide for adjustments which shall be identical to the adjustments provided for in this Section 6. The above provision of this Section shall similarly apply to successive consolidations or share reconstructions or amalgamations or mergers.
6.3 Elimination of Fractional Interests. The Company shall not be required to issue certificates representing fractions of Shares upon the exercise of the Purchase Warrant, nor shall it be required to issue scrip or pay cash in lieu of any fractional interests, it being the intent of the parties that all fractional interests shall be eliminated by rounding any fraction up or down, as the case may be, to the nearest whole number of Shares or other securities, properties or rights.
7. Reservation. The Company shall at all times reserve and keep available out of its authorized Shares, solely for the purpose of issuance upon exercise of the Purchase Warrants, such number of Shares or other securities, properties or rights as shall be issuable upon the exercise thereof. The Company covenants and agrees that, upon exercise of the Purchase Warrants and payment of the Exercise Price therefor, in accordance with the terms hereby, all Shares and other securities issuable upon such exercise shall be duly and validly issued, fully paid and non-assessable and not subject to preemptive rights of any shareholder.
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8. Certain Notice Requirements.
8.1 Holder’s Right to Receive Notice. Nothing herein shall be construed as conferring upon the Holder the right to vote or consent or to receive notice as a shareholder for the election of directors or any other matter, or as having any rights whatsoever as a shareholder of the Company. If, however, at any time prior to the expiration of the Purchase Warrants and their exercise, any of the events described in Section 8.2 shall occur, then, in one or more of said events, the Company shall deliver to each Holder a copy of each notice relating to such events given to the other shareholders of the Company at the same time and in the same manner that such notice is given to the shareholders.
8.2 Events Requiring Notice. The Company shall be required to give the notice described in this Section 8 upon one or more of the following events: (i) if the Company shall take a record of the holders of its Shares for the purpose of entitling them to receive a dividend or distribution payable otherwise than in cash, or a cash dividend or distribution payable otherwise than out of retained earnings, as indicated by the accounting treatment of such dividend or distribution on the books of the Company, or (ii) the Company shall offer to all the holders of its Shares any additional shares of capital stock of the Company or securities convertible into or exchangeable for shares of capital stock of the Company, or any option, right or warrant to subscribe therefor.
8.3 Notice of Change in Exercise Price. The Company shall, within 3 Business Days after an event requiring a change in the Exercise Price pursuant to Section 6 hereof, send notice to the Holders of such event and change (“Price Notice”). The Price Notice shall describe the event causing the change and the method of calculating same.
8.4 Transmittal of Notices. All notices, requests, consents and other communications under this Purchase Warrant shall be in writing and delivered personally, by e-mail, or sent by a nationally recognized overnight courier service to following addresses or to such other address as the Holder or the Company may designate by notice to the other party and shall be deemed given and effective on the earliest of (i) the time of transmission, if such notice or communication is delivered via e-mail (with confirmation of receipt from the intended recipient by return e-mail or other written acknowledgment) at the e-mail address set forth in this Section prior to 5:30 p.m. (New York City time) on any date, (ii) the next Business Day after the time of transmission, if such notice or communication is delivered via e-mail (with confirmation of receipt from the intended recipient by return email or other written acknowledgment) at the e-mail address set forth in this Section on a day that is not a Business Day or later than 5:30 p.m. (New York City time) on any Business Day, (iii) the second Business Day following the date of mailing, if sent by U.S. nationally recognized overnight courier service, or (iv) upon actual receipt by the party to whom such notice is required to be given:
If to the Holder:
Aegis Capital Corp.,
810 Seventh Avenue, 18th Floor,
New York, NY 10019,
Attention: Global Equity Markets
E-mail: [●]
with a copy (which shall not constitute notice) to:
Anthony W. Basch, Esq.
Kaufman & Canoles, P.C.
1021 E. Cary Street, Suite 1400
Two James Center
Richmond, VA 23219
E-mail: awbasch@kaufcan.com
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If to the Company:
Wearable
Devices Ltd.
2 Ha-Ta’asiya St.
Yokne’am Illit, 2069803 Israel
Attention: Asher Dahan, Chief Executive Officer
E-mail: asher.dahan@wearabledevices.co.il
with a copy (which shall not constitute notice) to:
Oded Har-Even, Esq.
Sullivan & Worcester LLP
1633 Broadway
New York, NY 10019
Email: ohareven@sullivanlaw.com
9. Miscellaneous.
9.1 Amendments. The Company and Holder may from time to time supplement or amend this Purchase Warrant without the approval of any of the Holders in order to cure any ambiguity, to correct or supplement any provision contained herein that may be defective or inconsistent with any other provisions herein, or to make any other provisions in regard to matters or questions arising hereunder that the Company and Holder may deem necessary or desirable and that the Company and Holder deem shall not adversely affect the interest of the Holders. All other modifications or amendments shall require the written consent of and be signed by (i) the Company and (ii) the Holder(s) of Purchase Warrants then-exercisable for at least a majority of the Shares then-exercisable pursuant to all then-outstanding Purchase Warrants.
9.2 Headings. The headings contained herein are for the sole purpose of convenience of reference, and shall not in any way limit or affect the meaning or interpretation of any of the terms or provisions of this Purchase Warrant.
9.3. Entire Agreement. This Purchase Warrant (together with the other agreements and documents being delivered pursuant to or in connection with this Purchase Warrant) constitutes the entire agreement of the parties hereto with respect to the subject matter hereof, and supersedes all prior agreements and understandings of the parties, oral and written, with respect to the subject matter hereof.
9.4 Binding Effect. This Purchase Warrant shall inure solely to the benefit of and shall be binding upon, the Holder and the Company and their permitted assignees, respective successors, legal representative and assigns, and no other person shall have or be construed to have any legal or equitable right, remedy or claim under or in respect of or by virtue of this Purchase Warrant or any provisions herein contained.
9.5 Governing Law; Submission to Jurisdiction; Trial by Jury. This Purchase Warrant shall be governed by and construed and enforced in accordance with the laws of the State of New York, without giving effect to conflict of laws principles thereof. The Company hereby agrees that any action, proceeding or claim against it arising out of, or relating in any way to this Purchase Warrant shall be brought and enforced in the courts located in the City of New York, County of New York, and State of New York, and irrevocably submits to such jurisdiction, which jurisdiction shall be exclusive. The Company hereby waives any objection to such exclusive jurisdiction and that such courts represent an inconvenient forum. Any process or summons to be served upon the Company may be served by transmitting a copy thereof by registered or certified mail, return receipt requested, postage prepaid, addressed to it at the address set forth in Section 8 hereof. Such mailing shall be deemed personal service and shall be legal and binding upon the Company in any action, proceeding or claim. The Company and the Holder agree that the prevailing party(ies) in any such action shall be entitled to recover from the other party(ies) all of its reasonable attorneys’ fees and expenses relating to such action or proceeding and/or incurred in connection with the preparation therefor. The Company (on its behalf and, to the extent permitted by applicable law, on behalf of its stockholders and affiliates) and the Holder hereby irrevocably waive, to the fullest extent permitted by applicable law, any and all right to trial by jury in any legal proceeding arising out of or relating to this Agreement or the transactions contemplated hereby.
9.6 Non-Waiver. The failure of the Company or the Holder to at any time enforce any of the provisions of this Purchase Warrant shall not be deemed or construed to be a waiver of any such provision, nor to in any way affect the validity of this Purchase Warrant or any provision hereof or the right of the Company or any Holder to thereafter enforce each and every provision of this Purchase Warrant. No waiver of any breach, non-compliance or non-fulfillment of any of the provisions of this Purchase Warrant shall be effective unless set forth in a written instrument executed by the party or parties against whom or which enforcement of such waiver is sought; and no waiver of any such breach, non-compliance or non-fulfillment shall be construed or deemed to be a waiver of any other or subsequent breach, non-compliance or non-fulfillment.
9.7 Exchange Agreement. As a condition of the Holder’s receipt and acceptance of this Purchase Warrant, Holder agrees that, at any time prior to the complete exercise of this Purchase Warrant by Holder, if the Company and Holder enter into an agreement (“Exchange Agreement”) pursuant to which they agree that all outstanding Purchase Warrants will be exchanged for securities or cash or a combination of both, then Holder shall agree to such exchange and become a party to the Exchange Agreement.
[Signature Page Follows]
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IN WITNESS WHEREOF, the Company has caused this Purchase Warrant to be signed by its duly authorized officer as of the date first written above.
| Wearable Devices Ltd. | |||
| By: | |||
| Name: | Asher Dahan | ||
| Title: | Chief Executive Officer | ||
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[Form to be used to exercise Purchase Warrant]
Date: __________, 20___
The undersigned hereby elects irrevocably to exercise the Purchase Warrant for ______ ordinary shares, no par value per share (the “Shares”), of Wearable Devices Ltd., an Israeli company (the “Company”), and hereby makes payment of $____ (at the rate of $____ per Share) in payment of the Exercise Price pursuant thereto. Please issue the Shares as to which this Purchase Warrant is exercised in accordance with the instructions given below and, if applicable, a new Purchase Warrant representing the number of Shares for which this Purchase Warrant has not been exercised.
or
The undersigned hereby elects irrevocably to convert its right to purchase ___ Shares of the Company under the Purchase Warrant for ______ Shares, as determined in accordance with the following formula:
| X | = | Y(A-B) | ||||
| A | ||||||
| Where, | ||||||
| X | = | The number of Shares to be issued to Holder; | ||||
| Y | = | The number of Shares for which the Purchase Warrant is being exercised; | ||||
| A | = | The fair market value of one Share which is equal to $_____; and | ||||
| B | = | The Exercise Price which is equal to $______ per share | ||||
The undersigned agrees and acknowledges that the calculation set forth above is subject to confirmation by the Company and any disagreement with respect to the calculation shall be resolved by the Company in its sole discretion.
Please issue the Shares as to which this Purchase Warrant is exercised in accordance with the instructions given below and, if applicable, a new Purchase Warrant representing the number of Shares for which this Purchase Warrant has not been converted.
Signature
Signature Guaranteed
INSTRUCTIONS FOR REGISTRATION OF SECURITIES
Name:
(Print in Block Letters)
Address:
NOTICE: The signature to this form must correspond with the name as written upon the face of the Purchase Warrant without alteration or enlargement or any change whatsoever, and must be guaranteed by a bank, other than a savings bank, or by a trust company or by a firm having membership on a registered national securities exchange.
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[Form to be used to assign Purchase Warrant]
ASSIGNMENT
(To be executed by the registered Holder to effect a transfer of the within Purchase Warrant):
FOR VALUE RECEIVED, __________________ does hereby sell, assign and transfer unto the right to purchase ordinary shares, no par value per share, of Wearable Devices Ltd., an Israeli company (the “Company”), evidenced by the Purchase Warrant and does hereby authorize the Company to transfer such right on the books of the Company.
Dated: __________, 20__
Signature
Signature Guaranteed
NOTICE: The signature to this form must correspond with the name as written upon the face of the within Purchase Warrant without alteration or enlargement or any change whatsoever, and must be guaranteed by a bank, other than a savings bank, or by a trust company or by a firm having membership on a registered national securities exchange.
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 |
Sullivan Tel Aviv (Har-Even & Co.) 28 HaArba’a St. HaArba’a Towers North Tower, 35th Floor, Tel-Aviv, Israel |
+972-747580480 sullivanlaw.com
|
Exhibit 5.1
April 6, 2022
To:
Wearable Devices Ltd.
2 Ha-Ta’asiya St.,
Yokne’am Illit, 2069803 Israel
Re: Registration Statement on Form F-1
Ladies and Gentlemen:
We have acted as Israeli counsel to Wearable Devices Ltd. (the “Company”), an Israeli company, in connection with the registration (including in connection with an over-allotment option granted to the underwriter) by the Company of: (i) units, each consisting of (a) one ordinary share, NIS 0.01 par value, of the Company (the “Ordinary Shares”), and (b) one warrant to purchase one Ordinary Share (the “Warrant”); (ii) pre-funded units, each consisting of (a) one pre-funded warrant to purchase one Ordinary Share (the “Pre-Funded Warrant”), and (b) one Warrant; and (iii) warrants to purchase Ordinary Shares (the “Underwriter Warrants”) issuable to the underwriter, in connection with an underwritten public offering of the Company (the “Offering”).
In connection with this opinion, we have examined the originals, or photocopies or copies, certified or otherwise identified to our satisfaction, of: (i) a registration statement on Form F-1 (Registration Statement No. 333-262838) (the “Registration Statement”), to which this opinion is filed as an exhibit; (ii) the exhibits to the Registration Statement, including the form of Underwriting Agreement between the Company and Aegis Capital Corp., as the underwriter; (iii) a copy of the Company’s articles of association; (iv) resolutions of the Company’s Board of Directors (the “Board”) which have heretofore been approved and relate to the Offering; and (v) such statutes, regulations, corporate records, documents, certificates and such other instruments that we have deemed relevant and necessary for the basis of our opinions hereinafter expressed. In such examination, we have assumed: (i) the authenticity of original documents and the genuineness of all signatures; (ii) the conformity to the originals of all documents submitted to us as copies; (iii) the truth, accuracy and completeness of the information, representations and warranties contained in the corporate records, documents, certificates and instruments we have reviewed; (iv) the due execution and delivery of all documents where due execution and delivery are a prerequisite to the effectiveness thereof; and (v) the legal capacity of all natural persons.
We are members of the Israel Bar and we express no opinion as to any matter relating to the laws of any jurisdiction other than the laws of the State of Israel and have not, for the purpose of giving this opinion, made any investigation of the laws of any other jurisdiction than the State of Israel.
Based upon and subject to the foregoing, we are of the opinion that (i) upon payment to the Company of the consideration in such amount and form as shall be determined by the Board or by an authorized committee thereof, the Ordinary Shares, when issued and sold in the Offering as described in the Registration Statement, will be duly and validly issued, fully paid and non-assessable; and (ii) the Ordinary Shares underlying the Warrants, Pre-Funded Warrants and Underwriter Warrants, when issued and sold by the Company and delivered by the Company against receipt of the exercise price therefor as shall be determined by the Board or an authorized committee thereof, in accordance with and in the manner described in the Registration Statement and the Warrant, Pre-Funded Warrant and Underwriter Warrants, as applicable, will be validly issued, fully paid and non-assessable, and in each case, including any additional Ordinary Shares including Ordinary Shares underlying Warrants, Pre-Funded Warrants and Underwriter Warrants pursuant to Rule 462(b) under the United States Securities Act of 1933, as amended (the “Securities Act”).
We hereby consent to the filing of this opinion as an exhibit to the Company’s Registration Statement and to the use of our name wherever it appears in the Registration Statement. In giving such consent, we do not believe that we are “experts” within the meaning of such term as used in the Securities Act, or the rules and regulations of the Securities and Exchange Commission issued thereunder with respect to any part of the Registration Statement, including this opinion as an exhibit or otherwise.
We further consent to the incorporation by reference of this letter and consent into any registration statement filed pursuant to Rule 462(b) under the Securities Act with respect to the Ordinary Shares.
| Very truly yours, | |
| /s/ Sullivan & Worcester Tel-Aviv (Har-Even & Co.) | |
| Sullivan & Worcester Tel-Aviv (Har-Even & Co.) |
Exhibit 5.2
April 5, 2022
Wearable Devices Ltd.
2 Ha-Ta’asiya St.,
Yokne’am Illit,
Israel 2069803
| Re: |
Registration Statement on Form F-1 |
Ladies and Gentlemen:
This opinion is furnished to you in connection with the Registration Statement on Form F-1 (Registration No. 333-262838) (as amended to date, the “Registration Statement”) filed by Wearable Devices Ltd., an Israeli company (the “Company”), with the United States Securities and Exchange Commission (the “Commission”) under the Securities Act of 1933, as amended (the “Securities Act”), for the registration (including in connection with an over-allotment option granted to the representative of the Underwriter (as defined below)) and proposed maximum aggregate offering price by the Company of up to $38,775,000 of: (A) units (the “Units”), with each unit consisting of either (1) (i) one ordinary share, NIS 0.01 par value, of the Company (the “Ordinary Shares”) and (ii) a warrant (the “Regular Warrant”) to purchase one Ordinary Share, or (2) (i) a pre-funded warrant (the “Pre-Funded Warrant” and together with the Regular Warrants, the “Warrants”) to purchase one Ordinary Share and (ii) a Regular Warrant, and (B) (1) warrants (the “Representative Warrants” and together with the Units, the “Securities”) to purchase Ordinary Shares issuable to the representative of the Underwriter; and (2) Ordinary Shares underlying the Warrants and the Representative Warrants, each in connection with an underwritten public offering of the Company (the “Offering”). The Securities are being registered by the Company, which has engaged Aegis Capital Corp. (the “Underwriter”) to act as the representatives of the underwriters in connection with the Offering.
We are acting as U.S. securities counsel for the Company in connection with the Registration Statement. We have examined signed copies of the Registration Statement and have also examined and relied upon minutes of meetings of the Board of Directors of the Company as provided to us by the Company, the articles of association of the Company, as restated and/or amended to date, and such other documents as we have deemed necessary for purposes of rendering the opinion hereinafter set forth.
In our examination of the foregoing documents, we have assumed the genuineness of all signatures, the authenticity of all documents submitted to us as originals, the conformity to original documents of all documents submitted to us as copies, the authenticity of the originals of such latter documents and the legal competence of all signatories to such documents. Other than our examination of the documents indicated above, we have made no other examination in connection with this opinion. Because the Warrants and the Representative Warrants contain provisions stating that they are to be governed by the laws of the State of New York, we are rendering this opinion as to New York law. We are admitted to practice in the State of New York, and we express no opinion as to any matters governed by any law other than the law of the State of New York. With respect to the Ordinary Shares and the Ordinary Shares underlying the Warrants and the Representative Warrants being duly and validly issued, fully paid and non-assessable, we have relied on the opinion of Sullivan & Worcester Tel-Aviv (Har-Even & Co.) filed as an exhibit to the Registration Statement as filed with the Commission.
Based upon and subject to the foregoing, we are of the opinion that, when the Registration Statement has become effective under the Securities Act, (i) each of the Units and each of the Warrants comprising the Units, if and when issued and paid for in accordance with the terms of the Offering, will be valid and binding obligations of the Company enforceable against the Company in accordance with their terms, and (ii) the Representative Warrants, if and when issued and paid for in accordance with the terms of the Offering, will be valid and binding obligations of the Company enforceable against the Company in accordance with their terms.
The opinion set forth herein is rendered as of the date hereof, and we assume no obligation to update such opinion to reflect any facts or circumstances which may hereafter come to our attention or any changes in the law which may hereafter occur (which may have retroactive effect). In addition, the foregoing opinion is qualified to the extent that (a) enforceability may be limited by and be subject to general principles of equity, regardless of whether such enforceability is considered in a proceeding in equity or at law (including, without limitation, concepts of notice and materiality), and by bankruptcy, insolvency, reorganization, moratorium and other similar laws affecting creditors’ and debtors’ rights generally (including, without limitation, any state or federal law in respect of fraudulent transfers); and (b) no opinion is expressed herein as to compliance with or the effect of federal or state securities or blue sky laws.
This opinion is rendered to you in connection with the Registration Statement. This opinion may not be relied upon for any other purpose, or furnished to, quoted or relied upon by any other person, firm or corporation for any purpose, without our prior written consent, except that (A) this opinion may be furnished or quoted to judicial or regulatory authorities having jurisdiction over you, and (B) this opinion may be relied upon by purchasers and holders of (i) the Units (including the underlying Warrants) and (ii) the Representative Warrants, currently entitled to rely on it pursuant to applicable provisions of federal securities law.
We hereby consent to the filing of this opinion as Exhibit 5.2 to the Registration Statement and to the reference to this firm under the caption “Legal Matters” in the Registration Statement and in any Registration Statement pursuant to Rule 462(b) under the Securities Act. In giving such consent, we do not admit that we are in the category of persons whose consent is required under Section 7 of the Securities Act or the rules and regulations of the Commission.
Very truly yours,
/s/ Sullivan & Worcester LLP
Sullivan & Worcester LLP
Exhibit 10.3
Final for Execution
SHARE PURCHASE AGREEMENT
This Share Purchase Agreement (this “Agreement”) is dated as of April 22, 2021, between Wearable Devices Ltd., an Israeli corporation (the “Company”), and each purchaser identified on the signature pages of Exhibit A hereto (each, including its successors and assigns, a “Purchaser” and collectively, the “Purchasers”).
WHEREAS, subject to the terms and conditions set forth in this Agreement and pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended (the “Securities Act”), and Rule 506 promulgated thereunder, if applicable, the Company desires to issue and sell to each Purchaser, and each Purchaser, severally and not jointly, desires to purchase from the Company, securities of the Company as more fully described in this Agreement;
WHEREAS, prior to the date hereof, certain Purchasers listed on Exhibit A-1 (the “Lenders”) have made available to the Company a total convertible financing amount of $2,900,000 (together with interest accrued thereon, if and where applicable, the “Financing Amount”) pursuant to certain Convertible Security Agreements by and between the Company and each of the Lenders, on such dates as indicated opposite each Lender’s name of Exhibit A-1 (the “Financing Agreements”);
WHEREAS, the Board of Directors of the Company has determined that it is in the best interests of the Company to raise additional capital of $3,025,000 (excluding the conversion of the Financing Amount), by means of issuance of the Company’s Ordinary Shares and Warrants (defined below) to purchase the Ordinary Shares; and
NOW, THEREFORE, IN CONSIDERATION of the mutual covenants contained in this Agreement, and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the Company and each Purchaser agree as follows:
ARTICLE I.
DEFINITIONS
1.1 Definitions. In addition to the terms defined elsewhere in this Agreement, for all purposes of this Agreement, the following terms have the meanings set forth in this Section 1.1:
“Action” shall have the meaning ascribed to such term in Section 3.1(j).
“Affiliate” means any Person that, directly or indirectly through one or more intermediaries, controls or is controlled by or is under common control with a Person, as such terms are used in and construed under Rule 405 under the Securities Act.
“Alpha” means Alpha Capital Anstalt, a Liechtenstein anstalt.
“Board” or “Board of Directors” means the board of directors of the Company.
“Business Day” means any day other than Friday, Saturday, Sunday or other day on which commercial banks in The City of New York or Tel Aviv are authorized or required by law to remain closed; provided, however, for clarification, commercial banks shall not be deemed to be authorized or required by law to remain closed due to “stay at home”, “shelter-in-place”, “non-essential employee” or any other similar orders or restrictions or the closure of any physical branch locations at the direction of any governmental authority so long as the electronic funds transfer systems (including for wire transfers) of commercial banks in The City of New York or Tel Aviv are generally are open for use by customers on such day.
“Closing Date” means a date agreed between the Company and the Purchasers which is a Business Day on which all of the Transaction Documents have been executed and delivered by the parties thereto, and all conditions precedent to (i) the Purchasers’ obligations to pay the Subscription Amount due at the Closing and (ii) the Company’s obligations to deliver the Shares due at the Closing, in each case, have been satisfied or waived.
“Commission” means the United States and Exchange Commission or the Israeli Securities Authority, if applicable.
“Ordinary Shares” means the ordinary shares of the Company, par value NIS 0.01 per share, and any other class of securities into which such securities may hereafter be reclassified or changed.
“Ordinary Shares Equivalents” means any securities of the Company or the Subsidiaries which would entitle the holder thereof to acquire at any time Ordinary Shares, including, without limitation, any debt, preferred stock, right, option, warrant or other instrument that is at any time convertible into or exercisable or exchangeable for, or otherwise entitles the holder thereof to receive, Ordinary Shares.
“Disclosure Schedules” means the Disclosure Schedules of the Company delivered concurrently herewith.
“Exchange Act” means the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder.
“Exempt Issuance” means the issuance of (a) Ordinary Shares or options to employees, officers or directors of the Company pursuant to the Company’s Equity Incentive Plan, or any other stock or option plan duly adopted for such purpose by a majority of the non-employee members of the Board of Directors or a majority of the members of a committee of non-employee directors established for such purpose for services rendered to the Company, (b) securities upon the exercise or exchange of or conversion of any Shares issued hereunder and/or other securities exercisable or exchangeable for or convertible into Ordinary Shares issued and outstanding on the date of this Agreement, provided that such securities have not been amended since the date of this Agreement to increase the number of such securities or to decrease the exercise price, exchange price or conversion price of such securities (other than in connection with stock splits or combinations) or to extend the term of such securities, (c) securities issued pursuant to acquisitions or strategic transactions approved by a majority of the disinterested directors of the Company, provided that such securities are issued as “restricted securities” (as defined in Rule 144) and carry no registration rights that require or permit the filing of any registration statement in connection therewith during the lock-up period set forth herein, and provided that any such issuance shall only be to a Person (or to the equity holders of a Person) which is, itself or through its subsidiaries, an operating company or an owner of an asset in a business synergistic with the business of the Company and shall provide to the Company additional benefits in addition to the investment of funds, but shall not include a transaction in which the Company is issuing securities primarily for the purpose of raising capital or to an entity whose primary business is investing in securities and (d) Shares issued due to a Recapitalization Event.
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“FCPA” means the Foreign Corrupt Practices Act of 1977, as amended.
“FDA” shall have the meaning ascribed to such term in Section 3.1(hh).
“FDCA” shall have the meaning ascribed to such term in Section 3.1(hh).
“GAAP” shall have the meaning ascribed to such term in Section 3.1(h).
“Indebtedness” shall have the meaning ascribed to such term in Section 3.1(y).
“Intellectual Property Rights” shall have the meaning ascribed to such term in Section 3.1(q).
“Legend Removal Date” shall have the meaning ascribed to such term in Section 3.3(c).
“Liens” means a lien, charge pledge, security interest, encumbrance, right of first refusal, preemptive right or other restriction.
“Material Adverse Effect” shall have the meaning assigned to such term in Section 3.1(b).
“Material Permits” shall have the meaning ascribed to such term in Section 3.1(n).
“Per Share Purchase Price” means the price per one Ordinary Share equal to $2.251793 as of the Closing, based on a $24,000,000 pre-money valuation of the Company (on a fully diluted basis, assuming the Financing Amount had been converted) subject to adjustment for reverse and forward stock splits, stock dividends, stock combinations and other similar transactions of the Ordinary Shares that occur after the date of this Agreement but before the date of the Closing.
“The Per Share Purchase Price at the IPO,” is the price per one Ordinary Share of the Company at the closing of the Qualified IPO.
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“Person” means an individual or corporation, partnership, trust, incorporated or unincorporated association, joint venture, limited liability company, joint stock company, government (or an agency or subdivision thereof) or other entity of any kind.
“Proceeding” means an action, claim, suit, investigation or proceeding (including, without limitation, an informal investigation or partial proceeding, such as a deposition), whether commenced or threatened.
“Public Company Date” means the date that the Company completes a Qualified IPO.
“Purchaser Party” shall have the meaning ascribed to such term in Section 3.5.
“Qualified IPO” means an initial public offering of the Shares of the Company, registered pursuant to an effective registration statement under the United States Securities Act of 1933, as amended, or the securities laws of another jurisdiction as determined by the Board of Directors, raising a gross amount of at least $US10,000,000 and resulting in the listing of the Ordinary Shares on a Trading Market (which shall not include any market operated by OTC Markets, Inc.), and with the prior written consent of Alpha.
“Recapitalization Event” means any event of share combination or subdivision, share splits, share dividends, bonus share issuance, combination or any other reclassification, reorganization or recapitalization or change of the Company’s share capital where the shareholders retain their proportionate holdings in the Company, on an as-converted basis.
“Required Approvals” shall have the meaning ascribed to such term in Section 3.1(e).
“Rule 144” means Rule 144 promulgated by the Commission pursuant to the Securities Act, as such Rule may be amended or interpreted from time to time, or any similar rule or regulation hereafter adopted by the Commission having substantially the same purpose and effect as such Rule.
“Securities Act” means the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder.
“Shares” means the Ordinary Shares issued or issuable to each Purchaser pursuant to this Agreement.
“Subscription Amount” means, as to each Purchaser, the aggregate amount to be paid for Shares purchased hereunder as specified below such Purchaser’s name on the signature page of this Agreement and next to the heading “Subscription Amount,” in United States dollars and in immediately available funds.
“Subsequent Equity Sales” shall have the meaning ascribed to such term in Section 3.10(a).
“Subsidiary” means any subsidiary of the Company as set forth on Schedule 3.1(a) and shall, where applicable, also include any direct or indirect subsidiary of the Company formed or acquired after the date hereof.
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“Trading Day” means a day on which the principal Trading Market is open for trading.
“Trading Market” means any of the following markets or exchanges on which the Ordinary Shares is listed or quoted for trading on the date in question: the NYSE American, the Nasdaq Capital Market, the Nasdaq Global Market, the Nasdaq Global Select Market, the New York Stock Exchange (or any successors to any of the foregoing), the Tel Aviv Stock Exchange, or any other recognized stock exchange on which the Company’s securities shall be registered for trade.
“Transaction Documents” means this Agreement, Company’s incorporation documents, and all exhibits and schedules thereto and hereto and any other documents or agreements executed in connection with the transactions contemplated hereunder.
“Transfer Agent” means the Company until the Public Company Date, and thereafter any successor transfer agent of the Company.
ARTICLE II.
PURCHASE AND SALE
2.1 Closing.
(a) Closing. On the Closing Date, upon the terms and subject to the conditions set forth herein, substantially concurrent with the execution and delivery of this Agreement by the parties hereto, the Company agrees to sell, and the Purchasers, severally and not jointly, agree to purchase, at a price per share equal to the Per Share Purchase Price, an aggregate of 1,343,375 Shares, and up to 671,688 Shares, assuming all Warrants are exercised, which Share numbers are subject to adjustments pursuant to the terms hereof, in consideration for an aggregate financing amount of $3,025,000.
(b) On the Closing Date, each Purchaser agrees, severally and not jointly, to purchase and the Company agrees to sell and issue to each Purchaser that number of Ordinary Shares, set forth opposite each Purchaser’s name on Exhibit A, in consideration for the Subscription Amount.
(c) Issuance of Warrants. On the Closing Date, each Purchaser shall also be issued, for no additional consideration, a warrant in the form attached hereto as Exhibit B (the “Warrant”), to purchase additional Ordinary Shares (“Warrant Shares”), for an aggregate amount equal to 50% (fifty percent) of such Purchasers’ Subscription Amount (“Exercise Amount”), for an exercise price per Warrant Share which is equal to 125% (One Hundred and Twenty Five Percent) of the Per Share Purchase Price at the IPO (“Exercise Price”). References herein to the Shares shall include, as applicable, the Warrant Shares, upon the due exercise of the Warrants and their conversion into Ordinary Shares. The Warrants shall be exercisable until the earlier to occur of: (i) Eighteen (18) months from the Public Company Date; (ii) a Change of Control (defined below), or (iii) the third anniversary of the Closing Date (the “Exercise Period”). This Warrant shall, at the end of the Exercise Period, no longer be exercisable and become null and void.
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A “Change of Control” means any of the following events (whether in one or in a series of related transactions): (i) a sale of all or substantially all of the Company’s assets or the majority of the shares; (ii) a merger, consolidation or other business combination of the Company with or into another entity (other than a wholly owned subsidiary) in which the Company’s shareholders immediately prior to such transaction do not hold a majority of the voting power of the surviving entity; (iii) the sale, lease, transfer, or exclusive license or other disposition of all or substantial all of the Company’s intellectual property.
(d) Per Share Purchase Price Protection. If the Company closes a Qualified IPO (1) within 9 months from the Closing (“First Period”), based on a Per Share Purchase Price at the Qualified IPO, reflecting a pre-money valuation of US$26,400,000, or a lower one, then each of the Purchasers shall receive additional Ordinary Shares, reflecting the number that each such Purchaser would have received for the Subscription Amount had the Per Share Purchase Price at the Closing had been 90% of the Per Share Purchase at the IPO (“Adjusted PPS”), less the number of Ordinary Shares that each Purchaser actually received at the Closing. The number of Warrant Shares covered by each such Warrant shall be increased assuming the Exercise Amount is divided by the Adjusted PPS; (2) after the First Period, based on a Per Share Purchase Price at the Qualified IPO, reflecting a pre-money valuation of US$26,400,000, or a lower one, then each of the Purchasers shall receive additional Ordinary Shares, reflecting the number that each such Purchaser would have received for the Subscription Amount had the Per Share Purchase Price at the Closing had been 80% of the Per Share Purchase Price at the IPO (“Discounted PPS”), less the number of Ordinary Shares that each Purchaser actually received at the Closing. The number of Warrant Shares covered by each such Warrant shall be increased assuming the Exercise Amount is divided by the Discounted PPS. In both cases, the Company shall issue to the Purchasers the additional Ordinary Shares and new Warrants reflecting the foregoing adjustments within 14 days following the completion of the IPO.
(e) Conversion of Financing Amount. Subject to the terms and conditions of this Agreement, on the Closing Date, the Company shall issue to the Lenders, such number of Ordinary Shares (“Conversion Shares”), as set forth opposite each Lender’s name in Exhibit A-1, at a Per Share Purchase Price equal to Per Share Purchase Price, minus the discount set forth in the applicable Financing Agreement, in consideration for the conversion of the Financing Amount outstanding under the Financing Agreements, including interest accrued thereon, if and when applicable according to the relevant Financing Agreements (the “Financing Conversion Shares”). References herein to the Shares shall include, as applicable, the Financing Conversion Shares.
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(f) On the Closing Date, each Purchaser shall deliver via wire transfer, immediately available funds such amount (a) equal to such Purchaser’s Subscription Amount as set forth in Exhibit A attached hereto to the Company and Company shall deliver to each Purchaser its respective Shares. Each Purchaser shall deliver the other items set forth in Section 2.2 deliverable at the Closing. Upon satisfaction of the covenants and conditions set forth in Sections 2.2 and 2.3, the Closing shall occur remotely via the exchange of documents and signatures or at a location as the parties shall mutually agree. The Company shall adopt on or before the Closing the Amended and Restated Articles of Association in the form attached hereto as Exhibit C (the “Restated Articles”). The Shares shall have and confer upon the holders thereof the rights, preferences, privileges and restrictions set forth in the Restated Articles, as may be amended from time to time in accordance with their terms.
2.2 Deliveries.
(a) On or prior to the Closing Date, the Company shall deliver or cause to be delivered to each Purchaser the following:
(i) this Agreement duly executed by the Company;
(ii) true and correct copies of written resolutions, or minutes of a meeting, of the Board of Directors of the Company, approving and adopting in all respects the execution, delivery and performance by the Company of this Agreement and the transactions contemplated hereby, including, among others, (i) the conversion of all existing Ordinary A Shares of the Company into Ordinary Shares of the Company according to the provisions of the Company’s Articles of Association in effect immediately prior to the Closing, (ii) the conversion of the Financing Amount into Ordinary Shares according to the terms of the Financing Agreements, (iii) the issuance of the Warrants to the Purchasers according to the terms hereof, (iv) authorizing the issuance and sale of each of the Shares against payment of the Per Share Purchase Price therefor; and (iii) the approval of the execution, delivery and performance by the Company of all agreements contemplated herein to which the Company is party and any agreements, instruments or documents ancillary thereto;
(iii) true and correct copies of unanimous written resolutions of the Company’s shareholders approving and adopting in all respects the execution, delivery and performance by the Company of this Agreement and the transactions contemplated hereby, including, among others, (i) the adoption of the Restated Articles as an amendment and restatement of the existing Articles of Association of the Company as in effect prior to the Closing; (ii) the approval of the execution, delivery and performance by the Company of all agreements contemplated herein to which the Company is party and any agreements, instruments or documents ancillary thereto and (iii) waivers by each of the Company’s shareholders regarding any preemptive rights, rights of first refusal, rights of co-sale, rights of tag-along, anti-dilution rights and/or other similar rights in connection with the issuance of the Shares under the Closing;
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(iv) A copy of the Restated Articles;
(v) Executed copies of the Warrants issued to each Purchaser at the Closing;
(vi) The Financing Agreement of each Lender is delivered to or marked cancelled by the Company in consideration for certificates evidencing the issuance of the Conversion Shares to, and in the name of, the Lender;
(vii) a certificate evidencing a number of Shares equal to such Purchaser’s Subscription Amount divided by the Per Share Purchase Price, registered in the name of such Purchaser;
(viii) copy of the register of shareholders of the Company, certified by an executive officer of the Company and prepared in accordance with Section 130 of the Israeli Companies Law, 5759–1999, as amended (the “Shareholders Register”), in which the respective purchased Shares issued at the Closing are registered in the name of each of the Purchasers;
(ix) duly completed notices to the Israeli Registrar of Companies, ready for immediate filing, as are required for all matters arising from this Agreement and the transactions contemplated hereby (including, of the issuance of the purchased Shares at the Closing, the adoption of the Restated Articles, and the changes to the composition of the Board of Directors, if any;
(x) true and correct copy of the notice to the Israel Innovation Authority (previously known as the Office of the Chief Scientist of Israel’s Ministry of Economy) (“IIA”), in the form attached hereto as Schedule 2.2(a)(x), with respect to this Agreement and the transactions contemplated hereunder;
(xi) the Company shall have provided each Purchaser with the Company’s wire instructions, on Company letterhead and executed by the Chief Executive Officer or Chief Financial Officer;
(b) a certificate of the Chief Executive Officer, attesting that that the Company’s representations and warranties herein remain true and correct as of the Closing Date and that the Company continues to be in compliance with all covenants of the Company applicable at the time of the Closing, and that no Material Adverse Effect (as defined in Section 3.1) has occurred.
(c) On or prior to each Closing Date, each Purchaser shall deliver or cause to be delivered to the Company, the following:
(i) this Agreement duly executed by such Purchaser;
(ii) Undertaking to IIA executed by such Purchaser in the form attached hereto as Schedule 2.2 (a)(x); and
(iii) If applicable such Purchaser’s Subscription Amount for the Closing by wire transfer to the account specified in writing by the Company.
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2.3 Closing Conditions.
(a) The obligations of the Company hereunder in connection with each Closing are subject to the following conditions being met:
(i) the accuracy in all material respects (or, to the extent representations or warranties are qualified by materiality or Material Adverse Effect, in all respects) on the Closing Date of the representations and warranties of the Purchasers contained herein (unless as of a specific date therein in which case they shall be accurate as of such date);
(ii) all obligations, covenants and agreements of each Purchaser required to be performed at or prior to the Closing Date shall have been performed; and
(iii) the delivery by each Purchaser of the items set forth in Section 2.2(c) of this Agreement.
(b) The respective obligations of the Purchasers hereunder in connection with the Closing are subject to the following conditions being met:
(i) the accuracy in all material respects (or, to the extent representations or warranties are qualified by materiality or Material Adverse Effect, in all respects) when made and on the Closing Date of the representations and warranties of the Company contained herein (unless as of a specific date therein in which case they shall be accurate as of such date);
(ii) all obligations, covenants and agreements of the Company required to be performed at or prior to the Closing Date shall have been performed;
(iii) the delivery by the Company of the items set forth in Sections 2.2(a)-(b) of this Agreement, as applicable; and
(iv) there shall have been no Material Adverse Effect with respect to the Company since the date hereof.
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ARTICLE III.
REPRESENTATIONS AND WARRANTIES
3.1 Representations and Warranties of the Company. Except as set forth in the Disclosure Schedules, which Disclosure Schedules shall be deemed a part hereof and shall qualify any representation or otherwise made herein to the extent of the disclosure contained in the corresponding section of the Disclosure Schedules, the Company hereby makes the following representations and warranties to each Purchaser as of the date hereof and as of the Closing Date (unless as of a specific date therein, in which case they shall be accurate as of such date):
(a) Subsidiaries. All of the direct and indirect subsidiaries of the Company are set forth on Schedule 3.1(a). The Company owns, directly or indirectly, all of the capital stock or other equity interests of each Subsidiary free and clear of any Liens, and all of the issued and outstanding shares of capital stock of each Subsidiary are validly issued and are fully paid, non-assessable and free of preemptive and similar rights to subscribe for or purchase securities. If the Company has no subsidiaries, all other references to the Subsidiaries or any of them in the Transaction Documents shall be disregarded.
(b) Organization and Qualification. The Company and each of the Subsidiaries is an entity duly incorporated or otherwise organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation or organization, with the requisite power and authority to own and use its properties and assets and to carry on its business as currently conducted. Neither the Company nor any Subsidiary is in violation nor default of any of the provisions of its respective certificate or articles of incorporation, bylaws or other organizational or charter documents. Each of the Company and the Subsidiaries is duly qualified to conduct business in the State of Israel, except where the failure to be so qualified or in good standing, as the case may be, could not have or reasonably be expected to result in: (i) a material adverse effect on the legality, validity or enforceability of any Transaction Documents, (ii) a material adverse effect on the results of operations, assets, business, prospects or condition (financial or otherwise) of the Company and the Subsidiaries, taken as a whole, or (iii) a material adverse effect on the Company’s ability to perform in any material respect on a timely basis its obligations under any Transaction Document (any of (i), (ii) or (iii), a “Material Adverse Effect”) and no Proceeding has been instituted in any such jurisdiction revoking, limiting or curtailing or seeking to revoke, limit or curtail such power and authority or qualification. The Company is not qualified to do business as a foreign corporation in any jurisdiction outside of Israel.
(c) Authorization; Enforcement. The Company has the requisite corporate power and authority to enter into and to consummate the transactions contemplated by this Agreement and each of the other Transaction Documents and otherwise to carry out its obligations hereunder and thereunder. The execution and delivery of this Agreement and each of the other Transaction Documents by the Company and the consummation by it of the transactions contemplated hereby and thereby have been duly authorized by all necessary action on the part of the Company and no further action is required by the Company, the Board of Directors or the Company’s shareholders in connection herewith or therewith other than in connection with the Required Approvals (defined below). This Agreement and each other Transaction Document to which it is a party has been (or upon delivery will have been) duly executed by the Company and, when delivered in accordance with the terms hereof and thereof, will constitute the valid and binding obligation of the Company enforceable against the Company in accordance with its terms, except (i) as limited by general equitable principles and applicable bankruptcy, insolvency, reorganization, moratorium and other laws of general application affecting enforcement of creditors’ rights generally, (ii) as limited by laws relating to the availability of specific performance, injunctive relief or other equitable remedies and (iii) insofar as indemnification and contribution provisions may be limited by applicable law.
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(d) No Conflicts. The execution, delivery and performance by the Company of this Agreement and the other Transaction Documents to which it is a party, the issuance and sale of the Shares and the consummation by it of the transactions contemplated hereby and thereby do not (i) conflict with or violate any provision of the Company’s or any Subsidiary’s certificate or articles of incorporation, bylaws or other organizational or charter documents, or (ii) conflict with, or constitute a default (or an event that with notice or lapse of time or both would become a default) under, result in the creation of any Lien upon any of the properties or assets of the Company or any Subsidiary, or give to others any rights of termination, amendment, anti-dilution or similar adjustments, acceleration or cancellation (with or without notice, lapse of time or both) of, any agreement, credit facility, debt or other instrument (evidencing a Company or Subsidiary debt or otherwise) to which the Company or any Subsidiary is a party or by which any property or asset of the Company or any Subsidiary is bound or affected, or (iii) subject to the Required Approvals, to Company’s knowledge, conflict with or result in a violation of any law, rule, regulation, order, judgment, injunction, decree or other restriction of any court or governmental authority to which the Company or a Subsidiary is subject (including federal and state securities laws and regulations), or by which any property or asset of the Company or a Subsidiary is bound or affected; except in the case of each of clauses (ii) and (iii), such as could not have or reasonably be expected to result in a Material Adverse Effect.
(e) Filings, Consents and Approvals. Except as set forth on Schedule 3.1(e), the Company is not required to obtain any consent, waiver, authorization or order of, give any notice to, or make any filing or registration with, any court or other federal, state, local or other governmental authority or other Person in connection with the execution, delivery and performance by the Company of the Transaction Documents, other than the filing of Form D with the Commission and such filings as are required to be made under applicable state securities laws (collectively, the “Required Approvals”).
(f) Issuance of the Shares. The Shares are duly authorized and, when issued and paid for in accordance with the applicable Transaction Documents, will be duly and validly issued, fully paid and nonassessable, free and clear of all Liens imposed by the Company other than restrictions on transfer provided for in the Transaction Documents and the Restate Articles. The Company has reserved from its duly authorized capital the maximum number of Ordinary Shares issuable pursuant to this Agreement.
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(g) Capitalization. The capitalization of the Company as of the date hereof is as set forth on Schedule 3.1(g), which Schedule 3.1(g) includes the number of Ordinary Shares owned of record, by the shareholders of the Company as of the date hereof as well as Ordinary Shares reserved, granted or unallocated as options to employees and service providers of the Company. No Person has any right of first refusal, preemptive right, right of participation, or any similar right to participate in the transactions contemplated by the Transaction Documents other than as set forth in the Restated Articles. Except as set forth in Schedule 3.1(g) or as a result of the purchase and sale of the Shares, there are no outstanding options, warrants, rights to subscribe to, calls or commitments of any character whatsoever granted by the Company relating to, or securities, rights or obligations convertible into or exercisable or exchangeable for granted by the Company, or giving any Person any right to subscribe for or acquire, any Ordinary Shares or the capital stock of any Subsidiary granted by the Company, or contracts, commitments, understandings or arrangements by which the Company or any Subsidiary is or may become bound to issue additional Ordinary Shares or Ordinary Shares Equivalents or capital stock of any Subsidiary. The issuance and sale of the Shares will not obligate the Company or any Subsidiary to issue Ordinary Shares or other securities to any Person (other than the Purchasers). There are no outstanding securities or instruments of the Company or any Subsidiary with any provision that adjusts the exercise, conversion, exchange or reset price of such security or instrument upon an issuance of securities by the Company or any Subsidiary. There are no outstanding securities or instruments of the Company or any Subsidiary that contain any redemption or similar provisions, and there are no contracts, commitments, understandings or arrangements by which the Company or any Subsidiary is or may become bound to redeem a security of the Company or such Subsidiary. The Company does not have any stock or share appreciation rights or “phantom stock” plans or agreements or any similar plan or agreement. All of the outstanding securities of the Company are duly authorized, validly issued, fully paid and nonassessable, have been issued in compliance with all the applicable securities laws, and none of such outstanding securities was issued in violation of any preemptive rights or similar rights to subscribe for or purchase securities. No further approval or authorization of any shareholder, the Board of Directors or others is required for the issuance and sale of the Shares. There are no shareholder agreements or other similar agreements with respect to the Company’s securities to which the Company is a party.
(h) Financial Statements. The financial statements of the Company included in Schedule 3.1(h) comply in all material respects with applicable accounting requirements and the rules and regulations applicable in the State of Israel with respect thereto as in effect at the time of filing. Such financial statements have been prepared in accordance with Israeli generally accepted accounting principles applied on a consistent basis during the periods involved (“GAAP”), except as may be otherwise specified in such financial statements or the notes thereto and except that unaudited financial statements may not contain all footnotes required by GAAP, and fairly present in all material respects the financial position of the Company and its consolidated Subsidiaries as of and for the dates thereof and the results of operations and cash flows for the periods then ended, subject, in the case of unaudited statements, to normal, immaterial, year-end audit adjustments.
(i) Material Changes; Undisclosed Events, Liabilities or Developments. Since the date of the latest audited financial statements included in Schedule 3.1(h), except as set forth on Schedule 3.1(i), (i) there has been no event, occurrence or development that has had or that could reasonably be expected to result in a Material Adverse Effect, (ii) the Company has not incurred any liabilities (contingent or otherwise) other than (A) trade payables and accrued expenses incurred in the ordinary course of business consistent with past practice and (B) liabilities not required to be reflected in the Company’s financial statements pursuant to GAAP or disclosed in filings made with the Commission, (iii) the Company has not altered its method of accounting, (iv) the Company has not declared or made any dividend or distribution of cash or other property to its shareholders or purchased, redeemed or made any agreements to purchase or redeem any of its equity securities and (v) the Company has not issued any equity securities to any officer, director or Affiliate, except pursuant to existing Company share option plans. Except for the issuance of the Shares contemplated by this Agreement or as set forth on Schedule 3.1(i), no event, liability, fact, circumstance, occurrence or development has occurred or exists or is reasonably expected to occur or exist with respect to the Company or its Subsidiaries or their respective businesses, prospects, properties, operations, assets or financial condition that would be expected to have a Material Adverse Effect on the Company.
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(j) Litigation. Except as set forth on Schedule 3.1(j), there is no action, suit, inquiry, notice of violation, proceeding or investigation pending or, to the knowledge of the Company, threatened against or affecting the Company, any Subsidiary or any of their respective properties before or by any court, arbitrator, governmental or administrative agency or regulatory authority (Israeli, U.S. federal, state, county, local or foreign) (collectively, an “Action”). None of the Actions set forth on Schedule 3.1(j), (i) adversely affects or challenges the legality, validity or enforceability of any of the Transaction Documents or the Shares or (ii) could, if there were an unfavorable decision, have or reasonably be expected to result in a Material Adverse Effect. Neither the Company nor any Subsidiary, nor any director or officer thereof, is or has been the subject of any Action involving a claim of violation of or liability under federal or state securities laws or a claim of breach of fiduciary duty.
(k) Employment Relations. No labor dispute exists or, to the knowledge of the Company, is imminent with respect to any of the employees of the Company, which could reasonably be expected to result in a Material Adverse Effect. None of the Company’s or its Subsidiaries’ employees is a member of a union that relates to such employee’s relationship with the Company or such Subsidiary, and neither the Company nor any of its Subsidiaries is a party to a collective bargaining agreement. To the knowledge of the Company, no executive officer of the Company or any Subsidiary is, or is now expected to be, in violation of any material term of any employment contract, confidentiality, disclosure or proprietary information agreement or non-competition agreement, or any other contract or agreement or any restrictive covenant in favor of any third party, and the continued employment of each such executive officer does not subject the Company or any of its Subsidiaries to any liability with respect to any of the foregoing matters. The Company and its Subsidiaries are in compliance with all Israeli state laws and regulations relating to employment and employment practices (including but not limited to employment, termination of employment, enforcement of labor laws, discrimination in employment, sexual harassment and other forms of harassment, terms and conditions of employment, notice to employees regarding employment terms, employee benefits (including contribution to the employees’ benefits), worker classification (including the proper classification of workers as Company’s contractors), engagement of Company servicers providers (including catering, security and cleaning services), wages, pay slips, working hours, overtime and overtime payments, working during rest days, social benefits contributions, termination and severance payment, engaging employees through services providers (including manpower employees and outsource employees), and occupational safety and health and employment practices, immigration), except where the failure to be in compliance could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. Other than their salaries, the employees of the Company are not entitled to any payment or benefit that may be reclassified as part of their determining salary for any purpose, including for calculating any social contributions. The Company has withheld and paid to the appropriate governmental entity, insurance companies, pension or similar fund or is holding for payment not yet due to such entities all amounts required to be withheld from employees of the Company and is not liable for any arrears of wages, taxes, penalties, or other sums for failure to comply with any of the foregoing. The Company is not bound by or subject to (and none of its assets or properties is bound by or subject to) any written or oral, express or implied, contract, commitment or arrangement with any labor union except for those provisions of general agreements between the Histadrut and any Employers’ Union or Organization which are applicable by Extension Order to all the employees in Israel. To the Company’s best knowledge, no employee has violated any material term of his or her employment agreement (whether oral or in writing). To the Company’s knowledge, none of its employees, consultant and service providers is obligated under any contract (including licenses, covenants or commitments of any nature) or other agreement, or subject to any judgment, decree or order of any court or administrative agency, that would interfere with such employee’s, consultant’s or service provider’s ability to promote the interest of the Company or that would conflict with the Company’s business. Neither the execution or delivery of the transactions contemplated hereunder, nor the carrying on of the Company’s business by the employees, consultants and/or service providers of the Company, nor the conduct of the Company’s business as now conducted, will conflict with or result in a breach of the terms, conditions, or provisions of, or constitute a default under, any contract, covenant or instrument under which any such employee, consultant, or service provider is now obligated to the Company. The Company has no unsatisfied obligations of any nature to any of their former employees or consultants, and their termination was in compliance with all applicable legal requirements and contracts. There are no controversies pending or, to the knowledge of the Company, threatened, between the Company and any of its current or former employees or company’ services providers, which controversies have or would reasonably be expected to result in a legal proceeding before any competent court in Israel. The Company has not received notice of complaints, charges or claims against the Company and, to the Company’s knowledge, no such complaints, charges, investigation of any kind or claims are threatened, by or before any competent court or based on, arising out of, in connection with or otherwise relating to the employment or engagement or termination of employment or engagement or failure to employ or engage by the Company, of any individual. There are no controversies pending or, to the knowledge of the Company, threatened, between the Company and any of its current or former employees or its consultants, which controversies have or would reasonably be expected to result in a lawsuit before any competent court. Schedule 3.1(k) of the Disclosure Schedules sets forth, with respect to all employees, the rates and the salary basis for such contributions, whether such Person, is subject to Section 14 Arrangement under the Israeli Severance Pay Law - 1963 (“Section 14 Arrangement”) (and, to the extent such employee is subject to the Section 14 Arrangement, an indication of whether such arrangement has been applied to such person from the commencement date of their employment and on the basis of their entire salary), accrued and unused vacation days and prior notice of termination requirements.
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(l) Compliance. Neither the Company nor any Subsidiary: (i) is in default under or in violation of (and no event has occurred that has not been waived that, with notice or lapse of time or both, would result in a default by the Company or any Subsidiary under), nor has the Company or any Subsidiary received notice of a claim that it is in default under or that it is in violation of, any indenture, loan or credit agreement or any other agreement or instrument to which it is a party or by which it or any of its properties is bound (whether or not such default or violation has been waived), (ii) is in violation of any judgment, decree, or order of any court, arbitrator or other governmental authority or (iii) is or has been, to the Company’s knowledge, in violation of any statute, rule, ordinance or regulation of any governmental authority, including without limitation all foreign, federal, state and local laws relating to taxes, environmental protection, occupational health and safety, product quality and safety and employment and labor matters, except in each case as could not have or reasonably be expected to result in a Material Adverse Effect.
(m) Environmental Laws. The Company and its Subsidiaries (i) , to the Company’s knowledge, are in compliance with all Israeli laws relating to pollution or protection of human health or the environment (including ambient air, surface water, groundwater, land surface or subsurface strata), including laws relating to emissions, discharges, releases or threatened releases of chemicals, pollutants, contaminants, or toxic or hazardous substances or wastes (collectively, “Hazardous Materials”) into the environment, or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of Hazardous Materials, as well as all authorizations, codes, decrees, demands, or demand letters, injunctions, judgments, licenses, notices or notice letters, orders, permits, plans or regulations, issued, entered, promulgated or approved thereunder (“Environmental Laws”); (ii) have received all permits licenses or other approvals required of them under applicable Environmental Laws to conduct their respective businesses; and (iii) are in compliance with all terms and conditions of any such permit, license or approval where in each clause (i), (ii) and (iii), the failure to so comply could be reasonably expected to have, individually or in the aggregate, a Material Adverse Effect.
(n) Regulatory Permits. The Company and the Subsidiaries possess all certificates, authorizations and permits issued by the appropriate regulatory authorities necessary to conduct their respective businesses as currently conducted, except where the failure to possess such permits could not reasonably be expected to result in a Material Adverse Effect (“Material Permits”), and neither the Company nor any Subsidiary has received any notice of proceedings relating to the revocation or modification of any Material Permit.
(o) Title to Assets. The Company and the Subsidiaries have good and marketable title in fee simple to all real property owned by them and good and marketable title in all personal property owned by them that is material to the business of the Company and the Subsidiaries, in each case free and clear of all Liens, except for (i) Liens as do not materially affect the value of such property and do not materially interfere with the use made and proposed to be made of such property by the Company and the Subsidiaries and (ii) Liens for the payment of federal, state or other taxes, for which appropriate reserves have been made therefor in accordance with GAAP and the payment of which is neither delinquent nor subject to penalties. Any real property and facilities held under lease by the Company and the Subsidiaries are held by them under valid, subsisting and enforceable leases with which the Company and the Subsidiaries are in compliance.
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(p) Independent Contractors. Schedule 3.1(p) of the Disclosure Schedules lists the particulars (the name, title and function, date of commencement of services and material terms of agreement and benefits, including termination notice, current remunerations and department) of all freelancers with which the Company has entered into an agreement or engaged the services of, which are currently in effect. Except as set forth on Schedule 3.1(p), all of such independent contractors are a party to a written Contract with the Company. True and accurate listing of all benefits and terms payable or which the Company is bound to provide (whether now or in the future) to each independent contractor or in respect of each independent contractor are described in a true, accurate and complete manner in Schedule 3.1(p). Each Person who has provided services to the Company and was classified and treated as an independent contractor, consultant, leased employee, volunteer, or other non-employee service provider was to the Company’s best knowledge properly classified and treated as such for all applicable purposes under applicable Law and would not reasonably be expected to be reclassified by any governmental authority as an employee of the Company, for any propose whatsoever and the Company has not engaged any consultants, sub-contractors, sales agents or freelancers who, according to any Law applicable in the jurisdiction of residence or location of services of such contractors, would be entitled to the rights of an employee vis-à-vis the Company. Each Contract with such Person contains provisions which state that no employer-employee relations exist between such consultant or contractor and the Company. No Company contractor and consultant or former Company contractor and consultant has issued to the Company a written notice of a claim or any other allegation that such contractor and/or consultant was not rightly classified as an independent contractor.
(q) Intellectual Property. The Company and the Subsidiaries have, or have rights to use, all patents, patent applications, trademarks, trademark applications, service marks, trade names, trade secrets, inventions, copyrights, licenses and other intellectual property rights and similar rights necessary or required for use in connection with their respective businesses as currently conducted and which the failure to so have could have a Material Adverse Effect (collectively, the “Intellectual Property Rights”). None of, and neither the Company nor any Subsidiary has received a notice (written or otherwise) that any of, the Intellectual Property Rights has expired, terminated or been abandoned, or is expected to expire or terminate or be abandoned, within two (2) years from the date of this Agreement. Neither the Company nor any Subsidiary has received, since the date of the latest audited financial statements of the Company, a written notice of a claim or otherwise has any knowledge, without making any inquiry, that the Intellectual Property Rights violate or infringe upon the rights of any Person, except as could not have or reasonably be expected to not have a Material Adverse Effect. To the knowledge of the Company and without making any inquiry, all such Intellectual Property Rights are enforceable and there is no existing infringement by another Person of any of the Intellectual Property Rights. The Company and its Subsidiaries have taken reasonable security measures to protect the secrecy, confidentiality and value of all of their intellectual properties, except where failure to do so could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. Except as set forth in Schedule 3.1(q) of the Disclosure Schedules, none of the Company’s Intellectual Property Rights was developed by or for or on behalf of, or using grants or any other subsidies of, any governmental entity or any university, and no government funding, facilities, faculty or students of a university, college, other educational institution or research center or funding from third parties was used in the development of the Company’s Intellectual Property (“Grants”). Schedule 3.1(q)(A) of the Disclosure Schedules sets forth: (a) the aggregate amount of each Grant; (b) the aggregate outstanding obligations of Company under each Grant with respect to royalties or other payments; (c) the outstanding amounts to be paid to Company under the Grants by the governmental entity, if any, and (d) the composition of such obligations or amount by the patent, other Intellectual Property, product or product family to which it relates. Company is in material compliance with the terms and conditions of each Grant. To the Company’s best knowledge, there is no event or other set of circumstances which would reasonably be expected to lead to the revocation or material modification of any Grant. Except as set forth in Schedule 3.1(q)(B) of the Disclosure Schedules, no current or former employee or consultant, of the Company, who was involved in, or who contributed to, the creation or development of any of the Company’s Intellectual Property Rights, has performed services for a government, university, college, or other educational institution or research center during a period of time during which such employee or consultant was also performing services for the Company.
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(r) Insurance. A list of the Company’s insurance policies is set forth in Schedule 3.1(r). Neither the Company nor any Subsidiary has any reason to believe that it will not be able to renew its existing insurance coverage as and when such coverage expires or to obtain similar coverage from similar insurers as may be necessary to continue its business without a significant increase in cost.
(s) Transactions with Affiliates and Employees. Except as set forth on Schedule 3.1(s), none of the officers or directors of the Company or any Subsidiary and, to the knowledge of the Company, none of the employees of the Company or any Subsidiary is presently a party to any transaction with the Company or any Subsidiary (other than for services as employees, officers and directors), including any contract, agreement or other arrangement providing for the furnishing of services to or by, providing for rental of real or personal property to or from, providing for the borrowing of money from or lending of money to or otherwise requiring payments to or from any officer, director or such employee or, to the knowledge of the Company, any entity in which any officer, director, or any such employee has a substantial interest or is an officer, director, trustee, stockholder, member or partner, in each case in excess of $120,000 other than for (i) payment of salary or consulting fees for services rendered, (ii) reimbursement for expenses incurred on behalf of the Company and (iii) other employee benefits, including stock option agreements under any stock option plan of the Company.
(t) Certain Fees. Except as listed in Schedule 3.1(t), no brokerage or finder’s fees or commissions are or will be payable by the Company or any Subsidiary to any broker, financial advisor or consultant, finder, placement agent, investment banker, bank or other Person with respect to the transactions contemplated by the Transaction Documents. The Purchasers shall have no obligation with respect to any fees or with respect to any claims made by or on behalf of other Persons for fees of a type contemplated in this Section that may be due in connection with the transactions contemplated by the Transaction Documents.
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(u) Private Placement. Assuming the accuracy of the Purchasers’ representations and warranties set forth in Section 3.2, no registration under the Securities Act is required for the offer and sale of the Shares by the Company to the Purchasers as contemplated hereby. The issuance and sale of the Shares hereunder does not contravene the rules and regulations of the Trading Market.
(v) Investment Company. The Company is not, and is not an Affiliate of, and immediately after receipt of payment for the Shares, will not be or be an Affiliate of, an “investment company” within the meaning of the Investment Company Act of 1940, as amended. The Company shall conduct its business in a manner so that it will not become an “investment company” subject to registration under the Investment Company Act of 1940, as amended.
(w) Registration Rights. Except as listed in Schedule 3.1(w), no Person has any right to cause the Company or any Subsidiary to effect the registration under the Securities Act or the Exchange Act, or any Israeli equivalent law, of any securities of the Company or any Subsidiary.
(x) Disclosure. All of the disclosure furnished by or on behalf of the Company to the Purchasers regarding the Company and its Subsidiaries, their respective businesses and the transactions contemplated hereby, including the Disclosure Schedules to this Agreement, is true and correct and does not contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements made therein, of which the Company is aware, in the light of the circumstances under which they were made, not misleading. The Company acknowledges and agrees that no Purchaser makes or has made any representations or warranties with respect to the transactions contemplated hereby other than those specifically set forth in Section 3.2 hereof.
(y) Solvency. Based on the consolidated financial condition of the Company as of the Closing Date, after giving effect to the receipt by the Company of the proceeds from the sale of the Shares hereunder, (i) the fair saleable value of the Company’s assets exceeds the amount that will be required to be paid on or in respect of the Company’s existing debts and other liabilities (including known contingent liabilities) as they mature, (ii) the Company’s assets do not constitute unreasonably small capital to carry on its business as now conducted, and (iii) the current cash flow of the Company, together with the proceeds the Company would receive, were it to liquidate all of its assets, after taking into account all anticipated uses of the cash, would be sufficient to pay all amounts on or in respect of its liabilities when such amounts are required to be paid. The Company has no knowledge of any facts or circumstances which lead it to believe that it will file for reorganization or liquidation under the bankruptcy or reorganization laws of any jurisdiction within one year from the Closing Date. Schedule 3.1(y) sets forth as of the date hereof all outstanding secured and unsecured Indebtedness of the Company or any Subsidiary, or for which the Company or any Subsidiary has commitments. For the purposes of this Agreement, “Indebtedness” means (x) any liabilities for borrowed money or amounts owed in excess of $50,000 (other than trade accounts payable incurred in the ordinary course of business), (y) all guaranties, endorsements and other contingent obligations in respect of indebtedness of others, whether or not the same are or should be reflected in the Company’s consolidated balance sheet (or the notes thereto), except guaranties by endorsement of negotiable instruments for deposit or collection or similar transactions in the ordinary course of business; and (z) the present value of any lease payments in excess of $50,000 due under leases required to be capitalized in accordance with GAAP. Neither the Company nor any Subsidiary is in default with respect to any Indebtedness.
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(z) Tax Status. Except for matters that would not, individually or in the aggregate, have or reasonably be expected to result in a Material Adverse Effect, the Company and its Subsidiaries each (i) has made or filed all Israeli income and franchise tax returns, reports and declarations required by any jurisdiction to which it is subject, (ii) has paid all taxes and other governmental assessments and charges that are material in amount, shown or determined to be due on such returns, reports and declarations and (iii) has set aside on its books provision reasonably adequate for the payment of all material taxes for periods subsequent to the periods to which such returns, reports or declarations apply. There are no unpaid taxes in any material amount claimed to be due by the taxing authority of any jurisdiction, and the Company or of any Subsidiary know of no basis for any such claim. The Company has not made any elections pursuant to the Israeli Income Tax Ordinance [New Version], 1961 (other than elections that relate solely to method of accounting, depreciation or amortization). The Company is duly registered for purposes of Israeli value added tax and have complied in all material respects with all requirements concerning value added taxes.
(aa) No General Solicitation. Neither the Company nor any Person acting on behalf of the Company has offered or sold any of the Shares by any form of general solicitation or general advertising. The Company has offered the Shares for sale only to the Purchasers and certain other “accredited investors” within the meaning of Rule 501 under the Securities Act.
(bb) Foreign Corrupt Practices. Neither the Company nor any Subsidiary, nor to the knowledge of the Company or any Subsidiary, any agent or other person acting on behalf of the Company or any Subsidiary, has (i) directly or indirectly, used, promised or authorized any funds for unlawful contributions, gifts, entertainment or other unlawful expenses related to foreign or domestic political activity, (ii) made any unlawful payment to foreign or domestic government officials or employees or to any foreign or domestic political parties or campaigns from corporate funds, (iii) failed to disclose fully any contribution made by the Company or any Subsidiary (or made by any person acting on its behalf of which the Company is aware) which is in violation of law or (iv) violated in any material respect any provision of FCPA and/or violated Sections 291 and 291A of the Israeli Penal Law 5737-1977.
(cc) Accountants. The Company’s accounting firm is set forth on Schedule 3.1(cc) of the Disclosure Schedules.
(dd) No Disagreements with Accountants and Lawyers. There are no disagreements of any kind presently existing, or reasonably anticipated by the Company to arise, between the Company and the accountants and lawyers formerly or presently employed by the Company and the Company is current with respect to any fees owed to its accountants and lawyers which could affect the Company’s ability to perform any of its obligations under any of the Transaction Documents.
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(ee) Acknowledgment Regarding Purchasers’ Purchase of Shares. The Company acknowledges and agrees that each of the Purchasers is acting solely in the capacity of an arm’s length purchaser with respect to the Transaction Documents and the transactions contemplated thereby. The Company further acknowledges that no Purchaser is acting as a financial advisor or fiduciary of the Company (or in any similar capacity) with respect to the Transaction Documents and the transactions contemplated thereby and any advice given by any Purchaser or any of their respective representatives or agents in connection with the Transaction Documents and the transactions contemplated thereby is merely incidental to the Purchasers’ purchase of the Shares. The Company further represents to each Purchaser that the Company’s decision to enter into this Agreement and the other Transaction Documents has been based solely on the independent evaluation of the transactions contemplated hereby by the Company and its representatives.
(ff) FDA, Agriculture. The Company makes no product subject to the jurisdiction of the U.S. Food and Drug Administration (“FDA”) under the Federal Food, Drug and Cosmetic Act, as amended, and the regulations thereunder (“FDCA”) or the U.S. Department of Agriculture, and any Israeli equivalent ministries or agencies.
(gg) Share Option Plans. The Company has duly adopted the Share Ownership and Option Plan (the “Equity Incentive Plan”) and a correct and complete copy of the Equity Incentive Plan, as well as all option awards thereunder, have been provided to the Purchasers. The Equity Incentive Plan is the only equity-based incentive plan currently in effect with respect to the Company. Schedule 3.1(gg) of the Disclosure Schedules accurately sets forth all of the issued and outstanding options to acquire share capital of the Company under the Equity Incentive Plan (“Options”), and the number of issued and outstanding Options held by each holder thereof, the number of Ordinary Shares into which such Options are exercisable by such holder, in each case as of the date of this Agreement and the date of grant or issuance, as applicable, and the exercise price thereof, the date on which such Option was granted or issued and expiration date, the applicable vesting schedule and any acceleration provision, if any, and the extent to which such Option is vested and exercisable as of the date hereof. The Options were duly authorized and were not issued in violation of any applicable law, the requirements set forth in the Equity Incentive Plan or the preemptive or similar rights of any Person. The Equity Incentive Plan is intended to qualify as a capital gains route plan under Section 102(b)(2) of the Israeli Tax Ordinance [New Version], 5724 – 1961 (the “Israeli Tax Ordinance”) and is deemed approved by passage of time without objection by the Israeli tax authorities. All options which have been originally intended or purported to be granted by the Company pursuant to the capital gains route under Section 102(b)(2) of the Israeli Tax Ordinance and all shares issued upon exercise of such Options (collectively, the “102 Options”), have been issued and to the Company’s knowledge, maintained in compliance in all respects with the applicable requirements of Section 102 of the Israeli Tax Ordinance, and the regulations, rules and guidelines promulgated in writing thereunder. Each grant of Option was duly authorized by all necessary corporate action, including, as applicable, approval by the Board and any required shareholder approval by the necessary number of votes or written consents, and the award agreement governing such grant (if any) was executed and delivered by each party thereto.
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(hh) Office of Foreign Assets Control. Neither the Company nor any Subsidiary nor, to the Company’s knowledge, any director, officer, agent, employee or affiliate of the Company or any Subsidiary is currently subject to any U.S. sanctions administered by the Office of Foreign Assets Control of the U.S. Treasury Department (“OFAC”).
(ii) U.S. Real Property Holding Corporation. The Company is not and has never been a U.S. real property holding corporation within the meaning of Section 897 of the Internal Revenue Code of 1986, as amended, and the Company shall so certify upon Purchaser’s request.
(jj) Bank Holding Company Act. Neither the Company nor any of its Subsidiaries or Affiliates is subject to the Bank Holding Company Act of 1956, as amended (the “BHCA”) and to regulation by the Board of Governors of the Federal Reserve System (the “Federal Reserve”). Neither the Company nor any of its Subsidiaries or Affiliates owns or controls, directly or indirectly, five percent (5%) or more of the outstanding shares of any class of voting securities or twenty-five percent or more of the total equity of a bank or any entity that is subject to the BHCA and to regulation by the Federal Reserve. Neither the Company nor any of its Subsidiaries or Affiliates exercises a controlling influence over the management or policies of a bank or any entity that is subject to the BHCA and to regulation by the Federal Reserve.
(kk) Money Laundering. The operations of the Company and its Subsidiaries are and have been conducted at all times in compliance with applicable financial record-keeping and reporting requirements of the Currency and Foreign Transactions Reporting Act of 1970, as amended, applicable money laundering statutes and applicable rules and regulations thereunder (collectively, the “Money Laundering Laws”), and no Action or Proceeding by or before any court or governmental agency, authority or body or any arbitrator involving the Company or any Subsidiary with respect to the Money Laundering Laws is pending or, to the knowledge of the Company or any Subsidiary, threatened.
(ll) Data Privacy. Except as set forth in Schedule 3.1(ll)(A) of the Disclosure Schedules, to Company’s knowledge, the Company has and is currently taking the measures required by any and all applicable law or any applicable binding directive, guidelines or requirements of a regulator in all relevant jurisdictions to protect the privacy of any Personal Information (as defined below) (the “Data Privacy Laws”) in connection with Company’s collection, storage, use, transfer of, (a) any personally identifiable information from any individuals, including name, address, telephone number, email address, financial account number, government-issued identifier, and any other data used or intended to be used to identify, contact or precisely locate a person, (b) any information from or about an individual whose use, aggregation, holding or management is restricted under any applicable Law, (c) Internet Protocol address or other persistent identifier; (d) “information” as defined by the Israeli Privacy Protection Law (whether or not such “information” constitutes “sensitive information” as defined thereunder) (collectively “Personal Information”) to maintain in confidence such Personal Information. Except as set forth in Schedule 3.1(ll)(B) of the Disclosure Schedules, to Company’s knowledge, the Company has at all times complied with the Data Privacy Laws, and is in compliance with any contractual obligations, if any, relating to privacy, data protection, and the collection, storage and use of the Personal Information, if any. No claims have been asserted or, to the best knowledge of the Company, are threatened against the Company by any Person alleging a violation of any Person’s or any entity’s privacy, personal or confidentiality rights under the Data Privacy Laws and/or contractual obligations relating to privacy. To the best knowledge of the Company, there has been no unauthorized access to or other misuse of Personal Information. The Company has never reported a data breach to any relevant regulator in any jurisdiction.
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(mm) Governmental Funding. Other than as listed in Schedule (mm), the Company has not applied, obtained or received any grant, loan, incentives, benefits (including tax benefits), subsidies or other assistance from any governmental or regulatory authority or any agency, or any international or bilateral fund, institute or organization or public entities or authorities, including, from the IIA. The Company is an “approved enterprise” within the meaning of the Israeli Encouragement of Capital Investments Law, 1959. The Company was and is in compliance, in all material respects, with the terms and conditions of any such recognitions, grants or benefits. Other than as set forth in Schedule 3.1(mm) of the Disclosure Schedule, no royalties, interest, participation fees or other payments are payable or will be payable by the Company as a result of such grants or benefits. The consummation of the transactions contemplated hereby will not affect the continued qualification for such grants or benefits, the terms or duration thereof or require any reimbursement, repayment, refund or cancellation of any previously claimed or received grants or benefits.
(nn) No Disqualification Events. With respect to the Shares to be offered and sold hereunder in reliance on Rule 506 under the Securities Act, none of the Company, any of its predecessors, any affiliated issuer, any director, executive officer, other officer of the Company participating in the offering hereunder, any beneficial owner of 20% or more of the Company’s outstanding voting equity securities, calculated on the basis of voting power, nor any promoter (as that term is defined in Rule 405 under the Securities Act) connected with the Company in any capacity at the time of sale (each, an “Issuer Covered Person” and, together, “Issuer Covered Persons”) is subject to any of the “Bad Actor” disqualifications described in Rule 506(d)(1)(i) to (viii) under the Securities Act (a “Disqualification Event”), except for a Disqualification Event covered by Rule 506(d)(2) or (d)(3). The Company has exercised reasonable care to determine whether any Issuer Covered Person is subject to a Disqualification Event. The Company has complied, to the extent applicable, with its disclosure obligations under Rule 506(e), and has furnished to the Purchasers a copy of any disclosures provided thereunder, if such disclosure is required.
(oo) Other Covered Persons. The Company is not aware of any person (other than any Issuer Covered Person, if applicable) that has been or will be paid (directly or indirectly) remuneration for solicitation of purchasers in connection with the sale of any Shares.
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(pp) Notice of Disqualification Events. The Company will notify the Purchasers in writing, prior to the Closing Date of (i) any Disqualification Event relating to any Issuer Covered Person and (ii) any event that would, with the passage of time, become a Disqualification Event relating to any Issuer Covered Person.
3.2 Representations and Warranties of the Purchasers. Each Purchaser, for itself and for no other Purchaser, hereby represents and warrants as of the date hereof and as of the Closing Date to the Company as follows (unless as of a specific date therein, in which case they shall be accurate as of such date):
(a) Organization; Authority. Such Purchaser is either an individual or an entity duly incorporated or formed, validly existing and in good standing under the laws of the jurisdiction of its incorporation or formation with full right, corporate, partnership, limited liability company or similar power and authority to enter into and to consummate the transactions contemplated by the Transaction Documents and otherwise to carry out its obligations hereunder and thereunder. The execution and delivery of the Transaction Documents and performance by such Purchaser of the transactions contemplated by the Transaction Documents have been duly authorized by all necessary corporate, partnership, limited liability company or similar action, as applicable, on the part of such Purchaser. Each Transaction Document to which it is a party has been duly executed by such Purchaser, and when delivered by such Purchaser in accordance with the terms hereof, will constitute the valid and legally binding obligation of such Purchaser, enforceable against it in accordance with its terms, except (i) as limited by general equitable principles and applicable bankruptcy, insolvency, reorganization, moratorium and other laws of general application affecting enforcement of creditors’ rights generally, (ii) as limited by laws relating to the availability of specific performance, injunctive relief or other equitable remedies and (iii) insofar as indemnification and contribution provisions may be limited by applicable law. No approval or consent from any person, entity or authority, is required by the Purchaser for the execution, delivery and performance by it of this Agreement and the Transaction Documents to which it is party, and any and all agreements and instruments ancillary hereto or thereto.
(b) Own Account. Such Purchaser understands that the Shares are “restricted securities” and have not been registered under the Securities Act or any applicable state securities law and is acquiring the Shares as principal for its own account and not with a view to or for distributing or reselling such Shares or any part thereof in violation of the Securities Act or any applicable state securities law, has no present intention of distributing any of such Shares in violation of the Securities Act or any applicable state securities law and has no direct or indirect arrangement or understandings with any other persons to distribute or regarding the distribution of such Shares in violation of the Securities Act or any applicable state securities law (this representation and warranty not limiting such Purchaser’s right to sell the Shares pursuant to a registration statement or otherwise in compliance with applicable federal and state securities laws). Such Purchaser is acquiring the Shares hereunder in the ordinary course of its business.
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(c) Purchaser Status. At the time such Purchaser was offered the Shares, it was, and as of the date hereof it is, and on the Closing Date it will be either: (i) an “accredited investor” as defined in Rule 501(a)(1), (a)(2), (a)(3), (a)(7) or (a)(8) under the Securities Act, (ii) a “qualified institutional buyer” as defined in Rule 144A(a) under the Securities Act, or (iii) if such Purchaser is Israeli then it qualifies as an “investor” under Section 15(A)(b)(1) of the Israeli Securities Law, 1968, is an investor of the type listed in the First Supplement to the Israeli Securities Law, 1968, and is aware of the significance of being such an investor.
(d) Experience of Such Purchaser. Such Purchaser, either alone or together with its representatives, has such knowledge, sophistication and experience in business and financial matters so as to be capable of evaluating the merits and risks of the prospective investment in the Shares, and has so evaluated the merits and risks of such investment. Such Purchaser is able to bear the economic risk of an investment in the Shares and, at the present time, is able to afford a complete loss of such investment. Such Purchaser has been afforded the opportunity to ask questions of and receive answers from duly authorized officers or other representatives of the Company concerning the Company’s business, assets and financial position and has reviewed and inspected all of the data and information provided to it by the Company in connection with the execution of this Agreement. The Purchaser acknowledges that (i) the issuance of the Shares hereunder does not constitute a promise or guaranty by the Company, its shareholders, officers or directors as to the financial, technological or commercial success of the Company or the future value of its shares, and (ii) the investment contemplated herein involves a high degree of risk that may result in the Purchaser losing its entire investment hereunder.
(e) General Solicitation. Such Purchaser is not, to such Purchaser’s knowledge, purchasing the Shares as a result of any advertisement, article, notice or other communication regarding the Shares published in any newspaper, magazine or similar media or broadcast over television or radio or presented at any seminar or, to the knowledge of such Purchaser, any other general solicitation or general advertisement.
(f) No Breach. Neither the execution and delivery of any of the Transaction Documents nor compliance by the Investor with the terms and provisions thereof, will conflict with, or result in a breach or violation of, any of the terms, conditions and provisions of: (i) the organizational documents of such Purchaser, (ii) any judgment, order, injunction, decree, or ruling of any court or governmental authority, domestic or foreign, (iii) any agreement, contract, lease, license or commitment to which such Purchaser is a party or to which it is subject, or (iv) applicable law.
(g) No Public Market. Such Purchaser understands that the Shares have not been registered under any applicable securities law and no public market now exists for any of the securities issued by the Company and that the Company has made no assurances that a public market will ever exist for the Company’s securities.
(h) Disclosure. Such Purchaser acknowledges that except for the representations and warranties of the Company contained in this Agreement, or any other Transaction Document or exhibit hereto or thereto, the Company is not making and has not made, and no other Person is making or has made on behalf of the Company, any express or implied representation or warranty in connection with this Agreement or the transactions contemplated hereby, and no third party is authorized to make any such representations and warranties on behalf of the Company.
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The Company acknowledges and agrees that the representations contained in this Section 3.2 shall not modify, amend or affect such Purchaser’s right to rely on the Company’s representations and warranties contained in this Agreement or any representations and warranties contained in any other Transaction Document or any other document or instrument executed and/or delivered in connection with this Agreement or the consummation of the transactions contemplated hereby.
OTHER AGREEMENTS OF THE PARTIES
3.3 Transfer Restrictions.
(a) Notwithstanding any other provision of this Agreement, as a condition to the issuance of any Shares to the Purchasers, each of the Purchasers shall be required to execute and deliver a lock-up agreement for a period of 180 days from the Public Company Date (“Lock-Up Period”), substantially in the form attached hereto as Exhibit D (a “Lock-Up Agreement”) in respect of such Shares. The Company shall be entitled, in its absolute discretion, to refrain from issuing any Shares in uncertificated form until the expiry of the applicable lock-up period set out in the Lock-Up Agreement and shall instead issue to the relevant Purchaser a certificate in respect of such Shares which includes a legend referring to the lock-up applicable thereto. Notwithstanding the aforesaid, the Lock-Up Period, shall automatically expire earlier, if for three (3) consecutive trading days during the Lock Up Period, the closing price of the Shares shall be at least double the Per Share Purchase Price at the IPO.
(b) Subject to the provisions hereof and of the Lock-Up Agreements, the Shares may only be disposed of in compliance with Israeli corporate and securities laws, and the Restated Articles, and following the Public Company Date, in connection with any transfer of Shares other than pursuant to an effective registration statement or Rule 144, to the Company or to an Affiliate of a Purchaser, the Company may require the transferor thereof to provide to the Company an opinion of counsel selected by the transferor and reasonably acceptable to the Company, the form and substance of which opinion shall be reasonably satisfactory to the Company, to the effect that such transfer does not require registration of such transferred Shares under the Securities Act. As a condition of transfer, any such transferee shall agree in writing to be bound by the terms of this Agreement and shall have the rights and obligations of a Purchaser under this Agreement and of the Lock-Up Agreement; provided, no subsequent transferee (other than an Affiliate of a Purchaser) shall have any rights to designate a member of the Board of Directors.
(c) The Purchasers agree to the imprinting, so long as is required by this Section 3.3 under either Israeli or United States law, of a legend on any of the Shares in the following form:
THIS SECURITY HAS NOT BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS.
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Subject to the terms hereof and of the Lock-Up Agreement, following the Public Company Date, (if the Company is the public entity, and if the Company is acquired by a public entity, it shall require as a condition of its acquisition by the public entity that the public entity agree that) certificates evidencing the Shares shall not contain any legend, (i) while a registration statement covering the resale of such security is effective under the Securities Act, (ii) following any sale of such Shares pursuant to Rule 144 other than to an affiliate of the Company, (iii) if such Shares are eligible for sale under Rule 144, without the requirement for the Company to be in compliance with the current public information required under Rule 144 as to such Shares and without volume or manner-of-sale restrictions, or (iv) if such legend is not required under applicable requirements of the Securities Act (including judicial interpretations and pronouncements issued by the staff of the Commission) and the Purchaser shall provide the Company with a “no action” letter from the SEC or a legal opinion confirming the same. The Company shall cause its counsel to issue a legal opinion to the Transfer Agent or the Purchaser if required by the Transfer Agent to effect the removal of the legend hereunder, or if requested by a Purchaser, respectively. Subject to the terms hereof and of the Lock-Up Agreement , the Company agrees that following the Public Company Date or at such time as such legend is no longer required under this Section 3.1(c), it will, no later than the earlier of (i) two (2) Trading Days and (ii) the number of Trading Days comprising the Standard Settlement Period (as defined below) following the delivery by a Purchaser to the Company or the Transfer Agent of a certificate representing Shares issued with a restrictive legend (such date, the “Legend Removal Date”), deliver or cause to be delivered to such Purchaser a certificate representing such shares that is free from all restrictive and other legends. The Company may not make any notation on its records or give instructions to the Transfer Agent that enlarge the restrictions on transfer set forth in this Section 3. Certificates for Shares subject to legend removal hereunder shall be transmitted by the Transfer Agent to the Purchaser by crediting the account of the Purchaser’s prime broker with the Depository Trust Company System as directed by such Purchaser. As used herein, “Standard Settlement Period” means the standard settlement period, expressed in a number of Trading Days, on the Company’s primary Trading Market with respect to the Ordinary Shares as in effect on the date of delivery of a certificate representing Shares issued with a restrictive legend.
3.4 Use of Proceeds. Except as set forth on Schedule 3.4 attached hereto, the Company shall use the net proceeds from the sale of the Shares hereunder for working capital purposes and shall not use such proceeds: (a) for the satisfaction of any portion of the Company’s debt (other than payment of trade payables in the ordinary course of the Company’s business and prior practices), (b) for the redemption of any Ordinary Shares or Ordinary Shares Equivalents, (c) for the settlement of any outstanding litigation or (d) in violation of FCPA or OFAC regulations.
3.5 Indemnification of Purchasers. Subject to the provisions of this Section 3.5, the Company will indemnify and hold each Purchaser (each, a “Purchaser Party”) harmless from any and all losses, liabilities, obligations, claims, contingencies, damages, costs and expenses, including all judgments, amounts paid in settlements, court costs and reasonable attorneys’ fees and costs of investigation (“Losses”) that any such Purchaser Party may suffer or incur as a direct result of or arising out of to any breach of any of the representations, warranties, covenants or agreements made by the Company in this Agreement or in the other Transaction Documents, up to a maximum amount not to exceed the amount actually invested by the applicable Purchaser Party under this Agreement.
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3.6 Subject only to fraud, willful or intentional misrepresentation or willful misconduct, with respect to which none of the following limitations shall apply:
(a) No indemnification shall be provided in connection with any claims that are less than US$100,000 in the aggregate (provided that if the claims are in greater amount, then indemnification shall be paid from the first dollar).
(b) All representations and warranties under Section 3.1 of this Agreement shall survive the Closing, if applicable, for a limited period, until the earlier of (i) 24 months following the Closing, and (ii) the consummation of a Change of Control or an IPO of the Company (as such terms are defined herein). Unless a Change of Control or an IPO of the Company is consummated, the representations and warranties set forth in Sections 3.1 (b) (Organization and Qualification), 3.1 (c) (Authorization; Enforcement), 3.1(e) (Filings, Consents and Approvals), 3.1 (g) (Capitalzation), 3.1 (q) (Intellectual Property), 3.1 (z) (Tax Status) shall survive until 48 months following the Closing. The provisions of this Section 3.6 shall be deemed to constitute a separate written legally binding agreement among the parties hereto, in accordance with the provisions of Section 19 of the Israeli Limitation Law, 5718-1958.
3.7 If any action shall be brought against any Purchaser Party and/or Company in respect of which indemnity may be sought pursuant to this Agreement, such Purchaser Party shall promptly notify the Company in writing, and the Company shall have the right to assume the defense thereof with counsel of its own choosing reasonably acceptable to the Purchaser Party. Any Purchaser Party shall have the right to employ separate counsel in any such action and participate in the defense thereof, but the fees and expenses of such counsel shall be at the expense of such Purchaser Party except to the extent that (i) the employment thereof has been specifically authorized by the Company in writing, (ii) the Company has failed after a reasonable period of time to assume such defense and to employ counsel or (iii) in such action there is, in the reasonable opinion of counsel, a material conflict on any material issue between the position of the Company and the position of such Purchaser Party, in which case the Company shall be responsible for the reasonable fees and expenses of no more than one such separate counsel. The Company will not be liable to any Purchaser Party under this Agreement (y) for any settlement by a Purchaser Party effected without the Company’s prior written consent, which shall not be unreasonably withheld or delayed; or (z) to the extent, but only to the extent that a loss, claim, damage or liability is attributable to any Purchaser Party’s breach of any of the representations, warranties, covenants or agreements made by such Purchaser Party in this Agreement or in the other Transaction Documents. The indemnification required by this Section 4.7 shall be made by periodic payments of the amount thereof during the course of the investigation or defense, as and when bills are received or are incurred.
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3.8 Reservation of Ordinary Shares. As of the date hereof, the Company has reserved and the Company shall continue to reserve and keep available at all times, free of preemptive rights, a sufficient number of Ordinary Shares for the purpose of enabling the Company to issue Shares pursuant to this Agreement.
3.9 Listing of Ordinary Shares. As of the Public Company Date (if the Company is the public entity, and if the Company is acquired by a public entity, it shall require as a condition of its acquisition by the public entity that the public entity agree that), the Company hereby agrees to use best efforts to maintain the listing or quotation of the Ordinary Shares. The Company further agrees, if the Company applies to have the Ordinary Shares traded on any Trading Market, it will then include in such application all of the Shares, and will take such other action as is reasonably necessary to cause all of the Shares to be listed or quoted on such other Trading Market as promptly as possible. If the Company is the public entity, and if the Company is acquired by a public entity, it shall require as a condition of its acquisition by the public entity that the public entity agree that the Company will then take all action reasonably necessary to continue the listing and trading of its Ordinary Shares on a Trading Market and will comply in all respects with the Company’s reporting, filing and other obligations under the bylaws or rules of the Trading Market.
3.10 Subsequent Equity Sales.
(a) Beginning on the date hereof and until the earlier of (i) the 90th calendar day after the expiration of the restriction period set forth in the Lockup Agreement or (ii) three years from the Closing Date, if the Company or any Subsidiary shall issue any Ordinary Shares or Ordinary Share Equivalents, in an equity transaction other than in an Exempt Issuance, (a “Dilutive Issuance”) entitling any person or entity to acquire Ordinary Shares at an effective price per share less than the Per Share Purchase Price (subject to prior adjustment for reverse and forward stock splits and the like) (the “Discounted Purchase Price,” as further defined below), then, for no additional consideration, the Company shall immediately issue to each Purchaser that number of additional Shares equal to (a) the Per Share Purchase Price paid by such Purchaser at the Closing divided by the Discounted Purchase Price, less (b) the Shares issued to such Purchaser at the Closing pursuant to this Agreement and pursuant to this Section 3.10(a).. The term “Discounted Purchase Price” shall mean the amount actually paid in new cash consideration by third parties for each Ordinary Share in the Dilutive Issuance. The sale of Ordinary Share Equivalents shall be deemed to have occurred at the time of the issuance of the Ordinary Share Equivalents and the Discounted Purchase Price covered thereby shall also include the actual exercise or conversion price thereof at the time of the conversion or exercise (in addition to the consideration per Ordinary Share underlying the Ordinary Share Equivalents received by the Company upon such sale or issuance of the Ordinary Share Equivalents). If shares are issued for a consideration other than cash, the per share selling price shall be the fair value of such consideration as determined in good faith by the Board of Directors of the Company. Additionally, prior to any issuance to a Purchaser pursuant to this Section 3.10, such Purchaser shall have the right to irrevocably defer such issuances to such Purchaser under this Section 3.10, in whole or in part, for continuous periods of not less than 75 days.
(b) Notwithstanding the foregoing, this Section 3.10 shall not apply in respect of an Exempt Issuance.
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3.11 Board Observer Rights. From the Closing Date until the Public Company Date, Alpha shall have the right, but not any obligation, to designate one person, reasonably acceptable to the Company, to attend all Board meetings and conference calls as an observer, with no right to vote on any matter. Such observer shall receive all information, written or oral, which Company management provides to the other Directors of the Company from time to time.
3.12 Equal Treatment of Purchasers. No consideration (including any modification of any Transaction Document) shall be offered or paid to any Person to amend or consent to a waiver or modification of any provision of the Transaction Documents unless the same consideration is also offered to all of the parties to the Transaction Documents. For clarification purposes, this provision constitutes a separate right granted to each Purchaser by the Company and negotiated separately by each Purchaser, and is intended for the Company to treat the Purchasers as a class and shall not in any way be construed as the Purchasers acting in concert or as a group with respect to the purchase, disposition or voting of Shares or otherwise.
3.13 Public Company. The Company agrees to use commercially reasonable best efforts to list its Ordinary Shares (or ADRs representing Ordinary Shares) on a Trading Market within one year of the Closing Date. Such listing may be in the form of an initial public offering at an equity enterprise valuation of not less than $24,000,000, or a merger with a company whose shares are listed on such exchange. In connection with such listing, the Company agrees to use best efforts, (i) within 20 calendar days following the Closing Date to engage the services of a “Big 4” auditing firm to audit the Company’s year-end financial statements for 2019 and 2020 in accordance with International Financial Reporting Standards (“IFRS”) acceptable to the Commission and (ii) promptly after the Closing Date, if necessary, hire a Chief Financial Officer with significant public company reporting experience.
ARTICLE IV.
AFFIRMATIVE COVENANTS BY THE COMPANY
4.1 Filing with the Israeli Registrar of Companies. As soon as possible following each Closing, and in any event no later than 14 days following each Closing, the Company shall file all required notices set forth in Section 2.2(a)(viii) with the Israeli Registrar of Companies.
4.2 Filing with IIA. As soon as possible following the Closing, and in any event no later than 14 days following the Closing, the Company shall file all required notices set forth in Section 2.2(a)(x) with IIA.
ARTICLE V.
MISCELLANEOUS
5.1 Fees and Expenses. Except as expressly set forth in the Transaction Documents to the contrary, each party shall pay the fees and expenses of its advisers, counsel, accountants and other experts, if any, and all other expenses incurred by such party incident to the negotiation, preparation, execution, delivery and performance of this Agreement. Following the Public Company Date (if the Company is the public entity, and if the Company is acquired by a public entity, it shall require as a condition of its acquisition by the public entity that the public entity agree that) the Company shall pay all Transfer Agent fees (including, without limitation, any fees required for same-day processing of any instruction letter delivered by the Company and any exercise notice delivered by a Purchaser), stamp taxes and other taxes and duties levied in connection with the delivery of any Shares to the Purchasers.
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5.2 Entire Agreement. The Transaction Documents, together with the exhibits and schedules thereto, contain the entire understanding of the parties with respect to the subject matter hereof and thereof and supersede all prior agreements and understandings, oral or written, with respect to such matters, which the parties acknowledge have been merged into such documents, exhibits and schedules.
5.3 Notices. Any and all notices or other communications or deliveries required or permitted to be provided hereunder shall be in writing and shall be deemed given and effective on the earliest of: (a) the time of transmission, if such notice or communication is delivered via email attachment at the email address as set forth on the signature pages attached hereto at or prior to 5:30 p.m. (New York City time) on a Trading Day, (b) the next Trading Day after the time of transmission, if such notice or communication is delivered via email attachment at the email address as set forth on the signature pages attached hereto on a day that is not a Trading Day or later than 5:30 p.m. (New York City time) on any Trading Day, (c) the second (2nd) Trading Day following the date of mailing, if sent by U.S. nationally recognized overnight courier service or (d) upon actual receipt by the party to whom such notice is required to be given. The address for such notices and communications shall be as set forth on the signature pages attached hereto.
5.4 Amendments; Waivers. No provision of this Agreement may be waived, modified, supplemented or amended except in a written instrument signed, in the case of an amendment, by the Company and Purchasers which purchased at a majority in interest of the Shares based on the initial Subscription Amounts hereunder or, in the case of a waiver, by the party against whom enforcement of any such waived provision is sought, provided that if any amendment, modification or waiver disproportionately and adversely impacts a Purchaser (or group of Purchasers), the consent of such disproportionately impacted Purchaser (or group of Purchasers) shall also be required. No waiver of any default with respect to any provision, condition or requirement of this Agreement shall be deemed to be a continuing waiver in the future or a waiver of any subsequent default or a waiver of any other provision, condition or requirement hereof, nor shall any delay or omission of any party to exercise any right hereunder in any manner impair the exercise of any such right. Any proposed amendment or waiver that disproportionately, materially and adversely affects the rights and obligations of any Purchaser relative to the comparable rights and obligations of the other Purchasers shall require the prior written consent of such adversely affected Purchaser. Any amendment effected in accordance with this Section 6.4 shall be binding upon each Purchaser and holder of Shares and the Company.
5.5 Headings. The headings herein are for convenience only, do not constitute a part of this Agreement and shall not be deemed to limit or affect any of the provisions hereof.
5.6 Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the parties and their successors and permitted assigns. The Company may not assign this Agreement or any rights or obligations hereunder without the prior written consent of a majority of the Purchasers (other than by merger). Subject to the terms hereof and of the Lock-Up Agreements, any Purchaser may assign any or all of its rights under this Agreement to any Person to whom such Purchaser assigns or transfers any Shares, provided that such transferee agrees in writing to be bound, with respect to the transferred Shares, by the provisions of the Transaction Documents that apply to the “Purchasers.”
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5.7 No Third-Party Beneficiaries. This Agreement is intended for the benefit of the parties hereto and their respective successors and permitted assigns and is not for the benefit of, nor may any provision hereof be enforced by, any other Person, except as otherwise explicitly set forth herein.
5.8 Governing Law. All questions concerning the construction, validity, enforcement and interpretation of the Transaction Documents shall be governed by and construed and enforced in accordance with the internal laws of the State of Israel, without regard to the principles of conflicts of law thereof. Each party agrees that all legal Proceedings concerning the interpretations, enforcement and defense of the transactions contemplated by this Agreement and any other Transaction Documents (whether brought against a party hereto or its respective affiliates, directors, officers, shareholders, partners, members, employees or agents) shall be commenced exclusively in the courts sitting in Tel-Aviv-Jaffa. Each party hereby irrevocably submits to the exclusive jurisdiction of these courts, for the adjudication of any dispute hereunder or in connection herewith or with any transaction contemplated hereby or discussed herein (including with respect to the enforcement of any of the Transaction Documents), and hereby irrevocably waives, and agrees not to assert in any Action or Proceeding, any claim that it is not personally subject to the jurisdiction of any such court, that such Action or Proceeding is improper or is an inconvenient venue for such Proceeding. Each party hereby irrevocably waives personal service of process and consents to process being served in any such Action or Proceeding by mailing a copy thereof via registered or certified mail or overnight delivery (with evidence of delivery) to such party at the address in effect for notices to it under this Agreement and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing contained herein shall be deemed to limit in any way any right to serve process in any other manner permitted by law. If any party shall commence an Action or Proceeding to enforce any provisions of the Transaction Documents, then, in addition to the obligations of the Company hereunder, the prevailing party in such Action or Proceeding shall be reimbursed by the non-prevailing party for its reasonable attorneys’ fees and other costs and expenses incurred with the investigation, preparation and prosecution of such Action or Proceeding.
5.9 Execution. This Agreement may be executed in two or more counterparts, all of which when taken together shall be considered one and the same agreement and shall become effective when counterparts have been signed by each party and delivered to each other party, it being understood that the parties need not sign the same counterpart. In the event that any signature is delivered by facsimile transmission or by e-mail delivery of a “.pdf” format data file, such signature shall create a valid and binding obligation of the party executing (or on whose behalf such signature is executed) with the same force and effect as if such facsimile or “.pdf” signature page were an original thereof.
5.10 Severability. If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction to be invalid, illegal, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions set forth herein shall remain in full force and effect and shall in no way be affected, impaired or invalidated, and the parties hereto shall use their commercially reasonable efforts to find and employ an alternative means to achieve the same or substantially the same result as that contemplated by such term, provision, covenant or restriction. It is hereby stipulated and declared to be the intention of the parties that they would have executed the remaining terms, provisions, covenants and restrictions without including any of such that may be hereafter declared invalid, illegal, void or unenforceable.
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5.11 Replacement of Share Certificates. If any certificate or instrument evidencing any Shares is mutilated, lost, stolen or destroyed, the Company shall issue or cause to be issued in exchange and substitution for and upon cancellation thereof (in the case of mutilation), or in lieu of and substitution therefor, a new certificate or instrument, but only upon receipt of evidence reasonably satisfactory to the Company of such loss, theft or destruction. The applicant for a new certificate or instrument under such circumstances shall also pay any reasonable third-party costs (including customary indemnity) associated with the issuance of such replacement certificates.
5.12 Sole Remedy. The indemnification provided by the Company herein and the enforcement of such indemnification shall be the sole and exclusive remedies available to the Purchasers against the Company for any breach of a representation or warranty or covenant by the Company.
5.13 Independent Nature of Purchasers’ Obligations and Rights. The obligations of each Purchaser under any Transaction Document are several and not joint with the obligations of any other Purchaser, and no Purchaser shall be responsible in any way for the performance or non-performance of the obligations of any other Purchaser under any Transaction Document. Nothing contained herein or in any other Transaction Document, and no action taken by any Purchaser pursuant hereto or thereto, shall be deemed to constitute the Purchasers as a partnership, an association, a joint venture or any other kind of entity, or create a presumption that the Purchasers are in any way acting in concert or as a group with respect to such obligations or the transactions contemplated by the Transaction Documents. Each Purchaser shall be entitled to independently protect and enforce its rights including, without limitation, the rights arising out of this Agreement or out of the other Transaction Documents, and it shall not be necessary for any other Purchaser to be joined as an additional party in any Proceeding for such purpose. Each Purchaser has been represented by its own separate legal counsel in its review and negotiation of the Transaction Documents, even if for reasons of administrative convenience only, each Purchaser and its respective counsel have chosen to communicate with the Company through one entity or one legal counsel. The Company has elected to provide all Purchasers with the same terms and Transaction Documents for the convenience of the Company and not because it was required or requested to do so by any of the Purchasers. It is expressly understood and agreed that each provision contained in this Agreement and in each other Transaction Document is between the Company and a Purchaser, solely, and not between the Company and the Purchasers collectively and not between and among the Purchasers.
5.14 Fridays, Saturdays, Sundays, Holidays, etc. If the last or appointed day for the taking of any action or the expiration of any right required or granted herein shall not be a Business Day, then such action may be taken or such right may be exercised on the next succeeding Business Day.
5.15 Construction. The parties agree that each of them and/or their respective counsel have reviewed and had an opportunity to revise the Transaction Documents and, therefore, the normal rule of construction to the effect that any ambiguities are to be resolved against the drafting party shall not be employed in the interpretation of the Transaction Documents or any amendments thereto. In addition, each and every reference to share prices and Ordinary Shares in any Transaction Document shall be subject to adjustment for reverse and forward stock splits, stock dividends, stock combinations and other similar transactions of the Ordinary Shares that occur after the date of this Agreement.
5.16 Confidentiality. No party to this Agreement shall disclose or issue any public statement or press release concerning, or relating to, this transaction, without the prior written approval of the other party of the substance and form of any such statement or release, except as, and only to the extent required, (a) to exercise any of its rights or fulfill any of its obligations under the Agreement, or (b) as may be required under applicable Law.
(Signature Pages Follow)
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IN WITNESS WHEREOF, the parties hereto have caused this Share Purchase Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.
| Wearable Devices Ltd. | Address for Notice: | |||
| By: | /s/ Asher Dahan | Email: | ||
| Name: | Asher Dahan | asher.dahan@wearabledevices.co.il | ||
| Title: | CEO; Director | |||
| With a copy to (which shall not constitute notice): | ||||
|
Email: ohareven@sullivanlaw.co.il | ||||
Oded Har Even, Adv.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
SIGNATURE PAGE FOR PURCHASER FOLLOWS]
[Company’s Signature page- SPA dated April
22, 2021]
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EXHIBIT A
[PURCHASER SIGNATURE PAGES TO SHARE PURCHASE AGREEMENT]
IN WITNESS WHEREOF, the undersigned have caused this Share Purchase Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.
Name of Purchaser: Alpha Capital Anstalt
Signature of Authorized Signatory of Purchaser: /s/ Nicola Feuerstein
Name of Authorized Signatory: Nicola Feuerstein
Title of Authorized Signatory: Director
Email Address of Authorized Signatory: feuerstein@alphacapital.li
Address for Notice to Purchaser: Altenbach 8, FL 9490 Vaduz
Address for Delivery of Shares to Purchaser (if not same as address for notice):
Subscription Amount:
At the Closing: $1,000,000
Shares: 444,091
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EXHIBIT A-11
CLA Conversion Date 22/04/2021
| Investor | Execution Date |
Amount | Interest Rate | Accrued Interest until Conversion |
Total Amount |
|||||||||||||
| O.O Tamar LTD | 24/01/2017 | $ | 250,000 | 4.00% | $ | 42,438 | $ | 292,438 | ||||||||||
| El Qadsiya 2008 LTD | 24/01/2017 | $ | 75,000 | 4.00% | $ | 12,732 | $ | 87,732 | ||||||||||
| Algodar LTD | 12/03/2017 | $ | 75,000 | 4.00% | $ | 12,345 | $ | 87,345 | ||||||||||
| Mudra CEO LLC | 26/04/2018 | $ | 600,000 | 4.00% | $ | 71,803 | $ | 671,803 | ||||||||||
| Yu Lau | 16/01/2019 | $ | 100,000 | 4.00% | $ | 9,063 | $ | 109,063 | ||||||||||
| Yu Lau | 16/04/2019 | $ | 200,000 | 4.00% | $ | 16,153 | $ | 216,153 | ||||||||||
| Mudra CEO LLC | 04/11/2019 | $ | 100,000 | 8% for 6 months and thereafter 4% |
$ | 7,836 | $ | 107,836 | ||||||||||
| Hubble Ventures Co., Ltd. | 01/12/2019 | $ | 1,500,000 | No Interest | $ | - | $ | 1,500,000 | ||||||||||
| Total | $ | 2,900,000 | $ | 3,072,370 | ||||||||||||||
| 1 | Exhibit A-1 of the executed copy of the Share Purchase Agreement included only the names of the Lenders without execution dates and amounts—this information is included herein for clarity. |
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EXHIBIT B
WARRANT
THIS WARRANT AND THE SHARES WHICH MAY BE PURCHASED UPON THE EXERCISE OF THIS WARRANT HAVE BEEN ACQUIRED SOLELY FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”), OR THE SECURITIES LAW OF ANY NON-U.S. JURISDICTION. SUCH SECURITIES MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF SUCH REGISTRATION OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY AND ITS COUNSEL THAT SUCH SALE, OFFER, PLEDGE OR HYPOTHECATION IS EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF THE ACT AND OF ANY APPLICABLE SECURITIES LAW OF ANY NON-U.S. JURISDICTION UNLESS SOLD PURSUANT TO RULE 144 OF THE ACT OR ANY OTHER SECURITIES LAW OF A NON-U.S. JURISDICTION.
WARRANT TO PURCHASE SHARES
OF
WEARABLE DEVICES LTD.
April 22, 2021
Terms not defined herein shall have the meaning ascribed to them in the Share Purchase Agreement executed on or around the date hereof (“SPA”).
Wearable Devices Ltd. an Israeli company, Reg. No. 51-505611-7 (the “Company”), hereby grants to Alpha Capital Anstalt (the “Holder”) the right to purchase from the Company during the exercise period set forth in Section 2 below, up to 8,690 Ordinary Shares of the Company, par value NIS 0.01 (the “Warrant Shares”), subject to the terms and conditions set forth below (“Warrant”).
1. Exercise Price. The exercise price for each Warrant Share purchasable hereunder shall be equal to an amount in United Stated Dollars which is 125% (One Hundred and Twenty Five Percent) of the Per Share Purchase Price at the IPO (as defined in the SPA), subject to adjustments under Section 6 of this Warrant (the “Exercise Price”).
2. Term. The Warrants shall be exercisable until the earlier to occur of: (i) Eighteen (18) months from the Public Company Date; (ii) a Change of Control (defined below), or (iii) the third anniversary of the Closing Date (the “Term”).
A “Change of Control” means any of the following events (whether in one or in a series of related transactions): (i) a sale of all or substantially all of the Company’s assets or the majority of the shares; (ii) a merger, consolidation or other business combination of the Company with or into another entity (other than a wholly owned subsidiary) in which the Company’s shareholders immediately prior to such transaction do not hold a majority of the voting power of the surviving entity; (iii) the sale, lease, transfer, or exclusive license or other disposition of all or substantial all of the Company’s intellectual property.
3. Exercise of Warrant. This Warrant may be exercised in whole or in part on one or more occasions during its Term.
a. Exercise for Cash. The Warrant may be exercised by the surrender of the Warrant to the Company at its principal office together with the Notice of Exercise annexed hereto as Exhibit A, duly completed and executed on behalf of the Holder.
b. Issuance of Shares on Exercise. The Company agrees that the Warrant Shares acquired hereunder shall be issued against receipt of the Notice of Exercise and payment (as provided in Section 3(a) above) and the Holder shall be deemed the record owner of such Warrant Shares as of and from the close of business on the date on which this Warrant shall be surrendered, together with payment in full. In the event of a partial exercise, the Company shall concurrently issue to the Holder a replacement Warrant on the same terms and conditions as this Warrant, but representing the number of Warrant Shares remaining after such partial exercise.
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c. Conditional Exercise. In connection with any Change of Control, such exercise may be made conditional upon the completion of such transaction.
4. Fractional Interest. No fractional shares will be issued in connection with any exercise hereunder. In the event of fractional shares, the Company shall round the number of Warrant Shares issuable upon such exercise up to the nearest whole share.
5. Warrant Confers No Rights of Shareholder. This Warrant does not, by itself, entitle the Holder to any voting rights or other rights as a shareholder of the Company. The Holder shall not have any rights as a shareholder of the Company with regard to the Warrant Shares prior to actual exercise resulting in the purchase of any Warrant Shares.
6. Adjustment of Exercise Price and Number of Shares. The number and kind of securities purchasable initially upon the exercise of this Warrant and the Exercise Price shall be subject to adjustment from time to time upon the occurrence of certain events, as follows:
a. Adjustment for Shares Splits and Combinations. If the Company at any time or from time to time effects a subdivision of its outstanding shares, the number of Warrant Shares issuable upon exercise of this Warrant immediately before the subdivision shall be proportionately increased, and conversely, if the Company at any time or from time to time combines its outstanding shares, the number of Warrant Shares issuable upon exercise of this Warrant immediately before the combination shall be proportionately decreased. Any adjustment under this Section 6(a) shall become effective at the close of business on the date the subdivision or combination becomes effective.
b. Adjustment for Certain Dividends and Distributions In the event the Company at any time, or from time to time makes, or fixes a record date for the determination of holders of its shares entitled to receive a dividend payable in additional shares, or other distribution payable in additional shares, then and in each such event the number of Warrant Shares issuable upon exercise of this Warrant shall be increased as of the time of such issuance or, in the event such a record date is fixed, as of the close of business on such record date, by multiplying the number of Warrant Shares issuable upon exercise of this Warrant by a fraction: (i) the numerator of which shall be the total number of shares issued and outstanding immediately prior to the time of such issuance or the close of business on such record date plus the number of shares issuable in payment of such dividend or distribution, and (ii) the denominator of which is the total number of shares issued and outstanding immediately prior to the time of such issuance or the close of business on such record date; provided, however, that if such record date is fixed and such dividend is not fully paid or if such distribution is not fully made on the date fixed thereof, the number of Warrant Shares issuable upon exercise of this Warrant shall be recomputed accordingly as of the close of business on such record date and thereafter the number of Warrant Shares issuable upon exercise of this Warrant shall be adjusted pursuant to this Section 6(b) as of the time of actual payment of such dividends or distributions.
c. Adjustment for Reclassification, Exchange and Substitution. If the Warrant Shares issuable upon the exercise of this Warrant are changed into the same or a different number of shares of any class or classes of shares, whether by recapitalization, reclassification or otherwise (other than a subdivision or combination of shares or share dividend, provided for elsewhere in this Section), then and in any such event the Holder shall have the right thereafter to exercise this Warrant into the kind and amount of shares and other securities receivable upon such recapitalization, reclassification or other change, by holders of the number of shares for which this Warrant might have been exercised immediately prior to such recapitalization, reclassification or change, all subject to further adjustment as provided herein and under the Company’s Amended and Restated Articles of Association (“Restated Articles”).
36
d. Reorganization. If at any time or from time to time there is a capital reorganization of its shares (other than a recapitalization, subdivision, combination, reclassification or exchange of shares provided for elsewhere in this Subsection), then, as a part of such reorganization, provision shall be made so that the Holder shall thereafter be entitled to receive upon exercise of this Warrant, the number of shares or other securities or property of the Company, to which a holder of shares deliverable upon conversion would have been entitled on such capital reorganization. In any such case (except to the extent any cash or property is received in such transaction), appropriate adjustment shall be made in the application of the provisions of this Subsection and the Restated Articles with respect to the rights of the Holder after the reorganization to the end that the provisions of this Subsection (including adjustment of the number of shares of Warrant Shares issuable upon exercise of this Warrant) shall be applicable after that event and be as nearly equivalent to the provisions hereof as may be practicable.
e. Adjustment of Exercise Price. Upon each adjustment in the number of Warrant Shares purchasable hereunder, the Exercise Price shall be proportionately increased or decreased, as the case may be, in a manner that is the inverse of the manner in which the number of Warrant Shares purchasable hereunder shall be adjusted.
f. No Change Necessary; Certain IPO Adjustments. The form of this Warrant need not be changed due to any adjustment in the Exercise Price or in the number and/or character of Warrant Shares issuable upon its exercise; provided however, that if the Exercise Price and the number of Warrant Shares is adjusted pursuant to the provisions of Section 2.1(d) of the SPA, then the Company shall issue to the Holder a new Warrant reflecting such adjustments following completion of the IPO.
g. Other Events. If, while this Warrant, or any portion hereof, remains outstanding and unexpired, any other event occurs as to which the provisions of this Section 6 do not strictly apply or if strictly applicable would not fairly protect the purchase rights of the Holder in accordance with the provisions hereof, then the Board shall make an adjustment in the number and class of shares available under the Warrant, the Exercise Price or the application of such provisions, so as to protect such purchase rights as aforesaid. The adjustment shall be such as will give the Holder upon exercise for the same aggregate Exercise Price the total number, class and kind of shares as such Holder would have owned had the Warrant been exercised immediately prior to the event and had the Holder continued to hold such shares until after the event requiring adjustment.
h. General Protection. The Company will not, by amendment of its Restated Articles or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder, but will at all times in good faith assist in the carrying out of all the provisions hereof. The Company agrees and undertakes that at all times it will maintain and reserve such number of authorized but unissued Warrant Shares so that this Warrant may be exercised into Warrant Shares immediately pursuant to its terms.
7. Notice of Adjustments. Whenever the number of Warrant Shares purchasable hereunder or the Exercise Price thereof shall be adjusted pursuant to Section 6 hereof, the Company shall provide notice to the Holder setting forth, in reasonable detail, the event requiring the adjustment, the amount of the adjustment, the method by which such adjustment was calculated, and the number and class of Warrant Shares which may be purchased and the Exercise Price therefor after giving effect to such adjustment.
37
8. Notification of Certain Events. Prior to the expiration of this Warrant pursuant to its terms, in the event that the Company shall authorize:
| (a) | A Change of Control; or |
| (b) | any transaction resulting in the expiration of this Warrant (for avoidance of doubt excluding the automatic expiration of the Warrant at the end of the Term); |
the Company shall deliver to the Holder a written notice of the same, at least 7 business days prior to the designated record date of such event.
9. Transfer. Neither this Warrant nor any rights hereunder may be assigned, conveyed or transferred, in whole or in part, without the Company’s prior written consent, other than to a Permitted Transferee, as defined in the Restated Articles.
10. Terms Binding. By acceptance of this Warrant, the Holder accepts and agrees to be bound by all the terms and conditions of this Warrant
11. Representations and Warranties. The Company represents and warrants to the Holder as follows: (i) all corporate actions on the part of the Company, its officers, directors and shareholders necessary for the sale and issuance of the Warrant and the Warrant Shares and the performance of the Company’s obligations hereunder were taken prior to and are effective as of the effective date of this Warrant; (ii) This Warrant has been duly authorized and executed by the Company and is a valid and binding obligation of the Company enforceable in accordance with its terms; (iii) the Warrant Shares are duly authorized and reserved for issuance by the Company and, when issued in accordance with the terms hereof, will be validly issued, fully paid and non-assessable and not subject to any liens, claims, and encumbrances, preemptive rights or similar rights.
12. Loss, Theft, Destruction or Mutilation of Warrant. Upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of any Warrant or Shares certificate, and in case of loss, theft or destruction, of indemnity, or security reasonably satisfactory to it, and upon reimbursement to the Company of all reasonable expenses incidental thereto, and upon surrender and cancellation of such Warrant or Shares certificate, if mutilated, the Company will make and deliver a new Warrant or Shares certificate of like tenor and dated as of such cancellation, in lieu of such Warrant or Shares certificate.
13. Notices. Any notice or other communication hereunder shall be in writing and shall be deemed to have been given upon delivery, if personally delivered or three business days after deposit if deposited in the mail for mailing by certified mail, postage prepaid, or on the next business day following transmission and electronic confirmation of receipt if sent via electronic mail or facsimile, and addressed as follows: if to the Company – at the Company’s main offices; if to the Holder – at the address set forth opposite its signature below or at such other address which may be provided hereafter by the Holder to the Company in accordance herewith.
14. Governing Law; Jurisdiction. This Warrant shall be governed by and construed in accordance with the laws of the State of Israel regardless of any applicable conflict of laws provisions, and the competent courts in Tel-Aviv-Jaffa, Israel shall have the sole and exclusive jurisdiction over all matters arising in connection with this Warrant.
38
15. Headings. The headings and captions used in this Warrant are used for convenience only and are not to be considered in construing or interpreting this Warrant. All references in this Warrant to sections and exhibits shall, unless otherwise provided, refer to sections hereof and exhibits attached hereto, all of which exhibits are incorporated herein by this reference.
16. Amendment; Waiver; Delay; Cumulative Remedies. Any term of this Warrant may be amended, and the observance of any term of this Warrant may be waived (either generally or in a particular instance and either retroactively or prospectively) only with the written consent of the Company and the Holder. No delay or omission to exercise any right, power or remedy accruing to Holder, upon any breach or default of the Company under this Warrant, shall impair any such right, power or remedy of Holder nor shall it be construed to be a waiver of any such breach or default, or an acquiescence therein, or of or in any similar breach or default thereafter occurring; nor shall any waiver of any single breach or default be deemed a waiver of any other breach or default theretofore or thereafter occurring. All remedies, either under this Warrant or by law or otherwise afforded to any Holder, shall be cumulative and not alternative.
17. Entire Agreement. This Warrant constitutes the entire agreement between the parties hereto with regard to the subject matters hereof, and supersedes any prior communications, agreements and/or understandings between the parties hereto with regard to the subject matters hereof.
18. Taxes. Holder shall bear full responsibility for all tax obligations and consequences relating to the exercise of this Warrant or the Warrant Shares issuable upon the exercise of this Warrant, which by their nature apply to holders of warrants. In the event that the Company is required under applicable law to withhold any tax as a result of the exercise of this Warrant and/or the issuance of the Warrant Shares, the Company will be entitled to withhold such taxes in accordance with applicable law, unless the Company is provided with a valid certificate exempting the Company from, or reducing the due withholding tax in respect of such payment as obtained from the Israeli Tax Authority.
[Signatures to Follow]
39
IN WITNESS WHEREOF, the Company has signed this Warrant to purchase Warrant Shares as of the date first appearing above.
| /s/ Asher Dahan | |
| Wearable Device Ltd. |
| Name: | Asher Dahan | |
| Chief Executive Officer |
| Agreed and Acknowledged: | ||
| /s/ Nicola Feuerstein | ||
| Alpha Capital Anstalt | ||
| By: | Nicola Feuerstein | |
| Date: | April 22, 2021 | |
| Address: | |
| Altenbach 8, FL 9490 Vaduz | |
| Attn: Nicola Feuerstein | |
| Tel: 004232323195 | |
| Fax: | |
| Email: feuerstein@alphacapital.li |
[Signature page to Warrant 2021]
40
NOTICE OF EXERCISE
To: Wearable Devices Ltd.
| 1. | The undersigned hereby elects to purchase _________ Ordinary Shares of Wearable Devices Ltd., pursuant to the terms of the attached Warrant. |
| 2. | Payment. Enclosed is payment / proof of payment of US$ [Exercise Price multiplied by the number of Warrant Shares] in cash. |
| 3. | Please issue a certificate representing said shares in the name of the undersigned. |
| 4. | Please issue a new Warrant for the unexercised portion (if any) of the attached Warrant in the name of the undersigned. |
| (Date) | (Print Name) | |
| (Signature) |
41
EXHIBIT C
AMENDED AND RESTATED ARTICLES OF ASSOCIATION
42
EXHIBIT D
Final for Execution – Lock-Up Agreement
FORM OF LOCK UP AGREEMENT
Wearable Devices Ltd.
2 HaTa’asiya, Yokne’am Illit, Israel
Ladies and Gentlemen:
As an inducement to Wearable Devices Ltd., an Israeli company (“WD”) to issue certain Shares to the undersigned, pursuant to a Share Purchase Agreement, dated April 22, 2021, by and between WD and the undersigned and other investors (the “SPA”), the undersigned hereby agrees that for a period of one hundred and twenty (180) days from the Public Company Date (as defined in the SPA) (the “Lock Up Period”), the undersigned will not, without the prior written consent of WD, directly or indirectly, offer for sale, sell, assign, pledge, issue, distribute, grant any option or any contract for sale of, or otherwise dispose of (any such action being hereafter referred to as a “Transfer”) the Shares (as defined in the SPA) or any portion thereof. Capitalized terms not otherwise defined herein shall be have the respective meanings given to them in the SPA. Notwithstanding the aforesaid, the Lock-Up Period, shall automatically expire earlier, if for three (3) consecutive trading days during the Lock Up Period, the closing price of the Shares shall be at least double the Per Share Purchase Price at the IPO.
In furtherance of the foregoing, WD and its transfer agent and registrar are hereby authorized to decline to make any Transfer of Shares if such transfer would constitute a violation or breach of this Lock-Up Agreement (the “Lock Up Agreement”). This Lock Up Agreement shall be binding on the undersigned and the successors, heirs, personal representatives and assigns of the undersigned.
If the undersigned fails to fully adhere to the terms and conditions of this Lock Up Agreement, the undersigned shall be liable to WD for any damages suffered by it by reason of any such breach of the terms and conditions hereof. The undersigned agrees that in the event of a breach of any of the terms and conditions of this Lock Up Agreement by the undersigned, that in addition to all other remedies that may be available in law or in equity to the non-defaulting parties, a preliminary and permanent injunction, without bond or surety, and an order of a court requiring the undersigned to cease and desist from violating the terms and conditions of this Lock Up Agreement and specifically requiring the undersigned to perform his/her/its obligations hereunder is fair and reasonable by reason of the inability of the parties to this Lock Up Agreement to presently determine the type, extent or amount of damages that WD may suffer as a result of any breach or continuation thereof.
This Lock Up Agreement may be executed in one or more counterparts, each of which will be deemed to be an original copy of this Lock Up Agreement and all of which, when taken together, will be deemed to constitute one and the same agreement. In the event that any signature is delivered by e-mail delivery of a “.pdf” format data file, such signature shall create a valid and binding obligation of the party executing (or on whose behalf such signature is executed) with the same force and effect as if such facsimile or “.pdf” signature page were an original thereof.
This Lock Up Agreement, the rights and obligations of the parties hereto, and any claims or disputes relating thereto, shall be governed by and construed in accordance with the law of the State of Israel without regard to the choice of law provisions thereof. Any disputes shall be resolved in accordance with Section 5.8 of the SPA. The undersigned agrees (a) to furnish upon request to each other such further information, (b) to execute and deliver to each other such other documents, and (c) to do such other acts and things, all as WD may reasonably request for the purpose of carrying out the intent of this Lock Up Agreement and the documents referred to in this Lock Up Agreement.
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Final for Execution – Lock-Up Agreement
| Investor : ALPHA CAPITAL ANSTALT | ||
| By: | ||
| Name: | ||
| Date: | ||
| AGREED AND ACCEPTED: | ||
| WD LTD. | ||
| By: | ||
| Name: | ||
| Date: | ||
44
Exhibit 10.4
CERTAIN IDENTIFIED INFORMATION HAS BEEN EXCLUDED FROM THIS EXHIBIT BECAUSE IT IS BOTH (i) NOT MATERIAL AND (ii) WOULD LIKELY CAUSE COMPETITIVE HARM TO WEARABLE DEVICES LTD. IF PUBLICLY DISCLOSED. OMISSIONS ARE DENOTED IN BRACKETS THROUGHOUT THIS EXHIBIT.
Wearable Devices Ltd.
Number with Registrar of Companies: 515056117
(hereinafter: the “Company”)
Date: July 16, 2020
| To | Company: 9397 |
Israel Innovation Authority
| Re: | Letter of Undertaking and Notice on the Implementation of an Approved Program |
| 1. | We are executing this letter of undertaking and notice on the implementation of an approved program (hereinafter: the “Letter of Undertaking”) with respect to the approval of the committee that is responsible for operating the track (hereinafter: the “Research Committee”) that is attached1 to the Letter of Undertaking as Exhibit A granted on 1 May 2020, with respect to an approved program the details of which are as set forth in this section below (hereinafter: the “Approved Program”): |
The subject of the Approved Program: A snc-based human-machine interface for communication with wearable devices
The Israel Innovation Authority’s benefit track where the file was approved: Benefit track no. 1 – R&D Fund (hereinafter: the “Track”), attached hereto as Exhibit B.
File number in the Israel Innovation Authority’s system: 71327
| 2. | We hereby inform you that we have commenced the implementation of the Approved Program pursuant to the approval the Research Committee granted us. |
| 3. | We declare and undertake to fulfill all of provisions of the Track, the Research, Development and Technological Innovation in Industry Encouragement Law, 5744-1984 (hereinafter: the “Innovation Law”), the rules and procedures set forth thereunder, and the approval of the Research Committee, including: |
| a. | The obligation not to transfer to anyone the information, rights thereon and production rights to derive form the research and development, without the Research Committee’s approval. |
| b. | To pay royalties and to submit all reports pursuant to the provisions of law and of the Track, and pursuant to the procedures and rules set forth thereunder. |
| 1. | A.D. |
| 2. | _____________ |
| 3. _____________ | _____________ |
| Signature with initials | Company stamp |
| c. | We agree to attribute this file with the number: 71327 to program 51481 |
on the subject: sEMG-based human-machine interface for communication with wearable devices.
| 4. | We declare that we have read all the procedures for financial reporting for R&D purposes, and that we shall act pursuant thereto, including with respect to the subject of a computerized system for reporting hours when allocating tasks. |
| 5. | Additional undertakings: |
Royalties are to be paid for the Company’s entire revenue.
| 6. | We hereby declare that we are conducting separate and special account/s as part of the financial accounting for purpose of implementing the Approved Program. The records therein are directly chronological, original, methodical and only pursuant to documentation. |
| 7. | We hereby declare that we are aware of the fact that the grant under discussion is to be paid subject to the terms of the approval, the provisions of the Track, the Innovation Law and the rules and procedures set forth thereunder. |
| 8. | The attached budget2 (Exhibit C) including all of its details, terms and schedules constitutes a binding framework. Costs that deviate from this detailed framework shall not be recognized, except with the prior and written approval of the Israel Innovation Authority. |
| 9. | We undertake to fulfill the following provisions: |
| a. | The company shall be entitled to an advance pursuant to the Israel Innovation Authority’s procedures and the terms set forth in the Research Committee’s approval, provided the program’s implementation really commenced. The advance shall be set off from payments due under the financial statements, except for payment for current tax advances. |
| b. | Any additional payment shall be made pursuant to a detailed financial report that complies with the Israel Innovation Authority’s procedures. The payment shall be made after an examination of such report. The receiver of the grant must submit a financial report once every 3 months, and a technical report at least once every 6 months, on forms of the Israel Innovation Authority or in their format. |
| c. | The accuracy of the financial report shall be confirmed by a competent representative of the Company, and attached to it there shall be documents that attest to actual payment to the subcontractors, if such costs were reported. |
2
| d. | Any payment for the approved grant shall only be calculated retroactively, until the approval of the final report. Until the final report no more than 90% (including the current advance payment) shall be paid from the budgeted grant or for the cost in the financial report, the lower thereof. The balance shall only be paid after receiving a final financial report and a final technical report including CPA confirmation on behalf of the Company. |
The payment shall be made after an examination of the reports by the Israel Innovation Authority, or anyone on its behalf.
| e. | The Company’s books, including the Company’s balance sheets, shall be open for examination on behalf of the Israel Innovation Authority for 7 years from the implementation of the Approved Program, or 6 years from the submission of the final financial report, according to the later date. |
| f. | The Israel Innovation Authority shall have a right to set off any amount it is due from the Company, from the grant that is hereby approved. |
| g. | The company shall not be entitled to terminate the implementation of the Approved Program, except with the written approval of the Israel Innovation Authority. Should the program be terminated without approval, the Israel Innovation Authority shall be entitled to demand the grant to be returned, plus interest and linkage in accordance with law. |
| h. | The Company shall be required to submit a final financial report that is confirmed by an accountant on its behalf, in form acceptable to the Israel Innovation Authority, and a final technical report for the Approved Program, no later than 3 months from the date the Approved Plan is completed. |
| i. | The Israel Innovation Authority is entitled to at all times demand additional technical reports. |
| j. | No cost shall be recognized unless the consideration therefore was paid, except for overhead in the salary section. |
| k. | The final financial report shall recognize costs that accumulated during the R&D period that was approved and which were paid no later than 60 days from its end. |
| l. | The Israel Innovation Authority is entitled to demand interest and linkage differentials in accordance with law for any amount due to it from the receiver of the grant. |
| 10. | We are aware of the fact that the various terms in this Letter of Undertaking do not detract from any provisions of the Innovation Law and of the Track and from any law applicable to the provision of the grant for the Approved Program. |
3
| 11. | We hereby undertake to observe the intellectual property laws as they shall be introduced from time to time in the State of Israel. We are aware of, and we agree to the fact that should we be convicted of an offense under the intellectual property laws, the Israel Innovation Authority shall be entitled to retroactively revoke any benefit that we received from you, including any grant, loan, benefit or other financial gain, or part of such benefit, and to demand from us to return such in addition to interest and linkage differentials in accordance with law. |
Signature Confirmation for a Corporation:
I, the undersigned, Einat Ashkenazy, Adv./CPA, hereby confirm that Wearable Devices Ltd. is duly registered in Israel; that Messrs. Asher Dahan who signed this Agreement in its name, signed it in my presence, and they are authorized to do so on its behalf; and that their signature on this Agreement binds the corporation.
| July 16, 2020 | /s/ Asher Dahan | |||
| Date | Signature and Stamp |
4
Exhibit A
Approval of Research Committee
[**]
A-1
National Authority for Technological Innovation
|
To Wearable Devices Ltd. 202 HaTa’asiya Yokne’am Illit 0 |
Jerusalem, 20 July 2020 Approval Letter: 71327 (Budget Regulation: 38300224) Group: 17 Merkava Request: 1001332688 Supplier no: 41054659 |
Approval Letter
| 1. | We hereby inform you that the research committee in its meeting of 10 June 2020 decided to approve the program as submitted by you on 7 May 2020, concerning: |
| a. | The benefit track of the National Authority for Technological Innovation (hereinafter: the “Authority”) where the request was submitted: |
Benefit track no. 1 – R&D Fund (hereinafter the “Track”)
| b. | Subject of the approved program: snc-based human-machine interface for communication with wearable devices |
| c. | Operator of the approved program: Wearable Devices Ltd. |
Registration no: 515056117
(hereinafter – “Approved Program”)
2.
| a. | The research and development costs that were approved for implementing the Approved Program shall be in an amount of up to: ILS 4,221,459 |
In words: four million two hundred and twenty-one thousand four hundred and fifty-nine shekels
| b. | The approved grant rate is 50% of the development costs (the grant includes an addition for a national priority zone (area/settlement around the Gaza strip) of up to: ILS 2,110,730 |
In words: two million one hundred and ten thousand seven hundred and thirty shekels
| 3. | The approval is stipulated on the fulfillment of the provisions of the Track and of the Research, Development and Technological Innovation in Industry Encouragement Law, 5744-1984 (hereinafter: the “Innovation Law”), the rules and procedures set forth thereunder, and subject to the following conditions: |
| a. | The Approved Program shall be implemented as set forth in your request within a 12 month period – from 1 May 2020 until 30 April 2021 (hereinafter the “Performance Period”). |
Page 1 (continued on Page 2)
A-2
National Authority for Technological Innovation
Jerusalem, 20 July 2020
Approval Letter: 71327
(Budget Regulation: 38300224)
Group: 17
Merkava Request: 1001332688
Supplier no: 41054659
| b. | The company and controlling shareholder or interested party (under such meaning in the Securities Law, 5728-1968) of the company, as applicable, must submit a report to the research committee, on the dates set forth and published on the Authority’s website, of any: (1) changes to the company’s control; (2) changes to the holdings of the company’s means of control that turns a person who is not an Israeli citizen or resident or a company that is not an Israeli corporation to a direct interested party of the company; upon such report the interested party shall execute a letter of undertaking in form to be published on the Authority’s website; in this respect, “holding” or “means of control” – as defined in the Securities Law, 5728-1968. |
| c. | Additional terms: |
Royalties are to be paid for all of the company’s revenues.
| d. | See the schedule on the subject of intellectual property. |
| e. | In the event the company’s assets are charged in favor of an Israeli bank against credit, the company must ensure that the charge shall be subject to the provisions of the Track and the Innovation Law, and the rules and procedures enacted thereunder. |
| f. | Should the program be related to an agreement with an academic institution or academic commercialization company, the company must ensure that the agreement is subject to the provisions of the Track and Innovation Law, and the rules and procedures set forth thereunder. |
Electronically signed by:
Aharon Aharon, on: 20 July 2020, 11:09:45
| Sincerely, | |
| /s/ Aharon Aharon | |
| Aharon Aharon | |
| Director General of the Innovation Authority |
| Attached: |
| 1. | Details of the budgets of the schedule to the approval letter |
| 2. | Letter of undertaking |
| 3. | Rules set forth by the research committee for executing the provisions of the Track and Innovation Law, and the rules and procedures set forth thereunder |
| 4. | Intellectual property schedule to the approval letter |
Page 2 (Last Page)
A-3
Exhibit B
Benefit Track No. 1 – R&D Fund
| 1. | General |
| 1.1. | The Israel Innovation Authority (hereinafter: the “Innovation Authority” or “Authority”) directly or indirectly assists and incentivizes the promotion of industrial technological innovation in Israel through a variety of tracks, tools and actions that it takes. |
| 1.2. | The purpose of Benefit Track No. 1 – R&D Fund (hereinafter: the “Benefit Track”) is to support research and development programs of industrial corporations, by providing grants for such research and development programs. |
| 2. | Definitions |
In this Benefit Track, the following terms shall be designated the definition appearing in this section, except if defined otherwise in the Innovation Law or in the Benefit Track itself. A term that was not explicitly defined in this Benefit Track shall be given the meaning pursuant to the Innovation Law.
| 2.1. | “Application” |
Application to receive a benefit during a certain period in the framework of a program.
| 2.2. | “Government Entity” |
A government ministry or corporation established pursuant to law.
| 2.3. | “Research and Development Costs” |
Costs spent when performing research and development pursuant to an Approved Program, with respect to which the Research Committee in the Benefit Track procedures determined that they can be taken into account pursuant to terms set forth in this track.
| 2.4. | “Research Committee” or “Committee” |
Under its meaning in section 3 below.
| 2.5. | “Innovation Law” |
The Encouragement of Research, Development and Industrial Technological Innovation Law, 5744-1984.
B-1
| 2.6. | “entrepreneur from a group with preferential financing terms” |
An individual who formulated the idea at the basis of the program subject of the Application and who meets the following conditions:
| a. | They are all Israeli residents. |
| b. | They are all part of, and declared when submitting the Application that they are part of, at least one group with preferential financing terms. |
| c. | When dealing with an individual – he/she is a full-time employee of the Applicant. |
| d. | When dealing with an individual from a group with preferential financing terms for women (section 2.12(a) below) – she must be employed full-time at the Applicant in the role of CEO and/or CTO. |
| e. | When dealing with a few entrepreneurs – at least one of them is employed in the role of CEO and/or CTO of the Applicant, and they are all employed full time at the Applicant or, subject to the Committee’s approval, less than full time. |
| 2.7. | “Applicant” or “Submitter of the Application” |
An industrial corporation that submitted an application to receive a benefit that is granted in the framework of the Benefit Track.
| 2.8. | “Complementary Financing” |
Financing for an Approved Program that is provided directly or indirectly by the Submitter of the Application or by a different financing entity that is not a Government Entity or the Innovation Authority, which supplements the grant to a scope of 100% of the Approved Budget.
| 2.9. | “Grant” |
Financing provided by the Innovation Authority to the Approval Recipient for the purpose of executing an Approved Program within the framework of the Approved Budget.
| 2.10. | “Approval Recipient” |
A person whose Application was approved as set forth in section 7.1 below.
| 2.11. | “Trial Device” |
A prototype, test model or pilot device used for examining the programming, proof of value, unlocking changes and improvements or adjusting existing technology, in a work environment partially or fully simulating its target market. In addition, their application shall be on a limited scale and for a limited period of time, and prior to being released for serial production or to being commercially introduced.
B-2
| 2.12. | “group with preferential financing terms” |
One of the following:
| a. | Women. |
| b. | “minority population” – as such term is defined in Government Resolution No. 922 dated 30 December 2015. |
| c. | An observant Jew, who is unique in terms of his religious observance and in terms of his education, nature of the community and lifestyle, which distinguish such person from other observant Jews, who meets one or more of the following conditions: |
| 1. | The places of study of his kids up to the age of 18 are known Haredi educational institutions, which are not formal institutions or “exempt” institutions, whose licenses are regulated by the Ministry of Education. |
| 2. | He learned in a Yeshiva Ketana [orthodox Jewish secondary school] or Yeshiva Gedola [Jewish educational institution]. |
| 3. | In the last five years, for at least one full year, he was entitled to a “scholarship for encouraging the integration of married yeshiva students in the work force” (which in the past was referred to as “guaranteed income for married yeshiva students”), under eligibility tests published by the Ministry of Education. |
| 4. | He received an exemption from military service pursuant to the Security Service Law [Consolidated Version], 5746-1986, due to affiliation with the Haredi community. |
| 5. | For women: she learned in a Haredi seminary, or her husband learned in a Yeshiva Ketana. |
| 2.13. | “Value-Added Rate” |
The cost of production performed in a certain country, less costs imported to that country for production, with respect to the product’s factory price.
| 2.14. | “Control” |
Under its meaning in the Securities Law, 5728-1968.
| 2.15. | “Startup Corporation” |
An industrial corporation that was incorporated 5 years or less before the date the Application was submitted, and the total requested budget in all of its Applications that were submitted in this Benefit Track during the calendar year does not exceed ILS 5 million.
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| 2.16. | “Startup Corporation of an entrepreneur from a group with preferential financing terms” |
A Startup Corporation with at least 33% of its share capital (on a fully diluted basis) directly or indirectly held by an entrepreneur from a group with preferential financing terms.
| 2.17. | “Industrial Corporation” |
A corporation duly incorporated and registered in Israel, operating pursuant to the laws of the State of Israel, which conducts research and development for commercial purposes.
| 2.18. | “Approved Program” |
A program that was approved by the Committee pursuant to the provisions of this Benefit Track.
| 2.19. | “Approved Budget” |
The total budget of an Approved Program, consisting of the Grant and Complementary Financing, which only includes recognized costs that were approved by the Committee, in accordance with the relevant procedures that it shall determine.
| 3. | The Committee |
| 3.1. | Composition of the Committee |
The following shall be members of the Research Committee:
| a. | Chairman of the Board of the Innovation Authority – member and chairman of the Committee; |
| b. | The CEO of the Innovation Authority – member and deputy chairman of the Committee; |
| c. | Three employees of the Innovation Authority who shall be appointed by the CEO of the Innovation Authority – members; |
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| d. | Two employees of the Ministry of Economy and Industry with academic degrees in areas pertaining to the work of the Committee, which shall include the Director General of the Ministry of Economy and Industry – members; |
| e. | A representative in charge of budgeting at the Ministry of Finance to be appointed by the Minister of Finance – member; |
| f. | A representative of the Accountant General at the Ministry of Finance to be appointed by the Minister of Finance – member; |
| g. | Five representatives from the public – members. |
| 3.2. | Deputy chairman of the Committee |
| a. | One of the Committee members from the Innovation Authority employees to be appointed by the Chairman of the Board of the Innovation Authority and CEO of the Innovation Authority shall be authorized to serve as Deputy CEO of the Innovation Authority in the role of deputy chairman of the Committee. |
| b. | This employee of the Innovation Authority can serve as deputy chairman of the Committee subject to the provision of written authorization from the Chairman of the Board of the Innovation Authority prior to the specific consideration of the Committee. |
| 3.3. | The role of the Committee and its powers |
| a. | The Research Committee shall serve as a research committee (under such meaning in the Innovation Law) for purposes of this Benefit Track. The Research Committee has the power to make any decision required for the purpose of managing the Benefit Track (provided it does not contradict the provisions of the Innovation Law, or the regulations, rules, procedures and provisions set forth thereunder), including: |
| 1. | Consider any Application submitted in the framework of the Benefit Track. |
| 2. | Take any action for the purpose of examining and assessing the Applicant’s representations, including with respect to the manner in which the program is implemented. |
| 3. | Make a decision with respect to approving the program within the framework of the Innovation Authority budget and determine conditions for their approval, and make a decision regarding the provision of benefits for programs and their amount, including the budgets submitted in the programs in full or in part. |
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| 4. | Approve or reject any Application submitted in the framework of the Benefit Track after examining the Application’s compliance with the threshold conditions and according to the criteria. |
| 5. | Set forth preliminary conditions for a program approval becoming effective. |
| 6. | Set forth the conditions for executing the Approved Program, including milestones, timetables and timeframe of the program. |
| 7. | Approve or reject in full or in part any change requested to be made in the Approved Program. It is clarified that the provisions of section 6.1 (threshold condition) and 6.2 (criteria) below shall apply to the approval of changes to the program, mutatis mutandis. |
| 8. | Monitor the implementation of an Approved Program and decide whether to set forth additional conditions and milestones for it. |
| 9. | Approve an extension of the execution period of the Approved Program with no additional budget, until full utilization of the Approved Budget. |
| 10. | Approve a shortening of the execution period of the Approved Program, should the Approved Budget be utilized in full and should the targets of the Approved Program be achieved. |
| 11. | Terminate or cease the support of an Approved Program. |
| 12. | Determine and publish procedures for implementing this Benefit Track. |
| b. | The Chairman of the Board of the Innovation Authority shall be entitled to appoint subcommittees from among the members of the Research Committee, and to determine the auxiliary actions that the subcommittees can take for purposes of the Committee’s activity. |
| 3.4. | Reward |
Committee members from among the public shall be entitled to a reward for participating in the Committee’s meetings, pursuant to the procedure determined by the Innovation Authority Board in this respect.
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| 4. | Framework of the public solicitation |
| 4.1. | The Application shall be submitted in one or more of the three ways set forth below, as shall be published on the Innovation Authority’s website: |
| a. | Invitation to tender |
| 1. | The Innovation Authority shall from time to time publish a designated public solicitation for submitting Applications for receiving a grant. The public solicitation shall include, inter alia, the deadline for submitting the Applications. |
| 2. | All the Applications that were submitted by the deadline for submitting the Applications shall be presented to the Committee, and they shall be examined against each other, pursuant to the allocated budget. Applications that were submitted late shall be rejected outright. |
| b. | Annual-regular submission |
| 1. | Applications for receiving a grant shall be submissible throughout the year, pursuant to the provisions and rules set forth in the track’s procedures. |
| 2. | During any period as shall be set forth in the Benefit Track procedures, all the Applications that were received and were ready for consideration by such deadline shall be presented to the Committee, and they shall be examined pursuant to the provisions of the Benefit Track and pursuant to the allocated budget. |
| c. | Submission on predetermined dates |
| 1. | The submission of Applications for receiving a grant shall be possible on a few predetermined dates during the year, as shall be determined in the Benefit Track procedures. |
| 2. | All the Applications that were filed by the deadline for submitting Applications shall be presented to the Committee, and they shall examine them against each other, pursuant to the allocated budget. Applications that were submitted late shall be rejected outright. |
| 4.2. | In the framework of each process of submitting Applications for receiving a grant (as set forth in section 4.1 above), the Research Committee is entitled to devote the process to one or more of the following: |
| a. | Applications where the Applicants are: (a) Startup Corporations; or (b) corporations that are not Startup Corporations; or |
| b. | Applications with limitations on the requested budget, including Applications of Applicants all of whose Applications to the Innovation Authority in a calendar year do not exceed a certain amount. |
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| 4.3. | An Applicant who is interested in submitting more than one Application in the framework of a process for submitting Applications to receive a grant (as set forth in section 4.1 above), shall submit all of its Applications on the same date (within 24 hours from the date of its first submission in the same process, subject to the deadline for submitting Applications in the process, if any), subject to the following provisions: |
| a. | It is clarified that in processes of the annual-regular submission type and submission on predetermined dates (sections 4.1(b) and 4.1(c) above, respectively), the Applicant must submit all of its Applications of that same calendar year on the same date. |
| b. | If the Applicant is a Startup Corporation whose previous Application in an annual-regular submission type process (section 4.1(b) above) was rejected, and no reconsideration was submitted on the matter by the end of the date set forth in section 11 below (reconsideration) or if the Application was also rejected in the reconsideration, the Applicant shall be entitled to submit one additional Application in that process during the same calendar year. It is clarified that such additional Application shall not exclude an Applicant from the definition of a Startup Corporation as set forth in section 2.15 above, provided the total budget requested in the additional Application does not exceed ILS 5 million. |
| c. | The Research Committee shall be entitled, in special cases and for reasons to be committed to paper, to allow the Applicant to submit additional Applications on a different date. |
| 5. | Manner of Application submission |
| 5.1. | An Application for receiving a grant shall be submitted subject and pursuant to the provisions and rules of this Benefit Track and its procedures, and pursuant to the terms to be set forth in a public solicitation that shall be published on the Authority’s website, including with respect to the deadline for submitting the Application. |
| 5.2. | An Application to receive a grant shall be submitted to the Innovation Authority on a designated form, prepared in accordance with the rules and procedures that the Committee set forth or shall set forth from time to time, including a declaration regarding the place of production and the Value-Added Rate of the Approval Recipient, including details on the holders of the rights to the knowhow arising from research and development under the Approved Program and any right deriving therefrom, and shall be accompanied by additional documents, as per the request of the Committee or of an entity authorized by it. |
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| 5.3. | The documents for submitting an Application to receive a grant shall be available for download on the Authority’s website. |
| 5.4. | Applications to receive a grant shall be submitted as a file for an execution period of up to 12 months or up to 24 months, as shall be set forth in the track’s procedures and pursuant to the following type of companies, in full or in part: (a) Startup Corporations; or (b) corporations that are not Startup Corporations. |
| 5.5. | Applications are to be submitted to the Innovation Authority full and complete, including all the required and relevant information and documents. For Applications submitted after the deadline for submitting Applications, if any, or Applications with substantive deficiencies, as shall be set forth in the track’s procedures, no file shall be opened on the Innovation Authority’s systems and the Applications shall not be considered by the Research Committee. |
| 6. | Examination of the Application |
| 6.1. | Threshold conditions for the provisions of a grant |
The Application and Applicant in the framework of this Benefit Track must be to the satisfaction of the Research Committee and meet all of the following threshold conditions cumulatively. It is clarified and emphasized that the threshold conditions must be met on the date the Application is submitted and for the duration of the entire program execution period, and that not meeting one of the following threshold conditions shall result in the disqualification of the entire Application or the cancellation of the Approved Program:
| a. | The Applicant is an Industrial Corporation that submitted an application for research and development support. |
| b. | The research and development subject of the program, including all of its components, is to be conducted in Israel, by Israeli residents, unless the Research Committee was convinced, for reasons to be committed to paper, that conducting the program is essential owing to the fact that part of the program is not to be conducted in Israel or not by Israeli residents. |
| c. | The research and development as part of an Approved Program is to be conducted by the Applicant or by whomever the Applicant specified in the program that the research and development, or part thereof, would be transferred to be conducted by it, or by a performing party that was approved under section 3.3(a)(7) above (change of program). |
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| d. | The Applicant warranted that it shall be the holder of the knowhow arising from research and development under the Approved Program and of any right deriving therefrom, including intellectual property rights, from the moment they are formed. In an Application that includes co-ownership of knowhow, as defined in section 14.3 below, all the owners of the knowhow warranted as foregoing. |
| e. | The program subject of the Application shall not be executed pursuant to an order of anyone other than the Application, in exchange for full or partial payment that is made against granting partial or full ownership rights in the knowhow or the product. |
| f. | The Submitter of the Application has no entirely or partially identical application for financing a program, which is being examined in any of the Innovation Authority’s benefit tracks, including secondary tracks. |
| g. | No financial aid for executing the file subject of the Application was received directly or indirectly from a Government Entity or from the Innovation Authority, which was not in line with the provisions of this Benefit Track. No additional benefit shall be granted for an approved file for which in the past a benefit was granted pursuant to the provisions of this Benefit Track. |
| h. | The Applicant does not have any restricted accounts and is not in a process of receivership, stay of proceedings, liquidation, etc. |
| i. | The Applicant and its controlling shareholders are in compliance with the requirements of the Encouragement of Research and Development in Industry (Approval Stipulation – Minimum Wage) Regulations, 5771-2011. |
| j. | Should the Innovation Authority reject the Application submission process as set forth in section 4.2 above, the Applicant or the Application, as applicable, are: (a) a Startup Corporation or a corporation that is not a Startup Corporation, as applicable; or (b) within the limits of the requested budget. |
| 6.2. | The criteria |
The Committee shall consider the Applications that met the threshold conditions and assess their nature pursuant to the following criteria:
| a. | The level of technological innovativeness and uniqueness of the program subject of the Application. |
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| b. | The level of challenges in implementing the program subject of the Application. |
| c. | The Applicant’s capabilities, including management capabilities and capabilities in bringing about the completion of the program subject of the Applications and its business implementation. |
| d. | The business-financial growth potential of the Applicant due to the success of the program subject of the Application. |
| e. | The technological and employment contribution of the program subject of the Application to Israel’s economy and the growth to the scale of the Applicant’s activity in Israel, including production activity. |
| 6.3. | In each of the examination phases of the Application, the Committee shall be entitled to receive and be supported by an opinion from various entities in the Innovation Authority and/or external entities, including an opinion from professional examiners on behalf of the Innovation Authority. |
| 6.4. | The Research Committee, or anyone on its behalf, including external entities, shall be entitled to contact the Applicant during the examination and assessment with a request for clarifications or with a request to receive additional information and documents that are required for purposes of examining the Application. The Applicant shall send the Research Committee, or anyone authorized to such end, any information and additional documents to be requested, which are required for the purpose of examining the Application. |
| 7. | The Committee’s decision |
| 7.1. | After examining the Application as set forth above, the Committee shall make a decision on whether to approve or reject the Application. Notice regarding such decision shall be sent to the Applicant. |
| 7.2. | If the Committee approves the file or part thereof: |
| a. | The Committee shall determine the Approved Budget and the grant amount to be provided to the Applicant, as set forth in section 8 below. |
| b. | The Applicant shall be required to sign onto a budget and letter of undertaking in a form to be determined by the Committee. |
| c. | The Application’s approval shall take effect after the Authority signs a certification letter that shall include, inter alia, the period of the file, the rate and amount of the grant, and additional terms if set by the Committee. |
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| 8. | Grant for an Approved Program |
| 8.1. | If the Committee approved the Application, it shall determine the grant amount to be provided to the Applicant, pursuant to its assessment of the Application as set forth in section 6.2 above (the criteria), and in accordance with the objectives of the Benefit Track as set forth below: |
| a. | The grant shall be at a rate of 20%, 30%, 40% or 50% of the Approved Budget. |
| b. | In its decision regarding the grant amount, the Research Committee shall give significant weight to the declaration of the Approval Recipient with respect to the original production rate in Israel (as such term is defined in section 15.1 below). |
| c. | A supplement shall be provided to the grant as set forth in section 8.1 above, pursuant to the rules set forth in Provisions Annex A – Supplement to amounts set by the Research Committee, in National Priority Areas; in this respect, “National Priority Areas” – the areas set forth under section 40D of the Encouragement of Capital Investments Law, 5719-1959, or other areas set by the government, from time to time, with respect to benefits under such law. |
| 8.2. | If the Applicant is a Startup Corporation of an entrepreneur from a group with preferential financing terms, and the program subject of the Application is the first program that the Applicant submitted in the framework of this Benefit Track (including, for the avoidance of doubt, Benefit Track No. 23 – starting companies, which was integrated into this Benefit Track), the following provisions shall apply: |
| a. | In an Application for the first execution period of the program, should the requested budget not exceed ILS 2.5 million, instead of the grant amount as set forth in section 8.1(a) above, the grant shall be 75% of the Approved Budget. |
| b. | In an Application for the second execution period of the program, instead of the grant amount as set forth in section 8.1(a) above, the grant shall be 70% of the Approved Budget. |
| c. | No additional National Priority Areas as set forth in section 8.1(c) above shall be given to the grant. |
| 9. | Guarantees |
The chairman of the Research Committee is entitled to require guarantees for securing returns-in-kind and in order to ensure fulfillment of the provisions of the Benefit Track, pursuant to the provisions to be set in this respect by the Innovation Authority Board.
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| 10. | Loans |
The Committee is entitled to approve, per the Applicant’s request, that instead of a grant under the provisions of this Benefit Track the Applicant shall be provided with a loan, in accordance with the provisions to be determined in this respect by the Innovation Authority Board.
| 11. | Reconsideration |
| 11.1. | The Committee shall reconsider any decision that it issued, if within 45 days from the date notice was received of the Committee’s decision, the Applicant, regarding which the Committee decision was issued, submitted a reasoned written request for reconsideration. |
| 11.2. | Submission of a request for reconsideration by the Applicant requires the payment of a fee pursuant to the regulations set forth in this respect by virtue of the Innovation Law. |
| 12. | Advance payments |
The Research Committee shall be entitled to approve advance payments on account of the grant, pursuant to the provisions to be set forth in this respect by the Innovation Authority Board. It is clarified that an advance payment on account of the grant shall be considered a grant.
| 13. | Double support |
| 13.1. | It is clarified that it is prohibited to receive additional assistance directly or indirectly from the Innovation Authority and/or from a Government Entity, for components in the Approved Program. |
| 13.2. | If the program or part thereof was funded by anyone other than the Applicant, not in the framework of an order of such other entity under section 6.1(e) above and not in the framework of assistance from the Innovation Authority, the financing amount shall be deducted from the program’s Approved Budget. |
| 14. | Knowhow |
| 14.1. | The Approval Recipient must be and must ensure to remain the owner of the knowhow arising from research and development pursuant to the Approved Program, and any right deriving therefrom, including intellectual property rights, from the time of their formation, unless it received approval to transfer them pursuant to the provisions of this Benefit Track. |
| 14.2. | Knowhow arising from research and development under an Approved Program, which is not the product that was developed as part of such program, and any right deriving therefrom, shall not be transferred to any other entity in or outside of Israel. The Research Committee is in special cases entitled to approve a request to transfer knowhow to or outside of Israel that arises from research and development under an Approved Program which is not the product that was developed in the framework of such program, and any right arising therefrom as set forth in Provisions Annex B – Provisions regarding the transfer of knowhow and the granting of Licenses. |
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| 14.3. | Notwithstanding section 14.1 above (the Approval Recipient and the owner of the knowhow), the Research Committee is entitled to approve co-ownership of the Approval Recipient and an additional entity of the knowhow arising from research and development pursuant to the Approved Program, and any right deriving therefrom, including intellectual property rights, all under the conditions and subject to the provisions set forth in this section. |
| a. | In this section 14.3: |
| 1. | “Israeli Research Institution” |
Each of the following:
| (a) | An institution for higher education as such term is defined in the Innovation Law; |
| (b) | A hospital and health corporation as defined in section 21 of the Budget Foundations Law; |
| (c) | The head of the Agricultural Research Organization; |
| (d) | An institution in Israel primarily engaged in academic research and development, in a scientific or technological field, and which is active in the transfer of knowhow to industry, provided it is approved by the Committee as a research institution with respect to this track in special cases and for reasons to be committed to paper. |
| 2. | “Application Company” |
A corporation incorporated in Israel that operates pursuant to the laws of the State of Israel and which is either of the following:
| (a) | It is wholly owned by an Israeli Research Institution, and it is primarily engaged in the commercialization of the technologies created in the framework of the academic research of such research institution. |
| (b) | A corporation whose primary activity is the commercialization of technologies created in an Israeli Research Institution, provided the Committee approved it to be an Application Company with respect to this track in special cases and for reasons to be recorded. |
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| 3. | “License” |
A permit or license for exclusive, unlimited and irreversible use of the knowhow, including knowhow that is the result of technological innovation activity of an Israeli Research Institution, for an area of activity, provided the Approval Recipient is allowed to act as described in the request for approving the Approved Program.
| 4. | “Application that includes co-ownership of knowhow” |
An Application that defines that there are one or more additional entities that are not the Applicant, who shall be the owners, jointly or severally, together with the Applicant, of knowhow arising from research and development under the Approved Program, and any right deriving therefrom, including intellectual property rights (each of those hereinafter: the ”Owners of the Knowhow”). It is clarified that Applicants are able to submit Applications that include co-ownership of knowhow as aforesaid, as part of Applications to be submitted separately, to be examined by the Research Committee on such date.
| 5. | “Foreign Research Institution” |
An entity that is not incorporated in Israel or that does not operate pursuant to the laws of the State of Israel, which is primarily engaged in academic research and development, in a scientific or technological field, is engaged in the transfer of knowhow to industry, and whose integration in the program is expected to significantly contribute to it achieving its objectives, provided the Committee approves it as a Foreign Research Institution in respect of this track.
| b. | In the event of an Application that includes co-ownership of knowhow, three additional and cumulative threshold conditions for the Application shall be added to the threshold conditions set forth in section 6.1 above, and the Applicant must meet them to the Research Committee’s satisfaction, and they are: |
| 1. | The Owners of the knowhow to arise from research and development and any right deriving therefrom, including intellectual property rights, who are not the Applicant, shall be one or more of the following: an industrial corporation, Israeli Research Institution, Application Company or Foreign Research Institution. |
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| 2. | Every Owner of the knowhow arising from research and development and any right deriving therefrom, including intellectual property rights, who is not the Applicant, has an essential and significant contribution to the implementation of the program subject of the Application. The statements in this section above shall not apply in a case where the two following conditions are fulfilled cumulatively: |
| (a) | The additional Owner of the Knowhow is an Israeli Research Institution or an Application Company. |
| (b) | The Application submitted is for a new program, which does not rely on knowhow that was developed as part of a program that was approved in the past within the framework of one or more tracks of the Innovation Authority, or an Application for a continuing program, which relies on knowhow that was developed as part of a program that was approved in the past within the framework of one or more tracks of the Innovation Authority, provided it was submitted within 24 months from the commencement date of the first execution period of such program. |
| 3. | There is an agreement between the Owners of the Knowhow that stipulates that the Applicant shall be the owner of part of the new knowhow that it contributed to the formation of, and that the Applicant is granted a license for part of the new knowhow that is owned by the other Owners of the Knowhow; or a different ownership arrangement to be approved by the Research Committee and on the condition that this arrangement does not impact that Applicant’s ability to implement the Approved Program and to realize its objectives. |
| c. | Should the Research Committee approve the Application, all the rules of the track shall apply to the Approved Program, including: |
| 1. | Every Owner of the Knowhow must be and ensure to be the owner of the knowhow arising from research and development under the Approved Program, and any right deriving therefrom, including intellectual property rights, from the moment of their conception. The Owners of the Knowhow shall be required to sign a letter of undertaking in form to be determined by the Research Committee for such purpose. |
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| 2. | All the obligations under this Benefit Track and pursuant to the terms of the Approved Program shall apply to each Owner of the Knowhow, including the obligation not to transfer the knowhow arising from research and development under the Approved Program and any right deriving therefrom, including intellectual property rights, from the moment of their conception, unless it received approval to transfer them pursuant to the provisions of this Benefit Track, and the obligation to pay royalties. |
| 3. | Notwithstanding the foregoing in sections 14.3(c)(1) and 14.3(c)(2) above, if one of the Owners of the Knowhow is a Foreign Research Institution, the following rules shall apply: |
| (a) | Any research and development costs of the Foreign Research Institution shall not be included in the Approved Program. |
| (b) | The Foreign Research Institution is able to use the knowhow that it holds and the rights deriving therefrom, including the intellectual property rights, without limitation from the time of their conception, as long as its use of the knowhow arising from research and development under the Approved Program and any right deriving therefrom, including intellectual property rights, does not impact the ability of the Applicant and the Owner of the Knowhow that is not the Foreign Research Institution, to use the knowhow and rights deriving therefrom, including the intellectual property rights; this arrangement must appear in the agreement between the parties as set forth in section 14.3(b)(3) above. The Foreign Research Institution shall be required to sign a letter of undertaking in form to be determined by the Research Committee for such purpose. |
| 14.4. | The provisions of section 14.1 above (the Approval Recipient and the Owner of the Knowhow) shall apply in respect of the Approved Program, in whole or in part, where the Research Committee approved for the Approval Recipient on the approval date of the program the grant of a right for the public good to use the source code of a computer software that constitutes knowhow deriving from research and development under an Approved Program, which is not a product that was developed as part of such Approved Program, pursuant to the provisions and the terms in respect of granting such rights of use, or any other right that was attached to knowhow as set forth in Provisions Annex C – Provisions regarding the granting of a right of use for the public good of the code of computer software that constitutes knowhow arising from research and development under an Approved Program, which is not the product that was developed in the framework of such Approved Program (open source). |
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| 15. | Production in Israel and transfer of production outside of Israel |
| 15.1. | The product to be developed as a result of the research and development, or any part thereof, shall be produced in Israel at a rate not falling below the production scale and Value-Added Rate in Israel that were included in the declaration regarding the place of production and the Value-Added Rate of the Approval Recipient (in this Benefit Track: the “Original Production Rate in Israel”). |
| 15.2. | If the declaration regarding the place of production and Value-Added rate included details with respect to the product’s production or part thereof outside of Israel, the Approval Recipient shall pay royalties due to the production outside of Israel, in amounts and under terms set forth pursuant to section 16 below. |
| 15.3. | Notwithstanding the foregoing in section 15.1 above (the Original Production Rate in Israel), for purposes of achieving the objectives of this Benefit Track, the Research Committee is entitled in special cases and for reasons to be committed to paper, during the program’s implementation or after it ends, pursuant to a request from the Approval Recipient, to approve the transfer of production or of production rights of a product developed as part of the program or deriving therefrom (in this Benefit Track: “Transfer of Production”), to outside Israel, for which the production rate in Israel fell below the original production rate set forth in section 15.1 above, provided one of the following is fulfilled: |
| a. | The Approval Recipient shall be charged with paying royalties due to the Transfer of Production, in amounts and under the terms set forth pursuant to the provisions of section 16 below; |
| b. | Against the Transfer of Production outside of Israel, the production or production rights of a product of a similar or higher technological level than the product subject of the request for transfer shall be transferred to Israel (in this section: the “Alternative Production”), provided the scope of employment and the creation of workplaces in Israel, the Value-Added Rate in Israel and the marketing scale for the global market, which are supposed to derive from the production or production rights to be transferred to Israel, shall be no lower than those that are supposed to derive from the production or production rights under the Approved Program, which are to be transferred outside of Israel; the Research Committee shall only approve a transfer under this section after the Approval Recipient deposited a bank guarantee, in a set amount, for guaranteeing the Alternative Production. |
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In this section 15.3, “Production Rights” – a permit for another entity to use knowhow that was developed as part of a program or that derives from a program, for purposes of producing only one specific product, while all other rights to use and exploit the knowhow remain with the transferor in Israel.
| 15.4. | If an additional Application was submitted under section 15.3 above (transfer of production outside of Israel), the following provisions shall apply for the purpose of determining the Original Production Rate in Israel of the Approval Recipient: |
| a. | If the previous application under the provisions of section 15.3(a) above was approved – the production rate in Israel, as amended pursuant to the approved application, shall be deemed the original production rate of the Approval Recipient; |
| b. | If the previous application under the provisions of section 15.3(b) above was approved – the Alternative Production under its meaning in said section shall be deemed to replace the production or the production rights that were transferred outside of Israel in accordance with the approved application. |
| 15.5. | Notwithstanding the foregoing in section 15.3 above (transfer of production outside of Israel), the transfer of production outside of Israel, which together with previous transfers of production of the Application Recipient leads to a reduction in the Original Production Rate in Israel that does not exceed 10%, does not require the approval of the Research Committee, provided the Approval Recipient announced this, in writing, prior to the execution of the transfer to the Research Committee, and the Research Committee or subcommittee appointed under section 3.3(b) above, did not inform it of its refusal to transfer the production within 30 days from the date the notice was received. If the production was transferred outside of Israel as described in this section, the Approval Recipient shall pay royalties due to such transfer of production, in amounts and under terms to be determined pursuant to section 16. |
| 15.6. | A Submitter of an Application or a provider of notice under this section, must, pursuant to a request of the Research Committee or anyone on its behalf, provide the Committee in writing, within the time period set forth in the request, with an explanation, details, information and documents in connection with the details included in the Application or in the notice, as applicable. |
| 15.7. | The Research Committee shall set rules regarding the details that must be included in the Application or in a notice under this section, and the documents that must be attached to it. |
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| 16. | Royalties |
The Approval Recipient must pay royalties in amounts and pursuant to the provisions set forth in Provisions Annex D – Provisions regarding the rate of royalties and rules for their payment.
| 17. | Supervisory and enforcement powers of the Innovation Authority |
The Approval Recipient warrants to allow at any time the Innovation Authority, or anyone on its behalf, including external entities, to audit its activity, on dates and under conditions to be determined by them, and to act pursuant to instructions of the Innovation Authority as shall be determined from time to time.
| 18. | Government Entities |
| 18.1. | Except for a discussion of the Applications for receiving grants under this Benefit Track, at the request of a Government Entity, and subject to the agreements reached between it and the Innovation Authority, the Research Committee shall be entitled to provide its opinion on matters related to technological innovation, including with respect to research and/or development programs that were submitted to the Government Entity by Industrial Corporations, or if this corresponds with the functions of the Authority as set forth in section 5A. of the Innovation Law with respect to research and/or development programs that were submitted to a Government Entity by entities that are not Industrial Corporations, in matters such as: the technological innovation of such corporation, the challenges in implementing the program, the corporation’s capabilities in executing the program, the economic potential of the program and/or of the corporation, and the program’s contribution to the Israeli economy. |
| 18.2. | For the avoidance of doubt it is clarified that the Research Committee is entitled to express its opinion on any research and/or development program of an Industrial Corporation as set forth in section 18.1 above, and this power is not limited to programs of Applicants under this Benefit Track only. |
| 19. | Withdrawal of the assistance |
The provisions of the Innovation Law, including Part VIII of the Innovation Law, with respect to withdrawing the assistance, shall apply to the benefits granted within the framework of this Benefit Track.
| 20. | Budget |
| 20.1. | It is clarified that the Innovation Authority Board is entitled to from time to time update the amounts and rates set forth in this Benefit Track. |
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| 20.2. | Granting assistance and managing the Benefit Track are subject to the budget’s annual approval, the budget’s restrictions, and the Approved Budget for the Benefit Track. |
| 20.3. | If on the date the Application is approved, the Innovation Authority’s budget has not yet been approved, the approval shall be subject to the existence of a budget in the appropriate budgetary regulation, and no final decision shall be made regarding the approved grant until after the budget’s approval by the relevant entities. |
| 21. | Miscellaneous |
| 21.1. | The provisions of the Innovation Law, the regulations, rules, procedures, terms and provisions set forth thereunder (if any) shall apply to this Benefit Track, mutatis mutandis, including the provisions of Article IV in Part III of the Innovation Law (the Research Committee), Part III.1 of the Innovation Law (duty of care and fiduciary duty of officers in the Innovation Authority), section 15BB of the Innovation Law (application of laws), section 15DD of the Innovation Law (revenues of the Innovation Authority), Part IV in the Innovation Law (approval of applications for granting benefits), Part V of the Innovation Law and Part VIII of the Innovation Law (general provisions), including section 47A of the Innovation Law (penalties). |
| 21.2. | Procedures of the Benefit Track, as shall be determined and published from time to time by the Committee, including with respect to the process of submitting the Applications and their consideration, are an integral part of this Benefit Track. Should there be a contradiction between the provisions of this Benefit Track and the procedures, the provisions of this Benefit Track shall prevail. |
| 21.3. | In any event, this Benefit Track should not be deemed an undertaking on behalf of the Innovation Authority to approve Applications and/or offers to be submitted or to transfer any payment. |
| 21.4. | The procedures, rules, notices, etc., to be set forth with respect to this Benefit Track shall be published on the Authority’s website. |
| 22. | Applicability and commencement |
| 22.1. | This track was in the past managed by the Office of the Chief Scientist of the Ministry of Economy and Industry as part of the benefit tracks by virtue of which approvals were granted for programs under Part IV of the Innovation Law, and as CEO directive no. 8.23. Under section 56(c) of the transitional provisions to Amendment No. 7 of the Innovation Law, upon the establishment of the Innovation Authority, the benefit track under which approvals were granted for programs pursuant to Part IV of the Innovation Law and the above CEO directives turned into this Benefit Track and Benefit Track No. 23 – commencing companies, which were operated by the Innovation Authority, and were later combined with this Benefit Track. |
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| 22.2. | The provisions of the Benefit Track were amended on 13 Adar I, 5782, which is 14 February 2022 (hereinafter: the “Commencement Date”); they replace the provisions of the Benefit Track dated 13 Tishrei 5782, which is 19 September 2021, and they shall apply to Applications submitted after the Commencement Date. |
List of provisions annexes for this Benefit Track:
Provisions Annex A - Supplement to amounts set by the Research Committee, in National Priority Areas.
Provisions Annex B - Provisions regarding the transfer of knowhow and the granting of licenses.
Provisions Annex C - Provisions regarding the granting of a right of use for the public good of the code of computer software that constitutes knowhow arising from research and development under an approved program, which is not the product that was developed in the framework of such Approved Program (open source).
Provisions Annex D - Provisions regarding the rate of royalties and rules for their payment.
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Exhibit C
Budget
[**]
C-1
Exhibit 23.1
Consent of Independent Registered Public Accounting Firm
Wearable Devices Ltd.
We hereby consent to the use in the Prospectus constituting a part of this Registration Statement on form F-1, of our report dated April 6, 2022, relating to the consolidated financial statements as of December 31, 2021 and 2020 and for each of the years in the two-year period ended December 31, 2021 of Wearable Devices Ltd., which is contained in that Prospectus. Our report contains and explanatory paragraph regarding the Company’s ability to continue as a going concern.
We also consent to the reference to us under the caption “Experts” in the Prospectus.
/s/ Ziv Haft
Ziv Haft
Certified Public Accountants (Isr.)
BDO Member Firm
April 6, 2022
Tel Aviv, Israel