UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
☐ | REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934 |
OR
R☐ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2020 |
For the fiscal year ended December 31, 2016
OR
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
OR
☐ | SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
for the transition period from __________ to ___________ |
for the transition period from __________ to ___________
Commission file number 001-36848
Check-Cap Ltd.
(Exact name of the Registrant as specified in its charter)
Israel
(Jurisdiction of incorporation or organization)
Check-Cap Building
29 Abba Hushi Avenue
P.O. Box 1271
Isfiya, 3009000, Israel
Israel
(Address of principal executive offices)
Alex Ovadia
Chief Executive Officer
29 Abba Hushi Avenue
P.O. Box 1271
Isfiya, 3009000, Israel
Telephone: +972 546706451
Email: Alex.Ovadia@check-cap.com
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Title of Each Class
Ordinary Shares, par value NIS 0.20
Name of each exchange on which registered
NASDAQ Capital Market
Title of each class Ordinary Shares, par value NIS 2.40 | Trading Symbol(s) CHEK | Name of each exchange on which registered Nasdaq Capital Market |
Warrants to purchase Ordinary Shares | CHEKZ | Nasdaq Capital Market |
| | |
Securities registered or to be registered pursuant to Section 12(g) of the Act:
None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None
As of December 31, 2016,2020, the registrant had 15,205,07546,239,183 ordinary shares outstanding, NIS 0.22.40 par value per share.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes ☐No T☒
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
Yes ☐No T☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes T☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes T☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.filer, or an emerging growth company.
☐ Large Accelerated filer | ☐ Accelerated filer | ☒ Non-accelerated filer | ☐ Emerging growth company |
| | | |
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐ Large Accelerated filer | ☐ Accelerated filer
| T Non-accelerated filer
|
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
T☒ US GAAP
| ☐ International Financial Reporting
Standards as issued by the International Accounting Standards Board | ☐ Other |
| | |
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.
☐ Item 17☐ Item 18
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐No T☒
(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of the securities under a plan confirmed by a court.
Yes ☐No ☐
TABLE OF CONTENTS
Page
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PART I |
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| | | 2 |
| A. | Directors and Senior Management | 2
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| B. | Advisers | 2
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| C. | Auditors | 2
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| | | 4 |
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| | | 4 |
A. | A. | Selected financial data | 4
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B. | B. | Capitalization and indebtednessIndebtedness | 65
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C. | C. | Reasons for the offerOffer and useUse of proceedsProceeds | 65
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D. | D. | Risk factors | 6
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A. | A. | History and Development of the Company | 4145
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B. | B. | Business Overview | 4246
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C. | C. | Organizational Structure | 6878
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D. | D. | Property, Plants and Equipment | 6878
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| | | 6878
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A. | A. | Operating Results | 7180
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B. | B. | Liquidity and Capital Resources | 7785
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C. | C. | Research and development, patents and licenses, etc. | 8590
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D. | D. | Trend Information | 8591
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E. | E. | Off-balance Sheet Arrangements | 8591
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F. | F. | Tabular Disclosure of Contractual Obligations.Obligations | 8591
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| | | 86 92 |
A. | A. | Directors and senior management | 8692
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| B. | Compensation of Directors and Executive Officers | 96
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| Compensation | 90 |
C. | | Board Practices | 9499
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D. | D. | Employees | 110
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E. | E. | Share Ownership | 110111
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| | | 115 |
A. | A. | Major shareholders | 115
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| B. | Related Party Transactions | 117
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| Related party transactions | 117 |
C. | | Interests of expertsExperts and counselCounsel | 121118
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| | | 121118 |
| A. | | Consolidated Statements and Other Financial InformationInformation. | 121118
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B. | B. | Significant Changes | 121119
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| | | 122 119 |
A. | A. | Offer and listing detailsListing Details | 122119
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B. | B. | Plan of distributionDistribution | 122119
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| C. | Markets for Ordinary Shares | 119
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| MarketsD. | 122Selling Shareholders | 119
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D. | | Selling shareholders | 122 |
E. | | Dilution | 123119
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F. | F. | Expenses of the issueIssue | 123119
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| | | 123 120 |
| A. | Share Capital | 120
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| Share capital | 123 |
B. | | Memorandum and articlesArticles of associationAssociation | 123120
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| C. | Material Contracts | 121
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| Material contracts | 129 |
D. | | Exchange controls | 129121
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E. | E. | Taxation | 129121
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F. | F. | Dividends and paying agents | 142136
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G. | G. | Statement by experts | 143136
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H. | H. | Documents on display | 143136
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I. | I. | Subsidiary Information | 143136
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| | Exhibits | 142
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Signatures
| 150144
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CERTAIN INFORMATION
We are a clinical stage medical diagnostics company engagedUnless otherwise stated, all of our financial information presented in the development of a capsule-based system that utilizes ultra-low-dose X-rays to generate structural information on the endoluminal surface of the colon that may be used for screening of the colon to detect polyps, masses and colorectal cancers, or CRC. While CRC is the second leading cause of death from cancer for both sexes combined in the United States and is preventable with early screening and intervention, according to the National Health Interview Survey, in 2015, only 63% of Americans over the age of 50 reported being current with CRC screening recommendations. Unlike other screening modalities that are designed for direct visualization and imaging of the internal colon, such as optical colonoscopy, computed tomographic colonography, or CTC, and other capsule-based technologies, our C-Scan system is designed to function without any cathartic preparation of the colon and to transit the gastrointestinal tract by natural motility while the patient continues his or her normal daily routine. Furthermore, the C-Scan system does not require fasting prior to or during capsule transit. Our C-Scan system is comprised of three main components: (1) C-Scan Cap, an ingestible X-ray scanning capsule; (2) C-Scan Track, a biocompatible unit worn on the patient’s back for capsule control, tracking and data recording; and (3) C-Scan View, a PC-based, standalone application used to process and display structural information of the colon. We believe that this solution will be attractive to both physicians and patients, with the potential to increase the number of people completing CRC screening.
Beginning with the fourth quarter of 2015, we haveannual report has been prepared our consolidated financial statements in accordance with generally accepted accounting principles in the United States of America, or U.S. GAAP. We recast the comparative amounts included in our 2015 financial statements to U.S. GAAP. Prior to the fourth quarter of 2015, we prepared our financial reports in accordance with International Financial Reporting Standards as issued by International Accounting Standard Board, or IFRS. We elected to use U.S. GAAP to increase the transparency and comparability of our financial reports and facilitate research and analysis by shareholders, analysts and other participants in the U.S. capital markets.
In this Annual Report on Form 20-F, or the Annual Report, unless the context indicates otherwise, references to “NIS” are to the legal currency of Israel, “U.S. dollars,” “$” or “dollars” are to United States dollars, and the terms “we,” “us,” “our company,” “our,” and “Check-Cap” refer to Check-Cap Ltd. Unless otherwise indicated, U.S. dollar translation of NIS amounts presented in this Annual Report are translated using the rate of $1.00 = NIS 3.845,3.215, the exchange rate published by the Bank of Israel on December 31, 2016,2020, and U.S. dollar translation of Euro amounts presented in this Annual Report are translated using the rate of $1.00 = Euro 0.9506,0.815, based on the exchange rates published by the Wall Street JournalBank of Israel on December 31, 2016.2020.
We effected a 1-for-201-for-12 reverse stock split of our ordinary shares effective immediately prior to the consummationas of our initial public offering on February 24, 2015,April 4, 2018, in accordance with the approval of our shareholders at a meeting held on January 15, 2015.April 2, 2018. All share numbers in this Annual Report are reflected on a post- reversepost-reverse stock split basis.
USE OF TRADE NAMES AND TRADEMARKS
Throughout this Annual Report, we refer to various trademarks, service marks and trade names that we use in our business. The “CHECK-CAP” and “C-Scan” trademarks and design logos are the property of Check-Cap Ltd. Other trademarks and service marks appearing in this annual reportAnnual Report are the property of their respective holders. We do not intend our use or display of other companies’ tradenames, trademarks or service marks to imply a relationship with, or endorsement or sponsorship of us by these other companies. Solely for convenience, trademarks and trade names referred to in this Annual Report appear without the ® or TM symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the rights of the applicable licensor to these trademarks and trade names.
FORWARD-LOOKING STATEMENTS
This Annual Report contains forward-looking statements, about our expectations, beliefs or intentions regarding, among other things, our ongoing and planned product development and clinical trials; the timing of, and our ability to make, regulatory filings and obtain and maintain regulatory approvals for our product candidates; our intellectual property position; the degree of clinical utility of our products, particularly in specific patient populations; our ability to develop commercial functions; expectations regarding product launch and revenue; our results of operations, cash needs; financial condition, liquidity, prospects, growth and strategies; the industry in which we operate; and the trends that may affect the industry or us. In addition, from time to time, we or our representatives have made or may make forward-looking statements, orally or in writing. Forward-looking statements can be deemedidentified by the use of forward-looking words such as “believe,” “expect,” “intend,” “plan,” “may,” “should” or “anticipate” or their negatives or other variations of these words or other comparable words or by the fact that these statements do not relate strictly to historical or current matters. These forward-looking statements may be “forward-looking statements” withinincluded in, but are not limited to, various filings made by us with the meaningU.S. Securities and Exchange Commission, or the SEC, press releases or oral statements made by or with the approval of the federal securities laws. Theseone of our authorized executive officers. Forward-looking statements relate to anticipated futureor expected events, futureactivities, trends or results as of operations and/or future financial performance. In some cases, you can identifythe date they are made. Because forward-looking statements by their use of terminology such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “future,” “intend,” “may,” “oughtrelate to” “plan,” “possible,” “potentially,” “predicts,” “project,” “should,” “will,” “would,” negatives of such terms or other similar terms. These forward-looking matters that have not yet occurred, these statements involve knownare inherently subject to risks and unknown risks, uncertainties and other factors that maycould cause our actual results performance or achievements to bediffer materially different from any future results performance or achievements expressed or implied by the forward-looking statements. TheMany factors could cause our actual activities or results to differ materially from the activities and results anticipated in forward-looking statements, including, but not limited to, the factors summarized below.
This Annual Report identifies important factors which could cause our actual results to differ materially from those indicated by the forward-looking statements, particularly those set forth under the heading “Risk Factors.” The risk factors included in this Annual Report are not necessarily all of the important factors that could cause actual results to differ materially from those expressed in any of our forward-looking statements. Given these uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements. Factors that could cause our actual results to differ materially from those expressed or implied in such forward-looking statements include, without limitation, statements relatingbut are not limited to:
our goals, targetshistory of losses and strategies;our ability to continue as a going concern;
our needs for additional capital to fund our operations and our inability to obtain additional capital on acceptable terms, or at all;
the timing and conductimpact of the clinical trials for our C-Scan system, including statements regarding COVID-19 pandemic;
the initiation, timing, progress and results of current and future preclinical studies andour clinical trials and our research andother product development programs;
timing or likelihood of regulatory filings, approvals and required licenses for our C-Scan system;efforts;
our future businessreliance on one product;
the clinical development, resultscommercialization and market acceptance of operations and financial condition;C-Scan;
our ability to adequately protect receive de novo classification and other regulatory approvals for C-Scan;
our ability to successfully complete clinical trials;
our reliance on single-source suppliers;
our reliance on third parties, such as for purposes of our clinical trials and clinical development and the manufacturing, marketing and distribution of C-Scan;
our ability to establish and maintain strategic partnerships and other corporate collaborations;
our ability to achieve reimbursement and coverage from government and private third-party payors;
the implementation of our business model and strategic plans for our business;
the scope of protection we are able to establish and maintain for intellectual property rights covering C-Scan and enforce such rights andour ability to avoid violation ofoperate our business without infringing the intellectual property rights of others;
our plans to develop, launchcompetitive companies, technologies and commercialize our C-Scan system and any future products;
the timing, cost or other aspects of the commercial launch of our C-Scan system;
our estimates regarding expenses, future revenues, capital requirements and our need for additional financing and strategic partnerships;
our estimates regarding the market opportunity, clinical utility, potential advantages, and market acceptance of our C-Scan system.
the impact of government laws and regulations;
our ability to recruit and retain qualified clinical, regulatory and research and development personnel;
the availability of reimbursement or other forms of funding for our products from government and commercial payors;
difficulties in maintaining commercial scale manufacturing capacity and capability and our ability to generate growth;
our failure to comply with regulatory guidelines;
uncertainty in industry demand and patient wellness behavior;
general economic conditions and market conditions in the medical device industry;
future sales of large blocks of our securities, which may adverselystatements as to the impact our share price;
depth of the trading marketpolitical and security situation in Israel on our securities;business; and
our expectations regardingthose factors referred to in “Item 3. Key Information – D. Risk Factors,” “Item 4. Information on the use of proceeds of our initial public offeringCompany,” and the concurrent private placement“Item 5. Operating and Financial Review and Prospects”, as well as our August 2016 registered direct offering.in this Annual Report generally.
All forward-looking statements attributable to us or persons acting on our behalf speak only as of the date of this Annual Report and are expressly qualified in their entirety by the cautionary statements included in this Annual Report. We undertake no obligations to update or revise forward-looking statements to reflect events or circumstances that arise after the date made or to reflect the occurrence of unanticipated events. In evaluating forward-looking statements, you should consider these risks and uncertainties.
The preceding list is not intendedEXPLANATORY NOTE
Market data and certain industry data and forecasts used throughout this Annual Report were obtained from internal company surveys, market research, consultant surveys commissioned by the Company, publicly available information, reports of governmental agencies and industry publications and surveys. Industry surveys, publications, consultant surveys commissioned by the Company and forecasts generally state that the information contained therein has been obtained from sources believed to be an exhaustive listreliable. However, this information may prove to be inaccurate because of allthe method by which some of the data for the estimates is obtained or because this information cannot always be verified with complete certainty due to the limits on the availability and reliability of raw data, the voluntary nature of the data gathering process and other limitations and uncertainties. As a result, the market and industry data and forecasts included or incorporated by reference in this Annual Report, and estimates and beliefs based on that data, may not be reliable. We have relied on certain data from third-party sources, including internal surveys, industry forecasts and market research, which we believe to be reliable based on our management’s knowledge of the industry. However, we have not ascertained the underlying economic assumptions relied upon therein. Forecasts are particularly likely to be inaccurate, especially over long periods of time. In addition, we do not necessarily know what assumptions regarding general economic growth were used in preparing the forecasts we cite. Statements as to our market position are based to the best of our forward-looking statements. Forward-looking statements reflectknowledge on the most currently available data. While we are not aware of any misstatements regarding the industry data presented in this Annual Report, our current views with respect to future events and are based on assumptions and subject toestimates involve risks and uncertainties and are subject to change based on various factors, including those describeddiscussed under the heading “Risk Factors” in Item 3D “Key Information - Risk factors.”
You should not unduly rely on any forward-looking statements. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that future results, levels of activity, performance and events and circumstances reflected in the forward-looking statements will be achieved or will occur. Except as required by law, we undertake no obligation to update publicly any forward-looking statements for any reason after the date of this Annual Report or to conform these statements to actual results or to changes in our expectations.Report.
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
A. | Directors and Senior Management |
Not required.
Not required.
Not required.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not required.
A. | Selected financial data |
The following selected consolidated financial data should be read in conjunction with Item 5 “Operating and Financial Review and Prospects” and the consolidated Financial Statements and Notes thereto included elsewhere in this Annual Report.
The following table summarizes our historical consolidated financial data. We have derived the selected consolidated statements of operations data for the years ended December 31, 2016, 20152020, 2019 and 20142018 and the selected consolidated balance sheet data as of December 31, 20162020 and 20152019 from our audited consolidated financial statements included elsewhere in this Annual Report. We have derived the selected consolidated statements of operations data for the years ended December 31, 20132017 and 20122016 and the selected consolidated financialbalance sheet data as of December 31, 2014, 20132018, 2017 and 20122016 from our audited consolidated financial statements not included in this Annual Report. Our Consolidated Financial Statements have been prepared in accordance with U.S. GAAP.GAAP.
Certain factors that affect the comparability of the information set forth in the following table are described in Item 5 “Operating and Financial Review and Prospects” and the Consolidated Financial Statements and related notes thereto included elsewhere in this Annual Report.
Consolidated Statements of Operations Data
| | Year Ended December 31, | |
| | 2020 | | | 2019 | | | 2018 | | | 2017 | | | 2016 | |
| | (US$ in thousands, except per share data) | |
Operating expenses (1) | | | | | | | | | | | | | | | |
Research and development expenses, net (2) | | $ | 10,008 | | | $ | 10,474 | | | $ | 7,618 | | | $ | 6,837 | | | $ | 5,491 | |
General and administrative expenses | | | 3,924 | | | | 3,595 | | | | 3,445 | | | | 3,164 | | | | 3,571 | |
Operating loss | | | 13,932 | | | | 14,069 | | | | 11,063 | | | | 10,001 | | | | 9,062 | |
Finance income, net | | | 86 | | | | 233 | | | | 473 | | | | 236 | | | | 244 | |
Loss before income tax | | | 13,846 | | | | 13,836 | | | | 10,590 | | | | 9,765 | | | | 8,818 | |
Taxes on income | | | - | | | | - | | | | (1 | ) | | | 6 | | | | 8 | |
Net loss | | $ | 13,846 | | | $ | 13,836 | | | $ | 10,589 | | | $ | 9,771 | | | $ | 8,826 | |
Comprehensive loss: | | | | | | | | | | | | | | | | | | | | |
Net loss | | | 13,846 | | | | 13,836 | | | | 10,589 | | | | 9,771 | | | | 8,826 | |
Change in fair value of cash flow hedge | | | - | | | | (13 | ) | | | 13 | | | | - | | | | - | |
Comprehensive loss | | | 13,846 | | | | 13,823 | | | | 10,602 | | | | 9,771 | | | | 8,826 | |
Net loss per ordinary share of NIS 2.40 par value, basic and diluted (3) | | $ | 0.46 | | | $ | 1.73 | | | $ | 2.61 | | | $ | 6.72 | | | $ | 7.31 | |
Weighted average number of ordinary shares outstanding – basic and diluted (in thousands) (3) | | | 30,351 | | | | 7,986 | | | | 4,058 | | | | 1,455 | | | | 1,208 | |
| | Year Ended December 31, | |
| | 2016 | | | 2015 | | | 2014 | | | 2013 | | | 2012 | |
| | (US$ in thousands, except per share data) | |
Operating expenses(1) | | | | | | | | | | | | | | | |
Research and development expenses, net(2) | | $ | 5,491 | | | $ | 5,837 | | | $ | 2,832 | | | $ | 2,893 | | | $ | 2,377 | |
General and administrative expenses | | | 3,571 | | | | 6,626 | | | | 1,703 | | | | 1,090 | | | | 1,118 | |
Other income (expenses) | | | - | | | | - | | | | - | | | | 11 | | | | (14 | ) |
Operating loss | | | 9,062 | | | | 12,463 | | | | 4,535 | | | | 3,972 | | | | 3,509 | |
Finance income (expenses), net | | | 244 | | | | 173 | | | | 3,925 | | | | 604 | | | | (841 | ) |
Loss before income tax | | | 8,818 | | | | 12,290 | | | | 610 | | | | 3,368 | | | | 4,350 | |
Taxes on income | | | 8 | | | | - | | | | - | | | | - | | | | - | |
Net loss | | $ | 8,826 | | | $ | 12,290 | | | $ | 610 | | | $ | 3,368 | | | $ | 4,350 | |
Net loss per ordinary share of NIS 0.20 par value, basic and diluted(3) | | $ | 0.61 | | | $ | 1.06 | | | $ | 1.18 | | | $ | 3.27 | | | $ | 3.88 | |
Weighted average number of ordinary shares outstanding – basic and diluted (in thousands)(3) | | | 14,499 | | | | 11,918 | | | | 2,181 | | | | 1,627 | | | | 1,627 | |
Consolidated Balance Sheet Data
| | As of December 31, | |
| | 2020 | | | 2019 | | | 2018 | | | 2017 | | | 2016 | |
| | (US$ in thousands, except per share data) | |
Cash and cash equivalents | | $ | 7,703 | | | $ | 7,685 | | | $ | 8,572 | | | $ | 6,997 | | | $ | 11,639 | |
Working capital (4) | | $ | 15,436 | | | $ | 5,633 | | | $ | 12,763 | | | $ | 5,841 | | | $ | 10,514 | |
Total assets | | | 19,638 | | | | 9,429 | | | | 15,436 | | | | 7,906 | | | | 12,295 | |
Capital stock | | | 107,361 | | | | 83,371 | | | | 76,344 | | | | 58,617 | | | | 53,348 | |
Total shareholders’ equity | | $ | 16,378 | | | $ | 6,234 | | | $ | 13,030 | | | $ | 5,905 | | | $ | 10,407 | |
| | As of December 31, | |
| | 2016 | | | 2015 | | | 2014 | | | 2013 | | | 2012 | |
| | (US$ in thousands, except per share data) | |
Cash and cash equivalents | | $ | 11,639 | | | | 9,392 | | | | 1,075 | | | | 4,975 | | | | 4,579 | |
Working capital(4) | | $ | 10,514 | | | $ | 12,856 | | | $ | (1,622 | ) | | $ | 4,134 | | | $ | 7,931 | |
Total assets | | | 12,295 | | | | 15,298 | | | | 2,985 | | | | 5,374 | | | | 8,975 | |
Capital stock | | | 53,348 | | | | 46,763 | | | | 20,999 | | | | 20,687 | | | | 20,631 | |
Total shareholders’ equity (deficiency) | | $ | 10,407 | | | $ | 12,648 | | | $ | (826 | ) | | $ | (528 | ) | | $ | 2,782 | |
(1) | IncludesOperating expenses include share-based compensation expense in the total amount of $0.4 million, $0.5 million, $0.7 million and $1.2 million $3.7 million, $312,000, $56,000 and 31,000 for the years ended December 31, 2020, 2019, 2017 and 2016, 2015, 2014, 2013respectively, and 2012, respectively.a negative share-based compensation expense of $65,000 as a result of forfeitures of awards for the year ended December 31, 2018. For additional information, see Item 5B “Operating and Financial Review and Prospects—Liquidity and Capital Resources—Application of Critical Accounting Policies and Estimates-Share-based compensation.” |
(2) | Research and development expenses, net is presented net of the amount of grants received from the NationalIsrael Innovation Authority, for Technological Innovation, or NATI,IIA, of the Ministry of Economy and Industry or NATI, (formerly known as the Office of the Chief Scientist, or OCS, of the Ministry of Economy and Industry, or the OCS)Industry), and the Israel-United States Binational Industrial Research and Development Foundation, or the BIRD Foundation. The effect of the participation by NATIthe IIA and the BIRD Foundation totaled $0, $0.1 million, $0.2 million, $1.1 million $354,000, $643,000, $148,000 and 1.0$0.3 million for the years ended December 31, 2016, 2015, 2014, 20132020, 2019, 2018, 2017 and 2012,2016, respectively. See Item 5A “Operating and Financial Review and Prospects—Operating Results - Financial Operations Overview—Research and Development, Expenses, Net” for more information. |
(3) | Basic and diluted loss per ordinary share is computed based on the basic and diluted weighted average number of ordinary shares outstanding during each period. For purposesyear. Diluted net loss per share is computed based on the weighted average number of these calculations,shares outstanding during each year, plus the followingdilutive potential of the ordinary shares were deemed to be outstanding: (i) 99,774 ordinary shares that were issuable to Mr. Guy Neev upon exercise of options, referred to as the Neev Options, which options were exercised immediately prior to the consummation of our initial public offering on February 24, 2015; (ii) 375,204 ordinary shares that were issuable under warrants that were subject to automatic exercise, for no consideration (unless the holder thereof objected to such exercise), upon the exercise by Mr. Guy Neev of the Neev Options, of which warrants to purchase 195,012and 653 ordinary shares were exercised during the years ended December 31, 2015 and 2016, respectively;(iii) since October 14, 2014, 2,658,463 ordinary shares issuable upon the exercise ofconsidered outstanding warrants with an exercise price of NIS 0.20 per share, of which warrants to purchase 524,818 and 1,557,507ordinary shares were exercised during the years ended December 31, 2016 and 2015, respectively, and warrants to purchase 9,091 and 24,277 ordinary shares expired during the years ended December 31, 2016 and 2015, respectively; and (iv) since August 11, 2016, 2,514,281 ordinary shares issuable upon the exercise of outstanding pre-funded warrants with an exercise price of NIS 0.20 per share, of which pre-funded warrants to purchase 2,224,281 ordinary shares were exercised during the year, ended December 31, 2016. in accordance with ASC 260-10 “Earnings per share”. For additional information, see Note 15 to our Consolidated Financial Statements for the year ended December 31, 20162020 included elsewhere in this Annual Report. |
(4) Working capital is defined as total current assets minus total current liabilities.
(4) | Working capital is defined as total current assets minus total current liabilities. |
B. | Capitalization and Indebtedness |
Not required.
C. | Reasons for the Offer and Use of Proceeds |
Not required.
In conducting our business, we face many risks that may interfere with our business objectives. Some of these risks could materially and adversely affect our business, financial condition and results of operations. In particular, we are subject to various risks resulting from changing economic, political, industry, business and financial conditions. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may also materially adversely affect our business operations.
You should carefully consider the following factors and other information in this Annual Report before you decide to invest in our ordinary shares. If any of the risks referred to below occur, our business, financial condition and results of operations could suffer. In any such case, the trading price of our ordinary shares could decline, and you may lose all or part of your investment.
Summary Risk Factors
Our business is subject to numerous risks and uncertainties, including those highlighted in the section titled “Risk Factors” immediately following this summary. The principal factors and uncertainties that make investing in our ordinary shares risky, include, among others:
Risks Related to Our Financial Position
| ● | We have a history of losses, may incur future losses and may not achieve profitability; |
| ● | Our recurring operating losses have raised substantial doubt regarding our ability to continue as a going concern; |
| ● | We will require additional funding in order to complete the development and commercialization of C-Scan, which may cause dilution to our existing shareholders, restrict our operations or require us to relinquish rights to C-Scan or intellectual property. If additional capital is not available, we may have to delay, reduce or cease the development or commercialization of C-Scan; |
Risks Related to Our Business
| ● | We may not succeed in completing the development of our product, achieve manufacturing stability and capacity, demonstrate sufficient clinical evidence or commercialize our product or generate significant revenues; |
| ● | Although we recently received FDA approval of our investigational device exemption, or IDE for ourU.S. pivotal study, even if commenced and completed, the outcome of the U.S. pivotal study is inherently uncertain; |
| ● | Clinical failure can occur at any stage of clinical development. Our clinical experience to date does not necessarily predict future results and may not have revealed certain potential limitations of the technology and potential complications from C-Scan and may require further clinical validation. Any product version we advance through clinical trials may not have favorable results in later clinical trials or receive regulatory approval; |
| ● | We expect to derive most of our revenues from sales of one product or product line. . Our inability to successfully commercialize this product, could severely harm our ability to generate revenues. |
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| ● | If healthcare professionals do not recommend our product to their patients, C-Scan may not achieve market acceptance and we may not become profitable; |
| ● | We expect to face competition from large, well-established manufacturers of traditional technologies for CRC screening and detection of gastrointestinal disorders, as well as from new competitive technologies, especially within the field of biomarkers; |
| ● | We are planning to rely on local distributors and/or strategic partners to market and distribute C-Scan in those countries where we intend to market and distribute C-Scan; |
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| ● | We have limited manufacturing capabilities and we rely on single source suppliers and if we are unable to find new suppliers or scale up our manufacturing operations to meet the necessary quantities for our upcoming clinical studies or anticipated market demand, our growth could be limited and our business, financial condition and results of operations could be materially adversely affected; |
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| ● | Our reliance on single source suppliers could harm our ability to conduct clinical trials and meet demand for our product in a timely manner or within budget. |
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| ● | A health epidemic, pandemic or other outbreak, including the current COVID-19 pandemic, may materially and adversely affect our business, financial condition and results of operations. |
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| ● | We may not be successful in establishing and maintaining strategic partnerships, which could adversely affect our ability to develop and commercialize C-Scan; |
Risks Related to Regulations
| ● | If we are unable to obtain, or experience significant delays in obtaining, FDA clearances or approvals, or equivalent third country approvals for C-Scan or future products or product enhancements, our ability to commercially distribute and market our products could suffer; |
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| ● | There is no guarantee that the FDA will grant de novo reclassification or PMA approval of C-Scan and failure to obtain necessary 510(k) clearances or approvals for our future products would adversely affect our ability to grow our business; |
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| ● | If we or our future distributors do not obtain and maintain the necessary regulatory clearances or approvals, or equivalent third country approvals in a specific country or region, we will not be able to market and sell C-Scan or future products in that country or region; |
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| ● | The results of our current or future clinical trials may not support our product candidate requirements or intended use claims or may result in the discovery of adverse side effects; |
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| ● | If we fail to obtain or maintain necessary regulatory clearances or CE Certificates for C-Scan or if there are regulatory changes in our existing or future target markets, our ability to sell C-Scan and generate revenues could be harmed; |
| ● | Our failure to comply with radiation safety or radio frequency regulationsin a specific countries or regions could impair our ability to commercially distribute and market C-Scan in that country or region; and |
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| ● | If we are unable to achieve reimbursement and coverage from government and private third-party payors for procedures using C-Scan, or if reimbursement is insufficient to create an economic benefit for purchasing or using C-Scan when compared to alternative procedures, demand for our products may not grow at the rate we expect. |
Risks Related to Our Intellectual Property
| ● | If we are unable to protect our intellectual property rights, our competitive position could be harmed. |
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| ● | Third-party claims of infringement or other claims against us could require us to redesign C-Scan, seek licenses, or engage in future costly intellectual property litigation, which could negatively affect our future business and financial performance. |
Risks Related to Our Operations in Israel
Our principal offices, research and development facilities and some of our suppliers are located in Israel and, therefore, our business, financial condition and results of operation may be adversely affected by political, economic and military instability in Israel.
Pursuant to the terms of the Israeli government grants we received for research and development expenditures and expenditures relating to our transition to manufacturing , we are obligated to pay certain royalties on our revenues to the Israeli government. The terms of the grants require us to satisfy specified conditions and to make additional payments in addition to repayment of the grants upon certain events.
Risks Related to Ownership of our Ordinary Shares
Our ordinary shares could be delisted from the Nasdaq Capital Market.
Our stock price has and may be subject to fluctuation, and purchasers of our securities could incur substantial losses.
Risks Related to Our Financial Position
We have a history of losses, may incur future losses and may not achieve profitability.
We are a clinical and development-stage medical diagnostics company with a limited operating history. We have incurred net losses in each fiscal year since we commenced operations in 2009. We incurred net losses of $610,000 in 2014, $12.3$13.8 million in 2015 and $8.82020, $13.8 million in 2016.2019 and $10.6 million in 2018. As of December 31, 2016,2020, our accumulated deficit was $42.9$91.0 million. OurWe expect our losses couldto continue for the foreseeable future as we continue our investment in research and development and clinical trials to complete the development of our technology and to attain regulatory approvals, manufacturing scale up, begin the commercialization efforts for our C-Scan, system, increase our marketing and selling expenses, and incur additional costs as a result of being a public company in the United States. Successful completion of our development program and, ultimately, the attainment of profitable operations is dependent upon future events, including obtaining adequate financing to fulfill our development activities and our ability to successfully commercialize ourmanufacture commercial quantities of C-Scan systemat an acceptable cost and achieve a level of sales adequate to support our cost structure.generate significant revenues. The extent of our future operating losses and the timing of becoming profitable are highly uncertain, and we may never achieve or sustain profitability.
Our recurring operating losses have raised substantial doubt regarding our ability to continue as a going concern.
As of December 31, 2020, we had an accumulated deficit of $91.0 million. Our recurring operating losses raise substantial doubt about our ability to continue as a going concern. Our financial statements include a note describing the conditions which raise this substantial doubt. As a result, our independent registered public accounting firm included a “going concern” explanatory paragraph in its report on our financial statements as of and for the year ended December 31, 2020 with respect to this uncertainty. Our ability to continue as a going concern will require us to obtain additional financing to fund our operations. The perception of our ability to continue as a going concern may make it more difficult for us to obtain financing or obtain financing on favorable terms for the continuation of our operations and could result in the loss of confidence by investors, suppliers and employees. If we are not successful in raising capital through equity offerings, debt financings, collaborations, licensing arrangements or any other means or are not successful in reducing our expenses, we may exhaust our cash resources and will be unable to continue our operations. If we cannot continue as a viable entity, our shareholders would likely lose most or all of their investment in us.
We will require additional funding in order to complete the development and commercialization of our C-Scan, system, which may cause dilution to our existing shareholders, restrict our operations or require us to relinquish rights to our C-Scan system or intellectual property. If additional capital is not available, we may have to delay, reduce or cease the development or commercialization of our C-Scan system.C-Scan.
Our operations have consumed substantial amounts of cash. We expect that we will need to continue to raise and spend substantial amounts in order to complete the development, clinical development, regulationregulatory approval and commercialization of our C-Scan system.C-Scan. We intend to use our cash resources, including the remaining proceeds of our initial public offeringApril 2020 and May 2020 registered direct offerings, our July 2020 warrant exercise transaction and the concurrent private placement and our August 2016 registered direct offeringproceeds received from the warrants exercise by certain warrants holders during the first quarter of 2021, to finance these efforts and believe that we have sufficient capital to fund our ongoing operations at least until December 31, 2017, and weplans through July 2022. We will therefore need to raise additional funds to obtain the required capital prior to completing the development and commercialization of our productC-Scan (see Item 5B “Operating and Financial Review and Prospects — Liquidity and Capital Resources — Sources of Liquidity”). We may seek additional funding through equity offerings, debt financings, collaborations, licensing arrangements or any other means to conduct clinical trials and develop, manufacture and market our C-Scan system or for our general corporate purposes. Securing additional financing may divert our management’s attention from ourits day-to-day activities, which may adversely affect our ability to develop and commercialize our C-Scan system.C-Scan. Additional financing may not be available to us on a timely basis on terms acceptable to us, or at all. In addition, if we raise additional funds by issuing equity securities, you may experience significant dilution of your ownership interest and the newly issued securities may have rights senior to those of the holders of our ordinary shares. In addition, the issuance of additional equity securities by us, or the possibility of such issuance, may cause the market price of our ordinary shares to decline. Alternatively, if we raise additional funds by obtaining loans from third parties, the terms of those financing arrangements may include negative covenants, may require us to grant a lender a security interest in our assets or may include other restrictions on our business that could impair our operational flexibility, and could also require us to fund additionalresult in interest expense.expense. If we raise additional funds through collaborations, licensing arrangements or other structured financing transactions, we may relinquish rights to certain of our technologies or products, grant security interests in our assets or grant licenses to third parties on terms that are unfavorable to us. If adequate additional financing on acceptable terms is not available, we may not be able to develop our C-Scan system at the rate or to the stage we desire, and we may have to delay or abandon the commercialization of our C-Scan system.C-Scan. Any of these factors could materially adversely affect our business, financial condition and results of operations.
Risks Related to Our Business
We may not succeed in completing the development of our product, commercializingachieve manufacturing stability and capacity, demonstrate sufficient clinical evidence or commercialize our product and generatinggenerate significant revenues.revenues.
Since commencing our operations, we have focused on the research and development and limited clinical trials of C-Scan. Although we have received CE Mark certification from our notified body (DEKRA - 0344) for the marketing and sale of C-Scan system.in the European Union, valid until January 1, 2023 (we are in a process to obtain a CE mark according to the new EU Regulation 2017/745 on Medical Devices (MDR), we have not commenced marketing and sales in the European Union and may require additional regulatory approval in each of the local jurisdictions in the European Union before we can commence marketing and sale of C-Scan, such as from the Swiss National Cooperative for the Disposal of Radioactive Waste (Nagra) and the German Federal Office for Radiation Protection (Bundesamt für Strahlenschutz, BfS). In Israel we received approval from the Medical Devices and Accessories Division of the Israeli Ministry of Health, or AMAR, for the marketing and sale of the C-Scan system in Israel, which is valid until March 31, 2022, For our advanced C-Scan, version 4, we will be required to obtain additional approval from the notified body in conjunction with the MDR, to allow for AMAR renewal and for future marketing in the EU. We have not received regulatory approvals in any jurisdiction for our C-Scan system to dateother jurisdictions, including the United States, and there can be no assurance that we will be able to receive regulatory approvals to commence marketing and sales for our C-Scan system in the foreseeable future or ever. Our ability to generate revenues and achieve profitability depends on our ability to successfully complete the development of our C-Scan product, demonstrate sufficient clinical evidence, obtain required regulatory approvals and commercial licenses, andmanufacture commercial quantities of C-Scan at an acceptable cost to enable us to generate significant revenues.
The future success of our business cannot be determined at this time, and we do not anticipate generating significant revenues from product sales for the foreseeable future. In addition, we have no experience in commercializing our C-Scan system and face a number of challenges with respect to our commercialization efforts, including, among others, that:
we may not have adequate financial or other resources to complete the development of our product, demonstrate adequate clinical results, attain required regulatory approvals and licensures, obtain adequate manufacturing and capacity and begin the commercialization efforts for our C-Scan system;C-Scan;
we may fail to obtain or maintain required regulatory approvals and licensures for our C-Scan system in our target markets or may face adverse regulatory or legal actions relating to our system even if regulatory approval is obtained;
we may not demonstrate adequate clinical safety and clinical effectiveness results from our current or future versions of C-Scan, to support regulatory body approval or market acceptance and adoption;
we may face ongoing limitations imposed by the Nuclear Regulatory Commission, or NRC, or other nuclear regulatory commissions in jurisdictions in which we intend to commercialize C-Scan in relation to the disposal of our C-Scan Cap in the sanitary system, such as requiring patients to retrieve our C-Scan Cap after use, which could impact enrollment pace in our clinical studies and make C-Scan less attractive;
we may not be able to maintain an adequate supply chain due to reliance on sole suppliers for critical components and scale up the manufacture our products inof C-Scan to commercial quantities at an adequate quality or at an acceptable cost;
we may not be able to establish adequate sales, marketing and distribution channels;
healthcare professionals and patients may not accept our C-Scan system;C-Scan;
we may not be aware of possible complications from the continued use of our C-Scan system because we have limited clinical experience with respect to the actual use of our C-Scan system;C-Scan;
other technological breakthroughs in colorectal cancer, or CRC, screening, treatment and prevention may reduce the demand for our C-Scan system;C-Scan;
changes in the market for CRC screening, new alliances between existing market participants and the entrance of new market participants may interfere with our market penetration efforts;
government and private third-party payors may not agree to provide coding, coverage and payment adequate to reimburse healthcare providers and patients for any or all of the purchase price in conjunction with clinical effectiveness of our C-Scan, system, which may adversely affect healthcare providers’ and patients’ willingness to purchase our C-Scan system;C-Scan;
uncertainty as to market demand may result in inefficient pricing of our C-Scan system;C-Scan;
we may not be able to adequately protect our intellectual property or may face third-party claims of intellectual property infringement; and
we are dependent upon the results of ongoing clinical studies relating to our C-Scan system and the products of our competitors.
If we are unable to meet any one or more of these challenges successfully, our ability to effectively commercialize our C-Scan system could be limited, which in turn could have a material adverse effect on our business, financial condition and results of operations.
Although we recently received FDA approval of our investigational device exemption, or IDE for our U.S. pivotal study, even if commenced and completed, the outcome of the U.S. pivotal study is inherently uncertain.
We recently received FDA approval of our IDE for our planned U.S. pivotal study. The commencement of any other clinical trials that we may initiate, subject to sufficient available funds, is subject to acceptance by the FDA of an IDE and acceptance by other regulatory authorities of the foreign equivalent of an IDE, and finalizing the planned trial design based on discussions with the FDA and other applicable regulatory authorities. In the event that the FDA or any other regulatory authority requires us to complete additional preclinical studies or we are required to satisfy other FDA or other regulatory requests, the start of the U.S. pivotal study may be delayed. Even after we receive and incorporate guidance from these regulatory authorities, the FDA or other regulatory authorities could disagree that we have satisfied their requirements to commence our clinical trial or change their position on the acceptability of our planned trial design or the clinical endpoints selected, which may require us to complete additional preclinical studies or clinical trials or impose stricter approval conditions than we currently expect. As a result of the foregoing, the research and development, preclinical studies and clinical testing is expensive and can take years to complete, and its outcome is inherently uncertain. Failure can occur at any time during the development process. (see “Risk Factors – Risks Related to Our Business – Clinical failure can occur at any stage of clinical development. Our clinical experience to date does not necessarily predict future results and may not have revealed certain potential limitations of the technology and potential complications from C-Scan and may require further clinical validation. Any product version we advance through clinical trials may not have favorable results in later clinical trials or receive regulatory approval.”).
Clinical failure can occur at any stage of clinical development. Our clinical experience to date does not necessarily predict future results and may not have revealed certain potential limitations of the technology and potential complications from our C-Scan system and may require further clinical validation. Any product version we advance through clinical trials may not have favorable results in later clinical trials or receive regulatory approval.
Clinical failure can occur at any stage of clinical development. To date, we have performed clinical studies with iterative versions of both scanning and non-scanning capsules, in conjunction with iterative versions of the C-Scan Track tracking and recording systems and the C-Scan View application.application and we are continuing to develop further iterative versions of our C-Scan Cap and C-Scan Track. Our clinical trials have been conducted under differing protocols, andwhile using specific inclusion criteria and limited groups of patients.enriched patient enrolment. Therefore, we have a limited ability to identify potential problems and/or inefficiencies concerning current and future versions of our C-Scan system in advance of its use in general and expanded groups of patients and we cannot assure you that its actual clinical performances will be satisfactory to support proposed indications and regulatory approvals and clinical acceptance and adoption, or that its use will not result in unanticipated complications. For example, we have experienced technical failures of the C-Scan Cap in previous versions of C-Scan and are currently engaged in implementing a plan to ensure improved reliability in future versions. To this end, we have finalized a clinical trial protocol for a study in Israel and identified over 10 clinical trial sites to enroll up to 250 average risk patients, however, if the results of such study are not satisfactory, the commencement of our U.S. pivotal study could be delayed. However, there can be no assurance that the implementation of our plan will be successful. Furthermore, the results from laboratory, pre-clinical,non-clinical and completed clinical studies, as well as preliminary analyses of the currentlyresults from our ongoing clinical studies,trials may not be indicative of final clinical results obtained from our current C-Scan systemversion or future versions of our C-Scan system on expanded screening populations. In addition, the results of our clinical trials are subject to human analyses and interpretation of the data accumulated, which could be affected by various errors due to, among others, lack of sufficient clinical experience with our C-Scan, system,assumptions used in the statistical analysis of results, interpretation errors in the analysis of the clinical trials results, including the reconstructed images by our C-Scan, system, or due to uncertainty in the actual efficacy of our C-Scan system in its current clinical stage. Therefore, the safety and efficacy of our C-Scan system and the clinical results to date will require further independent professional validation and require further clinical study. If our C-Scan system does not function as expected over time, we may not be able to develop our C-Scan system at the rate or to the stage we desire, we could be subject to liability claims, our reputation may be harmed, our C-Scan system may not achieve regulatory clearances, and our C-Scan system may not be widely adopted by healthcare providers and patients.
We expect to derive most of our revenues from sales of one product or product line.product. Our inability to successfully commercialize this product, or any subsequent decline in demand for this product, could severely harm our ability to generate revenues.
We are currently dependent on the successful commercialization of our C-Scan system to generate revenues. As a result, factors adversely affecting our ability to successfully commercialize, or the pricing of or demand for, this product could have a material adverse effect on our financial condition and results of operations. If we are unable to successfully commercialize or create market demand for our C-Scan, system, we will have limited ability to generate revenues.
Furthermore, we may be vulnerable to fluctuations in demand for our C-Scan system.C-Scan. Such fluctuations in demand may be due to many factors, many of which are beyond our control, including, among others:
market acceptance of a new product, including healthcare professionals’ and patients’ preferences;
market acceptance of the clinical safety and performance of our C-Scan system;C-Scan;
development of similarly cost-effective products by our competitors;
development delays of our C-Scan system;C-Scan;
technological innovations in CRC screening, treatment and prevention;
adverse medical side effects suffered by patients using our C-Scan, system, whether actually resulting from the use of our C-Scan system or not;
changes in regulatory policies toward CRC screening or imaging technologies;
changes in regulatory approval, clearance requirements and licensure for our product;
third-party claims of intellectual property infringement;
budget constraints and the availability of reimbursement or insurance coverage from third-party payors for our C-Scan system;C-Scan;
increases in market acceptance of other technologies;
adverse responses from certain of our competitors to the offering of our C-Scan system;C-Scan;
licensure and perceived risk of manufacturing and using a product containing a radioactive source;source , including associated agencies refusal to authorize capsule disposal; and
the shelf life of our C-Scan Cap.
If healthcare professionals do not recommend our product to their patients, our C-Scan system may not achieve market acceptance and we may not become profitable.
CRC screening candidates are generally referred by their healthcare professional to approved tests and screening technology options. If healthcare professionals, including physicians, do not recommend or prescribe our product to their patients, our C-Scan system may not achieve market acceptance and we may not become profitable. In addition, physicians have historically been slow to change their medical diagnostic and treatment practices because of perceived liability risks arising from the use of new products. Delayed adoption of our C-Scan system by healthcare professionals could lead to a delayed adoption by patients and government and private third-party payors. Healthcare professionals may not recommend or prescribe our C-Scan system until certain conditions have been satisfied including, among others:
there is sufficient long-term clinical and health-economic evidence to convince them to alter their existing screening methods and device recommendations;
there are recommendations from other prominent physicians, educators and/or associations that our C-Scan system is safe and effective;
we obtain favorable data from clinical and health-economic studies for our C-Scan system;C-Scan;
reimbursement or insurance coverage from government and private third-party payors is available;
healthcare professionals obtain required approvals and licensures for the handling, storage, dispensing and disposal of our C-Scan system;C-Scan; and
healthcare professionals become familiar with the complexities of our C-Scan system.C-Scan.
We cannot predict when, if ever, healthcare professionals and patients may adopt the use of our C-Scan system.C-Scan. Even if favorable data is obtained from clinical and health-economic studies for the regulatory approval of our C-Scan, system, there can be no assurance that prominent physicians would endorse it or that future clinical studies will continue to produce favorable data regarding our C-Scan system.C-Scan. In addition, prolonged market exposure may also be a pre-requisite to reimbursement or insurance coverage from government and private third-party payors. If our C-Scan system does not achieve an adequate level of acceptance by patients, healthcare professionals and government and private third-party payors, we may not generate significant product revenues and we may not become profitable.
We expect to face competition from large, well-established manufacturers of traditional technologies for CRC screening and detection of gastrointestinal disorders, as well as from new competitive technologies,. especially within the field of biomarkers.
Competition for our C-Scan system comes from traditional well-entrenched manufacturers of tests and equipment for CRC screening, such as colonoscopy, sigmoidoscopy, CT Colonography, or CTC, optical capsule endoscopy, fecal occult blood tests, or FOBTs, and fecal immunochemical tests, or FITs. The principal manufacturers of equipment for optical colonoscopy and sigmoidoscopy include Olympus, Pentax, Hoya and Fuji Film. The principal manufacturers of equipment for CTC include General Electric Healthcare Systems, Siemens Medical Solutions, Philips Medical Systems Ltd. and Toshiba Corporation. The principal manufacturemanufacturer of equipment for optical capsule endoscopy includes Medtronic plc. All of these companies have substantially greater financial resources than we do, and they have established reputations as well as worldwide distribution channels for providing medical instruments to physicians.
Several companies have developed or are developing non-invasive technologies based on stool, serum, or molecular diagnostics (from blood and other bodily fluids), or MDx, tests that are used to indicate the presence of CRC and polyps in the colon. These companies include Polymedco, Exact Sciences, Epigenomics AG, Gene News, EDP Biotech Corporation, Illumina, Inc., Quest Diagnostics, VolitionRx Nu.Q diagnostic, Freenome and Epigenomics AG.Grail. In August 2018, Exact Sciences announced that it entered into a U.S. promotion agreement with Pfizer for the promotion of Cologuard ®, a non-invasive stool DNA screening test for colorectal cancer. During the past years, there has been an extensive effort in utilization of molecular biology and advanced computational techniques to develop methods capable to identify cell-free cancer biomarkers. These advancements are greatly supported by large capital investments due to their promising claims to defeat cancer at its early stages.
ProceduresIn addition, procedures for bowel cleansing that are less onerous are constantly being developed, which could make our entry into the market more difficult. For instance, bowel cleansing initiated by the ingestion of pills or food-substitute diet regimes rather than through drinking large amounts of distasteful liquids may be viewed as an improvement to the cleansing process, but other screening methods may be even more palatable to patients.
If we are unable to convince patients and physicians to adopt our C-Scan system over the current technologies marketed by our competitors or future new technologies that may be marketed by our existing or potential competitors, our business and results of operations may suffer.
We are planning to rely on local distributors and/or strategic partners to market and distribute our C-Scan system in those countries where we intend to market and distribute our C-Scansystem.C-Scan.
We are planning to rely on local distributors and/or strategic partners for the marketing and distribution of our C-Scan system.C-Scan. Our success in generating sales in countries or regions where we will engage local distributors and/or strategic partners will depend in large part on the efforts of these third parties over whom we have limited control. If we are unable to identify and engage with suitable local distributors and/or strategic partners in the countries where we intend to market and distribute our C-Scan, system, our business, financial condition and results of operations could be negatively affected.
We have limited manufacturing capabilities and if we are unable to scale up our manufacturing operations to meet the necessary quantities for our upcoming clinical studies or anticipated market demand, our growth could be limited and our business, financial condition and results of operations could be materially adversely affected.
We currently have limited resources, facilities and experience in commercially manufacturing sufficient quantities of our C-Scan system to meet the quantities we need for our upcoming clinical studies and the demand we may expect from commercialization efforts.efforts, if we are able to obtain regulatory clearance in the United States for C-Scan. We do not have experience in manufacturing C-Scan in the commercial quantities that we expect to require to meet demand for C-Scan, nor can we be certain of our manufacturing costs. We have in the past, and we may in the future, face certain technical challenges as we increase manufacturing capacity, including, among others, logistics associated with the handling of radioactive materials, equipment design and automation, material procurement and lower than expected yields and increased scrap costs, as well as challenges related to maintaining quality control and assurance standards. Ourstandards, manufacturing commercial quantities of C-Scan systemcapsules at an acceptable cost and logistics associated with the handling of radioactive materials and the shelf life of our C-Scan Cap, which could result in delays in our clinical trial and commercialization plans and lost revenue. We may be unable to establish or maintain reliable, high-volume manufacturing capacity. Even if we can establish and maintain this capacity, the cost of doing so may increase the cost of C-Scan and reduce our ability to successfully compete the effort. In addition, while we intend to establish our own X-ray source production line in Israel to support our clinical needs and future sales in Israel and potentially in Europe, we may not be successful in such efforts. Despite our continuing cost-cutting efforts, including scaling-up of our manufacturing capabilities of our C-Scan capsule in commercial quantities, we may not be able to achieve adequate quality at an acceptable cost. C-Scan includes several components that are based on new technologies and are difficult to manufacture and some are being supplied to us by single source suppliers (see “Our“Risk Factors – Risks Related to Our Business – Our reliance on single source suppliers could harm our ability to conduct clinical trials and meet demand for our product in a timely manner or within budget.budget.”). Furthermore, we may encounter similar or unforeseen challenges initiating and later expanding production of any new products. If we are unable to scale up our manufacturing capabilities to meet market demand, our growth could be limited and our business, financial condition and results of operations could be materially adversely affected.
In addition, we have received and may receive in the future grants from the Government of the State of Israel through NATIthe IIA (formerly known as the OCS), for the termsfinancing of which require that products developed with NATI grants be manufactured in Israela portion of our research and thatdevelopment expenditures and to support the technology developed thereunder may not be transferred outsidefunding of Israel (including by way of license), unless prior approval is receivedour transition from the NATI, which we may not receive (and any such approval would be subjectresearch and development to increased royalty repayment rates and increased royalties). For additional information, see “Risks Relatedmanufacturing, pursuant to Our Operations in Israel”. We are currently considering whether it would be possible to assemble the C-Scan Cap without the X-ray source in Israel, and have the X-ray source subsequently assembled into our C-Scan system at a reactor or cyclotron site or at a distribution center outside Israel. Even following the full repayment of any NATI grants, we must nevertheless continue to comply with the requirements of the Encouragement of Research, Development and Technological Innovation in the Industry Law 5744-1984 (formerly known as the Encouragement of Industrial Research and Development Law 5744-1984), or the Research Law,Innovation Law. The terms of the IIA grants subject us to certain restrictions relating to (among other things) the transfer of the manufacturing of IIA-funded products outside Israel. See “Risk Factors – Risks Related to Our Operations in Israel – Pursuant to the terms of the Israeli government grants we received for research and regulationsdevelopment expenditures and guidelines thereunder.expenditures relating to our transition to manufacturing, we are obligated to pay certain royalties on our revenues to the Israeli government. The foregoingterms of the grants require us to satisfy specified conditions and to make additional payments in addition to repayment of the grants upon certain events.” Such restrictions may impair our ability to outsource or transfer development or manufacturing activities with respect to any product or technology outside of Israel.
Our reliance on single source suppliers could harm our ability to conduct clinical trials and meet demand for our product in a timely manner or within budget.
We currently depend on single source suppliersuppliers for some of the components necessary for the production of our C-Scan system.C-Scan. For example, for the current version of the C-Scan system used in clinical trials, we currently have a single supplier for the motor used to rotate the collimated X-ray source in our C-Scan, system and for each of the specially designedcustomized X-ray detectors , for the X-ray source and batteries used in our C-Scan system.C-Scan. There areis a limited number of manufacturers worldwide who are capable of manufacturing the motor, the customized X-ray detectors, the X-ray source and the specially designed X-ray detectors and X-ray sourcebatteries that we currently use in our C-Scan system.C-Scan. In addition, the application-specific integrated circuit, or ASIC, residing in our C-Scan system is currently manufactured for us by a single semiconductor fabrication plant, or FAB. Furthermore, we do not currently have written contracts with anyfew of suchthose suppliers. While our current suppliers have been able to supply the required quantities of such components to date, if the supply of these components is disrupted or terminated or if our current suppliers are unable to supply required quantities of components, we may not be able to find alternative sources for these key components in a timely manner. Although we are planning to maintain strategic inventory of key components, the inventory may not be sufficient to satisfy the clinical requirements or demand for our C-Scan system if such supply is interrupted, or otherwise affected bymay be subject to risk of loss due do catastrophic events, such as a fire at our storage facility. In addition, to partially mitigate the risks of reliance on single source suppliers, we are seeking alternate manufacturers for some of our components which requires us to dedicate significant resources and investment. There can be no assurance that we will be successful in seeking alternate suppliers or establish our own production line. As a result of the foregoing, we may be unable to meet theour clinical requirements ortrials timelines and meet the demand for our C-Scan, system, which could harm our ability to achieve regulatory approvals and generate revenues, and lead to customer dissatisfaction and damage our reputation. If we are required to change the manufacturersupplier of any of these key components, there may be a significant delay in locating a suitable alternative manufacturer. In addition, we may be required to verify that the new manufacturer maintains facilities and procedures that comply with FDA and other applicable quality standards and with all applicable regulations and guidelines. For example, our agreement with the sole supplier of the X-ray source used in C-Scan terminates on December 31, 2021. As part of our mitigation plan, we plan to establish our in-house production line for our X-ray source in Israel, however we cannot assure you that we will successfully complete this effort and we may be required to find an alternative supplier for the X-ray source, which we may not be able to do in a timely manner. The delays associated with the identificationintroduction of a new manufacturer for certain key components, could delay our ability to achieve regulatory approvals and to manufacture our C-Scan system in a timely manner or within budget. Furthermore, in the event that the manufacturer of a key component of our C-Scan system ceases operations or otherwise ceases to do business with us, we may not have access to the information necessary to enable anotheran alternative supplier to manufacture the component. The occurrence of any of these events could harm our ability to achieve regulatory approvals and to meet demand for our C-Scan system in a timely manner or within budget.
The use of any of our C-Scan Cap, C-Scan Track or C-Scan View could result in product liability or similar claims that could be expensive, damage our reputation and harm our business.business.
Our business exposes us to an inherent risk of potential product liability or similar claims related to the manufacturing, marketing and sale of medical devices. The medical device industry has historically been litigious, and we face financial exposure to product liability or similar claims if the use of any of our C-Scan Cap, C-Scan Track or C-Scan View were to cause or contribute to injury or death, including, without limitation, harm to the body caused by the procedure or inaccurate diagnoses from the procedure that could affect treatment options. There is also the possibility that defects in the design or manufacture of any of these products might necessitate a product recall. Although we plan to maintain product liability insurance, the coverage limits of these policies may not be adequate to cover future claims. In the future, we may be unable to maintain product liability insurance on acceptable terms or at reasonable costs and such insurance may not provide us with adequate coverage against potential liabilities. A product liability claim, regardless of merit or ultimate outcome, or any product recall could result in substantial costs to us, damage to our reputation, customer dissatisfaction and frustration, and a substantial diversion of management attention. A successful claim brought against us in excess of, or outside of, our insurance coverage could have a material adverse effect on our business, financial condition and results of operations.
C-Scan system is a complex medical device that requires training for qualified personal and care for data analysis.analysis.
Our C-Scan system is a complex medical device that requires training for qualified personal, including physicians, and care for data analysis. Although our distributors will be required to ensure that our C-Scan system is prescribed only by trained clinicians, the potential for misuse of our C-Scan system still exists due to its complexity. Such misuse could result in adverse medical consequences for patients that could damage our reputation, subject us to costly product liability litigation and otherwise have a material adverse effect on our business, financial condition and results of operations.
We depend on third parties to manage our clinical studies and trials, perform related data collection and analysis, and to enroll patients for our clinical trials, and, as a result, we may face costs and delays that are beyond our control.control.
We rely on third parties, such as third-party clinical research organizations, or CROs, clinical investigators and clinical sites, to manage our clinical trials and perform data collection and analysis, and to enroll patients for our clinical trials. Although we have and expect to continue to have contractual arrangements with these third parties, we control only certain aspects of their activities. Nevertheless, we are responsible for ensuring that each of our studies is conducted in accordance with the applicable protocol and legal, regulatory and scientific standards, and our reliance on such third parties does not relieve us of our regulatory responsibilities. If such third parties fail to comply with applicable regulatory requirements, the clinical data generated in our clinical trials may be deemed unreliable and regulatory authorities may require us to perform additional clinical trials before approving our marketing applications, which would delay the regulatory approval process. Furthermore, we may not be able to control the amount and timing of resources that these parties devote to our studies and trials or the quality of these resources. If these third parties fail to properly manage our studies and trials or enroll patients for our clinical trials, we will be unable to complete them at all or in a satisfactory or timely manner, which could delay or prevent us from obtaining regulatory approvals for, or achieving market acceptance of, our product.
In addition, termination of relationships with third parties may result in delays, inability to enter into arrangements with alternative third parties or do so on commercially reasonable terms. Switching or adding additional clinical sites involves additional cost and requires management time and focus. In addition, there is a natural transition period when a new clinical site commences work. As a result, delays occur, which can materially impact our ability to meet our desired clinical development timelines.
We currently intend to sell our products mainly in the United States, Europe, Israel and Japan and, if we are unable to manage our operations in these territories, our business, financial condition and results of operations could be materially adversely affected.affected.
Our headquarters and substantially all of our operations and employees are presently located in Israel, but we currently intend to market our products mainly in the United States, Europe, Israel and Japan. Accordingly, we are subject to risks associated with international operations, and our international sales and operations will require significant management attention and financial resources. In addition, our international sales and operations will subject us to risks inherent in international business activities, many of which are beyond our control and include, among others:
foreign certification, registration and other regulatory requirements;
customs clearance and shipping delays;
import and export controls;
multiple and possibly overlapping tax structures;
difficulty forecasting the results of our international operations and managing our inventory due to our reliance on third-party distributors;
differing laws and regulations, business and clinical practices, licensures, government and private third-party payor reimbursement policies and patient preferences;
differing standards of intellectual property protection among countries;
difficulties in staffing and managing our international operations;
difficulties in penetrating markets in which our competitors’ products are more established;established and achieving a competitive sale price for our product;
currency exchange rate fluctuations and foreign currency exchange controls and tax rates; and
political and economic instability, war or acts of terrorism.terrorism or natural disasters, emergence of a pandemic, or other widespread health emergencies (or concerns over the possibility of such an emergency, including for example, the COVID-19 pandemic).
If we are unable to manage our international operations effectively, our business, financial condition and results of operations could be materially adversely affected.
We may not be successful in establishing and maintaining strategic partnerships, which could adversely affect our ability to develop and commercialize C-Scan.
A part of our strategy is to evaluate and, as deemed appropriate, enter into partnerships in the future when strategically attractive, including potentially with major medical device companies. We face significant competition in seeking appropriate partners for C-Scan, and the negotiation process is time-consuming and complex. In order for us to successfully partner C-Scan, potential partners must view C-Scan as economically valuable in markets they determine to be attractive in light of the terms that we are seeking and other available products for licensing by other companies. Even if we are successful in our efforts to establish strategic partnerships, the terms that we agree upon may not be favorable to us, and we may not be able to maintain such strategic partnerships if, for example, development or approval of a product is delayed or sales of an approved product are disappointing. Any delay in entering into strategic partnership agreements related to C-Scan could delay the development and commercialization of our product candidates and reduce their competitiveness even if they reach the market.
In addition, our strategic partners may breach any future agreement with us, and we may not be able to adequately protect our rights under these agreements. Furthermore, our strategic partners will likely negotiate for certain rights to control decisions regarding the development and commercialization of C-Scan, if approved, and may not conduct those activities in the same manner as we would do so.
If we fail to establish and maintain strategic partnerships related to C-Scan, we will bear all of the risk and costs related to the development and commercialization of C-Scan, and we will need to seek additional financing, hire additional employees and otherwise develop expertise which we do not have and for which we have not budgeted.
If we lose our key personnel or are unable to attract and retain additional personnel, our business and ability to compete will be harmed.harmed.
Our success relies upon the continued service and performance of the principal members of our management and research and development team.team, including Alex Ovadia and Yoav Kimchy. In order to implement our business strategy, we will need to retain our key personnel with expertise in the areas of research and development, clinical testing, government regulation, manufacturing, finance, marketing and sales. Our product development plans depend in part on our ability to retain engineers with expertise in a variety of technical fields. The loss of a number of these persons or our inability to attract and retain qualified personnel could harm our business and our ability to compete. We do not maintain key man insurance for Alex Ovadia or Yoav Kimchy.
Substantially all of our operations are currently conducted at a single location near Haifa, Israel, and any disruption at our facility could materially adversely affect our business, financial condition and results of operations.
Substantially all of our operations are currently conducted at a single location near Haifa, Israel.Israel (other than certain manufacturing activities planned to be conducted by GE Healthcare for purposes of U.S. clinical trials, and certain other production activities conducted by subcontractors). We take precautions to safeguard our facility, including obtaining insurance coverage and implementing health and safety protocols. However, a natural or other disaster, such as a fire, flood, or an armed conflict involving Israel (as detailed further under “Risks“Risks Related to Our Operations in Israel”Israel”), or a terrorist attack, could damage or destroy our facility and our manufacturing equipment or inventory, cause substantial delays in our operations and otherwise cause us to incur additional unanticipated expenses. In addition, the insurance we maintain against fires, floods and other natural disasters and the war and terrorism insurance we maintain may not be adequate to cover our losses in any particular case. Damage to our facility or our other property or to any of our suppliers’ facilities and properties, whether located in Israel or elsewhere, due to fire, a natural disaster or casualty event or an armed conflict or terrorist attack, could materially adversely affect our business, financial condition and results of operations, with or without insurance.operations.
A security breach or disruption or failure in a computer or communications systemssystems could adversely affect us.
Our operations depend onDespite the continuedimplementation of security measures, our internal computer systems, and secure functioningthose of our CROs and other third parties on which we rely, are vulnerable to damage from computer viruses, unauthorized access, cyber-attacks, natural disasters, fire, terrorism, war, and communications systemstelecommunication and electrical failures. If such an event were to occur and interrupt our operations, it could result in a material disruption of our clinical program. For example, the protectionloss of electronic information (including sensitive personal information as well as proprietaryclinical trial data from ongoing or confidential information) storedplanned clinical trials could result in computer databases maintained by usdelays in our regulatory approval efforts and significantly increase our costs to recover or by third parties. Such systems and databases are subject to breach, damage,reproduce the data. To the extent that any disruption or failure from, among other things, cyber-attacks and other unauthorized intrusions, power losses, telecommunications failures, fires and other natural disasters, armed conflictssecurity breach results in a loss of or terrorist attacks. We may be subject to threatsdamage to our computer and communications systems and databasesdata or applications, loss of unauthorized access, computer hackers, computer viruses, malicious code, cyber-crime, cyber-attacks and other security problems and system disruptions. Unauthorized persons may attempt to hack into our systems to obtaintrade secrets or inappropriate disclosure of confidential or proprietary information, including protected health information or personal data relating toof clinical trial participants or employees or former employees, access to our clinical data, or disruption of the manufacturing process, we could incur liability and the further development of C-Scan could be delayed. We may also be vulnerable to cyber-attacks by hackers or other malfeasance. This type of breach of our cybersecurity may compromise our confidential information and/or proprietaryour financial information and adversely affect our business or ofresult in legal proceedings. Further, these cybersecurity breaches may inflict reputational harm upon us that may result in decreased market value and erode public trust.
We or the third parties upon whom we depend may be adversely affected by natural disasters and/or information relatinghealth epidemics or pandemics, such as the COVID-19 pandemic, and our business continuity and disaster recovery plans may not adequately protect us from a serious disaster.
Natural disasters could severely disrupt our operations and have a material adverse effect on our business, results of operations, financial condition and prospects. If a natural disaster, power outage, health epidemic or other event occurred that prevented us from using all or a significant portion of our office, manufacturing and/or lab spaces, that damaged critical infrastructure, such as the manufacturing facilities of our third-party contract manufacturers, subcontractors, suppliers, CROs, clinical sites, third parties ongoing activities and schedules or that otherwise disrupted operations, it may be difficult or, in certain cases, impossible for us to continue our plans and business for a substantial period of time.
A health epidemic, pandemic or other outbreak, including the current COVID-19 pandemic, may materially and adversely affect our business, financial condition and results of operations. We have experienced disruptions to our businessoperations as a result of the COVID-19 pandemic. In accordance with the directive of the Israel Ministry of Health, during the first wave of the COVID-19 pandemic in Israel, the majority of our employees worked remotely while a select few continued to work from our headquarters. Also, we temporarily suspended our clinical studies as well as interactions between hospitals and financial data. If, despitehealthcare professionals and our efforts to secure our systemsemployees and databases, events of this nature occur, we could expose clinical trial participants orpatients. In addition, to manage this crisis, we implemented several cost reduction measures, including a temporary 15% reduction in salaries for all employees and management and the fees of the members of our board of directors and lowered monthly expenditures by temporarily placing a number of operational employees on unpaid leave. As a result of lowered infection rates in Israel in June 2020, which resulted in the lifting of many government restrictions to control the spread of the virus as well as our improved financial or medical identity theft, lose clinical trial participants or employees orposition following our financings in April and May 2020, we resumed near normal operations and restored salaries to their original levels. However, during July 2020, and again in October 2020, due to significantly increased infection rates in Israel, the government mandated a second and third lockdown, respectively. We have difficulty attracting new clinical trial participants or employees, be exposedimplemented several measures according to the lossIsrael Ministry of Health’s guidelines, including remote working whenever possible, physical separation between employees and daily employee health monitoring. The extent to which the COVID-19 pandemic shall continue to impact our operations and planned timelines will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the duration and severity of the outbreak, the impact on the global economy, the impact of any further waves of COVID-19 and the actions that may be required to contain the COVID-19 pandemic or misusetreat its impact. In particular, the continued spread of confidential informationCOVID-19 globally could materially adversely impact our operations and workforce, including our research and clinical trials and our ability to continue raising capital. It could also affect the operations of key governmental agencies, such as the FDA, which may delay our development plans, and could result in the inability of our suppliers to deliver components or raw materials on a timely basis or at all, each of which in turn could have a material adverse impact on our business, financial condition and financial data,results of operation.
The disaster recovery and business continuity plans we have disputes with clinical trial participantsin place may prove inadequate in the event of a serious disaster or employees, suffer regulatory sanctions or penalties under applicable laws,similar event. We may incur substantial expenses as a result of the limited nature of our disaster recovery and business continuity plans, which could have a data privacy breach, or suffer othermaterial adverse consequences including legal action and damage to our reputation.
We have and will continue to incur significant costs as a result of operating as a public company in the United States, and our management is required to devote substantial time to compliance initiatives.
As a public company whose securities are traded in the United States, we have and will continue to incur significant legal, accounting and other expenses. The Sarbanes-Oxley Act of 2002, as well as rules and regulations implemented by the U.S. Securities and Exchange Commission and the NASDAQ Stock Market, impose various requirements on public companies, including requiring the establishment and maintenance of effective disclosure and financial controls. Our management and other personnel devote a substantial amount of time to these compliance initiatives. Changes in the laws, rules and regulations affecting public companies would result in increased costs to us as we respond to their requirements. These rules and regulations could make it more difficult or more expensive for us to obtain certain types of insurance, including director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantial costs to obtain or maintain the same or similar coverage. The impact of these requirements could also make it more difficult for us to attract and retain qualified persons to serveeffect on our board of directors, our board committees or as executive officers. We cannot predict or estimate the amount or timing of additional costs we may incur in order to comply with such requirements.
We are required to develop and maintain proper and effective internal controls over financial reporting. We may not complete our analysis of our internal controls over financial reporting in a timely manner, or these internal controls may have one or more material weaknesses, which may adversely affect investor confidence in our company and, as a result, the value of our securities.
Section 404 of the Sarbanes-Oxley Act requires the management of public companies to conduct an annual review and evaluation of their internal controls and to obtain an attestation report from their registered public accounting firm regarding the effectiveness of internal controls. We were first required to perform the annual review and evaluation of our internal controls in connection with our annual report on Form 20-F for the year ended December 31, 2015. However, so long as we qualify as a smaller reporting company and/or emerging growth company, which we expect to, we will be exempt from the auditors’ attestation requirement under Section 404 of the Sarbanes-Oxley Act. We would no longer qualify as a smaller reporting company if the market value of our public float exceeded $75 million as of the last day of our second fiscal quarter in any fiscal year following the date of our initial public offering. We would no longer qualify as an emerging growth company at such time as described in the risk factor below.
To maintain the effectiveness of our disclosure controls and procedures and our internal control over financial reporting, we expect that we will need to continue enhancing existing, and implement new, financial reporting and management systems, procedures and controls to manage our business effectively and support our growth in the future. The process of evaluating our internal control over financial reporting requires an investment of substantial time and resources, including by our Chief Financial Officer and other members of our senior management. The determination and any remedial actions required could divert internal resources and take a significant amount of time and effort to complete and could result in us incurring additional costs that we did not anticipate, including the hiring of outside consultants. During the evaluation and testing process, if we identify one or more additional material weaknesses in our internal control over financial reporting, we will be unable to assert that our internal controls are effective. If we are unable to assert that our internal control over financial reporting is effective, we could lose investor confidence in the accuracy and completeness of our financial reports, which could cause the price of our securities to decline.
While we currently qualify as an “emerging growth company” under the JOBS Act, we will cease to be an emerging growth company on or before the end of 2020, and at such time our costs and the demands placed upon our management will increase.
We will continue to be deemed an emerging growth company until the earliest of (i) the last day of the fiscal year in which our annual gross revenues exceed $1 billion (as indexed for inflation); (ii) the last day of the fiscal year following the fifth anniversary of the date of our initial public offering; (iii) the date on which we have, during the previous three-year period, issued more than $1 billion in non-convertible debt; or (iv) the date on which we are deemed to be a ‘large accelerated filer,’ as defined by the U.S. Securities and Exchange Commission, which would generally occur upon our attaining a public float of at least $700 million. Once we lose emerging growth company status, we expect the costs and demands placed upon our management to increase, as we will be required to comply with additional disclosure and accounting requirements, particularly if we also no longer qualify as a smaller reporting company.business.
Risks Related to Regulations
If we are unable to obtain, or experience significant delays in obtaining, FDA clearances or approvals, CE Certificates of Conformity, or equivalent third country approvals for our C-Scan system or future products or product enhancements, our ability to commercially distribute and market our products could suffer.suffer.
Our products are subject to rigorous regulation by the FDA and numerous other federal, state and foreign governmental authorities and notified bodies. The process of obtaining regulatory clearances or approvals, CE Certificates of Conformity, or equivalent third countrythird-country approvals to market a medical device can be costly and time consuming, and we may not be able to obtain these clearances or approvals, CE Certificates of Conformity, or equivalent third-country approvals on a timely basis, if at all. In particular, we expect to eventually generate a portion of our revenues from sales of our C-Scan system and future products in the United States, the European Union, or third countries. Before a new medical device, or a new use of, or claim for, an existing product can be marketed in the United States, it must first receive clearance under Section 510(k) of the Federal Food, Drug, and Cosmetic Act, or FDA approval of a premarket approval application, or PMA, unless an exemption applies. The FDA will clear marketing of a low toor moderate risk medical device through the 510(k) process if sufficiently similar predicate devices have previously been cleared via this pathway. In the 510(k) clearance process, the FDA must only determine that the proposed device is “substantially equivalent” to a device legally on the market, known as a “predicate” device, with respect to intended use/indications for use, technological characteristics and principles of operation in order to clear the proposed device for marketing. Clinical data is sometimes required to support substantial equivalence.
High risk devices deemed to pose the greatest risk, such as life-sustaining, life-supporting, or implantable devices, or devices not deemed substantially equivalent to a previously cleared device, require approval of a PMA. The PMA process is more costly, lengthy and uncertain than the 510(k) clearance process. The PMA pathway requires an applicant to demonstrate the safety and effectiveness of the device based, in part, on the data obtained in clinical trials. A PMA application must be supported by extensive data, including, but not limited to, technical, preclinical, clinical trial, manufacturing and labeling data, to demonstrate to the FDA’s satisfaction the safety and efficacy of the device for its intended use.
In instances where a device is novel and there is no suitable predicate device, but that device is deemed to be of low toor moderate risk, the FDA can reclassify the device to class I or class II via de novo reclassification. This process involves the submission of a reclassification petition, and the FDA accepting that “special controls” are adequate to ensure the product’s performance and safety. The FDA now allows “direct” de novo reclassification petitions, a mechanism by which a sponsor can directly submit a detailed de novo reclassification petition as the device’s initial submission without having to first receive a not substantially equivalent, or NSE, decision on a 510(k) submission.
These processes can be expensive and lengthy. FDA’s 510(k) clearance process usually takes betweenmay take 6 to 9 months, but it can last longer. Direct de novo reclassification typically takes at least 9 to 12 months from filing to clearance. The PMA pathway is much more costly and uncertain than the 510(k) clearance process or de novo reclassification, and generally takes at least 12 to 18 months, or even longer, from the time the application is filed with FDA to ultimate approval.
We are not aware of any legally marketed predicate device upon which FDA could base a determination of substantial equivalence under a 510(k) clearance process. Our proposed strategy, therefore, is to submit a direct de novo reclassification petition for our C-Scan system.C-Scan. To support this petition, our objective is to demonstrate that the device poses a low toor moderate risk to patients. We cannot assure you that FDA will not demand that we obtain PMA approval of our C-Scan system.C-Scan.
FDA can delay, limit or deny clearance or approval of an application for many reasons, including, among others:
we may not be able to demonstrate to FDA’s satisfaction that our products are safe and effective for their intended use;
the data from our pre-clinicalnon-clinical studies and clinical trials may be insufficient to support clearance or approval;
in the case of a PMA submission, that the manufacturing process or facilities we use may not meet applicable requirements; and
changes in FDA’s 510(k) clearance, de novo reclassification, or PMA approval processes and policies, or the adoption of new regulations may require additional data.
We may not obtain the necessary regulatory clearances, approvals CE Certificates of Conformity or equivalent third country approvals to market our C-Scan system or future products in the United States or elsewhere. Any delay in, or failure to receive or maintain, clearance, approval or CE Certificates of Conformity for our C-Scan system or other products under development could prevent us from generating revenue from these products or achieving profitability.
There is no guarantee that the FDA will grant de novo reclassification or PMA approval of our C-Scan system and failure to obtain necessary 510(k) clearances or approvals for our future products would adversely affect our ability to grow our business.business.
Our C-Scan system and some of our future products will require FDA clearance of a 510(k), de novo reclassification, or may require FDA approval of a PMA. The FDA may not approve or clear our C-Scan system or our future products for the indications that are necessary or desirable for successful commercialization. Indeed, the FDA may refuse our requests for 510(k) clearance, de novo reclassification or PMA for our C-Scan system or any other future product, new intended uses or modifications to these products once they are cleared or approved for marketing.
Our strategy is to submit a direct de novo reclassification petition for our C-Scan system.following completion of a U.S. pivotal study. A de novo reclassification generally applies where there is no predicate device and the FDA believes the device poses a low to moderate risk. De novo reclassifications can either be submitted in lieu of a 510(k) notice, such as in our case, or after a 510(k) notice has been filed and found NSE.NSE (Not Substantial Equivalent). If a 510(k) notice is found NSE, a de novo petition must be submitted within 30 days from the receipt of the NSE determination.
To support our direct de novo reclassification petition, our objective is to demonstrate that the device poses a low to moderate risk to patients. If the FDA determines that our C-Scan system is not a candidate for de novo reclassification, it will require approval of the device for market through the PMA process. A PMA application must be supported by extensive data, including, but not limited to, technical, preclinical, clinical trial, manufacturing and labeling data, to demonstrate to the FDA’s satisfaction the safety and efficacy of the device for its intended use. By statute, the FDA has 180 days to review the “accepted application,” although, generally, review of the application can take between one and three years. During this review period, the FDA may request additional information or clarification of information already provided or even request new data that may require us to conduct additional tests. Also during the review period, an advisory panel of experts from outside the FDA may be convened to review and evaluate the application and provide recommendations to the FDA as to the approvability of the device. In addition, the FDA will conduct a preapproval inspection of the manufacturing facility to ensure compliance with quality system regulations. The FDA’s review of a PMA could significantly delay our plans to get to market. There is also no guarantee that the FDA would approve a PMA. Failure to receive clearance or approval for our C-Scan system or future products would have an adverse effect on our ability to expand our business.
Even if the FDA ultimately accepts our de novo reclassification petition, to support our petition, we still may be required to conduct additional clinical trials before a petition can be filed. Such studies or trials can be costly and the results uncertain. If we are unable to successfully complete required clinical studies or trials, we will not receive FDA clearance or approval.
If we or our future distributors do not obtain and maintain the necessary regulatory clearances or approvals, or CE Certificates of Conformity, or equivalent third country approvals in a specific country or region, we will not be able to market and sell our C-Scan system or future products in that country or region.region.
We intend to market our C-Scan system in a number of international markets. To be able to market and sell our C-Scan system in a specific country or region, we and/or our distributors must comply with the regulations of that country or region. While the regulations of some countries do not impose barriers to marketing and selling part or all of our products or only require notification, others require that we and/or our distributors obtain the approval of a specified regulatory authorities orsuch as the Nuclear Regulatory Commission (NRC) in the U.S., the Swiss National Cooperative for the Disposal of Radioactive Waste (Nagra) and the German Federal Office for Radiation Protection (Bundesamt für Strahlenschutz, BfS), in addition to the CE mark that we obtain CE Certificates of Conformity from a Notified Body. We are engaged with Dekra Certification as our Notified Bodyis required for such purposes.medical devices throughout the EU. These regulations, including the requirements for approvals or CE Certificates of Conformity, and the time required for regulatory review, vary from country to country. Obtaining regulatory approvals or CE Certificates of Conformity is expensive and time-consuming, and we cannot be certain that we or our distributors will receive regulatory approvals or CE Certificates of Conformityrequired for our C-Scan system or any future products in each country or region in which we plan to market such products. As regards the CE-certification, we are engaged with Dekra Certification as our Notified Body. If we modify our C-Scan system or any future products, we or our distributors may need to apply for new regulatory approvals or our Notified Body may need to review the planned changes before we are permitted to sell them.the respective products. We may not meet the quality and safety standards required to maintain the authorizations or CE Certificates of Conformity that we or our distributors have received. If we or our distributors are unable to maintain our authorizations or CE Certificates of Conformity in a particular country or region, we will no longer be able to sell our C-Scan system and/or any potential future products in that country or region, and our ability to generate revenues will be materially and adversely affected.
Our C-Scan system may be considered a drug-device combination product because of the preparatory use of iodinated oral contrast medium to provide a coating for colonic imaging. We cannot be sure how the FDA or the competent regulatory authorities of foreign countries will regulate this product. The review of combination products is often more complex and more time consuming than the review of products under the jurisdiction of only one center within the FDA.
Our C-Scan system may be considered a combination product because of the preparatory use of iodinated oral contrast medium to provide a coating for colonic imaging. A combination product is the combination of two or more regulated components, i.e., drug/device, biologic/device, drug/biologic, or drug/device/biologic, that are combined or mixed and produced as a single entity; packaged together in a single package or as a unit; or a drug, device, or biological product packaged separately that according to its investigational plan or proposed labeling is intended for use only with an approved individually specified drug, device, or biological product where both are required to achieve the intended use, indication or effect. For a combination product, the FDA must determine which center or centers within the FDA will review the product and under what legal authority the product candidate will be reviewed. The combination product’s primary mode of action is used to determine which center within the FDA has primary regulatory jurisdiction over the product. The other centers within the agency also may provide consulting or collaborative reviews of the product as necessary. We believe that we will put forth a reasonable argument to the FDA that our C-Scan system should be regulated as a device and or a combination product with a device primary mode of action. However, we cannot be sure as to whether the FDA will treat our C-Scan system as a device or a combination product. The review of combination products is often more complex and more time consuming than the review of a product under the jurisdiction of only one center within the FDA. In the case of the system, should the FDA determine that the iodinated oral contrast medium is not being used in accordance with its approved labeling, the Center for Drug Evaluation and Research may take a prominent role it its regulation. If the FDA does not approve or clear our C-Scan system, or any future products, in a timely fashion, or at all, our business and financial condition will be adversely affected.
Similar obstacles may be encountered in foreign countries should our C-Scan system be considered as a combination product.
If the indications for use or instructions for use for which the iodinated oral contrast medium is approved are not sufficiently broad to support its use prior to the ingestion of our capsules, the FDA or the competent regulatory authorities in the EUEuropean Union (EU) Member States and other foreign countries may consider that contrast agent is being used off-label.
Ingestion of our C-Scan system requires the preparatory use of iodinated oral contrast medium to provide a coating for colonic imaging. We cannot be sure that the indications for which iodinated oral contrast medium are approved in the United States, the EU Member States or in other countries is sufficiently broad to cover such use. If the FDA or the competent regulatory authorities in the EU Member States and in other countries consider that iodinated oral contrast medium is not approved for the purpose for which it is used with the system, we may be considered to promote the off-label use of the iodinated oral contrast medium. Because the promotion of off-label use of drugs or medicinal products is prohibited in the United States, the EU Member States and in other countries, we could face both related issues with the FDA and/or the competent authorities of the EU Member States and/or other countries. In these circumstances, the FDA and/or the competent regulatory authorities in the EU Member States and/or other countries may require us to obtain appropriate regulatory approvals for the iodinated oral contrast medium prior to marketing our C-Scan system with such substances. Under such circumstances, should we fail to obtain approval of the contrast agent for use with our C-Scan, system, in a timely fashion, or at all, our business and financial condition will be adversely affected.
If we are unable to successfully complete clinical trials with respect to our C-Scan, system, we may be unable to receive regulatory approvals or clearances CE Certificates of Conformity or equivalent third-country approvals for our C-Scan system and/or our ability to achieve market acceptance of our C-Scan system will be harmed.harmed.
The development of medical devices typically includes pre-clinical studies. Certain other devices requirethe C-Scan system requires the submission of data generated from clinical trials, which can be long, expensive and uncertain processes, subject to delays and failure at any stage. The data obtained from the studies and trials may be inadequate to support regulatory clearances or approvals, or to obtain CE Certificates of Conformity or equivalent third-country approval, or to allow market acceptance of the products being studied. Our C-Scan system technology is currently undergoing clinical development and clinical trials. To date, we have performed clinical studies with several versions of our C-Scan system and with several versions of our non-scanning capsules.
The development of sufficient and appropriate clinical protocols to demonstrate safety, clinical performance and clinical effectiveness are required, and we may not adequately develop such protocols to support clearance, approval, or to obtain CE Certificates of Conformity or equivalent third country approval. The clinical trials that were conducted using prior versions of our C-Scan, system, were conducted under differing protocols, and used groups of patients different and/or smaller in size from those we intend to study in future clinical trials.trials with future versions of C-Scan, and the results from such clinical trials were subject to human interpretations and based on statistical assumptions that could be affected by erroneous considerations. Further, the FDA, the competent regulatory authorities of other countries, or our Notified Body in the EU may require us to submit data on a greater number of patients than we originally anticipated and/or for a longer follow-up period or they may change the data collection requirements or data analysis applicable to our clinical trials.
The commencement or completion of any of our clinical studies or trials may be delayed or halted, or be inadequate to support regulatory clearance, approval or product acceptance, or to obtain CE Certificates of Conformity or equivalent third country approval, for numerous reasons, including, among others:
patients do not enroll in the clinical trial at the rate we expect;
patients do not comply with trial protocols;
patient follow-up is not at the rate we expect;
undetected capsule retention in patients
patients experience severe adverse side effects, including damage to the colon wall or related to excessive radiation exposure as a result of capsule malfunction or break down;down or retention and may require to undergo a surgical procedure;
patient death during a clinical trial, even though their death may be unrelated to our product;
FDA, institutional review boards, or IRBs, or other regulatory authorities do not approve a clinical trial protocol or a clinical trial, or place a clinical trial on hold;
IRBs, Ethics Committees and third-party clinical investigators may delay or reject our trial protocol and Informed Consent Form;
third-party clinical investigators decline to participate in a study or trial or do not perform a study or trial on our anticipated schedule or consistent with the investigator agreements, study or trial protocol, good clinical practices or other FDA or IRBs, Ethics Committees, or any other applicable requirements;
third-party organizations do not perform data collection, monitoring and analysis in a timely or accurate manner or consistent with the study or trial protocol or investigational or statistical plans;
regulatory inspections of our studies, trials or manufacturing facilities may require us to, among other things, undertake corrective action or suspend or terminate our studies or clinical trials;
changes in governmental regulations or administrative actions;
we may not be able to develop our C-Scan system at the rate or to the stage we desire:desire;
the interim or final results of the study or clinical trial are inconclusive or unfavorable as to safety or efficacy;
a regulatory agency or our Notified Body concludes that our trial design is or was inadequate to demonstrate safety and efficacy; and
If we dothe capsule disposal was not continueauthorized by regulatory agencies or patients failed to retain a permit to employ Jewish employees on Saturdayscollect the capsule following procedure completion; and Jewish holidays to conduct our clinical trials, as required under the Israeli Hours of Work and Rest Law, 1951, and we are unsuccessful in employing only non-Jewish employees on Jewish rest days and holidays, we may be compelled to cease or halt our clinical trials during Saturdays and Jewish holidays, which could decrease our clinical capacity.
The results of pre-clinicalnon-clinical and clinical studies do not necessarily predict future clinical trial results, and predecessor clinical trial results may not be repeated in subsequent clinical trials. Additionally, the FDA the competent regulatory authorities of EU Member States,and/or other third country regulatory entities or our Notified Body may disagree with our interpretation of the data from our pre-clinicalnon-clinical studies and clinical trials, or may find the clinical trial design, conduct or results inadequate to demonstrate safety or efficacy, and may require us to pursue additional pre-clinicalnon-clinical studies or clinical trials, which could further delay the clearance, approval or CE Certificate of Conformity of our products. The data we collect from our non-clinical testing, our pre-clinical studies and other clinical trials may not be sufficient to support regulatory clearance approval or to obtain CE Certificates of Conformity.and approval.
If the third parties on which we rely to conduct our clinical trials and clinical development do not perform as contractually required or expected, we may not be able to obtain regulatory clearance or approval, CE Certificates of Conformity, or equivalent third country approval for, or commercialize, our C-Scan system or future products.products.
We do not have the ability to independently conduct our clinical trials for our C-Scan system and we must rely on third parties, such as contract research organizations, medical institutions, clinical investigators and contract laboratories to conduct such trials. If these third parties do not successfully carry out their contractual duties or regulatory obligations or meet expected deadlines, if these third parties need to be replaced, or if the quality or accuracy of the data they obtain is compromised due to the failure to adhere to our clinical protocols or regulatory requirements or for other reasons, our pre-clinicalnon-clinical development activities or clinical trials may be extended, delayed, suspended or terminated, and we may not be able to obtain CE Certificates of Conformity, regulatory clearance, approval for, or successfully commercialize, our C-Scan system or future products on a timely basis, if at all, and our business, operating results and prospects may be adversely affected. Furthermore, our third-party clinical trial investigators may be delayed in conducting our clinical trials for reasons outside of their control.
The results of our current or future clinical trials may not support our product candidate requirements or intended use claims or may result in the discovery of adverse side effects.effects.
Even if our current or future clinical trials are completed as planned, we cannot be certain that their results will support our product requirements or intended use claims, which could inhibit our marketing strategies, or that the FDA, foreign authorities or our Notified Body will agree with our conclusions regarding them. Success in pre-clinicalnon-clinical studies and early clinical trials does not ensure that later clinical trials will be successful, and we cannot be sure that clinical trials will replicate the results of prior trials and pre-clinical studies.trials. The clinical trial process may fail to demonstrate that our C-Scan, system, or any future products, are safe and effective for the desired or proposed indicated uses, which could cause us to abandon a product and may delay development of others. Any delay or termination of our clinical trials will delay the filing of our product submissions and, ultimately, our ability to commercialize our C-Scan, system, or any future products, and generate revenues. It is also possible that patients enrolled in clinical trials will experience adverse side effects that are not currently part of the product candidate’s profile.
If we fail to obtain or maintain necessary regulatory clearances or CE Certificates for C-Scan, or if there are regulatory changes in our existing or future target markets, our ability to sell C-Scan and generate revenues could be harmed.
C-Scan is a medical device that is subject to extensive regulations that are in particular intended to assure its safety, effectiveness and compliance with applicable consumer laws. These laws require medical devices to obtain approval or other market clearance before being placed on the market. If we fail to obtain or maintain these regulatory approvals or clearances, our ability to sell C-Scan and generate revenues will be materially harmed.
These laws and regulations relate inter alia to the design, development, testing, manufacturing, storage, labeling, packaging, content and language of the instructions for use of the device, sale, promotion, distribution, importing and exporting, shipping, post-sale surveillance and recall from C-Scan’s markets, and all countries in which we intend to sell C-Scan apply some form of regulations of this kind. Most notably, we must comply with the EU Medical Devices Directives, in particular, Directive 93/42/EEC on medical devices (MDD) and Regulations and EU Member States’ laws implementing and complementing it, and we are subject to extensive regulation in the United States by the FDA and other federal, state and local authorities.
We are and will be subject to audits by our Notified Body under the Medical Devices Directive, and, once applicable, the MDR. During this audit, the third-party assessor or Notified Body will examine the maintenance and implementation of our quality control system, device post-marketing vigilance system and any changes or modifications made to our products.
On May 26, 2021, the MDR will become applicable and replace the existing regulatory framework for medical devices in the EU. The MDR strengthens the medical devices rules in the EU. In particular, the MDR will result in several medical devices being classified in higher risk classes and therefore face elevated regulatory requirements. In addition, the MDR will generally elevate regulatory requirements to medical devices. As a result, it is likely that it will become more difficult to market medical devices and costs incurred for clinical evaluation, conformity assessment and post marketing surveillance will increase; such regulatory changes may adversely affect our business, financial condition and results of operations or restrict our operations.
Even if our C-Scan system or future products are cleared or approved by regulatory authorities or if we obtainafter obtaining CE Certificates of Conformity from our Notified Body, modifications to our C-Scan system or future products may require new regulatory clearances or approvals, new CE Certificates, of Conformity, or may require us to recall or cease marketing it until the necessary clearances, approvals or CE Certificates of Conformity are obtained.obtained.
Once cleared, approved or marketed, modifications to our C-Scan system or future products may require new regulatory approvals, clearances, including CE Certificates of Conformity from our Notified Body, 510(k) clearances or premarket approvals, or require us to recall or cease marketing the modified devices until these clearances or approvals are obtained. Any modification to a 510(k)-cleared device that could significantly affect its safety or efficacy, or that would constitute a major change in its intended use, requires a new 510(k) clearance or, possibly, a PMA. The FDA requires device manufacturers to initially make and document a determination of whether or not a modification requires a new approval, supplement or clearance. A manufacturer may determine that a modification could not significantly affect safety or efficacy and does not represent a major change in its intended use, so that no new 510(k) clearance is necessary. However, the FDA can review a manufacturer’s decision and may disagree. The FDA may also on its own initiative determine that a new clearance or approval is required. WeSubject to compliance with FDA guidance we may make modifications to our C-Scan system in the future that we believe do not or will not require additional clearances or approvals. Further, our products could be subject to recall if the FDA determines, for any reason, that our products are not safe or effective. Any recall or FDA requirement that we seek additional approvals or clearances could result in significant delays, fines, increased costs associated with modification of a product, loss of revenue and potential operating restrictions imposed by the FDA.
If a manufacturer determines that a modification to an FDA-cleared device could significantly affect its safety or efficacy, or would constitute a major change in its intended use, then the manufacturer must file for a new 510(k) clearance or possibly a premarket approval application. Where we determine that modifications to our products require a new 510(k) clearance or premarket approval application, we may not be able to obtain those additional clearances or approvals for the modifications or additional indications in a timely manner, or at all.
Any modification to a PMA-approved device must either be approved in a PMA Supplement, or if the modification does not impact the device’s safety or effectiveness, described in a 30-Day Notice or in the device’s Annual Report. The FDA may not approve a modification described in a PMA Supplement, in which case the modified device cannot be marketed. The FDA can also disagree that a change described in a 30-Day Notice or Annual Report is appropriately described in either filing, and request that the company file a PMA Supplement and/or request that the company cease marketing the modified device until the PMA Supplement is approved.
Similar rules also apply in foreign jurisdictions. In the European Union, or EU, we must inform the Notified Body that carried outwas involved in the conformity assessment of the medical devices we market or sell in the EU of any planned substantial changes to our quality system with regard to C-Scan system or changes to ourother devices whichwe may place on the market, if such changes could affect compliance with the Essential Requirements laid down in Annex Ithe Annexes to the Council Directive 93/42/EEC concerning medical devices,MDD or Medical Devices Directive,the MDR (Essential Requirements), respectively, or changes to the devices’ intended purpose. The Notified Body will then assess the changes and verify whether they affect the products’ conformity with the Essential Requirements laid down in Annex I to the Medical Devices Directive or the conditions for the use of the device.Requirements. If the assessment is favorable, the Notified Body will issue a new CE Certificate of Conformity or an addendum to the existing CE Certificate of Conformity attesting compliance with the Essential Requirements laid down in Annex I to the Medical Devices Directive. Requirements.
If the Notified Body or a relevant regulatory authorities disagreeauthority disagrees with our assessments and require modifications torepeals an authorization or an existing CE Certificate, of Conformity, the preparation ofwe may be required to apply for a new CE Certificates of ConformityCertificate or other new regulatory clearances or approvals for modifications, and until such new CE-Certificate or other regulatory clearance or change approval is obtained, we may be required to recall andand/or to stop marketing the modified devices.
Obtaining clearances and approvals, or new or amended CE Certificates of Conformity for device modifications can be a time-consuming process, and delays in obtaining required future clearances, approvals, or CE Certificates of Conformity could adversely affect our ability to introduce new or enhanced products in a timely manner, which in turn could harm our future growth.
Even if our C-Scan system and future products are cleared or approved by regulatory authorities or if we obtainafter obtaining CE Certificates of Conformity from our Notified Body, if we or our suppliers fail to comply with ongoing FDA or other foreign regulatory authority requirements, or if we experience unanticipated problems with our products, our products could be subject to restrictions or withdrawal from the market.market.
The manufacturing processes, reporting requirements, post-approval clinical data and promotional activities associated with any product for which we obtain clearance, approval or approval CE Certificates, of Conformity, or equivalent third country approval will be subject to continuous regulatory review, oversight and periodic inspections by the FDA other domestic and foreign regulatory authorities and our Notified Body. In particular, we and certain of our suppliers are required to comply with the FDA’s Quality System Regulations, or QSR, as well as current good manufacturing practices, or cGMP. In the EU, we will also be subject to the quality management system requirements laid down in the Annexes to the Medical Devices Directive.MDD and the MDR, respectively. Such compliance can be facilitated by, among other things, a certificate of compliance with the current version of the ISO 13485 (which, at this point, it ISO 13485:2003.2016). Through compliance with the ISO 13485:20032016 standard, we will benefit from a presumption of conformity with the relevant quality management system requirements laid down in the Annexes to Medical Devices Directive.the MDD or, respectively, the MDR. These regulations and standards govern the methods and documentation of the design, testing, production, control, quality assurance, labeling, packaging, storage and shipping of any product for which we obtain clearance or approval, CE Certificates, of Conformity, or equivalent third country approval. Regulatory authorities, such as the FDA, and our Notified Body enforce the QSR and other regulations through periodic inspections. The failure by us or one of our suppliers to comply with applicable statutes and regulations falling within the competence of the FDA and other regulatory authorities or our Notified Body, or the failure to timely and adequately respond to any adverse inspectional observations or product safety issues, could result in, among other things, any of the following enforcement actions:
untitled letters, warning letters, fines, injunctions, corporate integrity agreements, consent decrees and civil penalties;
unanticipated expenditures to address or defend such actions;
customer notifications for repair, replacement or refunds;
recall, detention or seizure of our products;
operating restrictions or partial suspension or total shutdown of production;
refusing or delaying our requests for 510(k) clearance or premarket approval of new products or modified products;
withdrawing 510(k) clearances on PMA approvals that have already been granted;
suspension or withdrawal of our CE Certificates of Conformity;Certificates;
refusal to grant export approval for our products; or
If any of these actions were to occur, our reputation would be harmed, our product sales and profitability would suffer and we may not be able to generate revenue. Furthermore, our key suppliers may not currently be or may not continue to be in compliance with all applicable regulatory requirements which could result in our failure to produce our products on a timely basis and in the required quantities, if at all.
Even if regulatory clearance or approval of a product is granted, or if we obtainafter obtaining CE Certificates, of Conformity, such clearance or approval, or CE Certificates of Conformity may be subject to limitations on the intended uses for which the product may be marketed and reduce our potential to successfully commercialize the product and generate revenue from the product. If FDA or the competent regulatory authorities of foreign countries determines that our promotional materials, labeling, training or other marketing or educational activities constitute the promotion of an unapproved use or the promotion of an intended purpose not covered by our CE mark, they could request that we cease or modify our training or promotional materials or subject us to regulatory enforcement actions. It is also possible that other federal, state or foreign enforcement authorities might take action if they consider our training or other promotional materials to constitute promotion of an unapproved use, which could result in significant fines or penalties under other statutory authorities, such as laws prohibiting false claims for reimbursement.
In addition, we may be required to conduct costly post-market testing and surveillance to monitor the safety or effectiveness of our products, and we must comply with medical device reporting requirements, including the reporting of adverse events and malfunctions related to our products. Later discovery of previously unknown problems with our products, including unanticipated adverse side effects or adverse side effects of unanticipated severity or frequency, manufacturing problems, or failure to comply with regulatory requirements such as QSR, may result in changes to labeling, restrictions on such products or manufacturing processes, withdrawal of the products from the market, voluntary or mandatory recalls, a requirement to repair, replace or refund the cost of any medical device we manufacture or distribute, fines, suspension or withdrawal of regulatory approvals or CE Certificates, of Conformity, product seizures, injunctions or the imposition of civil or criminal penalties, all of which would adversely affect our business, financial condition and operating results and prospects.
If we fail to maintain necessary regulatory clearances or CE Certificates of Conformity for our C-Scan system and indications in our target foreign markets, if clearances or approvals, or CE Certificates of Conformity for future products and indications are delayed or not issued, or if there are regulatory changes in our existing or future target markets, our commercial operations could be harmed.
Our C-Scan system is a medical device that is subject to extensive regulations that are intended to assure its safety, effectiveness and compliance with applicable consumer laws. If we fail to obtain and maintain these regulatory approvals or clearances, or CE Certificates of Conformity, our ability to sell our C-Scan system and generate revenues will be materially harmed.
These laws and regulations relate to the design, development, testing, manufacturing, storage, labeling, packaging, content and language of the instructions for use of the device, sale, promotion, distribution, importing and exporting, shipping, post-sale surveillance and recall from our C-Scan system’s markets, and all countries in which we intend to sell our C-Scan system apply some form of regulations of this kind. Most notably, we must comply with the Medical Devices Directive and are subject to extensive regulation in the United States by the FDA and other federal, state and local authorities. In the EU, compliance with the requirements set forth in the Medical Devices Directive, including the Essential Requirements set forth in its Annex I thereto, is a prerequisite to be able to affix the CE mark of conformity to our medical devices. Without such CE mark, our products cannot be marketed or sold in the EU. To demonstrate compliance with the Essential Requirements laid down in Annex I to the Medical Devices Directive we must undergo a conformity assessment procedure, which varies according to the type of medical device and its classification. Apart from low risk medical devices (Class I with no measuring function and which are not sterile), in relation to which the manufacturer can make an EC Declaration of Conformity based on self-assessment of the conformity of its products with the Essential Requirements laid down in Annex I to the Medical Devices Directive, a conformity assessment procedure requires the intervention of a Notified Body. The Notified Body would typically audit and examine the products’ Technical File, which we must create, and the quality system for manufacture, design and final inspection of our devices before issuing a CE Certificate of Conformity demonstrating compliance with the relevant Essential Requirements laid down in Annex I to the Medical Devices Directive or the quality system requirements laid down in the other Annexes to the Directive. Following the issuance of this CE Certificate of Conformity, we can draw up an EC Declaration of Conformity and affix the CE mark to the products covered by this CE Certificate of Conformity and by the EC Declaration of Conformity. Other countries outside the EU also accept the CE mark as a certification of quality, efficacy and safety of medical devices and an element of related authorization of the products in their territory.
We will be subject to annual audits by a Notified Body under the Medical Devices Directive. During this audit, the third-party assessor or Notified Body will examine the maintenance and implementation of our quality control system, device post-marketing vigilance system and any changes or modifications made to our products.
On September 26, 2012, the European Commission adopted a package of legislative proposals designed to replace the existing regulatory framework for medical devices in the EU. These proposals are intended to strengthen the medical devices rules in the EU. On October 22, 2013, the European Parliament voted in favor of an amended draft of the Regulation. The proposed text is currently being discussed by the Council of the European Union. These adopted or expected regulatory changes may adversely affect our business, financial condition and results of operations or restrict our operations.
Our failure to comply with radiation safety or radio frequency regulations in a specific country or region could impair our ability to commercially distribute and market our C-Scan system in that country or region.
Our C-Scan system includes a small X-ray source and wireless radio frequency transmitter and receiver, and is therefore subject to equipment authorization requirements in a number of countries and regions. In the United States, the EU and Japan, authorities often require advance clearance of all radiation and radio frequency devices before they can be sold or marketed in these jurisdictions, subject to limited exceptions. Modifications to the approved C-Scan system design and specifications may require new or further regulatory clearances or approvals before we are permitted to market and sell a modified C-Scan system. If we are unable to obtain any required clearances or approvals from the authorities responsible for the radiation as well as the radio frequency regulations in these and other jurisdictions, the sale or use of our C-Scan system could be prevented in these countries. Any such action could negatively affect our business, financial condition and results of operations.
Our C-Scan system may in the future be subject to product recalls that could harm our reputation, business and financial results.results.
The FDA and similar foreign governmental authorities have the authority to require the recall of commercialized products in the event of material deficiencies or defects in design or manufacture or a public health/safety issue. In the case of the FDA, the authority to require a recall must be based on an FDA finding that there is a reasonable probability that the device would cause injury or death. In addition, foreign governmental bodies have the authority to require the recall of our products in the event of material deficiencies or defects in design or manufacture. Manufacturers may, under their own initiative, recall a product if any material deficiency in a device is found. A government-mandated or voluntary recall by us or one of our distributors could occur as a result of component failures, manufacturing errors, design or labeling defects or other deficiencies and issues. Once marketed, recalls of any of our products, including our C-Scan, system, would divert managerial and financial resources and have an adverse effect on our business, financial condition and results of operations. FDA requires that certain classifications of recalls be reported to the FDA within 10 working days after the recall is initiated. Companies are required to maintain certain records of recalls, even if they are not reportable to FDA. We may initiate voluntary recalls involving our products in the future that we determine do not require us to notify the FDA. If the FDA disagrees with our determinations, they could require us to report those actions as recalls. A future recall announcement could harm our reputation with customers and negatively affect our sales. In addition, the FDA could take enforcement action against us based on our failure to report the recalls when they were conducted.
If our C-Scan system or future products cause or contribute to a death or a serious injury, or malfunction in such a way that causes or contributes to a death or serious injury, we will be subject to medical device reporting regulations, which can result in corrective actions or enforcement actions from regulatory authorities.
Under FDA medical device reporting regulations, medical device manufacturers are required to report to the FDA information that a device has or may have caused or contributed to a death or serious injury or has malfunctioned in a way that would likely cause or contribute to a death or serious injury if the malfunction of our device (or any similar future product) were to recur. If we fail to investigate and report these events to FDA within the required timeframes, or at all, the FDA could take enforcement action against us. Any such adverse event involving our products also could result in future corrective actions, such as recalls or customer notifications, or agency action, such as inspection or enforcement action. Any corrective action, whether voluntary or involuntary, including any legal action taken against us, will require us to devote sufficient time and capital to the matter, distract management from operating our business, and may harm our reputation and financial results.
In addition, we must also comply withhave a medical devices vigilance system in place. Under the EUcurrent law, guidance on the requirements for such vigilance system is provided in the European Commission’s Guidance on a Medical Device Vigilance System (MEDDEV 2.12/1 rev.8), which is intended to protect the health and safety of patients, users and others by establishing reporting procedures and reducing the likelihood of reoccurrence of incidents related to the use of a medical device.procedures. Under this system, incidents (which are defined as any malfunction or deterioration in the characteristics and/or performance of a device, as well as any inadequacy in the labeling or the instructions for use which, directly or indirectly, may lead to or may have led to the death of a patient, or user or of other persons or to a serious deterioration in such person’stheir state of health) must be reported by manufacturers through a Manufacturer’s Incident Reports to competent authorities within periods of time specified in the MEDDEV 2.12/1 rev. 8. Such incidents are evaluated and, where appropriate, information is disseminated between the competent authorities of the EU Member States. The MEDDEV 2.12/1 rev. 8 is also intended to facilitate a direct, early and harmonized establishment of Field Safety Corrective Actions, or FSCAs, across the EU Member States in which the device is being marketed. An FSCA is an action taken by a manufacturer to reduce a risk of death or serious deterioration in the state of health associated with the use of a medical device that is already placed on the market. An FSCA may include device recall, modification, exchange, or destruction. FSCAs must be reported by the manufacturer or the manufacturer’s European Authorized Representative, to its customers and/or the end users of the device through a Field Safety Notice. FSCAs must also be reported to the competent authorities of the EU Member States.
Once the MDR will become applicable, we will have to comply with medical devices vigilance provisions under the MDR, that will require greater vigilance efforts from medical device manufacturers. In particular, according to Art. 83 MDR, the manufacturer is required to have a post-market surveillance system in place in a manner that is proportionate to the risk class and appropriate for the type of device, as an integral part of the quality management system. Depending on the devices’ risk class, either a post market surveillance report or a periodic safety update report (PSUR) has to be created and provided to the competent authority upon request. The PSUR also has to be provided to the Notified Body. Furthermore, requirements on vigilance and incident reporting are increased and market surveillance competencies of the authorities are strengthened.
Our failure to comply with radiation safety or radio frequency regulations in a specific country or region could impair our ability to commercially distribute and market C-Scan in that country or region.
C-Scan includes a small X-ray source and wireless radio frequency transmitter and receiver, and is therefore subject to equipment authorization requirements in a number of countries and regions. In the United States, the EU and Japan, authorities often require advance clearance of all radiation and radio frequency devices before they can be sold or marketed in these jurisdictions, subject to limited exceptions. Competent authorities for such additional approval requirements include the Swiss National Cooperative for the Disposal of Radioactive Waste (Nagra) and the German Federal Office for Radiation Protection (Bundesamt für Strahlenschutz, BfS). Modifications to the approved C-Scan version design and specifications may require new or further regulatory clearances or approvals before we are permitted to market and sell a modified C-Scan version. If we are unable to obtain any required clearances or approvals from the authorities responsible for the radiation as well as the radio frequency regulations in these and other jurisdictions, the sale or use of C-Scan could be prevented in these countries. Any such action could negatively affect our business, financial condition and results of operations.
Our business is subject to complex environmental legislation that may increase our costs and our risk of noncompliance.noncompliance.
Our research and development and manufacturing processes involve the handling of potentially harmful radioactive and other hazardous materials. We are subject to local laws and regulations governing the use, shipping, handling, storage and disposal of these materials, and we incur expenses related to compliance with these laws and regulations. If we are found to have violated environmental, health and safety laws, whether as a result of human error, equipment failure or other causes, we could be held liable for damages, penalties and costs of remedial actions which could materially adversely affect our business, financial condition and results of operations. In the future, we could be subject to additional environmental requirements or existing environmental laws could become more stringent, which could lead to greater compliance costs and increasing risks and penalties associated with violations. For example, changes to, or restrictions on, permitting requirements or processes, hazardous or radioactive material storage or handling might require an unplanned capital investment or relocation. If we fail to comply with existing or new environmental laws or regulations, our business, financial condition and results of operations could be materially adversely affected.
If we are unable to achieve reimbursement and coverage from government and private third-party payors for procedures using our C-Scan, system, or if reimbursement is insufficient to create an economic benefit for purchasing or using our C-Scan system when compared to alternative procedures, demand for our products may not grow at the rate we expect.expect.
The demand for our C-Scan system will depend significantly on the eligibility of the procedures performed using our C-Scan system for reimbursement through government-sponsored healthcare payment systems and private third-party payors. Reimbursement practices vary significantly from country to country and within some countries, by region, and we must obtain reimbursement approvals on a country-by-country and/or region-by-region basis. In general, the process of obtaining reimbursement and coverage approvals has been longer outside of the United States. We may not be able to obtain reimbursement approvals in a timely manner or at all and existing reimbursement and coverage policies may be revised from time to time by government and private third-party payors. If physicians, hospitals and other healthcare providers are unable to obtain sufficient coverage and reimbursement from government and private third-party payors for procedures using our C-Scan, system, if reimbursement is, or is perceived by our customers to be, insufficient to create an economic incentive for purchasing or using our C-Scan, system, or if such reimbursement does not adequately compensate physicians and health care providers compared to the other procedures they offer, demand for our products may not grow at the rate we expect.
Federal and state privacy laws, and equivalent laws of third countries, may increase our costs of operation and expose us to civil and criminal sanctions.sanctions.
The Health Insurance Portability and Accountability Act of 1996, as amended, and the regulations that have been issued under it, to which we refer collectively as HIPAA, and similar laws outside the United States, contain substantial restrictions and requirements with respect to the use and disclosure of individuals’ protected health information. The HIPAA privacy rules prohibit “covered entities,” such as healthcare providers and health plans, from using or disclosing an individual’s protected health information, unless the use or disclosure is authorized by the individual or is specifically required or permitted under the privacy rules. Under the HIPAA security rules, covered entities must establish administrative, physical and technical safeguards to protect the confidentiality, integrity and availability of electronic protected health information maintained or transmitted by them or by others on their behalf. While we do not believe that we are a covered entity under HIPAA, many of our customers are covered entities subject to HIPAA. Such customers may require us to enter into business associate agreements, which will obligate us to safeguard certain health information we obtain in the course of our relationship with them, restrict the manner in which we use and disclose such information and impose liability on us for failure to meet our contractual obligations.
In addition, under The Health Information Technology for Economic and Clinical Health Act of 2009, or HITECH, which was signed into law as part of the U.S. stimulus package in February 2009, certain of HIPAA’s privacy and security requirements are now also directly applicable to “business associates” of covered entities and subject them to direct governmental enforcement for failure to comply with these requirements. We may be deemed as a “business associate” of some of our customers. As a result, we may be subject as a “business associate” to civil and criminal penalties for failure to comply with applicable privacy and security rule requirements. Moreover, HITECH created a new requirement obligating “business associates” to report any breach of unsecured, individually identifiable health information to their covered entity customers and imposes penalties for failing to do so.
In addition to HIPAA, most U.S. states have enacted patient confidentiality laws that protect against the disclosure of confidential medical information, and many U.S. states have adopted or are considering adopting further legislation in this area, including privacy safeguards, security standards, and data security breach notification requirements. These U.S. state laws, which may be even more stringent than the HIPAA requirements, are not preempted by the federal requirements, and we are therefore required to comply with them to the extent they are applicable to our operations.
These and other possible changes to HIPAA or other U.S. federal or state laws or regulations, or comparable laws and regulations in countries where we conduct business, could affect our business and the costs of compliance could be significant. Failure by us to comply with any of the standards regarding patient privacy, identity theft prevention and detection, and data security may subject us to penalties, including civil monetary penalties and in some circumstances, criminal penalties. In addition, such failure may damage our reputation and adversely affect our ability to retain customers and attract new customers.
The protection of personal data, particularly patient data, is subject to strict laws and regulations in many countries. The collection and use of personal health data in the EU is governed by the provisions of Directive 95/46/EC of the European Parliament and of the Council of 24 October 1995 on the protection of individuals with regard to the processing of personal data and on the free movement of such data, commonly known as theGeneral Data Protection Directive. This DirectiveRegulation Reg. EU 2016/769, which became applicable on May 25, 2018, or the GDPR. The GDPR imposes a number of requirements, including an obligation to seek the consent of individuals to whom the personal data relates, the information that must be provided to the individuals, notification of data processing obligations to the competent national data protection authorities of individual EU Member States and the security and confidentiality of the personal data. The Data Protection DirectiveGDPR also imposes strict rules on the transfer of personal data out of the EU to the US.U.S. Failure to comply with the requirements of the Data Protection DirectiveGDPR and the related national data protection laws of the EU Member States may result in fines and other administrative penalties and harm our business. We may incur extensive costs in ensuring compliance with these laws and regulations, particularly if we are considered to be a data controller within the meaning of the Data Protection Directive.GDPR.
The adoption of healthcare reform and deficit reduction measures in the United States may adversely affect our business and financial results.results.
On March 23, 2010, President Obama signed into law major healthcare reform legislation under theThe Patient Protection and Affordable Care Act of 2010, or the PPACA, which was modified on March 30, 2010 by the enactment of the Health Care and Education Reconciliation Act of 2010. This law substantially changes2010, affects the way healthcare is financed by both governmental and private insurers, and significantly impacts the device industry. The PPACA is intended to broaden access to health insurance, reduce or constrain the growth of healthcare spending, enhance remedies against fraud and abuse, add new transparency requirements for healthcare and health insurance industries, impose new taxes and fees on pharmaceutical and medical device manufacturers, and impose additional health policy reforms. Under the PPACA, it is expected that expanded healthcare coverage will be made available to millions of Americans. The increased costs to the U.S. government from the PPACA are expected to be funded through a combination of payment reductions for providers over time and several new taxes. The PPACA imposes, among other things, an annual excise tax of 2.3% on any entity that manufactures or imports medical devices offered for sale in the United States beginning in 2013, resulting in an anticipated cost to the medical device industry of up to $20 billion over the next decade. We likely will be subject to the excise tax with respect to our C-Scan system if it is approved for sale in the United States. The PPACA also limits the rate of growth in Medicare payments to providers and authorizes certain voluntary demonstration projects beginning no later than 2013 around development of bundling payments for acute, inpatient hospital services, physician services, and post-acute services for episodes of hospital care. In addition, the PPACA provides for the establishment of an Independent Payment Advisory Board, or IPAB, that, beginning in 2014, could recommend changes in Medicare payments to physicians and other providers that would take effect unless Congress passes an alternative measure to achieve the same amount of savings. The IPAB has not yet been created. The PPACA also increases fraud and abuse penalties and expands the scope and reach of the Federal Civil False Claims Act and government enforcement tools, which may adversely impact healthcare companies.
There have been judicial and congressional challenges to the PPACA. The U.S. Supreme Court heard a constitutional challenge to the PPACA and in June 2012 held that the PPACA is constitutional. However, states are allowed to opt out of the expansion of eligibility criteria for Medicaid under the PPACA and many states have chosen to do so, causing many uninsured patients to remain without coverage. In addition to the PPACA, the effect of which cannot presently be quantified given its recent enactment, various healthcare reform proposals have also emerged at the state level. If a law is enacted, many if not all of the provisions of the PPACA may no longer apply to prescription drugs. While we are unable to predict what changes may ultimately be enacted, to the extent that future changes affect how any future products are paid for and reimbursed by government and private payers our business could be adversely impacted. On December 14, 2018, a federal district court in Texas ruled that the PPACA is unconstitutional as a result of the Tax Cuts and Jobs Act, the federal income tax reform legislation previously passed by Congress and signed by President Trump on December 22, 2017, that eliminated the individual mandate portion of the PPACA. The case, Texas, et al, v. United States of America, et al., (N.D. Texas), is an outlier, but in 2019, the Fifth Circuit Court of Appeals subsequently upheld the lower court decision which was then appealed to the United States Supreme Court. The U.S. Supreme Court declined to hear the appeal on an expedited basis and so no decision will be forthcoming until the next Supreme Court term in early 2021. In November 2020, Joseph Biden was elected President and, in January 2021, the Democratic Party obtained control of the Senate. As a result of these electoral developments, it is unlikely that continued legislative efforts will be pursued to repeal PPACA. Instead, it is possible that legislation will be pursued to enhance or reform PPACA. We are not able to state with any certainty what will be the impact of this court decision on our business pending further court action and possible appeals.
We cannot predict whether future healthcare initiatives will be implemented at the federal or state level or the effect any future legislation or regulation will have on us. However, we anticipate that the PPACA, as well as other healthcare reform measures that may be adopted in the future, may result in more rigorous coverage criteria and an additional downward pressure on the price that we receive for any approved product, and could adversely affect our business. Any reduction in reimbursement from Medicare or other government programs may result in a similar reduction in payments from private payors. Insurers may also refuse to provide any coverage of uses of approved products for medical indications other than those for which the FDA has granted market approvals, all of which may adversely affect our business, financial condition and results of operations, possibly materially.
In addition, other legislative changes have been proposed and adopted since the PPACA was enacted. In August 2011, President Obama signed into law the Budget Control Act of 2011, which, among other things, created the Joint Select Committee on Deficit Reduction to recommend to Congress proposals in spending reductions. The Joint Select Committee did not achieve a targeted deficit reduction of an amount greater than $1.2 trillion for the years 2013 through 2021, triggering the legislation’s automatic reduction to several government programs. This includes aggregate reductions to Medicare payments to healthcare providers of up to 2.0% per fiscal year, starting in 2013. In January 2013, President Obama signed into law the American Taxpayer Relief Act of 2012, which, among other things, reduced Medicare payments to several categories of healthcare providers and increased the statute of limitations period for the government to recover overpayments to providers from three to five years. If we ever obtain regulatory approval and commercialization of C-Scan or any future product candidates, these laws may result in additional reductions in Medicare and other healthcare funding, which could have a material adverse effect on our customers and accordingly, our financial operations. Legislative and regulatory proposals have been made to expand post-approval requirements and restrict sales and promotional activities for pharmaceutical products. We cannot be sure whether additional legislative changes will be enacted, or whether the FDA regulations, guidance or interpretations will be changed, or what the impact of such changes on the marketing approvals of C-Scan or any future product candidates may be.
Although we cannot predict the full effect on our business of the implementation of existing legislation or the enactment of additional legislation pursuant to healthcare and other legislative reform, we believe that legislation or regulations that would reduce reimbursement for, or restrict coverage of, C-Scan or any future product candidates, could adversely affect how much or under what circumstances healthcare providers will prescribe or administer our products. This could materially and adversely affect our business by reducing our ability to generate revenue, raise capital, obtain additional collaborators and market C-Scan or any future product candidates. In addition, we believe the increasing emphasis on managed care in the United States has and will continue to put pressure on the price and usage of pharmaceutical products, which may adversely impact any future product sales.
In addition to healthcare reform, other deficit reduction measures could affect reimbursement for our device and related procedures. For example, beginning April 1, 2013, Medicare payments for all items and services have been reduced by 2% under the sequestration (i.e., automatic spending reductions) required by the Budget Control Act of 2011, as amended by the American Taxpayer Relief Act of 2012. These cuts will remain in effect until 2024 unless Congress enacts legislation to cancel or delay the cuts. These payment reductions, or similar efforts to reduce Medicare spending to control the federal deficit, could adversely affect our business by reducing reimbursement to the providers who purchase and use our devices and perform related procedures.
The implementation of the reporting and disclosure obligations of the Physician Payment Sunshine Act'sAct’s provisions relating to healthcare reform could adversely affect our business. A health care reform provision, generally referred to as the Physician Payment Sunshine Act or Open Payments Program, has imposed new reporting and disclosure requirements for drug and device manufacturers with regard to payments or other transfers of value made to certain practitioners (including physicians, dentists and teaching hospitals), and for such manufacturers and for group purchasing organizations, with regard to certain ownership interests held by physicians in the reporting entity. On February 1, 2013, the Centers for Medicare and Medicaid Services, or CMS, released the final rule to implement the Physician Payment Sunshine Act. As required under the Physician Payment Sunshine Act, CMS will publish information from these reports on a publicly available website, including amounts transferred and physician, dentist and teaching hospital identities.
The final rule implementing the Physician Payment Sunshine Act is complex, ambiguous, and broad in scope. If we participate in federal healthcare programs, meaning our product is reimbursed by a federal healthcare program such as Medicare, Medicaid, or Children’s Health Insurance Program, our product would be considered a “covered device.” Within 180 days of becoming “covered,” we would be required to collect and report detailed information regarding certain financial relationships we have with physicians and teaching hospitals. The Physician Payment Sunshine Act preempts similar state reporting laws, although we may be required to report under certain of such state laws. Our compliance with the new final rule imposes additional costs on us and requires additional resources including dedicated personnel with experience and expertise in this area. Failure to comply may expose us to federal and/or state enforcement action and fines.
If we fail to comply with the U.S. federal Anti-Kickback Statute and similar state and third-country laws, we could be subject to criminal and civil penalties and exclusion from federally funded healthcare programs including the Medicare and Medicaid programs and equivalent third-country programs, which would have a material adverse effect on our business and results of operations.operations.
A provision of the Social Security Act, commonly referred to as the federal Anti-Kickback Statute, prohibits the knowing and willful offer, payment, solicitation or receipt of any form of remuneration, directly or indirectly, in cash or in kind, to induce or reward the referring, ordering, leasing, purchasing or arranging for, or recommending the ordering, purchasing or leasing of, items or services payable, in whole or in part, by Medicare, Medicaid or any other federal healthcare program. PPACA, among other things, clarified that a person or entity needs not to have actual knowledge of the federal Anti-Kickback Statute or specific intent to violate it. Although there are a number of statutory exemptions and regulatory safe harbors to the federal Anti-Kickback Statute protecting certain common business arrangements and activities from prosecution or regulatory sanctions, the exemptions and safe harbors are drawn narrowly, and practices that do not fit squarely within an exemption or safe harbor may be subject to scrutiny. The federal Anti-Kickback Statute is very broad in scope and many of its provisions have not been uniformly or definitively interpreted by existing case law or regulations. In addition, most of the states have adopted laws similar to the federal Anti-Kickback Statute, and some of these laws are even broader than the federal Anti-Kickback Statute in that their prohibitions may apply to items or services reimbursed under Medicaid and other state programs or, in several states, apply regardless of the source of payment. Violations of the federal Anti-Kickback Statute may result in substantial criminal, civil or administrative penalties, damages, fines and exclusion from participation in federal healthcare programs.
All of our financial relationships with healthcare providers, purchasers, formulary managers, and others who provide products or services to federal healthcare program beneficiaries are potentially governed by the federal Anti-Kickback Statute and similar state laws. We believe our operations are in compliance with the federal Anti-Kickback Statute and similar state laws. However, we cannot be certain that we will not be subject to investigations or litigation alleging violations of these laws, which could be time-consuming and costly to us and could divert management’s attention from operating our business, which in turn could have a material adverse effect on our business. In addition, if our arrangements were found to violate the federal Anti-Kickback Statute or similar state laws, the consequences of such violations would likely have a material adverse effect on our business, results of operations and financial condition.
There are other federal and state laws that may affect our ability to operate, including the federal civil False Claims Act, which prohibits, among other things, individuals or entities from knowingly presenting, or causing to be presented, a false or fraudulent claim for payment of government funds or knowingly making, using or causing to be made or used, a false record or statement material to an obligation to pay money to the government or knowingly concealing or knowingly and improperly avoiding, decreasing, or concealing an obligation to pay money to the federal government. PPACA amended the Social Security Act to provide that the government may assert that a claim including items or services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the federal civil False Claims Act. Moreover, we may be subject to other federal false claim laws, including, among others, federal criminal healthcare fraud and false statement statutes that extend to non-government healthcare benefit programs. Moreover, there are analogous state laws. Violations of these laws can result in substantial criminal, civil or administrative penalties, damages, fines and exclusion from participation in federal healthcare programs.
Similar restrictions are imposed by the national legislation of many third countries in which our medical devices will be marketed. Moreover, the provisions of the Foreign Corrupt Practices Act of 1997 and other similar anti-bribery laws in other jurisdictions generally prohibit companies and their intermediaries from providing money or anything of value to officials of foreign governments, foreign political parties, or international organizations with the intent to obtain or retain business or seek a business advantage. Recently, there has been a substantial increase in anti-bribery law enforcement activity by U.S. regulators, with more aggressive and frequent investigations and enforcement by both the U.S. Securities and Exchange Commission and the Department of Justice. A determination that our operations or activities violated United States or foreign laws or regulations could result in imposition of substantial fines, interruption of business, loss of supplier, vendor or other third-party relationships, termination of necessary licenses and permits, and other legal or equitable sanctions. In addition, lawsuits brought by private litigants may also follow as a consequence.
If the U.S. Nuclear Regulatory Commission, or NRC, or other nuclear regulatory commissions around the world, would take the position that a system containing radioactive material cannot be passed in excreta into the sanitary sewer system without limitation, we may be subject to further regulations and patients may be required to retrieve our C-Scan system after use.
As our C-Scan system includes an ingestible capsule with a radioactive source, we must address NRC regulations in addition to FDA requirements as well as regulations of other nuclear regulatory commissions in jurisdictions in which we intend to commercialize our C-Scan system. Our C-Scan system is loaded with the X-ray source, sealed and then ingested by the patient. Although the NRC places conditions and limitations on the disposal of radioactive material in the sanitary sewer, such conditions and limitations do not apply to radioactive material contained in the excreta of individuals that are undergoing medical diagnosis or therapy with radioactive material. However, there is no assurance that the NRC or other regulatory commissions worldwide will take a similar position in relation to our C-Scan system and we may face limitations by the NRC or other nuclear regulatory commissions in jurisdictions in which we intend to commercialize our C-Scan system in relation to the disposal of our C-Scan Cap in the sanitary system, such as requiring patients to retrieve our C-Scan system after use, which could make our C-Scan system less attractive.
Our failure to comply with the necessary regulatory approval regarding the use of radioactive materials could significantly impair our ability to develop, manufacture and/or sell our C-Scan system.C-Scan.
The manufacture of our C-Scan system requires the use and storage of radioactive materials. In order to use such materials in the development and manufacture of our C-Scan system in Israel, we are required to obtain a permit from the Israeli Commissioner for Environmental Radiation, or the Commissioner, pursuant to the Israeli Pharmaceutical Regulations (Radioactive Elements and By-Products), 5740–1980. Should we fail to comply with the conditions of our currently existing permit, the Commissioner would have authority to cancel our permit. Should the Commissioner determine that our activities or facilities constitute a danger to the health and well-being of a person, the public or the environment, the cancellation of our permit could be immediate and without prior notice. Furthermore, we cannot guarantee the annual renewal of our permit and/or annual renewal subject to identical conditions, as the approval of an annual application and the conditions thereof are at the discretion of the Commissioner. Similar requirements and regulations may apply to the manufacture of our C-Scan system in other countries. Cancellation of or failure to renew our permit could have materially adverse consequences on our ability to manufacture and sell our products and therefore on our ability to continue our business and operations.
Risks Related to Our Intellectual Property
If we are unable to protect our intellectual property rights, our competitive position could be harmed.harmed.
Our success and ability to compete depends in large part upon our ability to protect our intellectual property. Although we have patents issued in Israel, Europe, United States, Japan, China, India, Hong Kong, Canada, South Korea and Australia, we continue to file and prosecute in many of the same countries and additional countries such as Canada, Brazil and South Korea.Brazil. We face several risks and uncertainties in connection with our intellectual property rights, including, among others:
pending and future patent applications may not result in the issuance of patents or, if issued, may not be issued in a form that will be advantageous to us;
our issued patents may be challenged, invalidated or legally circumvented by third parties;
our patents may not be upheld as valid and enforceable or prevent the development of competitive products;
the eligibility of certain inventions related to diagnostic medicine, more specifically diagnostic methods and processes, for patent protection in the United States has been limited recently which may affect our ability to enforce our issued patents in the United States or may make it difficult to obtain broad patent protection going forward in the United States;
for a variety of reasons, we may decide not to file for patent protection on various improvements or additional features; and
intellectual property protection and/or enforcement may be unavailable or limited in some countries where laws or law enforcement practices may not protect our proprietary rights to the same extent as the laws of the United States, the European Union, Canada or Israel.
Consequently, our competitors could develop, manufacture and sell products that directly compete with our products, which could decrease our sales and diminish our ability to compete. In addition, competitors could attempt to develop their own competitive technologies that fall outside of our intellectual property rights. If our intellectual property does not adequately protect us from our competitors’ products and methods, our competitive position could be materially adversely affected.
Because the medical device industry is litigious, we are susceptible to intellectual property suits that could cause us to incur substantial costs or pay substantial damages or prohibit us from selling our C-Scan system.C-Scan.
There is a substantial amount of litigation over patent and other intellectual property rights in the medical device industry. Whether a product infringes a patent involves complex legal and factual issues, the determination of which is often uncertain. We are presently unaware of any other parties’ valid patents and proprietary rights which our evolving product designs would infringe. Searches typically performed to identify potentially infringed patents of third parties are often not conclusive and because patent applications can take many years to issue, there may be applications now pending, which may later result in issued patents which our current or future products may infringe. In addition, our competitors or other parties may assert that our C-Scan system and the methods it employs may be covered by patents held by them. If our C-Scan systemor any of its components infringes a valid patent, we could be prevented from manufacturing or selling it unless we can obtain a license or redesign the product to avoid infringement. For example, in March 2021, we entered into an exclusive license agreement with the University of Missouri with respect to certain patents held by the University of Missouri that the University of Missouri claimed included background intellectual property in C-Scan. In consideration for the grant of an exclusive license to those patents in the medical field, we agreed to pay royalties ranging from $0.30 to $5.00 per C-Scan unit depending on the number of units sold up to $15,000,000 in the aggregate. Third parties may currently have, or may eventually be issued, patents on which our current or future products or technologies may infringe.
A license may not always be available or may require us to pay substantial royalties. We also may not be successful in any attempt to redesign our product to avoid infringement. Infringement and other intellectual property claims, with or without merit, can be expensive and time-consuming to litigate and could divert our management’s attention from operating our business.
The steps we have taken to protect our intellectual property may not be adequate, which could have a material adverse effect on our ability to compete in the market.market.
In addition to patents, we rely on confidentiality, non-compete, non-disclosure and assignment of inventions provisions, as appropriate, with our employees, consultants, subcontractors, suppliers and to some extent, our distributors,clinical investigators to protect and otherwise seek to control access to, and distribution of, our proprietary information. These measures may not be adequate to protect our intellectual property from unauthorized disclosure, third-party infringement or misappropriation, for the following reasons:
the agreements may be breached, may not provide the scope of protection we believe they provide or may be determined to be unenforceable;
we may have inadequate remedies for any breach;
proprietary information could be disclosed to our competitors; or
others may independently develop substantially equivalent or superior proprietary information and techniques or otherwise gain access to our trade secrets or disclose such technologies.
Specifically with respect to non-compete agreements, under current United States and Israeli law, we may be unable to enforce these agreements, in whole or in part, and it may be difficult for us to restrict our competitors from gaining the expertise that our former employees gained while working for us. For example, Israeli courts have recently required employers seeking to enforce non-compete undertakings of a former employee to demonstrate that the competitive activities of the former employee will harm one of a limited number of material interests of the employer which have been recognized by the courts, such as the secrecy of a company’s confidential commercial information or its intellectual property. If we cannot demonstrate that harm would be caused to us, we may be unable to prevent our competitors from benefiting from the expertise of our former employees. In addition, some states in the United States, such as California, have laws which severely restrict the use of non-compete undertakings.
If, for any of the above reasons, our intellectual property is disclosed or misappropriated, it could harm our ability to protect our rights and could have a material adverse effect on our business, financial condition and results of operations.
Furthermore, although our employees and consultants have agreed to assign to us all rights to any intellectual property created in the scope of their employment or engagement with us and most of our current employees and consultants, have agreed to waive their economic rights with respect to our intellectual property, we cannot assure you that such claims will not be brought against us by current or former employees or consultants, despite their contractual representations and obligations toward us, or by any of the medical and/or governmental institutions that employ or engage such consultants, claiming alleged rights to our intellectual property or demanding remuneration in consideration for assigned intellectual property rights, which could result in litigation and adversely affect our business, financial condition and results of operations.
Third-party claims of infringement or other claims against us could require us to redesign our C-Scan, system, seek licenses, or engage in future costly intellectual property litigation, which could negatively affect our future business and financial performance.performance.
Substantial litigation over intellectual property rights exists in the medical device industry in general and in the medical imaging or screening sectors in particular. We expect that we may be subject to third-party infringement claims as our profile grows, we generate any future revenues, increase, the number of competitors grows andor the functionality of products and technology in different industry segments converges. For example, in March 2021, we entered into an exclusive license agreement with the University of Missouri with respect to certain patents held by the University of Missouri that the University of Missouri claimed included background intellectual property in C-Scan. In consideration for the grant of an exclusive license to those patents in the medical field, we agreed to pay royalties ranging from $0.30 to $5.00 per C-Scan unit depending on the number of units sold up to $15,000,000 in the aggregate. Third parties may currently have, or may eventually be issued, patents on which our current or future products or technologies may infringe.
In addition, litigation in which we are accused of infringement may cause negative publicity, adversely impact prospective customers, cause product shipment delays, prohibit us from manufacturing, marketing or selling our current or future products, require us to develop non-infringing technology, make substantial payments to third parties or enter into royalty or license agreements, which may not be available on acceptable terms, or at all. If a successful claim of infringement were made against us and we could not develop non-infringing technology or license the infringed or similar technology in a timely and cost-effective manner, our ability to generate significant revenues may be substantially harmed and we could be exposed to significant liability. A court could enter orders that temporarily, preliminarily or permanently enjoin us or our customers from making, using, selling, offering to sell or importing our current or future products, or could enter an order mandating that we undertake certain remedial activities. Claims that we have misappropriated the confidential information or trade secrets of third parties can have a similar negative impact on our reputation, business, financial condition or results of operations.
We may also become involved in litigation in connection with our brand name rights. We do not know whether others will assert that our brand name infringes their trademark rights. In addition, names we choose for our products may be claimed to infringe names held by others. If we have to change the names we use, we may experience a loss in goodwill associated with our brand name, customer confusion and a loss of sales.
Third parties may challenge the validity of our issued patents or challenge patent applications in administrative proceedings before various patent offices which, if successful, could negatively affect our future business and financial performance.performance.
Various patent offices, including in the United States and Europe, provide administrative proceedings by which a third party can challenge the validity of an issued patent or challenge an application that is being examined absent any threat of litigation. In some instances, including in the United States, the administrative proceedings provide a more efficient and favorable forum to challenge our patents which may lead to more opportunities for competitors to do so, particularly smaller competitors with limited resources. Moreover, the standards utilized in these administrative proceedings, at least in the United States, provide certain legal advantages versus challenging the validity of a patent in a district court. If a third party is successful in one of these administrative proceedings, the patent will no longer be enforceable in the corresponding jurisdiction. With this loss in patent rights, we will not be able to prevent third parties from offering identical or similar competing products which may result in lower profits and a less substantial market share.
We may need to initiate lawsuits to protect or enforce our patents and other intellectual property rights, which could be expensive and, if we lose, could cause us to lose some of our intellectual property rights, which would harm our ability to compete in the market.market.
We rely on patents to protect a portion of our intellectual property and our competitive position. Patent law relating to the scope of claims in the technology fields in which we operate is still evolving and, consequently, patent positions in the medical device industry are generally uncertain. In order to protect or enforce our patent rights, we may initiate patent and related litigation against third parties, such as infringement suits or interference proceedings. Any lawsuits that we initiate could be expensive, take significant time and divert our management’s attention from other business concerns and the outcome of litigation to enforce our intellectual property rights in patents, copyrights, trade secrets or trademarks is highly unpredictable. Litigation also puts our patents at risk of being invalidated or interpreted narrowly and our patent applications at risk of not being issued. In addition, we may provoke third parties to assert claims against us. We may not prevail in any lawsuits that we initiate and the damages or other remedies awarded, including attorney fees, if any, may not be commercially valuable. The occurrence of any of these events could have a material adverse effect on our business, financial condition and results of operations.
We rely on trademark protection to distinguish our products from the products of our competitors; however, if a third party is entitled to use orour trademark, we could be forced to rebrand, which could result in loss of brand recognition and our ability to distinguish our products may be impaired, which could adversely affect our business.
We rely on trademark protection to distinguish our products from the products of our competitors. We have registered the “CHECK CAP” and “C-Scan” trademarks and design logos in the United State and European Union. In jurisdictions where we have not registered our trademarks and logos and are using them, and as permitted by applicable local law, we rely on common law trademark protection. Third parties may oppose our trademark applications, or otherwise challenge our use of the trademarks, and may be able to use our trademarks in jurisdictions where they are not registered or otherwise protected by law. If our trademarks are successfully challenged or if a third party is using confusingly similar or identical trademarks in particular jurisdictions before we do, we could be forced to rebrand our products, which could result in loss of brand recognition, and could require us to devote additional resources to marketing new brands. If others are able to use our trademarks, our ability to distinguish our products may be impaired, which could adversely affect our business. Further, we cannot assure you that competitors will not infringe upon our trademarks, or that we will have adequate resources to enforce our trademarks.
We may not be able to enforce covenants not to compete at all or, we may be unable to enforce them for the duration contemplated in our employment contracts and may, therefore, be unable to prevent competitors from benefiting from the expertise of some of our former employees involved in research and development activities.
We currently have non-compete agreements with substantially all of our employees who are involved in research and development, all of whom are located in Israel. These agreements prohibit our employees, if they cease working for us, from directly competing with us or working for our competitors for a limited period of time following termination of employment. In many jurisdictions, courts are increasingly refusing to enforce restrictions on competition by former employees or have interpreted them narrowly. For example, in Israel, where all of our employees reside, courts have required employers seeking to enforce non-compete undertakings of a former employee to demonstrate that the competitive activities of the former employee will harm one of a limited number of material interests of the employer which have been recognized by the courts, such as the secrecy of a company’s confidential commercial information or its intellectual property. If we cannot demonstrate that harm would be caused to us, an Israeli court may refuse to enforce our non-compete restrictions or reduce the contemplated period of non-competition such that we may be unable to prevent our competitors from benefiting from the expertise of our former employees.
Risks Related to Our Operations in Israel
Our principal offices, research and development facilities and some of our suppliers are located in Israel and, therefore, our business, financial condition and results of operation may be adversely affected by political, economic and military instability in Israel.Israel.
Our principal offices and research and development facilities are located near Haifa, in the northern part of Israel. In addition, substantially all of our employees and officers, and certainone of our directors, are residents of Israel. Accordingly, political, economic and military conditions in Israel may directly affect our business. Since the establishment of the State of Israel in 1948, a number of armed conflicts have taken place between Israel and its neighboring countries. Any hostilities involving Israel or the interruption or curtailment of trade between Israel and its trading partners could adversely affect our operations and results of operations.
During the Second Lebanon War of 2006, between Israel and Hezbollah, a militant Islamic movement, rockets were fired from Lebanon into Israel, including into the Haifa area, where our facility is located, causing casualties and major disruption of economic activities in northern Israel. An escalation in tension and violence between Israel and the militant Hamas movement (which controls the Gaza Strip) and other Palestinian Arab groups, culminated with Israel’s military campaign in Gaza in December 2008, in November 2012 and again in July and August 2014 in an endeavor to prevent continued rocket attacks against Israel’s southern towns, as well as other tension and violence between Israel and Palestinian Arab groups and individuals. It is unclear whether any negotiations that may occur between Israel and the Palestinian Authority will result in an agreement. In addition, Israel faces threats from more distant neighbors, in particular, Iran, an ally of Hezbollah and Hamas.Hamas, and the militant group known as the Islamic State of Iraq and Syria.
Popular uprisings in various countries in the Middle East and North Africa are affecting the political stability of those countries. Such instability may lead to deterioration in the political and trade relationships that exist between the State of Israel and these countries. Furthermore, several countries, principally in the Middle East, restrict doing business with Israel and Israeli companies, and additional countries may impose restrictions on doing business with Israel and Israeli companies if hostilities in the region continue or intensify. Such restrictions may seriously limit our ability to sell our products to customers in those countries. Similarly, Israeli corporations are limited in conducting business with entities from several countries. Parties with whom we may do business could decline to travel to Israel during periods of heightened unrest or tension. In addition, the political and security situation in Israel may result in parties with whom we may have agreements involving performance in Israel claiming that they are not obligated to perform their commitments under those agreements pursuant to force majeure provisions in such agreements. In addition, any hostilities involving Israel could have a material adverse effect on our facilities including our corporate office or on the facilities of our local suppliers, in which event all or a portion of our inventory may be damaged, and our ability to deliver products to customers could be materially adversely affected.
Furthermore, the war and terrorism insurance we maintain may not be adequate to cover our losses associated with armed conflicts and terrorist attacks. Although the Israeli government in the past covered the reinstatement value of certain damages that were caused by terrorist attacks or acts of war, we cannot assure you that this government coverage will be maintained, or if maintained, will be sufficient to compensate us fully for damages incurred. Any losses or damages incurred by us could have a material adverse effect on our business.
Our operations could also be disrupted by the obligations of personnel to perform military service. As of February 15, 2017,December 31, 2020, we had 5765 employees and independent contractors, all of whom were based in Israel other than our Chief Executive Officer.Israel. Some of these employees and independent contractors may be called upon to perform up to 54 days in each three year period (and in the case of military officers, up to 84 days in each three year period) of military reserve duty until they reach the age of 40 (and in some cases, depending on their specific military profession up to 45 or even 49 years of age) and, in certain emergency circumstances, may be called to immediate and unlimited active duty. In response to increases in terrorist activity, there have been periods of significant call-ups of military reservists and it is possible that there will be similar large-scale military reserve duty call-ups in the future. Our operations could be disrupted by the absence of a significant number of employees related to military service, which could materially adversely affect our business and results of operations.
Any hostilities involving Israel, terrorist activities or political instability in the region or the interruption or curtailment of trade between Israel and its present trading partners, or significant downturns in the economic or financial condition of Israel, could adversely affect our operations and product development, cause our revenues to decrease and adversely affect our share price.
Pursuant to the terms of the Israeli government grants we received for research and development expenditures and expenditures relating to our transition to manufacturing , we are obligated to pay certain royalties on our revenues to the Israeli government. The terms of the grants require us to satisfy specified conditions and to make additional payments in addition to repayment of the grants upon certain events.events.
We have received grants from the Government of the State of Israel through NATIthe IIA (formerly known as the OCS) for the financing of a portion of our research and development expenditures and recently, in January 2021, to finance a portion of the development of our manufacturing line, pursuant to the ResearchInnovation Law and related regulations and guidelines. As of December 31, 2016,2020, we had received funding from NATIthe IIA in the aggregate amount of $5.1approximately $5.6 million. As of December 31, 2016,2020, we had not paid any royalties to NATIthe IIA and had a contingent obligation to NATIthe IIA, including interest at the rate of 12-month LIBOR, in the amount of $5.3approximately $6.1 million. In January 2021, we received an additional IIA grant to support the funding of our transition from research and development to manufacturing in the amount of up to $750,000 (along with a co-investment by us of the same amount), subject to the terms and conditions set forth in the grant approval, of which we received approximately $260,000 in January 2021. We may apply for additional NATIIIA grants in the future. However, asfuture; however, there is no assurance that such applications will be approved in the amount requested or at all. Furthermore, the funds available for NATIIIA grants out of the annual budget of the State of Israel have been reduced in the past and may be further reduced in the future, wefuture. We cannot predict whether we will be entitled to any future grants, or the amounts of any such grants.
Under the terms of the ResearchInnovation Law as currently in effect, products developed with NATI grantsIIA funding are required to be manufactured in Israel, and technology developed thereunderunless the IIA approved grant program includes a pre-determined portion of manufacturing that may not be performed outside Israel (as certain of our IIA approved grants included). The approval of the IIA is required for the transferring of manufacturing outside Israel in excess of such pre-determined portion (however, only a notice to the IIA, as opposed to approval, is required for the transfer outside Israel of up to 10% of the cumulative manufacturing in excess of such pre-approved portion). If manufacturing of IIA-funded products is transferred outside Israel (following IIA approval) in excess of Israel (including by way of license), unless priorthe pre-determined percentage included in the grant approval, is received from NATI, which we may not receive. In addition, payment of additional amounts would be required if manufacturing is moved outside of Israel, in which casethen the royalty repayment rate iswill be increased by 1% with respect to the additional approved percentage to be manufactured outside Israel and the royalty ceiling can reachrepayment for the entire approved program may be increased to up to three times the amount of the grants received, and if NATI developed know-how is transferreddepending on the percentage manufactured outside Israel (plus accrued interest). For example, during 2019, we provided notice to the IIA with respect to the transfer of manufacturing outside of Israel of our C-Scan Track in an amount that represents less than 10% of cumulative deviation exceeding the pre-determined portion to be manufactured abroad that was included in our grant approval. This may increase our royalty repayment ceiling can reach up to six times120% of the amountrevenues of grants received (plus interest).the C-Scan Track and the repayment rate may increase by 1% for the part of manufacturing carried out abroad. We are currently consideringcontinuing to explore whether certain other components of C-Scan can be assembled outside of Israel. For example, we are continuing to explore whether it would be possible to assemble the capsule without the X-ray source in Israel, and have the X-ray source subsequently manufactured and assembled into our C-Scan system at a reactor or cyclotron sitecertified radioisotope production facility or at a distribution center outside Israel. Over the years, we received approval of grant applications that included a certain predetermined percentage of manufacturing to be performed outside of Israel of the X-ray source but additional examination of these approvals and consequent manufacturing is required to determine liabilities to the IIA, if any. IIA prior approval is also required for the transfer of IIA-funded know-how to a third party outside of Israel (including by way of license), which we may not receive (and any such approval would typically be subject to payment of a redemption fee, calculated according to a formula under the Innovation Law, which may be in the amount of up to six times the amount of the grants received (less paid royalties, if any, and depreciation, but no less than the total grants received), plus accrued interest. Even following the full repayment of any NATIIIA grants, we must nevertheless continue to comply with the requirements of the ResearchInnovation Law and related regulations and guidelines. The foregoing restrictions and requirements for payment may impair our ability to sell our technology assets outside of Israel or to outsource or transfer development or manufacturing activities with respect to any product or technology outside of Israel. Furthermore, the consideration available to our shareholders in a transaction involving the transfer outside of Israel of technology or know-how developed with NATIIIA funding (such as a merger or similar transaction) may be reduced by any amounts that we are required to pay to NATI.the IIA.
A significant amendment to the Research Law entered into effect on January 1, 2016, under which NATI, a statutory government corporation, was established, which replaced the OCS. Under such amendment, NATI is authorized to establish rules concerning the ownership and exploitation of NATI-funded know-how (including with respect to restrictions on transfer of manufacturing activities and NATI-funded know-how outside of Israel), which may differ from the restrictive laws, regulations and guidelines as currently in effect (and which shall remain in effect until such rules have been established by NATI). No such rules have been published to date by NATI and we cannot predict or estimate the changes (if any) that may be made to this legislation (including with respect to the acquisition of a NATI-funded entity or the transfer of NATI-funded technology).
If we fail to comply with any of the conditions and restrictions imposed by the ResearchInnovation Law and related regulations and guidelines, or by the specific terms under which we received the grants, we may be required to refund any grants previously received together with interest and penalties, and, in certain circumstances, may be subject to criminal charges.
Your rights and responsibilities as a shareholder are governed by Israeli law, which differ in some material respects from the rights and responsibilities of shareholders of U.S. companies.companies.
The rights and responsibilities of the holders of our ordinary shares are governed by our amended articles of association and by Israeli law. These rights and responsibilities differ in some material respects from the rights and responsibilities of shareholders in U.S. based corporations. In particular, a shareholder of an Israeli company has a duty to act in good faith and in a customary manner in exercising its rights and performing its obligations towards the company and other shareholders, and to refrain from abusing its power in the company, including, among other things, in voting at a general meeting of shareholders on matters such as amendments to a company’s articles of association, increases in a company’s authorized share capital, mergers and acquisitions and certain related party transactions requiring shareholder approval.approval under Israeli law. In addition, a controlling shareholder of an Israeli company or a shareholder who is aware that it possesses the power to determine the outcome of a shareholder vote or to appoint or prevent the appointment of a director or executive officer in the company or prevent anyhas other power granted to a shareholder underpowers towards the company's articles of association,company, has a duty of fairness toward the company. There is limited case law available to assist us in understanding the nature of this duty or the implications of these provisions. These provisions may be interpreted to impose additional obligations and liabilities on holders of our ordinary shares that are not typically imposed on shareholders of U.S. corporations.
It may be difficult to enforce a judgment of a U.S. court against us, certain of our officers and directors or the Israeli experts named in this Annual Report in Israel or the United States, to assert U.S. securities laws claims in Israel or to serve process on certain of our officers and directors and these experts.experts.
We are incorporated in Israel. All but one of our executive officers, who is also a director, twoone of our directors and our Israeli experts, reside in Israel, and substantially all of our assets and a substantial portion of the assets of these persons are located in Israel. Therefore, a judgment obtained against us, or any of these persons, including a judgment based on the civil liability provisions of the U.S. federal securities laws, may not be collectible in the United States and may not be enforced by an Israeli court. It also may be difficult for you to effect service of process on these persons in the United States or to assert U.S. securities law claims in original actions instituted in Israel. Israeli courts may refuse to hear a claim based on an alleged violation of U.S. securities laws on the grounds that Israel is not the most appropriate forum in which to bring such a claim. In addition, even if an Israeli court agrees to hear a claim, it may determine that Israeli law and not U.S. law is applicable to the claim. If U.S. law is found to be applicable, the content of applicable U.S. law must be proven as a fact by expert witnesses, which can be a time consuming and costly process. Certain matters of procedure will also be governed by Israeli law. There is little binding case law in Israel that addresses the matters described above. As a result of the difficulty associated with enforcing a judgment against us in Israel, you may not be able to collect any damages awarded by either a U.S. or foreign court.
Provisions of Israeli law and our amended articles of association may delay, prevent or otherwise impede a merger with, or an acquisition of, us, even when the terms of such a transaction are favorable to us and our shareholders.shareholders.
Israeli corporate law regulates mergers, requires tender offers for acquisitions of shares above specified thresholds, requires special approvals for transactions involving directors, officers or significant shareholders and regulates other matters that may be relevant to such types of transactions. For example, a full tender offer for all of a public company’s issued and outstanding shares can only be completed if the acquirer receives positive responses from the holders of at least 95% of the issued share capital and the approval of a majority of the offerees that do not have a personal interest in the tender offer, unless at least 98% of the company’s outstanding shares are tendered. Furthermore, the shareholders, including those who indicated their acceptance of the tender offer (unless the acquirer stipulated in its tender offer that a shareholder that accepts the offer may not seek appraisal rights), may, at any time within six months following the completion of the tender offer, petition an Israeli court for an appraisal right, to alter the consideration for the acquisition. In addition, a statutory merger may not be consummated unless at least 50 days have passed from the date on which a proposal for approval of the merger was filed by each party with the Israeli Registrar of Companies and at least 30 days have passed from the date on which the merger was approved by the shareholders of each party.
We may become subject to claims for payment of compensation for assigned service inventions by our current or former employees, which could result in litigation and adversely affect our business.
Under the Israeli Patents Law, 5727-1967, or the Patents Law, inventions conceived by an employee during the scope of his or her employment are regarded as “service inventions” and are owned by the employer, absent a specific agreement between the employee and employer giving the employee service invention rights. Section 134 of the Patents Law provides that if no agreement between an employer and an employee exists that prescribes whether, to what extent, and on what conditions the employee is entitled to remuneration for his or her service inventions, then such matters may, upon application by the employee, be decided by a government-appointed compensation and royalties committee established under the Patents Law, or the Committee. Although our employees have agreed to assign to us all rights to any intellectual property created in the scope of their employment and most of our current employees, including all those involved in the development of our intellectual property, have agreed to waive their economic rights with respect to service inventions, we cannot assure you that claims will not be brought against us by current or former employees demanding remuneration in consideration for assigned service inventions. If any such claims were filed, we could potentially be required to pay remuneration to our current or former employees for such assigned service inventions, or be forced to litigate such claims, which could negatively affect our business.
Risks Related to the Company
For as long as we are an “emerging growth company,” we will not be required to comply with certain reporting requirements that apply to other public companies. We cannot predict whether the reduced disclosure requirements applicable to emerging growth companies will makeOwnership of our securities less attractive to investors.Ordinary Shares
We have and will continue to incur significant costs as a result of operating as a public company in the United States, and our management is required to devote substantial time to compliance initiatives.
As a public company whose securities are traded in the United States, we have and will continue to incur significant legal, accounting and other expenses. The Sarbanes-Oxley Act of 2002, as well as rules and regulations implemented by the U.S. Securities and Exchange Commission and the Nasdaq Stock Market, impose various requirements on public companies, including requiring the establishment and maintenance of effective disclosure and financial controls. As a result, we incurred and will continue to incur additional legal, accounting and other expenses that we did not incur as a privately-held company, particularly since, as of December 31, 2020, we are no longer considered an “emerging growth company,”company” as defined in the JOBS Act. For as longOur management and other personnel devote a substantial amount of time to these compliance initiatives. Changes in the laws, rules and regulations affecting public companies would result in increased costs to us as we continuerespond to be an emerging growth company,their requirements. These rules and regulations could make it more difficult or more expensive for us to obtain certain types of insurance, including director and officer liability insurance, and we may choosebe required to take advantageaccept reduced policy limits and coverage or incur substantial costs to obtain or maintain the same or similar coverage. The impact of certain exemptions from reportingthese requirements applicablecould also make it more difficult for us to other public companies that are not emerging growth companies. These include: (i) not being requiredattract and retain qualified persons to serve on our board of directors, our board committees or as executive officers. We cannot predict or estimate the amount or timing of additional costs we may incur in order to comply with such requirements.
If we fail to maintain effective internal control over financial reporting, the auditorprice of our ordinary shares may be adversely affected.
Our internal control over financial reporting may have weaknesses and conditions that could require correction or remediation, the disclosure of which may have an adverse impact on the price of our ordinary shares. We are required to establish and maintain appropriate internal control over financial reporting. Failure to establish those controls, or any failure of those controls once established, could adversely affect our public disclosures regarding our business, prospects, financial condition or results of operations. In addition, management’s assessment of internal control over financial reporting may identify weaknesses and conditions that need to be addressed in our internal control over financial reporting or other matters that may raise concerns for investors. As a “non-accelerated filer,” we are exempt from the provisions of Section 404(b) of the Sarbanes-Oxley Act requiring that independent registered public accounting firms provide an attestation requirementsreport on the effectiveness of internal control over financial reporting. Decreased disclosures in our SEC filings due to our status as a “non-accelerated filer” may make it harder for theinvestors to analyze our results of operations and financial prospects and may make our ordinary shares a less attractive investment. Any actual or perceived weaknesses and conditions that need to be addressed in our internal control over financial reporting or disclosure of management’s assessment of our internal controlscontrol over financial reporting providedmay have an adverse impact on the price of our ordinary shares.
Our ordinary shares could be delisted from the Nasdaq Capital Market.
Nasdaq has established certain standards for the continued listing of a security on the Nasdaq Capital Market. The standards for continued listing include, inter alia, that the minimum bid price for the listed securities be at least $1.00 per share. Under these rules, a security is considered deficient if it fails to achieve at least a $1.00 closing bid price for a continuous period of 30 business days. On June 5, 2020, we announced that we received a notification from the Nasdaq Listing Qualifications, or the Staff, that we are not in compliance with the minimum bid price requirement for continued listing set forth in Listing Rule 5550(a)(2), which requires listed securities to maintain a minimum bid price of $1.00 per share, or the Minimum Bid Price Requirement. Further, on April 16, 2020, in response to the COVID-19 pandemic, and the resulting related market conditions, Nasdaq elected to provide temporary relief from the bid price requirements by Section 404tolling compliance through June 30, 2020. As a result of the Sarbanes-Oxley Act of 2002, or Sarbanes-Oxley Act; (ii) not being required to comply with any requirements adopted by the Public Company Accounting Oversight Board, or PCAOB, requiring mandatory audit firm rotation or a supplement to the auditor’s report in which the auditor would be required to provide additional information about the audit and the financial statementstolling of the issuer; (iii) not being requiredbid price requirements, we had 180 calendar days from July 1, 2020, or until December 28, 2020, to complyregain compliance with any new audit rules adopted by the PCAOB after April 5, 2012 unless the U.S. Securities and Exchange Commission determines otherwise, (iv) not being required to provide certain disclosure regarding executive compensation required of larger public companies; and (v) not being required to holdminimum bid price requirement. On December 29, 2020, we received a non-binding advisory vote on executive compensation or seek shareholder approval of any golden parachute payments not previously approved. We could be an emerging growth company for up to five yearsletter from the endStaff notifying us that Nasdaq granted us a 180-day extension, until June 28, 2021, or the Extension Period, to regain compliance with the Minimum Bid Price Requirement. We did not regain compliance with the minimum bid price requirement before December 28, 2020, and instead we advised Nasdaq of our current fiscal year, although,intent to cure the deficiency within the Extension Period. On January 26, 2021 following the increase of the share price in Nasdaq during January 2021, we were notified by Nasdaq that we regained compliance with the minimum $1.00 bid price rule.
If we are delisted from Nasdaq, our ordinary shares may be eligible for trading on an over-the-counter market in the United States. In the event that we are not able to obtain a listing on another U.S. stock exchange or quotation service for our ordinary shares, it may be extremely difficult or impossible for shareholders to sell their ordinary shares in the United States. Moreover, if we are delisted from Nasdaq, but obtain a substitute listing for our ordinary shares in the United States, it will likely be on a market valuewith less liquidity, and therefore, experience potentially more price volatility than experienced on Nasdaq. Shareholders may not be able to sell their ordinary shares on any such substitute U.S. market in the quantities, at the times, or at the prices that could potentially be available on a more liquid trading market. As a result of these factors, if our ordinary shares are delisted from Nasdaq, the price of our ordinary shares that is held by non-affiliates exceeds $700 million aslikely to decline. A delisting of any June 30 before the end of that five-year period, we would ceaseour ordinary shares from Nasdaq could also adversely affect our ability to be an emerging growth company as of the following December 31. We cannot predict if investors will find our securities less attractive if we choose to rely on these exemptions. If some investors find our securities less attractive as a result of any choices to reduce future disclosure, there may be a less active trading marketobtain financing for our securities and the price for our securities may be more volatile. Further, asoperations and/or result in a resultloss of these scaled regulatory requirements, our disclosure may be more limited than that of other public companies and you may not have the same protections afforded to security holders of such companies.confidence by investors, or employees.
We are a foreign private issuer and, as a result, we are not be subject to U.S. proxy rules and are subject to the Securities Exchange Act of 1934 reporting obligations that, to some extent, are more lenient and less frequent than those applicable to a U.S. issuer.issuer.
We report under the Securities Exchange Act of 1934, as amended, or the Exchange Act as a foreign private issuer. Because we qualify as a foreign private issuer under the Exchange Act, we are exempt from certain provisions of the Exchange Act that are applicable to U.S. public companies, including (i) the sections of the Exchange Act regulating the solicitation of proxies, consents or authorizations in respect of a security registered under the Exchange Act; (ii) the sections of the Exchange Act requiring insiders to file public reports of their stock ownership and trading activities and liability for insiders who profit from trades made in a short period of time; and (iii) the rules under the Exchange Act requiring the filing with the SEC of quarterly reports on Form 10-Q containing unaudited financial and other specified information, or current reports on Form 8-K, upon the occurrence of specified significant events. We intend to furnish quarterly reports to the SEC on Form 6-K for so long as we are subject to the reporting requirements of Section 13(g) or 15(d) of the Exchange Act, although the information we furnish may not be the same as the information that is required in quarterly reports on Form 10-Q for U.S. domestic issuers. In addition, while U.S. domestic issuers that are not large accelerated filers or accelerated filers are required to file their annual reports on Form 10-K within 90 days after the end of each fiscal year, foreign private issuers are not required to file their annual report on Form 20-F until 120 days after the end of each fiscal year. Foreign private issuers are also exempt from the Regulation Fair Disclosure,FD (Fair Disclosure), aimed at preventing issuers from making selective disclosures of material information. Although we intend to make interim reports available to our shareholders in a timely manner, you may not have the same protections afforded to shareholders of companies that are not foreign private issuers.
As a foreign private issuer, we are permitted, to follow, and follow certain home country corporate governance practices instead of otherwise applicable NASDAQNasdaq requirements, which may result in less protection than is accorded to investors under rules applicable to domestic U.S. issuers.issuers.
As a foreign private issuer, we are permitted to follow certain home country corporate governance practices instead of those otherwise required under the Listing Rules of the NASDAQNasdaq Stock Market for domestic U.S. issuers. For instance, we follow home country practice in Israel with regard to, among other things, director nomination procedures, the approval of compensation of officers and quorum requirements at general meetings of our shareholders. In addition, we intend to follow our home country law instead of the Listing Rules of the NASDAQNasdaq Stock Market that require us to obtain shareholder approval for certain dilutive events, such as the establishment or amendment of certain equity based compensation plans, an issuance that will result in a change of control of the company, certain transactions other than a public offering involving issuances of a 20% or greater interest in the company, and certain acquisitions of the stock or assets of another company. Following our home country governance practices as opposed to the requirements that would otherwise apply to a United States company listed on NASDAQNasdaq may provide less protection to you than what is accorded to investors under the Listing Rules of the NASDAQNasdaq Stock Market applicable to domestic U.S. issuers.
If we lose our status as a foreign private issuer under the SEC’s rules, our compliance costs will increase.
We would lose our foreign private issuer status if more than 50 percent of our outstanding voting securities are directly or indirectly held of record by residents of the United States and if a majority of our directors or executive officers are U.S. citizens or residents and we fail to meet additional requirements necessary to avoid loss of foreign private issuer status. Although we have elected to comply with certain U.S. regulatory provisions, our loss of foreign private issuer status would make such provisions mandatory. The regulatory and compliance costs for us under U.S. securities laws as a U.S. domestic issuer may be significantly higher. If we are not a foreign private issuer, we will be required to file periodic reports and registration statements on U.S. domestic issuer forms with the SEC, which are more detailed and extensive than the forms available to a foreign private issuer. We would also be required to follow U.S. proxy disclosure requirements, including the requirement to disclose more detailed information about the compensation of our senior executive officers on an individual basis. We may also be required to modify certain of our policies to comply with corporate governance practices associated with U.S. domestic issuers. Such conversion and modifications will involve additional costs. In addition, we may lose our ability to rely upon exemptions from certain corporate governance requirements on U.S. stock exchanges that are available to foreign private issuers.
Exchange rate fluctuations between the U.S. dollar and the NIS and the Euro and inflation may negatively affect our earnings and we may not be able to hedge our currency exchange risks successfully.
The dollar is our functional and reporting currency. However, a significant portion of our operating expenses, including personnel and facilities related expenses, are incurred in NIS. As a result, we are exposed to the risks that the NIS may appreciate relative to the U.S. dollar, or, if the NIS instead devaluesdepreciates relative to the U.S. dollar, that the inflation rate in Israel may exceed such rate of devaluationdepreciation of the NIS, or that the timing of such devaluationdepreciation may lag behind inflation in Israel. In any such event, the dollar cost of our operations in Israel would increase and our dollar-denominated results of operations would be adversely affected. In year 2020, the NIS appreciate by 6.79% relative to the U.S dollar. The Israeli rate of inflation has not had a material adverse effect on our financial condition during the years 2016, 20152020, 2019 and 2014.2018. In addition, we expect tomay incur operating expenses denominated in Euros, and therefore, our operating results aremay also be subject to fluctuations due to changes in the U.S. dollar/Euro exchange rate. Given our general lackWe cannot predict any future trends in the rate of inflation in Israel or the rate of devaluation (if any) of the NIS, the Euro and other foreign currencies against the U.S. dollar. Although we engage in currency hedging arrangements from time to time, these measures may not adequately protect us from fluctuations in the exchange rates of the NIS, the Euro and other foreign currencies in relation to the U.S. dollar (and/or from inflation of such foreign currencies), we may be exposed to material adverse effects from such movements. We cannot predict any future trends in the rateand involve costs and risk of inflation in Israel or the rate of devaluation (if any) of the NIS against the U.S. dollar.their own.
We have never declared or paid a dividend and currently do not intend to pay cash dividends in the foreseeable future. Any return on investment may be limited to the value of our securities.securities.
We have never declared and do not anticipate paying cash dividends on our ordinary shares in the foreseeable future. Our board of directors has discretion to declare and pay dividends on our ordinary shares and will make any determination to do so based on a number of factors, such as our operating results, financial condition, current and anticipated cash needs and other business and economic factors that our board of directors may deem relevant. In addition, we are only permitted to pay dividends out of “profits” (as defined by the Israeli Companies Law, 1999, or the Israeli Companies Law), provided that there is no reasonable concern that the dividend distribution will prevent us from meeting our existing and foreseeable obligations, as they become due. If we do not pay dividends, our ordinary shares may be less valuable because a return on your investment will only occur if the trading price of our securities appreciates. Further, you should not rely on an investment in us if you require dividend income from your investments.
If securities or industry analysts do not publish research or reports about us or our business or publish unfavorable research about us or our business, the price of our securities and their trading volume could decline.decline.
The trading market for our securities will depend in part on the research and reports that securities or industry analysts publish about us or our business. We currently have limited research coverage by securities and industry analysts. If one or more of the analysts who covers us downgrades our securities, the price of our securities would likely decline. We do not have control over these analysts and we do not have commitments from them to continue to write research reports about us or our business. The price of our ordinary shares could decline if one or more equity research analysts downgrade our ordinary shares or if those analysts issue other unfavorable commentary or cease publishing reports about us or our business.
Our stock price has and may be subject to fluctuation, and purchasers of our securities could incur substantial losses.losses.
Our stock price has been subject to considerable fluctuation since our initial public offering in February 2015, with the closing price per share having varied from a low of $0.97$0.264 to a high of $5.88,$70.56, and may be subject to fluctuation in the future. The stock market in general has experienced extreme volatility that has often been unrelated to the operating performance of particular companies. As a result of this volatility, investors may not be able to sell their securities at or above the purchase price. The market price for our ordinary shares on the NASDAQNasdaq Capital Market may fluctuate as a result of a number of factors, some of which are beyond our control, including, among others:
we may not be able to develop our C-Scan system at the rate or to the stage we desire;
inability to obtain the approvals necessary to commence further clinical trials;
unsatisfactory results of clinical trials;
announcements of regulatory approval or the failure to obtain it, or specific label indications or patient populations for its use, or changes or delays in the regulatory review process;
any intellectual property infringement actions in which we may become involved;
announcements concerning our competitors or the medical device industry in general;
achievement of expected product sales and profitability or our failure to meet expectations;
our commencement of, or involvement in, litigation;
any major changes in our board of directors or management;
legislation in the United States relating to the sale or pricing of medical device;
future substantial sales of our ordinary shares;
changes in earnings estimates or recommendations by securities analysts, if our ordinary shares are covered by analysts; or
the trading volume of our ordinary shares.shares; or
natural disasters and political and economic instability, including wars, terrorism, political unrest, results of certain elections and votes, emergence of a pandemic, or other widespread health emergencies (or concerns over the possibility of such an emergency, including for example, the COVID-19 pandemic), boycotts, adoption or expansion of government trade restrictions, and other business restrictions.
In addition, the stock market in general, and NASDAQNasdaq Stock Market in particular, have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of small companies. Broad market and industry factors may negatively affect the market price of our ordinary shares, regardless of our actual operating performance. Further, a systemic decline in the financial markets and related factors beyond our control may cause our share price to decline rapidly and unexpectedly.
The trading market for our ordinary shares is not always active, liquid and orderly, which may inhibit the ability of our shareholders to sell ordinary shares.
Prior toSince our initial public offering in February 2015, there was no public market for our ordinary shares. Since that time, the trading market for our ordinary shares has not always been active, liquid or orderly. The lack of an active market at times may impair your ability to sell your shares at the time you wish to sell them or at a price that you consider reasonable. The lack of an active market may also reduce the fair market value of your shares. An inactive market may also impair our ability to raise capital by selling shares.
We recently amended our articles of association to increase our authorized share capital. There are certain risks associated with this increase.
In December 2020, our shareholders approved an increase to our authorized share capital and to amend our Articles of Association accordingly. As a result, our authorized and registered share capital is NIS 864,000,000 divided into 360,000,000 ordinary shares, nominal (par) value NIS 2.40 each. The increase of our authorized share capital is designed to enable us to have sufficient authorized share capital that would allow us to meet our future business needs as they arise. These needs could include, among other things, the sale of shares in public and private offerings to raise additional capital, the purchase of property or assets, the use of shares for various equity compensation and other employee benefit plans and arrangements, the declaration of share splits, and other bona fide corporate purposes. The possible future issuance of equity securities consisting of ordinary shares or securities convertible into ordinary shares could affect our current shareholders in a number of ways, including the following: (i) diluting the voting power of the current holders of ordinary shares; (ii) diluting the market price of the ordinary shares, to the extent that the new ordinary shares are issued and sold at prices below current trading prices of the existing ordinary shares, or if the issuance consists of equity securities convertible into ordinary shares, to the extent that the securities provide for the conversion into ordinary shares at prices that could be below current trading prices of the ordinary shares; and (iii) diluting the book value per share of the outstanding ordinary shares. Furthermore, the authorized shares could, in theory, also be used to resist or frustrate a third-party transaction that is favored by a majority of the independent shareholders (for example, by permitting issuances that would dilute the share ownership of a person seeking to effect a change in the composition of our board of directors or management or contemplating a tender offer or other transaction for the combination of our company with another company).
We have broad discretion in how we use the net proceeds from our initial public offering and concurrent private placement and our August 2016 registered direct offering,financings, and we may not use these proceeds effectively.effectively.
Our management has broad discretion as to the application of the net proceeds of our initial public offering and concurrent private placement and our August 2016 registered direct offering.financings. Our shareholders may not agree with the manner in which our management chooses to allocate and spend the net proceeds. Moreover, our management may use the net proceeds for corporate purposes that may not increase our profitability or our market value.
Risks Related to Taxation
There is a risk that we could be treated as a domestic (U.S.) corporation for U.S. federal income tax purposes by reason of the transactions related to our acquisition of all of the business operations and substantially all of the assets of Check-Cap LLC on May 31, 2009, (hereinafter sometimes referred to asor the “reorganization”).Reorganization.
Section 7874(b) of the Internal Revenue Code of 1986, as amended, or the Code, generally provides that a foreign corporation (i.e., a corporation created or organized under the laws of a jurisdiction outside of the United States) would be treated as a domestic (U.S.) corporation for U.S. federal income tax purposes if, pursuant to a plan or a series of related transactions, (1) the foreign corporation acquires, directly or indirectly, substantially all of the assets of a domestic corporation (or substantially all of the properties constituting a trade or business of a domestic partnership), (2) after the acquisition, the former shareholders of the acquired corporation by reason of holding shares of the acquired corporation (or, in the case of an acquisition with respect to a domestic partnership, the former partners of the domestic partnership by reason of holding a capital or profits interest in the domestic partnership) own at least 80% of the stock (by vote or value) of the acquiring corporation, and (3) after the acquisition, the expanded affiliated group that includes the acquiring corporation does not have substantial business activities in the foreign country in which, or under the laws of which, the acquiring corporation is created or organized when compared to the total business activities of such expanded affiliated group. On the basis of analysis of the relevant facts and circumstances and the relevant law (including the temporary regulations under Section 7874 applicable at the time of the reorganization)Reorganization), it was determined that the third condition described in the preceding sentence was not met with respect to the reorganizationReorganization and, therefore, that the inversion tax rules of Section 7874(b) would not apply to treat us as a domestic corporation for U.S. federal income tax purposes. However, since this determination was made on the basis of all of the relevant facts and circumstances, and it is not clear which facts and circumstances the Internal Revenue Service, or the IRS, may consider more important than others, this conclusion is not free from doubt.
If Section 7874(b) were to apply to the reorganizationReorganization (and we were to be treated as a domestic corporation for U.S. federal income tax purposes), then, among other things, (i) we would be subject to U.S. federal income tax on our worldwide taxable income (if and when we have taxable income); (ii) certain payments (e.g., interest and dividends) that we make (or have made) to our foreign investors may be (or may have been) subject to U.S. withholding taxes; (iii) we may be subject to significant penalties for the failure to file certain tax returns and reports, including reports with respect to our foreign bank accounts; and (iv) the U.S. unitholders of Check-Cap LLC would not have been subject to U.S. federal income tax on royalties that are deemed to be paid to them under Section 367(d) of the Code as a result of the reorganization.Reorganization. As discussed under Item 5B “Operating and Financial Review and Prospects – Liquidity and Capital Resources – Application of Critical Accounting Policies and Estimates – Royalties provision – Reimbursement liability to Check-Cap LLC unitholders,” and Item 5F “Operating and Financial Review and Prospects-Tabular Disclosure of Contractual Obligations,” as part of the reorganization,Reorganization, we committed to reimburse the unitholders of Check-Cap LLC for any tax burdens that may be imposed on them due to the reorganization,Reorganization, including royalties that are deemed to be paid to the U.S. unitholders under Section 367(d) of the Code.
Prospective investors are urged to consult their own advisors on these issues. The balance of this discussion, including the discussion under Item 10E “Additional Information – Taxation – U.S. Federal Income Taxation,” assumes that we will be and have been treated as a foreign corporation for U.S. federal income tax purposes.
We may be eligible for tax benefits from government programs, which require us to meet certain conditions, including regarding the location of our property, plant and equipment and manufacturing in Israel. We can provide no assurance that we would continue to be eligible for such benefits and/or that any such benefits will not be terminated in the future.future.
Our manufacturing facilities in Israel may qualify as a “Benefited Enterprise” under the Israeli Law for Encouragement of Capital Investments, 1959, or the Investment Law,5719-1959, which would entitle us to receive certain tax benefits. In order to be eligible for such benefits, we would be required to meet certain conditions, including the making of a minimum capital investment in our productive assets and the carrying on of a required portion of our manufacturing in Israel. The amount of the benefit will be determined in accordance with various conditions, including the location of our property, plant and equipment and the location of certain of our sub-contractors. If we cease to meet the required conditions for eligibility, the tax benefits could be cancelled and we could be required to pay increased taxes or to refund the amounts of the benefits received with interest and penalties. We can provide no assurance as to the amount of future capital investment in our productive assets, our future manufacturing location and the future location of our property, plant and equipment and certain of our sub-contractors, and therefore, we cannot provide assurance that we will be eligible for such tax benefits or assurance as to the amount of such tax benefits. Even if we continue to meet the relevant requirements, the tax benefits that Benefited Enterprises receive may not be continued in the future at their current levels or at all. If these tax benefits were reduced or eliminated, the amount of taxes that we would be required to pay would likely increase, as all of our operations would consequently be subject to corporate tax at the standard rate, which could adversely affect our results of operations. See Item 10E “Additional Information—Taxation—Israeli Tax Considerations and Government Programs—Law for the Encouragement of Capital Investments, 5719-1959”5719-1959�� for additional information concerning these tax benefits.
There is a risk that we may be classified as a passive foreign investment company, or PFIC, which could result in adverse U.S. federal income tax consequences to U.S. investors.investors.
In general, we will be treated as a PFIC for any taxable year in which either (1) at least 75% of our gross income (including our pro rata share of the gross income of our 25% or more-owned corporate subsidiaries) is passive income or (2) at least 50% of the average value of our assets (including our pro rata share of the assets of our 25% or more-owned corporate subsidiaries) is attributable to assets that produce, or are held for the production of, passive income. Passive income generally includes dividends, interest, rents, royalties, and gains from the disposition of passive assets. If we are determined to be a PFIC for any taxable year (or portion thereof) that is included in the holding period of a U.S. Holder (as defined in Item 10E “Additional Information - Information—Taxation—U.S. Federal Income Taxation—General”) of our securities, the U.S. Holder may be subject to increased U.S. federal income tax liability upon a sale or other disposition of our securities or the receipt of certain excess distributions from us and may be subject to additional reporting requirements. We have not performed an analysis of ourbelieve that we were a PFIC status for ourthe taxable year ended December 31, 2016. In addition, our2020 and may be a PFIC for the taxable year ending December 31, 2021. Our actual PFIC status for our current taxable year or any subsequent taxable year is uncertain and will not be determinable until after the end of such taxable year. Accordingly, there can be no assurance with respect to our status as a PFIC for our taxable year endedending December 31, 20162021 or any subsequent taxable year.
U.S. investors are urged to consult their own tax advisors regarding the possible application of the PFIC rules. For more information, see Item 10E “Additional Information—Taxation—U.S. Federal Income Taxation—U.S. Holders—Passive Foreign Investment Company Rules.”
There is a risk that a holder of Long Term Incentive Warrants will recognize ordinary compensation income on the exercise of the Long Term Incentive Warrants, which may result in U.S. federal and Israeli income tax liability to such holder without the receipt of cash.
While not free from doubt, the Long Term Incentive Warrants may be treated for U.S. federal and Israeli income tax purposes as compensatory warrants (i.e., warrants issued to compensate an original purchaser of units in our initial public offering for holding the ordinary shares underlying the units for a certain period of time after the closing date of our initial public offering). Based on this characterization, a holder may recognize ordinary compensation income for U.S. federal and Israeli income tax purposes on the exercise of the Long Term Incentive Warrants, as described under Item 10E “Additional Information—Taxation—Israeli Tax Considerations and Government Programs—Taxation of our Shareholders—Taxation of Non-Israeli Shareholders upon Exercise of Long Term Incentive Warrants” and Item 10E “Additional Information—Taxation—U.S. Federal Income Taxation—U.S. Holders—Exercise of Long Term Incentive Warrants” and “Non-U.S. Holders.” Such compensation income may result in U.S. federal or Israeli income tax liability to such holder without the receipt of cash. Holders of Long Term Incentive Warrants are urged to consult their own tax advisors with respect to the U.S. federal and Israeli income tax consequences that may arise with respect to the Long Term Incentive Warrants.
ITEM 4. INFORMATION ON OUR COMPANY
A. | History and Development of the Company |
Our History
Our legal and commercial name is Check-Cap Ltd. We were formed as a company in Israel on April 5, 2009. On May 31, 2009, we acquired all of the business operations and substantially all of the assets of Check-Cap LLC, a Delaware limited liability company formed in December 2004. On May 15, 2015, we formed our wholly-owned subsidiary Check-Cap US, Inc., a Delaware corporation.
On February 24, 2015, we successfully completed an initial public offering in the United States and the listing of our securities on the NASDAQNasdaq Capital Market.
We are subject to the provisions of the Israeli Companies Law. Our principal executive offices are located at Check-Cap Building, 29 Abba Hushi Avenue, P.O. Box 1271, Isfiya, 3009000, Israel. Our telephone number is +972-4-8303400 and our website is located at www.check-cap.com (the information contained therein or linked thereto shall not be considered incorporated by reference in this annual report)Annual Report). Our U.S. agent is Puglisi & Associates, located at 850 Library Avenue, Suite 204, Newark, Delaware 19711.
We use our website (http://www.check-cap.com) as a channel of distribution of company information. The information we post through this channel may be deemed material. Accordingly, investors should monitor our website, in addition to following our press releases, SEC filings and public conference calls and webcasts. The contents of our website are not, however, a part of this Annual Report.
Principal Capital Expenditures
For a discussion of our capital expenditures, see Item 5 “Operating and Financial Review and Prospects—Liquidity and Capital Resources.”
Our Company
We are a clinical stage medical diagnostics company engaged inaiming to redefine CRC screening through the developmentintroduction of aC-Scan®, the first and only patient-friendly preparation-free test designed to detect polyps before they may transform into cancer to enable early intervention and cancer prevention.
The disruptive capsule-based screening technology aims to increase screening adherence worldwide and enable millions of people to stay healthy. The system that utilizes ultra-low-dose X-rays to generate structural information onscan the endoluminal surfaceinner lining of the colon that may be used for screening of the colon to detectprecancerous polyps, masses and CRC. Whileother structural abnormalities. CRC is the second leading causethird most commonly diagnosed cancer, with more than 1.9 million new cases identified every year globally. Nearly 935,000 deaths occur annually worldwide as a result of death from cancer for both sexes combined in the United States and is preventable with early screening and intervention, according to the National Health Interview Survey, in 2015, only 63% of Americans over the age of 50 reported being current with CRC screening recommendations. Unlike other screening modalities that are designed for direct visualization and imagingCRC. While approximately 0.5% of the internal colon, such as optical colonoscopy, CTC and other capsule-based technologies, our C-Scan system is designed to function without any cathartic preparation ofaverage-risk screening population presents with cancerous polyps in the colon and rectum at any given time, approximately 25% of the same population presents with benign polyps that could potentially turn into cancer over time. It can take up to transit10 years before a pre-cancerous polyp develops into invasive cancer. As such, there is a crucial detection window for the prevention of colorectal cancer, through the detection of these benign polyps. While routine screening is recommended by The American Cancer Society for healthy people aged 45 years and older, screening adherence remains low. Currently, colonoscopy is the gold standard for the detection of colorectal polyps, but about 1 in 3 adults among the targeted screening population avoids having a colonoscopy in the U.S., and adherence in other regions of the world such as Europe and Asia is even lower, due to the invasiveness of the procedure and bowel preparation. Most patient-friendly CRC screening tests currently available, or poised to enter the market, such as fecal or liquid biopsy tests, are primarily designed to detect cancer and demonstrate low sensitivity in detecting pre-cancerous polyps. As such, they do not necessarily provide patients with the time window to pre-empt the disease. C-Scan is non-invasive and requires no preparation or sedation, allowing the patients to continue their daily routine with no interruption as the capsule is propelled through the gastrointestinal tract by natural motility while the patient continues his or her normal daily routine. Furthermore, themotility. C-Scan system does not require fasting prior to or during capsule transit. Our C-Scan system is comprised of three main components: (1) C-Scan Cap, an ingestible X-ray scanning capsule; (2) C-Scan Track, a biocompatible unitthree miniaturized patches worn on the patient’s back for capsuleintegrated positioning, control tracking and data recording; and (3) C-Scan View, a PC-based, standalone application usedproprietary software to process and display structural informationrepresent 2D and 3D maps of the inner surface of the colon. We believe that this solution will be attractivehas the potential to become an alternative for both physicians and patients with the potentialand to increase the number of people completing CRC screening.
In August 2019, we announced the completion of manufacturing line transfer implementation and qualification for C-Scan to be operated by GE Healthcare, primarily to enable the manufacture of systems for U.S. clinical trials. We have recently signed a distribution agreement with GE Healthcare to support our planned U.S. clinical trial.
Our C-Scan Cap will beis swallowed and propelled by natural motility through the gastrointestinal tract and excreted naturally with no need for retrieval for data collection. Unlike other existing CRC screening methods, this process should not disrupt a patient’s normal activities or require fasting. Our C-Scan Cap employs ultra-low-dose X-rays, which allow the C-Scan system to imagescan the interior lining of the colon even when surrounded by intestinal content. As such, we believe that patients using our C-Scan system will not be required to undergo any prior bowel preparation.
Our C-Scan Cap is being designed to transmit position, motility and the data it collects to the C-Scan Track that will be worn on the patient’s back. The external data recorder is being designed to enable the download of the data to our C-Scan View application to allow physicians to analyze the data collected by our C-Scan Cap. The C-Scan Track is being designed to provide the physician with localization data aligned with a reconstructed image. We intend for physicians to be able to review the colon’s inner structural information.
Colonic polyps are tissue growths that occur on the lining of the colon. Polyps in the colon are common, and certain types of polyps may become cancerous over time. In the event that polyps are identified by C-Scan, the patient may be advised to undergo a subsequent traditional colonoscopy procedure to examine, remove and biopsy the polyps. For those patients who require a subsequent colonoscopy, concerns regarding pain, discomfort and embarrassment may still remain. We do not, however, believe that these concerns will make the use of C-Scan any less attractive to physicians and patients. Although patients who are initially screened utilizing a traditional colonoscopy could avoid the need for a second colonoscopy if polyps are discovered, we believe that C-Scan will still be attractive to physicians and patients who object to or cannot undergo a colonoscopy as a large number of these patients if screened will not require a subsequent colonoscopy.
We initiated our first clinical studies in 2010, consisting of two single-center feasibility studies with non-scanning (no X-ray source) capsules for the purposes of measuring gastrointestinal tract activity, colon contractions and associated capsule motility, and shortening capsule transit time.
In 2013, we initiated a multi-center prospective clinical feasibility study, designed to allow for the recruitment of 100 subjects, to establish clinical proof of concept, safety and functionality of C-Scan in patients eligible for CRC screening. Analysis conducted on the first 66 capsules swallowed by participants showed that 65 of 66 capsules swallowed were naturally eliminated, without major or minor side effects, after 62±40.7 hours. The average calculated radiation exposure was 0.06 ± 0.04 mSv (similar to a single chest radiograph). Both pedunculated and sessile polyps were detected in several patients and validated later by colonoscopy.
In September 2017, we completed a multi-center study of C-Scan in support of CE Mark submission. The objective of the study was to assess safety and the clinical performance of C-Scan in detecting patients with polyps. The three-center trial enrolled 66 patients, with a mean age of 59 years. Following capsule ingestion, subjects swallowed small doses of contrast agent and fiber supplements with each meal throughout capsule passage. Average capsule transit time was 52±32 hours, and the average total X-ray dose was 0.05 mSv (CT colonography effective dose is ~ 6.0 mSv). No bowel preparation, sedation, or change in diet was required. Both confirmatory colonoscopy, performed by an independent investigator, and C-Scan review, performed by a central review group, were blinded to results. The study demonstrated a 44% sensitivity in the 45 subjects included in the analysis for polyps, with specificity (ability to correctly identify lack of polyps) of 89%. Sensitivity strongly correlated (R-squared = 0.98) to the percentage of the colon scanned. Sensitivity was 78% (p<0.05) and 100% (p<0.05) for subjects where greater than 50% and 70% of the colon was scanned, respectively. Specificity was consistent for all subjects.
In the fourth quarter of 2017, we initiated an interim clinical study for the purpose of introducing an advanced version of C-Scan, Version 3, which incorporated the then latest algorithms and system optimization and tailored scanning of the colon to the patient’s natural colonic movements to maximize the amount of the colon that is tracked and imaged. In March 2018, we announced results from the interim study. Evaluable results of 21 patients showed average colon imaging coverage of 64%, a 40% improvement over 46% average colon imaging coverage in the multi-center study. Sensitivity was 78% (p<0.05) for subjects with greater than 50% colon imaging coverage and 100% (p<0.05) for subjects with greater than 70% colon imaging coverage. Specificity was consistent at around 89%.
Following our certification to ISO 13485:2016 by our Notified Body, and completion of our multi-center clinical study and achievement of compliance with the requirements of the Medical Devices Directive, in September 2017, we submitted a request for CE marking for the marketing and sale of C-Scan in the European Union. We received the CE Mark certification from our notified body (DEKRA - 0344) on January 9, 2018. In September 2018, we received approval from the Medical Devices and Accessories Division of the Israeli Ministry of Health, or AMAR, for the marketing and sale of C-Scan system in Israel, which, following its extension, is valid until March 31, 2022. For our advanced C-Scan version 4, we will be required to obtain additional approval from the notified body in conjunction with the MDR, to allow for AMAR renewal.
During the first quarter of 2018, we initiated a multi-center, open label, home monitoring, prospective study designed to determine the performance characteristics of C-Scan system Version 3, for detecting pre-cancerous polyps compared with the fecal immunochemical test (FIT), in each case using colonoscopy as the reference method, for the purpose of collecting additional evidence of clinical effectiveness and clinical utility to support market adoption. The study included 90 evaluable patients who either had known polyps or were considered to be of average risk. Each patient ingested a C-Scan capsule and also underwent a FIT and a comparative colonoscopy performed by independent gastroenterologists, who were blinded to the corresponding test’s results. The C-Scan clinical evaluation was obtained using the evaluable patient population implementing a gender-based motility analysis and the results of both C-Scan and FIT were compared to colonoscopy. The primary efficacy endpoint of the study was sensitivity (ability to correctly identify patients with polyps) and specificity (ability to correctly identify patients with lack of polyps) of the C-Scan system compared to FIT in detecting subjects with polyps ≥10 mm. In July 2019, we announced final results from our post-CE approval study. The results demonstrate that C-Scan achieved a sensitivity of 76% (p=0.0005) in patients with polyps ≥10 mm, while FIT achieved a sensitivity of 29% (p=0.005) in patients with polyps ≥10 mm. C-Scan achieved a specificity of 82% in all patients, while FIT achieved a specificity of 96% in all patients. In addition, C-Scan detected all 4 patients (100%) with polyps ≥40 mm, while the FIT detected only 1 of the 4 patients (25%) with polyps ≥40mm. Overall, C-Scan achieved a sensitivity of 66% (p=0.01) in all patients, including patients with polyps <10mm, while FIT achieved a sensitivity of 23% (p<0.0001) in all patients, including patients with polyps <10mm. In total, 142 patients enrolled in the study and after factoring in technical and physiological dropouts and protocol violations, the number of evaluable patients was 90. No serious adverse events were reported, and the adverse events were mild in severity.
We conducted pre-submission meetings with the FDA during the period of December 2016 and February 2017 for the purpose of receiving feedback on the regulatory pathway for our system in the United States. We also sought feedback on a proposed protocol for a feasibility or pilot study, the primary purposes of which is to establish the safety of the C-Scan system and evaluate user compliance and satisfaction. In December 2018, we received from the FDA conditional approval of our IDE application to initiate a U.S. pilot study of C-Scan and received final approval from the FDA in February 2019.
In April 2019, we initiated the U.S. pilot study of C-Scan. The U.S. pilot study (NCT03735407 ) was a prospective, multi-center, open label, single arm study was designed to evaluate the safety, usability and subject compliance of the C-Scan system. The study included 28 evaluable patients, more than two thirds of whom were considered to be of average risk for colorectal cancer. Each patient ingested a C-Scan capsule and also underwent a fecal immunochemical test (FIT) as well as a comparative colonoscopy, which was performed by an independent gastroenterologist who was blinded to the corresponding test results. The study was performed at two sites, the NYU Grossman School of Medicine and Mayo Clinic, Rochester. The primary endpoint of the study was to evaluate the incidence of device or procedure related serious adverse events. Secondary endpoints included patient compliance, subject satisfaction and device and procedure related performance. Due to sample size, the study was not designed to be powered for statistical significance. In December 2019, we announced the results of the study. No device or procedure related serious adverse events (SAEs) were reported and all device or procedure related adverse events were mild in severity. In total, 45 patients enrolled in the study, of which 40 patients underwent the study procedure. All 40 patients complied with the procedure and completed a questionnaire following the procedure and reported higher satisfaction with the C-Scan System procedure compared to colonoscopy. A total of 28 patients were evaluable after factoring in technical and physiological dropouts and protocol violations. Analysis of the evaluable patient results revealed agreement between C-Scan and colonoscopy in detection of polyps was consistent with data from the post-CE approval study.
We continue to optimize C-Scan’s functionality and patient experience in preparation for our planned pivotal study in the United States by additional clinical data collection at Israeli sites through the enrollment of up to 250 average-risk patients at 10 or more sites, using an advanced C-Scan version, which incorporates mainly advanced algorithms, improved detection and reduced energy consumption. In November 2020, we finalized our proposed pivotal design and submitted our IDE to the FDA and in March 2021, our IDE was approved. Subject to receipt of required approvals and available capital, we plan to initiate a pivotal study in the United States in late 2021 to (i) demonstrate device safety as evidenced by a lack of device-related serious adverse events; and (ii) provide efficacy data concerning C-Scan’s performance.
Following and subject to the successful completion of our pivotal trial and available capital, our current strategy is to submit a direct de novo reclassification petition, which we anticipate submitting in either late 2022 or early 2023, for FDA approval for the marketing of C-Scan in the United States. Direct de novo reclassification typically takes at least 9 to 12 months from filing to clearance. If the FDA determines that C-Scan is not a candidate for de novo reclassification, it will require approval of the device for market through the PMA process. The PMA pathway is much more costly and uncertain than the 510(k) clearance process or de novo reclassification, and generally takes at least 12 to 18 months, or even longer, from the time the application is filed with FDA to ultimate approval.
Since our formation, we have not generated any revenue. We do not anticipate generating any significant revenue for the foreseeable future and we do not yet have any specific launch dates for our product. We incurred net losses of $13.8 million in 2020, $13.8 million in 2019 and $10.6 million in 2018. As of December 31, 2020, we had an accumulated deficit of $91.0 million and a total shareholders’ equity of $16.4 million.
Our Solution
CRC screening can reduce the incidence of and mortality from the disease by enabling detection of precancerous polyps in the colon at an earlier, more treatable stage. CRC is one of the few cancers that can be prevented through screening because pre-cancerous polyps, from which colon cancers often develop, can be identified and removed. Today, there is a range of options for CRC screening in the average-risk population, with current technology falling into two general categories: (i) structural exams that enable physicians to visualize the colon for abnormalities, such as optical colonoscopy (which is currently regarded as the “gold standard” for CRC screening), sigmoidoscopy, CTC and optical capsules. All such exams require aggressive bowel preparation and are invasive exams ; and (ii) stool and serum based tests, such as FOBTs, FITs, stool DNA, and blood tests, which test for blood in stool and irregularities in blood and DNA. Notwithstanding the many CRC screening alternatives and despite the fact that the tests are encouraged by clinicians and insurers and the proven clinical value of screening for CRC, a large portion of the population is still reluctant to perform CRC screening.
C-Scan is designed to enable early detection of precancerous polyps while providing a patient friendly solution without requiring any colon cleansing. The purpose of C-Scan is to detect colorectal polyps in subjects who, based on demographics and medical history factors, are considered average risk for CRC. If polyps are detected, the patient is elevated to high risk for CRC, which studies have shown increases the adherence of patients to undergo a colonoscopy procedure. If a positive result is obtained through the C-Scan, the patient should be referred to colonoscopy.
Although C-Scan utilizes radiation that is on average of 0.05 mSv, we believe that the potential risks associated with such radiation exposure are low compared to the potential risks associated with other procedures such as perforation, bleeding or sedation related effects (optical colonoscopy and sigmoidoscopy) and dehydration and damage to kidneys. Unlike FOBTs, FITs and stool DNA tests, our capsule-based imaging modality generates structural information on the colon, which could assist in the detection of pre-cancerous polyps. We therefore do not believe that the ultra-low-dose radiation in our capsule will make C-Scan less attractive to physicians and patients than other less-effective products that do not employ any radiation.
The Radiation Safety Division of the Soreq Nuclear Research Center found, as set forth in its report of November 2010 that was prepared at our request and based on the information provided by us and the relevant methods and principles known at such time, or the Report, that the radiation dose to the patient in the proposed screening procedure utilizing the scanning device developed by us at that time in routine operation and normal conditions is low relative to the radiation dose involved in conventional imaging procedures using X-rays (such as fluoroscopy and CT) and is also low when compared to the radiation dose involved in established screening procedures such as mammography, all as more fully described in the Report.
Our C-Scan Cap is being designedReport In addition, Michael S. Gossman, M.S., DABR, FAAPM, FACR, the Chief Medical Physicist in Radiation Oncology and Radiation Safety Officer, Regulation Directive Medical Physics, concluded, as set forth in his report dated November 14, 2018 that was prepared at our request and submitted to transmit position, motility and the data it collects to the C-Scan Track that will be worn on the patient’s back. The external data recorder is being designed to enable the transfer of the data to our C-Scan View application to allow physicians to analyze the data collected by our C-Scan Cap. The C-Scan Track is being designed to provide the physician with accurate localization data aligned with a reconstructed image. We intend for physicians to be able to review the colon’s inner images in less time than is required to perform an optical colonoscopy.
Colonic polyps are tissue growths that occur on the lining of the colon. Polyps in the colon are common, and certain types of polyps may become cancerous over time. In the event that polyps are identified by our C-Scan system, the patient may be advised to undergo a subsequent traditional colonoscopy procedure to examine, remove and biopsy the polyps. For those patients who require a subsequent colonoscopy, concerns regarding pain, discomfort and embarrassment may still remain. We do not, however, believe that these concerns will make the use of our C-Scan system any less attractive to physicians and patients. Although patients who are initially screened utilizing a traditional colonoscopy could avoid the need for a second colonoscopy if polyps are discovered, we believe that our C-Scan system will still be attractive to physicians and patients as a large number of patients who are screened will not require a subsequent colonoscopy. Published data from a multi-center CT colonography screening study of 2,531 asymptomatic adults published in The New England Journal of Medicine in 2008 showed that if all patients with a lesion measuring 5mm or more on CT colonography were referred for colonoscopy, the colonoscopy-referral rate would have been 17%.
We initiated our first clinical studies in 2010, consisting of two single-center feasibility studies with non-scanning (no X-ray source) capsules for the purposes of measuring gastrointestinal tract activity, colon contractions and associated capsule motility, and shortening capsule transit time.
In 2013, we initiated a multi-center prospective clinical feasibility study, designed to allow for the recruitment of 100 subjects, to establish clinical proof of concept, safety and functionality of our C-Scan system in patients eligible for CRC screening. Analysis conducted on the first 66 capsules swallowed by participants showed that 65 of 66 capsules swallowed were naturally eliminated, without major or minor side effects, after 62±40.7 hours. The average calculated radiation exposure was 0.06 ± 0.04 mSv (similar to a single chest radiograph). Both pedunculated and sessile polyps were detected in several patients and validated later by colonoscopy.
In the first quarter of 2017, we initiated enrollment in a multi-center study of the C-Scan system in support of CE Mark submission. This prospective study, designed to demonstrate the safety and clinical performance of the C-Scan system, will evaluate polyp detection as compared to colonoscopy.
To date, we have achieved key product development milestones, including the ability of our C-Scan system to reconstruct the human colon and to identify polyps. Following our certification to ISO 13485:2003 by our Notified Body, successful completion of our current multi-center clinical study and achievement of compliance with the requirements of the Medical Devices Directive, we plan to submit during the first half of 2017 a request for CE marking for the marketing and sale of our C-Scan system in the European Union. We expect to initiate post-marketing studies in Europe following CE marking for the purpose of collecting additional evidence of clinical effectiveness and clinical utility to support market adoption. Subject to clinical results, regulatory approvals, available capital and engagement with strategic partners, we anticipate launching our C-Scan system commercially in Europe during 2018.
We conducted a pre-submission meeting with the FDA in December 2016connection with the IDE application for the purpose of receiving feedback on the regulatory pathway for our system in the United States. We also sought feedback on a proposed protocol for a feasibility orU.S. pilot study, the primary purposesfollowing analysis of whichboth normal capsule transit and extreme conditions, that C-Scan is radiation dose safe for medical diagnostics and exposes patients to establish the safety ofvery low dose radiation during normal operation and that even in extreme and unlikely scenarios, patient exposure to radiation is unlikely to cause severe harm to patients undergoing the C-Scan system and evaluate user compliance and satisfaction. Subject to required approvals, we plan on initiating such a study in 2017. Following successful completion of the pilot study and receipt of required approvals, we plan to initiate during 2018, a pivotal study in the United States to (i) demonstrate device safety as evidenced by a lack of device-related serious adverse events; and (ii) provide efficacy data concerning our C-Scan system’s performance. We anticipate that FDA approval for the pivotal study will be subject to our providing sufficient clinical data from previous clinical studies, which may include the multi-center clinical feasibility study, the multicenter safety and clinical performance study, and U.S. pilot study. However, there can be no assurance that we will receive approvals for the pilot and/or pivotal studies to be conducted in the United States.
We also intend to pursue clinical trials for regulatory approvals in Japan and China in parallel to the U.S. pivotal study, subject to available capital and engagement with strategic partners. Pivotal studies are expected, among other things, to compare polyps identified by our C-Scan system with the polyps identified by traditional optical colonoscopy. These clinical findings may be analyzed in comparison with results obtained from FOBTs and FITs.
Following and subject to the successful completion of our pivotal trial, our current strategy is to submit a direct de novo reclassification petition, which we anticipate submitting in 2019, for initial FDA approval for the marketing of our C-Scan system in the United States. Direct de novo reclassification typically takes at least 9 to 12 months from filing to clearance. If the FDA determines that our C-Scan system is not a candidate for de novo reclassification, it will require approval of the device for market through the PMA process. The PMA pathway is much more costly and uncertain than the 510(k) clearance process or de novo reclassification, and generally takes at least 12 to 18 months, or even longer, from the time the application is filed with FDA to ultimate approval.
We have submitted patent applications covering our technology in the United States, member states of the European Patent Organisation, Australia, Brazil, Canada, China, Hong Kong, India, Israel, Japan and South Korea. We have been granted patents for our core patent by the U.S. Patent and Trademark Office as well as from the European Patent Office, Australia, China, Hong Kong, Israel, India and Japan. We also filed patent applications describing the use of our technology in several other medical applications.
Since our formation, we have not generated any revenue. We do not anticipate generating any revenue for the foreseeable future and we do not yet have any specific launch dates for our product. We incurred net losses of $8.8 million in 2016, $12.3 million in 2015 and $610,000 in 2014. As of December 31, 2016, we had an accumulated deficit of $42.9 million and a total shareholders’ equity of $10.4 million.
Our Solution
CRC screening can reduce the incidence of and mortality from the disease by detecting polyps at an earlier, more treatable stage. CRC is one of the few cancers that can be prevented through screening because pre-cancerous polyps, from which colon cancers often develop, can be identified and removed. Today, there is a range of options for CRC screening in the average-risk population, with current technology falling into two general categories: (i) structural exams, such as optical colonoscopy (which is currently regarded as the “gold standard” for CRC screening), sigmoidoscopy, CTC and optical capsules (all of which require aggressive bowel preparation), which are invasive exams that enable physicians to visualize the colon for abnormalities; and (ii) stool and serum based tests, such as FOBTs, FITs, stool DNA, and blood tests, which test for blood in stool and irregularities in blood and DNA. Notwithstanding the many CRC screening alternatives, despite the fact that the tests are encouraged by clinicians and insurers and the clinical value of screening for CRC, a large portion of the population is still reticent to go for CRC screening and are not satisfied with the currently available alternatives.
We believe that our C-Scan system could represent a potential breakthrough in CRC screening by providing structural information on the endoluminal surface of the colon without the discomfort and embarrassment experienced by some patients undergoing a traditional optical colonoscopy and other currently available screening methods by offering the following benefits:
eliminating the need for fasting and prior bowel preparation, which would differentiate our system from every other currently available structural screening exam;
providing patients with a procedure that requires them to swallow our C-Scan Cap and small amounts of a contrast agent, thereby minimizing any disruption to their normal activities;
eliminating the need to sedate patients;
obviating the requirement for the insufflation (the forcing of air into the gastrointestinal tract) of patients; and
providing digital reporting, storage and remote consulting capabilities.
Although our C-Scan system utilizes radiation that is less than one mSv, we believe that the potential risks associated with such radiation exposure are low compared to the potential risks associated with other procedures such as perforation, bleeding or sedation related effects (optical colonoscopy and sigmoidoscopy) and dehydration and damage to kidneys. Unlike FOBTs, FITs and stool DNA tests, our capsule-based imaging modality generates structural information on the colon, which could assist in the detection of pre-cancerous polyps. We therefore do not believe that the ultra-low-dose radiation in our capsule will make our C-Scan system less attractive to physicians and patients than other less-effective products that do not employ any radiation.procedure.
We believe that gastroenterologists will adopt our technology and encouragerecommend the use of our capsule. This may increase the number of people undergoing CRC screening and may causeencourage more people with polyps to obtainundergo a polypectomy – a therapeutic procedure during which polyps are removed.
Our goal is to become a leading supplier of CRC screening technology and to establish our technology as a leading CRC screening method. Key elements of our strategy include:
obtaining CE marking for the marketing and sale of our C-Scan system in the European Union, followed by obtainingseeking to obtain regulatory approvals for the sale of our C-Scan system initially in the United States and Japan;States;
In Europe and Japan, we intend to offer our C-Scan system as an imaging and screening tool for the general population. In the United States, we may choose to first obtain regulatory clearance/approval for our C-Scan system in a screening sub-population, and after we have conducted more extensive clinical studiesenter into partnerships in the United States, we would anticipate applying to the FDA for the use of our C-Scan system as a primary screening tool;future when strategically attractive, including potentially with major medical device companies;
obtaining government and private third-party reimbursement for our technology;
improving and enhancing our existing technology portfolio and developing new technologies; and
successfully marketing our product to establish a large customer base.base, primarily in the U.S.
Our Technology
Our technology is based on an ingestible capsule (C-Scan Cap), which is swallowed by the patient and propelled by natural motility through the gastrointestinal tract. Our capsule transmits information to a receiving device (C-Scan Track) worn on the patient’s body that stores the information for off-line analysis. Our C-Scan Cap consists of an X-ray source and several X-ray detectors. The X-ray source is contained in a rotating radiation shield, enabling the generation of 360-degree angular scans. The collection of successive angular scans is intended to enable the virtual reconstruction of a portion of the colon’s inner surface. During movement of our capsule longitudinally through the colon, successive images of portions of the colon enable the three-dimensional reconstruction of the colon. Our C-Scan system is also intended to enable structural identification of polyps, masses, and colorectal cancersmasses, which protrude inward into the colon, through the detection of irregularities in the topography of the colon'scolon’s inner surface.
Our C-Scan system is intended to be prescribed to patients by physicians. Immediately prior to capsule ingestion, patients will swallow 15ml of iodinated oral contrast medium, combined with oral fiber, and continue to do so with normal daily meals in order to enhance the contrast of the colon surface. The capsule is propelled by natural motility through the gastrointestinal tract. During transit, information is transmitted to the C-Scan Track, which stores the information for off-line analysis. After our C-Scan Cap is expelled from a patient’s body, the C-Scan Track data will be downloaded into our workstation (C-Scan View) through which physicians will utilize our data viewer software application to analyze the data collected by our C-Scan system.C-Scan. Our proprietary software is being designed to process the data and produce a two and three-dimensional visualization of the colon’s inner surface. A physician will then analyze the visualization to determine whether any anatomical anomalies are present on the inner surface of the colon.
Our C-Scan system consists of the following three main subsystems that together enable the generation of high-resolution 3D imaging of the colon’s inner surface, further described below: (i) an ultra-low-dose X-ray based colon scanning capsule (C-Scan Cap); (ii) C-Scan Track; and (iii) a PC-based standalone application (C-Scan-View).
The C-Scan system enables a patient-friendly, preparation free and painless evaluation of colorectal abnormalities. Using the C-Scan system, suspicious findings that may be colorectal polyps can be identified, thus assisting the physician in deciding to elevate the patient to high risk category and refer the patient to a colonoscopy procedure. Studies have shown that the adherence of an elevated-risk patient to undergo a colonoscopy procedure is higher than that of an average risk patient.
The C-Scan system provides information for the physician, enabling him to make a “YES / NO” decision for suspected presence of polyps in the colon, based on the premise that the presence of polyps in the colon is associated with the potential development of CRC. The C-Scan system is intended to be used as a preliminary tool to assist in the detecting of subjects who are at elevated risk for polyps and thus may increase the adherence of those subjects to undergo colonoscopy.
The C-Scan system is designed to evaluate the presence of polyps, without the need for fasting and prior bowel cleansing, through identifying suspects in the human colon supported by physiological data, such as measured transit time of the capsule through the GI tract.
The C-Scan system presented in Figure 1 includes three main units, C-Scan Cap, C-Scan Track and C-Scan View. The C-Scan procedure steps are illustrated in Figure 2. The C-Scan Track is attached to the patient’s back, after which, the patient ingests the C-Scan capsule. The capsule starts moving through the patient’s gastrointestinal system until it reaches the colon where it starts scanning the colon walls and transmitting the acquired data to the C-Scan Track. Following the natural excretion of the capsule, the patient returns the C-Scan Track to enable data loading and analysis using C-Scan View. The analysis report includes an indication of either “NO- Average Risk” in cases where no suspicious findings were identified or “YES- Elevated Risk” in cases where suspicious findings were identified. An operational block diagram is presented below in Figure 4.
Figure 1: Illustration of C-Scan system units
Figure 2: Illustration of C-Scan system procedure
C-Scan Cap
C-Scan Cap is an X-ray scanning capsule, which enables detection of suspected polyps. C-Scan Cap is ingested by the patient and propelled by peristalsis, natural motility, it passes through the gastrointestinal tract and is excreted naturally, with either no need for retrieval or required retrieval of the capsule, depending on the local agency guidance.
C-Scan Cap is designed to measure, collect and transmit structural information, and is comprised of the following components:
X-ray Source – Including radioactive material sealed in a cylindrical housing.
Collimator – Radiation shield around the source, which absorbs most of the radiation. Several radial holes enable emission of radiation in defined directions.
X-ray Sensor – Comprised of several solid state X-ray detectors for measuring the scattered radiation intensity.
Tilt Sensor – Indication of capsule motion (3D acceleration).
Rotation Motor – For rotating the collimator and X-ray Source.
Compass sensor – Indication of true north (reference coordinate system).
Pressure sensor – indicating the hydrostatic pressure inside the colon.
Source Concealment Mechanism – Conceals the source inside the radiation shield.
R-T – Radio frequency transceiver device to communicate with the receiver.
Batteries – Electrical power supply for the capsule.
Memory – Data storage. The capsule should be able to store up to an hour of measured data.
C-Scan Track Coil – Transmits a continuous electromagnetic filedfield utilized by an external localization system to track 3D position.
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Figure 3: C-Scan Cap
C-Scan Track
C-Scan Track is a small, disposable system ofattached to the patient’s back via biocompatible stickers whichadhesive skin patches. C-Scan Track communicates with the C-Scan Cap and enables data download for analysis purposes. Both the C-Scan Track and C-Scan Capsule are designed to automatically track the imaging capsule’s positioningequipped with an electromagnetic capability allowing for capsule position and orientation throughoutestimations through the gastrointestinal tract transit, control the capsule scan mechanism through an embeddedC-Scan Track. A dedicated scan control algorithm or SCA, capture imaging data(SCA) identifies the C-Scan Cap’s movements in the colon and, accordingly, commands the C-Scan Cap when to perform a scan. C-Scan Track also measures the transit time from the capsule ingestion to excretion through radio frequency communication to a non-volatile memory device, and enable data retrieval, through either wired or wireless communication, to an external processor.
The C-Scan Track is comprised of the following components:
Sticker Housings – Biocompatible and water-resistant stickers and housing integrating all functional components, attached to the patient’s back, enabling approximately five days of continuous operation.
Recorder – Consists of receiver electronics embedded software and nonvolatile memory.
Antennas – Radio frequency antennas are embedded into the sticker housings and used to communicate with the capsule.
Activation/Deactivation Circuit – Used to activate/deactivate the C-Scan Track through a specialized protocol.
UI Indicators – Provides user with vocal light orand vibration indication as required.
PCB – Electronics’ printed circuit boards.
Microcontroller – Runs embedded software, logic that manages the C-Scan Track and SCA.
RF Transceivers – Several transceivers used to communicate with the capsule.
TILT/Compass Sensors – To determine the patient’s body movements.
Batteries – Electrical power supply for the C-Scan Track.
Memory – Non-volatile data storage to store data acquired by the system.
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C-Scan View
C-Scan View is a specialized, user friendly, personal computer-based software package designed to retrieve and process clinical data from the C-Scan Track and to reconstruct and produce 3D visualization of the colon’s inner surface. The C-Scan Track is comprised of the following software components:
Communication Driver Software – to communicate with the C-Scan Track and retrieve collected data following procedure completion.
Data Processing Software – to process and reconstruct clinical data into a 3D structure.
Data Display and Management Software – includes the following functions:
| ○ | 3D visualization of the reconstructed colon surface. |
| ○ | Registration of patient and capsule data and management of the patient database. |
| ○ | Report – to enable generation of clinical results report out. |
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C-Scan View
The C-Scan View software is a client/server-based application that enables procedure data download from the C-Scan Track, data analysis and report generation. The C-Scan View’s main functions are:
Load and display procedure information and data;
Image review, enabling the user to view structural information of the colon wall;
Produce procedure report; and
Store procedure results on server.
The data from the C-Scan Track is loaded and processed to create a reconstruction model of the colon wall, which is displayed in the C-Scan View as structural information of the colon wall, as well as Whole-Gut-Transit-Time (WGTT) data. The data is analyzed by a team that includes expert analysts, who review the structural information to identify suspicious findings that are protruding or bulging on the colon wall. The analysts consider capsule’s WGTT as part of the analysis process. The gastroenterology physician reviews the analysis in the C-Scan View and generates the final report as to whether the patient is assessed to be at average or at elevated risk, determined through a combined analysis consisting of both structural analysis and transit time analyses.
Figure 4: Conceptual block-diagram of the C-Scan system
C-Scan System Non-Clinical Pre-Clinical and Clinical History
We have developed and validated our capsule-based imaging modality for providing structural information on colonic polypoid lesions and masses for CRC screening. Below is a summary of the validation tests carried out by us in the laboratory, in phantoms, animals and humans, which were designed to evaluate this new imaging modality’s performance and potential clinical value.
Non-Clinical and Pre-Clinical Testing
Imaging Performance Testing
The C-Scan Cap transmits data as it transits the colon. This data consists of imaged slices perpendicular to the capsule’s longitudinal axis; slices are then reconstructed by the C-Scan View to produce 2D and 3D images of the inner surface of the colon. Following are performance measurements of the capsule imaging.
••Modulation Transfer Function, or MTF. The capsule was moved along a longitudinal-edge phantom setup in 3mm steps. The figure below shows a typical raw signal after filtering for peak detection. The same test was carried out using an angular-edge phantom setup, which demonstrated similar results to those shown below. These tests do not take into account noise characteristics.
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For each position of the capsule in the phantom, the mean signal intensity (peak) was measured, the result of which is shown in the right figure below. Resulting line spread function, or LSF, which is the differential of the curve in the left figure below.
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The graphs above demonstrate that the existing design of our C-Scan system can detect objects of approximately 2-3mm when noise is not taken into account.
•●Resolution Limit: Estimation of the Smallest Visible Object Size.In order to estimate the size of the smallest visible object, both spatial resolution and noise characteristics must be taken into account. The graph below presents the estimated MTF of our C-Scan system.C-Scan. Noise analysis indicates MTF 1/3 for minimum visibility, which demonstrates that the smallest visible object that can be detected with the existing design of our C-Scan system (in the conditions used, which included a colon diameter of 30mm) is of approximately 5-6 mm (see graph below).
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Image Reconstruction
Two main characteristics of our C-Scan system contribute to the image reconstruction performance:
The number of photons hitting the detector per time frame.
The angular spread of the photon beam coming out of the capsule collimator.
Based on the laboratory tests performed with thea previous version of our C-Scan, system, polyps of 6 mm and larger should be visible and 10 mm polyps and larger are expected to be detected at highhigher sensitivity. To further enhance the visibility of 6 mm - 9 mm polyps, a new design of the collimator was successfully incorporated and tested in a prototype version of our advanced C-Scan Cap whichthat is expected to enable 2.51.5 times the number of photons to be detected by the detectors, allowing the implementation of an image enhancementour recently enhanced algorithm which is expected to improve the imaging performance.
Animal Testing and Tissue Equivalent Phantom Image Reconstruction
The physics of our imaging modality was tested in the laboratory on phantoms with tissue equivalent material and in animals to ensure that laboratory conditions mimic real life clinical scenarios.
Following the initial proof of concept, we performed a series of studies in order to evaluate the feasibility and preliminary safety of our technology. All studies were performed in pigs ranging from 60 to 90 kg. Pigs, which are commonly used in gastrointestinal studies, were selected as the animal model for preliminary evaluation of our C-Scan system based on the resemblance of the porcine colon size and morphology to the human colon. However, there are marked differences between the colon of pigs and that of humans. The pig colon is much longer and ashas a larger diameter, in addition to other anatomical differences. In the pig model, the pressure waves of peristalsis are believed to be more frequent and shorter than in humans. As a result, we believe that colon content movement is substantially slower and more frequent in pigs than in humans. In these studies, we did not intend to collect statistically significant data; hence, the tests were repeated a limited number of times until adequate data was collected.
The first test was performed to demonstrate imaging proof-of-concept using a wired C-Scan system.C-Scan. This technology included all the basic features intended to be included in the clinical C-Scan, system, but on a larger scale due to the use of off-the-shelf components. The subsequent studies used versions of the C-Scan system that integrated most of the imaging components, software and electronics of the C-Scan system that we used with humans. Since off-the-shelf components were used, the animal capsules were larger and heavier than the version of our C-Scan system that are used clinically.
Raw data from an animal colon showing a decrease in X-ray florescence, or XRF, photon signals and an increase in Compton backscattering, or CMT, signals corresponding to the position of a polyp that was detected when our C-Scan Cap passed over the polyp is shown in the image below. These two signals are combined in order to form a three dimensional image below.
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The animal studies conducted to date demonstrate that our technology provides sufficient resolution, in these studies, for the detection of 10 mm polyps which is the size of clinically significant polyps. The animal studies also demonstrated that 5 mm polyps can be detected, though with lower resolution than 10 mm polyps in the first animal capsule. Animal health was maintained throughout the studies. No adverse effects related to passage of our capsule were noted.
The capsules evaluated in the animal studies were significantly larger than the capsules that we are using with humans. The differences in anatomy, physiology, and capsules may have several effects on the data compared to use in the human population. Motility of the capsules through the digestive C-Scan system was slow due to the specific shape of the porcine gastrointestinal tract. In addition, because of the size of the capsule, it was retained in the stomach for many hours and even days. Accordingly, the animal model required that normal ingestion be replaced by direct insertion of the capsule into the small bowel. In order to simplify the development and animal testing, we used Tungsten radiation source with long half-life (120 days).
Following the success of the animal testing, a series of in-vitro tests were conducted to simulate different clinical scenarios in the laboratory using a miniaturized human capsule. Polyps were created and reconstruction of the laboratory phantoms with a human capsule was generated to assess the ability to detect polyps as the capsule advances in the colon. The in-vitro tests demonstrated the imaging capabilities of our imaging technology. Below is the reconstruction of a laboratory phantom image.
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Polyp Detection Analysis
Laboratory tests were carried out to estimate the capsule’s ability to detect polyps in phantoms and demonstrate sensitivity and specificity of such detection. Below is an example of the reconstruction of a scan composed of three slices: XRF, CMT and a fused (combined) image.
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Receiver Operating Characteristics
Standard receiver operating characteristics, or ROC, curves were generated from phantom data with 8 mm polyp in a 30 mm barrel phantom with 3% iodine concentration mimicking the colon contents. CMT, XRF and fused (combined) data were analyzed based on 2D slices that were generated and standard deviation indicator. There were a few cases where the noise in the phantoms was high enough to generate polyp false positive condition separately for each data type, especially in CMT. However, fusion of CMT and XRF data contributed to noise reduction and enabled to demonstrate 100% true positive and 0% false positive.
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Clinical Trials
We initiated our first clinical study at University Hospital, Hamburg, Germany in 2010. The purpose of this study was to monitor and record the colon contractions and the associated motility of the capsule in the colon. This study was conducted with a passive capsule that contained no X-ray source or detectors. It included several electronic components of the C-Scan system and had similar dimensions to the current capsule. 63 healthy volunteers were enrolled and no adverse events were reported.
We completed a limited, single-center, feasibility study at Rambam Medical Center, Haifa, Israel to assess the motility of a non-scanning capsule in healthy subjects. The objective of the study was optimizing the daily routine of the subjects in order to shorten the transit time of our capsule. 15 subjects participated and swallowed a capsule with the same weight and dimensions as our current C-Scan capsule. No adverse events were reported and all capsules were retrieved. A structured daily routine determined the timing of the following: capsule ingestion, the subjects’ daily meals, the contrast agent ingestion and one evening dose of 10 mg of Bisacodyl, and all subjects continued their regular active lifestyles (such as work and exercise). The average transit time of the capsule in the 15 subjects was approximately 38 ± 19 hours, which is comparable to the average transit time of our capsule in subjects participating in the multi-center feasibility study, in which the participants do not ingest a daily dose of Bisacodyl, and participants are released to their homes and continue their regular lifestyles during the study.
A 10 subject clinical proof-of-concept study, conducted at Tel Aviv Sourasky Medical Center in Israel and using a prior version of our C-Scan, system, did not identify any material safety or feasibility issues. The study demonstrated the applicability of our C-Scan system to the human colon, generating images of the colon without any prior bowel preparation. All subjects ingested the capsule easily with smooth passage within the designated transit time, on average, within 48-72 hours. There were no reported device-related adverse events. Mild effects on bowel movements were noted, which were determined to be related to the contrast agent and passed within one to two days after the capsule excretion. Estimated total radiation exposure was calculated using standard established factors for calculating effective radiation exposure, such as the duration of the capsule inside the body, and was based on the activity of the radiation source inside the C-Scan Cap and radiation energy, both of which were measured for each case study. The average calculated exposure for the entire procedure in the 10-case study, from ingestion of the capsule to excretion, was 0.03 mSv (STD 0.007 mSv). This level of radiation exposure is similar to a single chest X-ray (approximately 0.06mSv) and two orders of magnitude less than a CTC.
The 10-subject study constituted the initial phase of a multi-center, prospective clinical feasibility study to establish the safety, functionality and preliminary efficacy of our C-Scan system in patients eligible for CRC screening, by comparing results from the clinical feasibility study with those from non-invasive, low-sensitivity FOBTs and FITs, as well as from optical colonoscopies. The feasibility study has been designed to allow for the recruitment of 100 subjects. The study is beingwas conducted at multiple centers in Israel, with the potential to be conducted at a single site in the Netherlands.Israel. The clinical feasibility study willwas used to evaluate the image resolution generated by the capsule in a human colon without cathartic preparation, will assess polyp imaging in various shapes and in different segments of the colon, and will evaluateevaluated the safety of the device in terms of total and segmental transit time and analyze the effects of the presence of polyps and variable colon dimensions on these parameters. The study will also seek to create a clinical atlas of images that will enable comparisons between images acquired by different CRC screening modalities. During the feasibility study we will collectcollected data regarding the overall imaging of the colon’s internal surfaces during the passage of the capsule to support the development of a correlation map of polyps identified through our imaging system with polyps imaged by optical colonoscopy and CTC. Additionally, the feasibility study will measureallowed for the measurement of total radiation exposure and the distribution of contrast material within the colon.
Analysis conducted on the first 66 capsules swallowed by participants enrolled in the multi-center, prospective clinical feasibility study showed that 65 of 66 capsules swallowed were naturally eliminated, without major or minor side effects, after 62±40.7 hours. The average calculated radiation exposure was 0.06 ± 0.04 mSv (similar to a single chest radiograph). Image reconstructions allowed 2D/3D views of the colonic wall and lumen with the typical contour of different segments (hepatic flexure, triangular shape of the transverse colon). Both pedunculated and sessile polyps were detected in several patients and validated later by colonoscopy.
In the first quarter ofSeptember 2017, we initiated enrollment incompleted a multi-center study of the C-Scan system in support of CE Mark submission. ThisThe objective of the study was to assess safety and the clinical performance of C-Scan in detecting patients with polyps. The three-center trial enrolled 66 patients, with a mean age of 59 years. Following capsule ingestion, subjects swallowed small doses of contrast agent and fiber supplements with each meal throughout capsule passage. Average capsule transit time was 52±32 hours, and the average total X-ray dose was 0.05 mSv (CT colonography effective dose is ~ 6.0 mSv). No bowel preparation, sedation, or change in diet was required. Both confirmatory colonoscopy, performed by an independent investigator, and C-Scan review, performed by a central review group, were blinded to results. The study demonstrated a 44% sensitivity in the 45 subjects included in the analysis for polyps, with specificity (ability to correctly identify lack of polyps) of 89%. Sensitivity strongly correlated (R-squared = 0.98) to the percentage of the colon scanned. Sensitivity was 78% (p<0.05) and 100% (p<0.05) for subjects where greater than 50% and 70% of the colon was scanned, respectively. Specificity was consistent for all subjects.
In the fourth quarter of 2017, we initiated an interim clinical study for the purpose of introducing an advanced C-Scan version, Version 3, which incorporated the then latest algorithms and system optimization and tailored scanning of the colon to the patient’s natural colonic movements to maximize the amount of the colon that is tracked and imaged. In March 2018, we announced results from the interim study. Evaluable results of 21 patients showed average colon imaging coverage of 64%, a 40% improvement over 46% average colon imaging coverage in the multi-center study. Sensitivity was 78% (p<0.05) for subjects with greater than 50% colon imaging coverage and 100% (p<0.05) for subjects with greater than 70% colon imaging coverage. Specificity was consistent at around 89%.
During the first quarter of 2018, we initiated a multi-center, open label, home monitoring, prospective study designed to demonstratedetermine the safetyperformance characteristics of C-Scan Version 3, for detecting pre-cancerous polyps compared with the fecal immunochemical test (FIT), in each case using colonoscopy as the reference method, for the purpose of collecting additional evidence of clinical effectiveness and clinical performanceutility to support market adoption. The study included 90 evaluable patients who either had known polyps or were considered to be of average risk. Each patient ingested a C-Scan capsule and also underwent a FIT and a comparative colonoscopy performed by independent gastroenterologists, who were blinded to the corresponding test’s results. The C-Scan clinical evaluation was obtained using the evaluable patient population implementing a gender-based motility analysis and the results of both C-Scan and FIT were compared to colonoscopy. The primary efficacy endpoint of the study was sensitivity (ability to correctly identify patients with polyps) and specificity (ability to correctly identify patients with lack of polyps) of the C-Scan system willcompared to FIT in detecting subjects with polyps ≥10 mm. In July 2019, we announced final results from our post-CE approval study. The results demonstrate that C-Scan achieved a sensitivity of 76% (p=0.0005) in patients with polyps ≥10 mm, while FIT achieved a sensitivity of 29% (p=0.005) in patients with polyps ≥10 mm. C-Scan achieved a specificity of 82% in all patients, while FIT achieved a specificity of 96% in all patients. In addition, C-Scan detected all 4 patients (100%) with polyps ≥40 mm, while the FIT detected only 1 of the 4 patients (25%) with polyps ≥40mm. Overall, C-Scan achieved a sensitivity of 66% (p=0.01) in all patients, including patients with polyps <10mm, while FIT achieved a sensitivity of 23% (p<0.0001) in all patients, including patients with polyps <10mm. In total, 142 patients enrolled in the study and after factoring in technical and physiological dropouts and protocol violations, the number of evaluable patients was 90. No serious adverse events were reported, and the adverse events were mild in severity.
In December 2018, we received from the FDA conditional approval of our IDE application to initiate a U.S. pilot study of the C-Scan Version 3 and received final approval from the FDA in February 2019. In April 2019, we initiated the U.S. pilot study of C-Scan. The U.S. pilot study (NCT03735407 ) was a prospective, multi-center, open label, single arm study was designed to evaluate polyp detectionthe safety, usability and subject compliance of the C-Scan. The study included 28 evaluable patients, more than two thirds of whom were considered to be of average risk for colorectal cancer. Each patient ingested a C-Scan capsule and also underwent a fecal immunochemical test (FIT) as well as a comparative colonoscopy, which was performed by an independent gastroenterologist who was blinded to the corresponding test results. The study was performed at two sites, the NYU Grossman School of Medicine and Mayo Clinic, Rochester. The primary endpoint of the study was to evaluate the incidence of device or procedure related serious adverse events. Secondary endpoints included patient compliance, subject satisfaction and device and procedure related performance. Due to sample size, the study was not designed to be powered for statistical significance. In December 2019, we announced the results of the study. No device or procedure related serious adverse events (SAEs) were reported and all device or procedure related adverse events were mild in severity. In total, 45 patients enrolled in the study, of which 40 patients underwent the study procedure. All 40 patients complied with the procedure and completed a questionnaire following the procedure and reported higher satisfaction with C-Scan procedure compared to colonoscopy. A total of 28 patients were evaluable after factoring in technical and physiological dropouts and protocol violations. Analysis of the evaluable patient results revealed agreement between C-Scan and colonoscopy in detection of polyps was consistent with data from the post-CE approval study.
In preparation for the planned pivotal study, that we expect to initiate in late 2021, we continue to optimize the functionality and patient experience of our advanced version of C-Scan, which incorporates mainly advanced algorithms, improved detection and reduced energy consumption, through additional clinical data collection at Israel sites. To this end, we have finalized a clinical trial protocol for a study in Israel and identified over 10 clinical trial sites to enroll up to 250 average risk patients.
In November 2020, we finalized our proposed pivotal design and submitted our IDE application to the FDA and in March 2021, our IDE was approved.
Research and Development
Our research and development strategy is centered on developing our C-Scan system.C-Scan. Our research and development team is located at our facilities in Isfiya, Israel, and consists of 51 employees54 individuals employed on a full-time basis and independent contractors3 individuals on a part-time basis as of FebruaryMarch 15, 2017 and is supported by highly experienced consultants.2021.
We have received grants from the Government of the State of Israel through NATIthe IIA (formerly known as the OCS) for the financing of a portion of our research and development expenditures and a portion of our expenditures relating to our transition to manufacturing pursuant to the ResearchInnovation Law and related regulations and guidelines. As of December 31, 2016,2020, we had received funding from NATIthe IIA in the aggregate amount of $5.1approximately $5.6 million and had a contingent obligation to NATIthe IIA in the amount of $5.3approximately $6.1 million. As of December 31, 2016,2020, we had not paid any royalties to NATI.the IIA. In January 2021, we received an additional IIA grant to support the funding of our transition from research and development to manufacturing in the amount of up to $750,000 (along with a co-investment by us of the same amount), subject to the terms and conditions set forth in the grant approval, of which we received approximately $260,000 in January 2021. We may apply for additional NATIIIA grants in the future. However, as the funds available for NATI grants out of the annual budget of the State of Israel have been reducedfuture; however, there is no assurance that such applications will be approved in the past and may be further reduced in the future, weamount requested or at all. We cannot predict whether we will be entitled to any future grants, or the amounts of any such grants.
We incurred approximately $5.5$10.0 million, $5.8$10.5 million and $2.8$7.6 million in research and development expenses, net (after deducting participation by others and government grants) for the years ended December 31, 2016, 20152020, 2019 and 2014,2018, respectively. For additional information, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Financial Operations Overview—Research and Development Expenses, Net.”
Intellectual Property
An important part of our competitive strategy is to seek, when appropriate, protection for our products and proprietary technology through a combination of U.S. and foreign patents, trademarks, trade secrets and non-disclosure and confidentiality, assignment of invention and other contractual arrangements with our employees, consultants and suppliers. These measures, however, may not be adequate to protect our technology from unauthorized disclosure, third-party infringement or misappropriation as these parties may breach these agreements, and we may not have adequate remedies for any such breach. We intend to prosecute and defend our proprietary technology. The primary test for patent protection eligibility includes novelty, non-obviousness and usefulness.
We submit applications under the Patent Cooperation Treaty, or PCT, which is an international patent law treaty that provides a unified procedure for filing a single initial patent application to seek patent protection for an invention simultaneously in each of the member states. Although a PCT application is not itself examined and cannot issue as a patent, it allows the applicant to seek protection in any of the member states through national-phase applications.
As of December 31, 2016,2020, we had 2346 granted patents (not including separate validations in Europe), 2 allowed patent application and 3717 pending patent applications worldwide relating to various elements and functions of our products and related enhancements. We have submitted patent applications covering our technology in the United States, member states of the European Patent Organisation, Australia, Brazil, Canada, China, Hong Kong, India, Israel, Japan and South Korea. We have received patent grants for our core patent by the United States Patent and Trademark Office as well as from the European Patent Office, Australia, China, Hong Kong, Israel, India, Canada, South Korea and Japan. We also filed patent applications describing the use of our technology in several other medical applications.
Our registered U.S. Patent Number 7,787,926 discloses an ingestible capsule with a radiation source and radiation detectors that, when used in conjunction with a radio opaque contrast agent, is adapted to detect clinically relevant findings in the colon. Utilizing X-ray fluorescence and Compton back scatterings, the capsule is able to measure the distance between the capsule and the colon wall and to distinguish between gas, intestinal contents, and clinically significant findings in the gastrointestinal tract. If the appropriate maintenance, renewal, annuity or other governmental fees are paid, the non-extended patent term for this patent will expire on August 28, 2026.
A second PCT patent application (PCT/IL2008/000163), which is pending in several countries in the national-phase and granted in Europe, Israel, United States, Australia, India, China, Canada and Hong Kong, discloses additional features such as a rotating collimator and improved scanning mechanisms, the capability to determine tissue density to differentiate between different types of polyps, as well as the capability to determine capsule movement in the colon. If the appropriate maintenance, renewal, annuity or other governmental fees are paid, the non-extended patent term for all national phases will expire on February 6, 2028, other than the U.S. patent that will expire on April 4, 2030.
Another PCT application (PCT/IL2011/000462), which is pending in several countriesBrazil in the PCT national-phase and granted in Europe, Israel, United States, Canada, Australia and South Korea, discloses a number of alternate fail safe concealment mechanisms that can be utilized in the capsule to ensure that the X-ray source is blocked when the capsule is not scanning and is open when it is scanning, allowing the capsule to image the colon. The fail-safe feature ensures that in the event of power failure, the radiation source is blocked and X-rays do not escape. RecentlyIf the application filed in Australia has been granted andappropriate maintenance, renewal, annuity or other governmental fees are paid, the application filed in Europe has been allowed.non-extended patent term for all national phases will expire on June 9, 2031, other than the U.S. patent that will expire on July 5, 2032.
In another PCT patent application (PCT/IL2008/000765), which was granted in the United States, Europe, Israel and Japan, we disclose an imaging catheter that utilizes X-ray fluorescence, Compton back scattering and electron back scattering. The imaging catheter is designed for use in cardiac applications as well as intra-operative imaging applications such as imaging inside blood vessels where optical imaging cannot be performed because of obscuring circumstances. If the appropriate maintenance, renewal, annuity or other governmental fees are paid, the non-extended patent term for all national phases will expire on June 4, 2028, other than the U.S. patent that will expire on July 28, 2028.
While our policy is to obtain patents by application, to maintain trade secrets and to seek to operate without infringing on the intellectual property rights of third parties, technologies related to our business have been rapidly developing in recent years. Additionally, patent applications that we may file may not result in the issuance of patents, and our issued patents and any issued patents that we may receive in the future may be challenged, invalidated or circumvented. For example, we cannot predict the extent of claims that may be allowed or enforced in our patents nor be certain of the priority of inventions covered by pending third-party patent applications. If third parties prepare and file patent applications that also claim technology or therapeutics to which we have rights, we may have to partake in proceedings to determine priority of invention, which could result in substantial costs to us, even if the eventual outcome is favorable to us. Moreover, because of the extensive time required for clinical development and regulatory review of a product we may develop, it is possible that, before our C-Scan system can be commercialized, related patents will have expired or will expire a short period following commercialization, thereby reducing the advantage of such patent. Loss or invalidation of certain of our patents, or a finding of unenforceability or limited scope of certain of our intellectual property, could have a material adverse effect on us. See “Item 3D “Key Information - Information—Risk Factors—Risks Related to Our Intellectual Property.”
In addition to patent protection, we rely on trade secrets, including unpatented know-how, technology innovation, drawings, technical specifications and other proprietary. We also rely on protection available under trademark laws, and hold the following registered trademarks for the “CHECK-CAP” and “C-Scan” marks and design logos in the United States and Europe. Applications for additional marksHong Kong: “CHECK CAP”, CHECK CAP (logo), “C-Scan” and design logosC-Scan (logo) and the following registered trademarks in the European Union: CHECK CAP (logo), “C-Scan” and C-Scan (logo), and the following trademark applications are pending in China: “CHECK CAP”, CHECK CAP (logo), “C-Scan” and C-Scan (logo).
In March 2021, we entered into an exclusive license agreement with the United States and Europe.University of Missouri with respect to certain patents held by the University of Missouri that the University of Missouri claimed included background intellectual property in C-Scan. In consideration for the grant of an exclusive license to those patents in the medical field, we agreed to pay royalties ranging from $0.30 to $5.00 per C-Scan unit depending on the number of units sold up to $15,000,000 in the aggregate.
Competition
Competition for our C-Scan system comes from traditional well-entrenched manufacturers of tests and equipment for CRC screening, such as colonoscopy, sigmoidoscopy, CTC, optical capsule endoscopy, FOBTs and FITs. The principal manufacturers of equipment for optical colonoscopy and sigmoidoscopy include Olympus, Pentax, Hoya and Fuji Film. The principal manufacturers of equipment for CTC include General Electric Healthcare Systems, Siemens Medical Solutions, Philips Medical Systems Ltd. and Toshiba Corporation. The principal manufacturemanufacturer of equipment for optical capsule endoscopy includes Medtronic plc. All of these companies have substantially greater financial resources than we do, and they have established reputations as well as worldwide distribution channels for providing medical instruments to physicians.
SeveralAdditional competition comes from several companies that have developed or are developing non-invasive technologies based on stool, serum, or molecular diagnostics (from blood and other bodily fluids), or MDx, tests that are used primarily to indicate the presence of CRC and polyps in the colon.or advanced adenomas through associated markers. These companies include Polymedco, Exact Sciences, Epigenomics AG, Gene News, EDP Biotech Corporation, Illumina, Inc., Quest Diagnostics VolitionRx Nu.Q diagnostic, Freenome and Epigenomics AG.Grail. In August 2018, Exact Sciences announced that it entered into a U.S. promotion agreement with Pfizer for the promotion of Cologuard ®, a non-invasive stool DNA screening test for colorectal cancer. During the past years, there has been an extensive effort in utilization of molecular biology and advanced computational techniques to develop methods capable to identify cell-free cancer biomarkers. These advancements are greatly supported by large capital investments due to their promising claims to defeat cancer at its early stages.
Procedures for bowel cleansing that are less onerous are constantly being developed, which could make our entry into the market more difficult. For instance, bowel cleansing initiated by the ingestion of pills or food-substitute diet regimes rather than through drinking large amounts of distasteful liquids may be viewed as an improvement to the cleansing process, but other screening methods may be even more palatable to patients.
Sales and Marketing
Our goal is to establish our position as a leading player in the CRC screening market. Although we do not currently generate revenues, we expect to generate revenues through sales of our C-Scan system following demonstration of acceptable clinical safety and effectiveness and obtaining required regulatory approvals and licensures.
Because we are still in the clinical and development stage, we are subject to certain challenges, including, among others, that:
our technology has been tested on a limited basis and therefore we cannot assure the product’s clinical value;
we need to receivefollowing the receipt of CE Mark of conformity to protection standards for sale of the C-Scan system in the European Union, we may need to obtain additional regulatory approvals in certain local jurisdictions in the European Union before we can commence marketing and sale of C-Scan and will need to obtain the requisite regulatory approvals in the United States, Japan and other markets where we plan to focus our commercialization efforts;
we need to raise an amount of capital sufficient to complete the development of our technology, obtain the requisite regulatory approvals and commercialize our current and future products;
we need to obtain reimbursement coverage from third-party payors for procedures using our C-Scan system;C-Scan;
we need to increasescale-up our manufacturing capabilities;capabilities of C-Scan in commercial quantities at an adequate quality and at an acceptable cost; and
we need to establish and expand our user base while competing against other sellers of capsule endoscopy systems as well as other current and future CRC screening technologies and methods.
Our ability to operate our business and achieve our goals and strategies is subject to numerous risks as described more fully in “Risk Factors.”
SubjectOur primary corporate objective is obtaining the U.S. clearance/approval for C-Scan. However, in parallel we are evaluating whether to commence pilot sales in Israel and Europe subject to our receipt ofprogress in obtaining the regulatory approvals,approval in the U.S., approval under MDR in Europe and associated approval in Israel (AMAR), available capital and engagement with strategic partners, we expect to commercialize our C-Scan system during 2018 in selected markets in Europe. We intend to target major markets in Europe.partners. In these markets, we are planning to work with strategic partners and/or local distributors who are active in the gastroenterology field and who have already demonstrated excellent performance in introducing new and innovative technologies.
In Europe, and Japan, we intend to offer our C-Scan system as an imaging and screening tool for the general population. In the United States, we may choose to first obtain regulatory clearance/approval for our C-Scan system in a screening sub-population, and after we have conducted more extensive clinical studies supported by compelling evidence in the United States, we would anticipate applying to the FDA for the use of our C-Scan system as a primary screening tool.
Subject to the successful completion of our clinical trials and the receipt of our initial FDA clearance/approval, we expect to launch the product in the U.S. market, where we will consider settingto either set up our own sales force or aligningalign with a strategic partner. Initially, we are planning to sell ouranticipate selling C-Scan system to the private sector. Simultaneously,We are currently building our strategy for reimbursement and we willplan to work intensively to obtain reimbursement by Medicare and private insurers within the shortest possible time frame.
Subject to local regulatory approval, we also intend at a later stage to market our C-Scan system in key markets in Asia. Initial efforts will focusare expected in Japan, in view of its developed CRC screening market.
Manufacturing and Suppliers
Our manufacturing operations are conducted at a facility located in Isfiya, Israel. We leasePrior to January 26, 2021, we leased approximately 900 square meters at this facility under a lease agreement expiringscheduled to expire on May 31, 2022. On January 26, 2021, we entered into a new lease agreement, as amended, according to which effective as of April 1, 2021, the existing lease agreement shall terminate and we shall lease approximately 1,550 square meters at the same facility located in Isfiya, Israel. The new lease agreement expires on December 31, 2023, and we have an option to extend the agreement for an additional period of three years. We have the right to terminate the new lease agreement at any time, upon asat least 60 days prior written notice.
We currently have sufficient space to manufacture our C-Scan system for the clinical studies, but have limited resources facilities and experiencefacilities in commercially manufacturing large quantities of our C-Scan system, external receiver and software applicationC-Scan View to meet the demand we expect fromfor our expandedfuture commercialization efforts. We have faced and expect to face certain technical challenges as we increase manufacturing capacity, including, among others, logistics associated with the handling of radioactive materials, equipment design and automation, material procurement, lower than expected yields and increased scrap costs, as well as challenges related to maintaining quality control and assurance standards.standards, while maintaining commercially efficient pricing for C-Scan. Our production objective is to establish a scalable capacity in order to meet such expanded demand for our C-Scan system and market expansion. If we are unable to scale up our manufacturing capabilities to meet our clinical trials needs and future market demand, our growth could be limited and our business, financial condition and results of operations could be materially adversely affected.
We are continuing to upgrade and expand our production system and capacity and developing supply chain systems to support production for clinical trials and to meet standards for CE marking. Our current capacity was built to accommodate our clinical phase.trials. We have integrated a product life management system to enable overall life cycle tracking and documentation including full configuration management control and manufacturing documentation.
During the clinical testing phase in Europe, we are planning to conduct both the assembling of our C-Scan system and the insertion of the X-ray source at our facilities. 63
In July 2016, we entered into an agreement with GE Healthcare to develop and demonstrate proof of principle of the process for high-volume manufacturing for the production of the X-ray source and its assembly into our C-Scan capsule. SubjectThe agreement was amended in November 2017 in order to successfulfurther our manufacturing collaboration with GE Healthcare. The agreement involves GE’s final assembly, packaging and shipping of C-Scan capsules. We supplied GE Healthcare with supporting calibration and final assembly methodology and equipment and in August 2019, we announced the completion of manufacturing line transfer implementation and qualification for C-Scan operated by GE Healthcare, primarily to enable the availability of C-Scan for U.S. clinical trials.
In January 2021, we received an additional IIA grant to support the funding of our transition from research and we may discuss a collaborationdevelopment to manufacturing in the amount of up to $750,000, including for the purpose of the establishment of our own X-Ray source manufacturing line in Israel, which currently is produced by a high-volume manufacturing facility and the distribution of the C-Scan system.single source supplier.
We do not currently have any sales. We are planning to develop a scale-up plan to meet our expected commercial supply needs. We are also working on a plan to expand our manufacturing capacity to support the expected larger clinical volume and subsequent higher volumes expected in the early commercialization stage. We are considering, among other options,exploring whether certain components of C-Scan can be assembled outside of Israel. In preparation for commercialization in the expansion ofU.S., we are continuing to explore whether it would be possible to assemble the capsule without the X-ray source in Israel, and have the X-ray source subsequently assembled into C-Scan at a certified radioisotope manufacturer site or at a distribution center outside Israel. In addition, we are expanding our assembly line in Israel and are considering, among other options, the buildup of new assembly lines in the United States and Europe, and obtaining alternative sources for the key capsule components (such as the motor, X-ray detectors, electrical components and PCBs). All of the facilities in which manufacturing and assembly of our products will be conducted will need to comply with applicable regulations and standards for medical devices.
We have received grants from Government of the State of Israel through NATIthe IIA (formerly known as the OCS) for the financing of a portion of our research and development expenditures and a portion of our expenditures relating to our transition to manufacturing, pursuant to the ResearchInnovation Law and related regulations and guidelines. Under theThe terms of the Research Law as currently in effect,IIA grants subject us to certain restrictions relating to the transfer of the manufacturing of IIA-funded products developed with NATI grants are required to be manufactured inoutside Israel and the technology developed thereunder may not be transferred outsidetransfer of Israel (including by way of license), unless prior approval is received from NATI, which we may not receive (and any such approval would be subject to increased royalty repayment rates and increased royalties). We are currently considering whether it would be possible to assemble the capsule without the X-ray source in Israel, and have the X-ray source subsequently assembled into our C-Scan system at a reactor or cyclotron site or at a distribution centerIIA-funded know-how outside Israel. Even following the full repayment of any NATIIIA grants, we must nevertheless continue to comply with the requirements of the ResearchInnovation Law and regulations and guidelines thereunder. The foregoing restrictions may impair our ability to outsource or transfer development or manufacturing activities with respect to any product or technology outside of Israel. A significant amendment to the Research Law entered into effect on January 1, 2016, under which NATI, a statutory government corporation, was established and replaced the OCS. Under such amendment, NATI is authorized to establish rules concerning the ownership and exploitation of NATI-funded know-how (including with respect to restrictions on transfer of manufacturing activities and NATI-funded know-how outside of Israel, which may differ from the restrictive laws, regulations and guidelines as currently in effect (and which shall remain in effect until such rules have been established by NATI). See “Risk“Risk Factors – Risks Related to Our Operations in Israel.Israel – Pursuant to the terms of the Israeli government grants we received for research and development expenditures and expenditures relating to our transition to manufacturing program, we are obligated to pay certain royalties on our revenues to the Israeli government. The terms of the grants require us to satisfy specified conditions and to make additional payments in addition to repayment of the grants upon certain events.”
We currently depend on single source suppliers for some of the components necessary for the production of our C-Scan system.C-Scan. For example, for the current version of the C-Scan system used in clinical trials, we currently have a single supplier for the motor used to rotate the collimated X-ray source in our C-Scan, systemfor the customized X-ray detectors and for each of the specially designed X-ray detectors, X-ray source and batteries used in our C-Scan system.C-Scan. There areis a limited number of manufacturers worldwide who are capable of manufacturing the motor, the customized X-ray detectors, the X-ray source and the specially designed X-ray detectors and X-ray sourcebatteries that we currently use in our C-Scan system.C-Scan. In addition, the ASIC residing in our C-Scan system is currently manufactured for us by a single FAB. However, there are many alternative FABs worldwide and the design of our current ASIC could be adapted in the event it became necessary to use an alternative FAB. Furthermore, we do not currently have written contracts with anymost of such suppliers. While our current suppliers have been able to supply the required quantities of such components to date, if the supply of these components is disrupted or terminated or if our current suppliers are unable to supply required quantities of components, we may not be able to find alternative sources for these key components in a timely manner. Although we are planning to maintain strategic inventory of key components, the inventory may not be sufficient to satisfy the demand for our C-Scan system if such supply is interrupted, or subject to risk of loss due to catastrophic events such as a fire at our storage facility. In addition, to partially mitigate the risks of reliance on single source suppliers, we are seeking alternate manufacturers for some of our components which requires us to dedicate significant resources and investment. There can be no assurance that we will be successful in seeking alternate suppliers or establish our own production line. As a result of the foregoing, we may be unable to meet our clinical trials timelines and to meet the demand for our C-Scan, system, which could harm our ability to generate revenues, lead to customer dissatisfaction and damage our reputation. If we are required to change the manufacturersupplier of any of these key components, there may be a significant delay in locating a suitable alternative manufacturer. In addition, we may be required to verify that the new manufacturer maintains facilities and procedures that comply with FDA and other applicable quality standards and with all applicable regulations and guidelines. For example, our agreement with the supplier of the X-ray source used in C-Scan terminates on December 31, 2021, and we intend to establish our own production line for our X-ray source in Israel as an alternative, however, we cannot assure you that we will succeed in establishing our in house production line in Israel or abroad and we may be required to find an alternative source for the X-ray source, which we may not be able to do in a timely manner. The delays associated with the identificationintroduction of a new manufacturer for certain key components, could delay our ability to manufacture our C-Scan system in a timely manner or within budget. Furthermore, in the event that the manufacturer of a key component of our C-Scan system ceases operations or otherwise ceases to do business with us, we may not have access to the information necessary to enable anotheran alternative supplier to manufacture the component. The occurrence of any of these events could harm our ability to meet demand for our C-Scan system in a timely manner or within budget.
Environmental Health and Safety Matters
We are subject to environmental health and safety laws and regulations in Israel, governing, among other things, the use of radioactive materials, including the Israeli Radioactive Elements and their Products, Regulation, 1980, the Israeli Work Safety Regulations (Occupational Safety and Health of Ionizing Radiation Practitioners) 1992-5753 and Women Employment Regulations (Work with Ionizing Radiation), 1979-5739. Our current research and development activities require, and our currently contemplated commercial activities will require, permits from various governmental authorities including, Israel’s Ministry of Environmental Protection, Israel’s Ministry of Health and, local municipal authorities.authorities and the NRC and Agreement State regulators. Failure to obtain or maintain any such permits could have a material adverse effect on our business, financial condition and results of operations. The Ministry of Environmental Protection and the Ministry of Health conduct from time to time periodic inspections in order to review and ensure our compliance with the various regulations.
These laws, regulations and permits could potentially require expenditure by us for compliance or remediation. If we fail to comply with such laws, regulations or permits, we may be subject to fines and other civil, administrative or criminal sanctions, including the revocation of permits and licenses necessary to continue our business activities. In addition, we may be required to pay damages or civil judgments in respect of third-party claims, including those relating to personal injury (including exposure to radioactive materials) or contribution claims. Some environmental, health and safety laws allow forapply strict, joint and several liability for remediation costs, regardless of comparative fault.liability. We may be identified as a responsible party under such laws. Such developments could have a material adverse effect on our business, financial condition and results of operations.
In addition, laws and regulations relating to environmental, health and safety matters are often subject to change. In the event of any changes or new laws or regulations, we could be subject to new compliance measures or to penaltiesliabilities for activities which were previously permitted.
U.S. Government Regulation
Our C-Scan system is a medical device subject to extensive regulation by FDA and other U.S. federal and state regulatory bodies. To ensure that medical products distributed in the United States are safe and effective for their intended use, FDA has imposed regulations that govern, among other things, the following activities that we or our partners perform and will continue to perform:
product design and development;
validation and verifications;
product storage, shipping and handling;
premarket clearance or approval;
advertising and promotion;
product marketing, sales and distribution; and
post-market surveillance reporting death or serious injuries and medical device reporting.
FDA’s Premarket Clearance and Approval Requirements
Unless an exemption applies, before we can commercially distribute medical devices in the United States, we must obtain, depending on the type of device, either prior 510(k) clearance or PMA approval from the FDA. The FDA classifies medical devices into one of three classes:
Class I devices, which are subject to only general controls (e.g., labeling, medical devices reporting, and prohibitions against adulteration and misbranding) and, in some cases, to the 510(k) premarket clearance requirements;
Class II devices, generally requiring 510(k) premarket clearance before they may be commercially marketed in the United States; and
Class III devices, consisting of devices deemed by the FDA to pose the greatest risk, such as life-sustaining, life-supporting or implantable devices, or devices deemed not substantially equivalent to a predicate device, generally requiring the submission of a PMA approval supported by clinical trial data.
510(k) Clearance Pathway
To obtain 510(k) clearance, we must submit a premarket notification, or 510(k) notice, demonstrating that the proposed device is substantially equivalent to a previously cleared 510(k) device or a device that was in commercial distribution before May 28, 1976 for which the FDA has not yet called for the submission of premarket approval applications. The FDA’s 510(k) clearance pathway takesmay take approximately between 6 to 9 months, but it can take significantly longer. FDA may require additional information, including clinical data, to make a determination regarding substantial equivalence.
After a device receives 510(k) clearance, any modification that could significantly affect its safety or effectiveness, or that would constitute a new or major change in its intended use, will require a new 510(k) clearance or, depending on the modification, require premarket approval. The FDA requires each manufacturer to determine whether the proposed change requires submission of a 510(k), or a premarket approval, but the FDA can review any such decision and can disagree with a manufacturer’s determination. If the FDA disagrees with a manufacturer’s determination, the FDA can require the manufacturer to cease marketing and/or recall the modified device until 510(k) clearance or premarket approval is obtained. If the FDA requires us to seek 510(k) clearance or premarket approval for any modifications to a previously cleared product, we may be required to cease marketing or recall the modified device until we obtain this clearance or approval. Also, in these circumstances, we may be subject to significant regulatory fines or penalties.
De Novo Reclassification
If the FDA finds that there is no suitable predicate device for our C-Scan, system, it will automatically be considered a class III device. However, in instances where a device is novel and there is no suitable predicate device, but that device is deemed to be of low to moderate risk, the FDA can reclassify the device to class I or class II via de novo reclassification. This process involves the submission of a reclassification petition, and the FDA'sFDA’s acceptance that “special controls” are adequate to ensure the product’s performance and safety.
The FDA now allows “direct” de novo reclassification petitions, a mechanism by which a sponsor can directly submit a detailed de novo reclassification petition as the device’s initial submission without having to first receive a not substantially equivalent, or NSE, decision on a 510(k) submission. The direct de novo pathway takes at least 9 to 12 months from submission of the petition to device clearance.
Our current strategy is to submit a direct de novo reclassification petition for our C-Scan system.C-Scan. To support a direct de novo reclassification petition, our objective is to demonstrate that the device poses a low to moderate risk to patients. If the FDA determines that our C-Scan system is not a candidate for de novo reclassification, it will require approval of the device for market through the PMA process.
Alternatively, if we seek 510(k) clearance and our device is found not substantially equivalent, or NSE, a de novo petition must be filed within 30 days from the receipt of the NSE determination. The request should include a description of the device, labeling for the device, reasons for the recommended classification and information to support the recommendation. The de novo process following an NSE determination has a 60-day review period, although it is typical for the review to take far longer. If the FDA classifies the device into class II, the company will then receive an approval order to market the device. This device type can then be used as a predicate device for future 510(k) submissions. However, if the FDA subsequently determines that the device will remain in the class III category, then the device may not be marketed until the company has obtained an approved PMA.
Premarket Approval Pathway
A premarket approval application must be submitted if the device cannot be cleared through the 510(k) process or is found ineligible for de novo reclassification. The premarket approval application process is generally more costly and time consuming than the 510(k) process. A premarket approval application must be supported by extensive data including, but not limited to, technical, preclinical, clinical trials, manufacturing and labeling to demonstrate to the FDA’s satisfaction the safety and effectiveness of the device for its intended use.
After a premarket approval application is sufficiently complete, the FDA will accept the application and begin an in-depth review of the submitted information. By statute, the FDA has 180 days to review the “accepted application,” although, generally, review of the application can take at least 12 to 18 months, but it may take significantly longer. During this review period, the FDA may request additional information or clarification of information already provided. Also during the review period, an advisory panel of experts from outside FDA may be convened to review and evaluate the application and provide recommendations to the FDA as to the approvability of the device. In addition, the FDA will conduct a preapproval inspection of the manufacturing facility to ensure compliance with quality system regulations. New premarket approval applications or premarket approval application supplements are required for modifications that affect the safety or effectiveness of the device, including, for example, certain types of modifications to the device’s indication for use, manufacturing process, labeling and design. Premarket approval supplements often require the submission of the same type of information as a premarket approval application, except that the supplement is limited to information needed to support any changes from the device covered by the original premarket approval application and may not require as extensive clinical data or the convening of an advisory panel.
Clinical Trials
Clinical trials are almost always required to support a premarket approval application or de novo reclassification petition and are sometimes required for a 510(k) premarket notification. If the device presents a “significant risk,” as defined by the FDA, to human health, the FDA requires the device sponsor to file an IDE application with the FDA and obtain IDE approval prior to commencing the human clinical trials. The investigational device exemption application must be supported by appropriate data, such as animal and laboratory testing results, showing that it is safe to test the device in humans and that the testing protocol is scientifically sound. The investigational device exemption application must be approved in advance by the FDA for a specified number of patients, unless the product is deemed a “non-significant risk” device and eligible for more abbreviated investigational device exemption requirements. Clinical trials for a significant risk device may begin once the investigational device exemption application is approved by the FDA and the appropriate institutional review boards at the clinical trial sites. Future clinical trials of our motion preservation designsmost advanced C-Scan system will require that we obtain an investigational device exemption from the FDA prior to commencing clinical trials and that the trial be conducted under the oversight of an institutional review board at the clinical trial site. Our clinical trials must be conducted in accordance with FDA regulations and federal and state regulations concerning human subject protection, including informed consent and healthcare privacy. A clinical trial may be suspended by the FDA or the investigational review board at any time for various reasons, including a belief that the risks to the study participants outweigh the benefits of participation in the study. Even if a study is completed, the results of our clinical testing may not demonstrate the safety and efficacy of the device, or may be equivocal or otherwise not be sufficient to obtain approval of our product. Similarly, in Europe the clinical study must be approved by the local ethics committee and in some cases, including studies of high-risk devices, by the Ministry of Health in the applicable country.
Pervasive and Continuing FDA Regulation
After a device is placed on the market, numerous regulatory requirements continue to apply. These include:
product listing and establishment registration, which helps facilitate FDA inspections and other regulatory action;
Quality System Regulation, or QSR, and current good manufacturing practices, or cGMP, which require manufacturers, including third-party manufacturers, to follow stringent design, testing, control, documentation and other quality assurance procedures during all aspects of the manufacturing process;
labeling regulations and FDA prohibitions against the promotion of products for uncleared, unapproved or off-label use or indication;
clearance of product modifications that could significantly affect safety or efficacy or that would constitute a major change in intended use of one of our cleared devices;
approval of product modifications that affect the safety or effectiveness of one of our approved devices;
medical device reporting regulations, which require that manufacturers comply with FDA requirements to report if their device may have caused or contributed to a death or serious injury, or has malfunctioned in a way that would likely cause or contribute to a death or serious injury if the malfunction of the device or a similar device were to recur;
post-approval restrictions or conditions, including post-approval study commitments;
post-market surveillance regulations, which apply when necessary to protect the public health or to provide additional safety and effectiveness data for the device;
FDA’s recall authority, whereby it can ask, or under certain conditions order, device manufacturers to recall from the market a product that is in violation of governing laws and regulations;
regulations pertaining to voluntary recalls; and
notices of corrections or removals.
We and our third-party manufacturers must register with the FDA as medical device manufacturers and must obtain all necessary state permits or licenses to operate our business. As manufacturers, we and our third-party manufacturers are subject to announced and unannounced inspections by the FDA to determine our compliance with quality system regulation and other regulations. We have not yet been inspected by the FDA.
Failure to comply with applicable regulatory requirements can result in enforcement action by the FDA, which may include any of the following sanctions:
untitled letters, warning letters, fines, injunctions, consent decrees and civil penalties;
unanticipated expenditures to address or defend such actions;
customer notifications for repair, replacement, refunds;
recall, detention or seizure of our products;
operating restrictions or partial suspension or total shutdown of production;
refusing or delaying our requests for 510(k) clearance or premarket approval of new products or modified products;
withdrawing 510(k) clearances on PMA approvals that have already been granted;
refusal to grant export approval for our products; or
Regulatory Pathway for our C-Scan System
We have established a clinical and regulatory strategy with our advisors and have conducted a pre-IDEpre submission meeting now referred to as a pre-submission meeting,during the period of December 2016 and February 2017, with the FDA (an informal interaction to facilitate a clearer understanding of FDA’s expectations). During this process, we received the FDA’s feedback on our submission and our questionsquestions. We also sought feedback on a proposed protocol for a feasibility or pilot study, the primary purposes of which was to establish the safety of the C-Scan system and evaluate user compliance and satisfaction. In December 2018, we are planningreceived from the FDA conditional approval of our IDE application to continueinitiate a U.S. pilot study of the dialogue withC-Scan system and received final approval from the FDA beforein February 2019. In April 2019, we initiated the submissionU.S. pilot study of a formal requestC-Scan that was completed by December 2019. In November 2020, we finalized our proposed pivotal design and submitted our IDE to the FDA and in March 2021, the FDA approved our IDE.
In preparation for the IDEplanned pivotal study, that is necessarywe expect to initiate in late 2021, we continue to optimize the functionality and patient experience of our advanced version of C-Scan, which incorporates mainly advanced algorithms, improved detection and reduced energy consumption, through additional clinical data collection at Israel sites. To this end, we have finalized a clinical trial protocol for usa study in Israel and identified over 10 clinical trial sites to conduct the U.S. pivotal clinical trial.enroll up to 250 average risk patients.
Our current strategy is to submit a direct de novo reclassification petition for our system. Although the FDA could require us to submit a PMA, we believe that the device could be considered for evaluation under the FDA’s de novo reclassification provisions, which allow a novel device to be reclassified into class I or class II. To support this, our objective is to demonstrate that the device poses a low to moderate risk to patients.
We believe that important potential benefits of our C-Scan system for CRC screening are the elimination of the need for bowel preparation, the elimination of the need for conscious sedation, the minimally invasive, painless nature of the examination, and the ability to pursue normal daily activities immediately following the procedure. Furthermore, the C-Scan system is being designed to generate information from segments of the colon (e.g., cecum and ascending colon) that are difficult to access by conventional optical colonoscopy (i.e., incomplete colonoscopies) without the risks and discomforts of operative examination or other invasive methods. We believe these benefits will be attractive to a large number of patients from the target populations that so far refrained from any screening tests. Thus, we anticipate that our capsule will increase the public compliance to screening recommendation.
If FDA determines that our C-Scan system is not a candidate for de novo reclassification, it will require approval of the device for market through the PMA process. Because of the technological characteristics of this device, the non-clinical tests (including lab and animals) and clinical data required may not be significantly different between de novo and PMA regulatory processes. We believe that under both scenarios, we will be required to conduct a multi-center clinical study to establish the safety and efficacy and to demonstrate sensitivity and specificity of our C-Scan system in several hundreds of patients.
In February 2021, the FDA granted us a Breakthrough Device designation for C-Scan for the indication as stated in the FDA's Breakthrough Device designation approval, as follows: “C-Scan is intended to identify adult subjects 50 years or older, within the average risk population, who are at elevated risk for polyps larger than or equal to 1 cm. It is intended for adults who are poor candidates for colonoscopy. Polyps have been shown to be associated with the development of colorectal cancer. C-Scan is not intended to replace colonoscopy. A positive C-Scan result should be followed by colonoscopy.”
The FDA’s Breakthrough Device Program aims to provide patients and providers with expedited access to innovative medical devices that offer more effective diagnosis by expediting their development, assessment and review while preserving the statutory standards for premarket approval. In addition, the Centers for Medicare & Medicaid Services (CMS) has created expedited and special reimbursement pathways and programs based on FDA’s Breakthrough Device designation, for which we may be eligible.
FCC Clearance and Regulation
Because our C-Scan system includes a wireless radio frequency transmitter and receiver, it is subject to equipment authorization requirements in the United States. The U.S. Federal Communications Commission, or FCC, requires authorization of radio frequency devices before they can be sold or marketed in the United States, subject to limited exceptions. The authorization requirements are intended to confirm that the proposed products comply with FCC radio frequency emission, power level standards, and other technical requirements and will not cause interference. Our capsulesystem is using the same frequency band as other approved capsules,capsules. The current design of C-Scan complies with the FCC’s technical requirements and we expect that itour advanced design will comply with the FCC’s technical requirements, so it is expected that it will be authorized by the FCC as well.
Third-Party Coverage and Reimbursement
Coverage of and reimbursement for our C-Scan system and related procedures, after approval, will be subject to the requirements of various third-party payors, including government-sponsored healthcare payment systems and private third-party payors. Coverage policies and reimbursement methodologies vary significantly from program-to-program and may be subject to federal and state regulations. For example, the Medicare statuteSocial Security Act requires all items and services to be “reasonable and necessary for the diagnosis or treatment of illness or injury or to improve the functioning of a malformed body member” in order to be covered.covered by Medicare. While Medicare currently doesmight not provide separate reimbursement for many devices, buta device, it, may include payment for the device in the payment to the facility or physician for the related procedure. Third-party payors’ coverage and reimbursement policies, including their interpretations of whether an item or service is “reasonable and necessary” or experimental and/or investigational, and their payment methodologies, are subject to change pursuant to legislation, regulation, or, in the case of private payors, negotiations with industry and providers.
Fraud and Abuse Laws
In the United States, the healthcare industry is subject to extensive federal, state, and local regulation. Both federal and state governmental agencies subject the healthcare industry to intense regulatory scrutiny, including heightened civil and criminal enforcement efforts. These laws constrain the sales, marketing and other promotional activities of manufacturers of medical devices, by limiting the kinds of financial arrangements (including sales programs) we may have with hospitals, physicians and other potential purchasers of the medical devices. The laws and regulations that may affect our ability to operate include, but are not limited to:
The federal Anti-Kickback Statute, which prohibits, among other things, knowingly or willingly offering, paying, soliciting or receiving remuneration, directly or indirectly, in cash or in kind, to induce or reward the purchasing, leasing, ordering or arranging for or recommending the purchase, lease or order of any health care items or service for which payment may be made, in whole or in part, by federal healthcare programs such as Medicare and Medicaid. This statute has been interpreted to apply to arrangements between medical device manufacturers on one hand and prescribers, purchasers and formulary managers on the other. Further, PPACA, among other things, clarified that a person or entity needs not to have actual knowledge of the federal Anti-Kickback Statute or specific intent to violate it. Although there are a number of statutory exemptions and regulatory safe harbors to the federal Anti-Kickback Statute protecting certain common business arrangements and activities from prosecution or regulatory sanctions, the exemptions and safe harbors are drawn narrowly, and practices that do not fit squarely within an exemption or safe harbor may be subject to scrutiny;
The federal civil False Claims Act, which prohibits, among other things, individuals or entities from knowingly presenting, or causing to be presented, a false or fraudulent claim for payment of government funds or knowingly making, using or causing to be made or used, a false record or statement material to an obligation to pay money to the government or knowingly concealing or knowingly and improperly avoiding, decreasing, or concealing an obligation to pay money to the federal government. In addition, PPACA amended the Social Security Act to provide that the government may assert that a claim including items or services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the federal civil False Claims Act. Many medical device manufacturers and other healthcare companies have been investigated and have reached substantial financial settlements with the federal government under the civil False Claims Act for a variety of alleged improper marketing activities, including providing free product to customers with the expectation that the customers would bill federal programs for the product; providing consulting fees, grants, free travel, and other benefits to physicians to induce them to use the company’s products. In addition, in recent years the government has pursued civil False Claims Act cases against a number of manufacturers for causing false claims to be submitted as a result of the marketing of their products for unapproved, and thus non-reimbursable, uses. Device manufacturers also are subject to other federal false claim laws, including, among others, federal criminal healthcare fraud and false statement statutes that extend to non-government health benefit programs;
Analogous state laws and regulations, such as state anti-kickback and false claims laws, may apply to items or services reimbursed under Medicaid and other state programs or, in several states, apply regardless of the payor. Several states now require medical device manufacturers to report expenses relating to the marketing and promotion or require them to implement compliance programs or marketing codes. For example, California, Connecticut and Nevada mandate the implementation of corporate compliance programs, while Massachusetts and Vermont impose more detailed restrictions on device manufacturers'manufacturers’ marketing practices and tracking and reporting of gifts, compensation and other remuneration to healthcare providers;
The federal Foreign Corrupt Practices Act of 1997 and other similar anti-bribery laws in other jurisdictions generally prohibit companies and their intermediaries from providing money or anything of value to officials of foreign governments, foreign political parties, or international organizations with the intent to obtain or retain business or seek a business advantage. Recently, there has been a substantial increase in anti-bribery law enforcement activity by U.S. regulators, with more frequent and aggressive investigations and enforcement proceedings by both the Department of Justice and the U.S. Securities and Exchange Commission. Violations of these laws can result in the imposition of substantial fines, interruptions of business, loss of supplier, vendor or other third-party relationships, termination of necessary licenses and permits, and other legal or equitable sanctions. Other internal or government investigations or legal or regulatory proceedings, including lawsuits brought by private litigants, may also follow as a consequence; and
The federal Physician Payment Sunshine Act, being implemented as the Open Payments Program, requires manufacturers of “covered products” (drugs, devices, biologics, or medical supplies for which payment is available under Medicare, Medicaid, or the Children’s Health Insurance Program) to track and publicly report payments and other transfers of value that they provide to U.S. physicians and teaching hospitals, as well as any ownership interests that U.S. physicians hold in applicable manufacturer. Applicable manufacturers must submit a report to the Centers for Medicare & Medicaid Services, or CMS, by the 90th day of each calendar year disclosing payments and transfers of value made in the preceding calendar year.
Violations of any of the laws described above or any other governmental regulations that apply to us, may cause us to be subject to significant civil, criminal and administrative penalties, damages, fines, exclusion from government-funded healthcare programs, like Medicare and Medicaid, and the curtailment or restructuring of our operations.
Privacy Laws
HIPAA/HITECH and related U.S. federal and state laws protect the confidentiality of certain patient health information, including patient records, and restrict the use and disclosure of that protected information. In particular, the U.S. Department of Health and Human Services promulgated patient privacy rules under HIPAA.
These privacy rules protect medical records and other personal health information by limiting their use and disclosure, giving individuals the right to access, amend and seek accounting of their protected health information and limiting most use and disclosures of health information to the minimum degree reasonably necessary to accomplish the intended purpose. Because we intend to sell products, once approved, to persons and entities subject to HIPAA and are exposed to personally-identifiable health information in the course of our operations, we also may be subject to certain elements of HIPAA, particularly as a business associate to covered entities, as well as similar state laws. HIPAA imposes civil and criminal penalties for violations of its provisions, which could be substantial. State privacy laws have their own penalty provisions which may be applicable.
NRC Regulatory Issues
As our C-Scan system includes an ingestible capsule with a radioactive source, the company must address NRC regulations, or relevant NRC Agreement State licensing requirements and regulations, in addition to FDA requirements. It must also consider the licensing requirements and regulations of other nuclear regulators in jurisdictions in which we intend to commercialize C-Scan. An Agreement State is a state that has signed an agreement with the NRC authorizing the state to regulate certain uses of radioactive materials within the state. Agreement State regulations are often substantially similar to the NRC’s regulations.regulations, but may be stricter in certain circumstances.
The capsuleC-Scan is loaded with thean X-ray source, sealed and then ingested by the patient. The capsule is excreted naturally through the patient’s system and is not intended to be recovered and therefore is disposed of in the sanitary sewer system. Although the NRC regulations in 10 CFR Part 20 place certainplaces conditions and limitations on the disposal of radioactive material in the sanitary sewer, such conditions and limitations do not apply to radioactive material contained in excreta of individuals that are undergoing medical diagnosis or therapy with radioactive material. Our regulatory advisors have advised us that the NRC staff likely would take the position that a capsule containing radioactive material, which can be passeddisposed of in excreta into the sanitary sewer system without limitation. If, however,restriction. Following discussion with NRC staff, the NRC werestaff has determined that the C-Scan capsule after it passes through a person and is excreted in human waste is not considered excreta and is instead a distinctive radioactive source separate from the excreta. Therefore, at this stage during clinical trials in the USA, the C-Scan will need to find that our C-Scan system could not be passedcollected and cannot be disposed of in excreta into the sanitary sewer system without limitation pursuant to 10 CFR 20.2003(b)system. After discussions with the NRC may place restrictionsstaff, at this time we intend to seek a change in NRC regulations through established NRC rulemaking process following completion of additional FDA trials in the USA. Although the NRC staff has indicated it will consider a rulemaking proposal on this topic, there is no assurance that the NRC will approve a change to its regulations to permit the unrestricted disposal of the C-Scan systemcapsule in the sanitary sewer system. It is also possible that other regulatory commissions worldwide will take a similar positions in relation to C-Scan and we may face limitations in those other jurisdictions in which we intend to commercialize C-Scan in relation to the disposal of our C-Scan Cap in the sanitary system. This could include requiring patients to retrieve our C-Scan Cap after use, which could make C-Scan less attractive.
An entity which manufactures, prepares, or transfers a medical capsule containing radioactive byproduct material needs to be licensed or covered by a license issued by the NRC or an Agreement State. An NRC or Agreement State licensee authorized to possess and/or distribute byproduct material can transfer the byproduct material only to another NRC, or Agreement State, approved entity or licensee. The NRC’s regulations permit only individuals who are authorized users (e.g., individuals who meet certain training and experience criteria regarding the safe use of radioactive drugs) or persons working under the supervision of an authorized user to administer radioactive drugs for medical use.
The NRC regulations do exempt certain products from the NRC’stheir regulations. Existing exemptions from licensing requirements for the use of byproduct material include exemptions for specific products (e.g., time pieces), exemptions for classes of products (e.g., gas or aerosol detectors), and broader materials exemptions for “exempt concentrations” and “exempt quantities” of radioactive material. These two broad materials exemptions specifically exclude the transfer of byproduct material contained in any food, drug, or product designed for ingestion by a human being. Capsules containing our X-ray source would not qualify as an “exempt quantity” because of their intended use (i.e., for ingestion) even though they may contain a smaller quantity of the source than the exempt quantities set forth in the regulations. NRC Agreement States have similar regulations. In each state in the United States, either the NRC or an Agreement State’s nuclear regulations apply.
Accordingly, we and/or our manufacturing and distributing partners in the United States will need to obtain the appropriate licenses from the NRC or an Agreement State prior to the clinical investigation and/or marketing of the device.device, to the extent these activities involve handling radioactive material. We intend to engage a radiopharmaceutical company to manufactureradiation source manufacturer for the production of our X-ray source and distribution of our C-Scan Cap.Cap for the U.S markets. The fact that another company will be manufacturing the capsule,X-ray source and will subsequently assemble it into our C-Scan Cap, however, does not exempt us from also obtaining radioactive materials licenses from the NRC or an Agreement State.State if we are to handle radioactive material. Distribution activities are generally classified by the NRC as either “distribution” or “redistribution”, and both types of activities require a specific license. “Distribution” refers to the initial transfer from the manufacturing radiopharmacy, while “redistribution” refers to a subsequent transfer of the drug by an NRC licensee to an authorized user. In order to distribute the capsule commercially, we will need to obtain an NRC or Agreement State “medical distribution” radioactive materials license and may also need to obtain a radioactive materials license authorizing the possession of the radioactive material. Both types of licenses may be obtained by submitting a license application request to the NRC or an Agreement State. In the event that we develop the capsule outside the United States, we would be required to have one of our U.S. offices apply for and receive both the possession and medical distribution radioactive materials licenses. If we do not have an office in the United States, then we can contract with a company with a U.S. office to apply for and obtain these licenses, and that company would be the licensed U.S. distributor of the capsule.
We may be able to petition the NRC to carve out an exemption for the distribution licensing requirement to permit distribution to all health care professionals and not just those licensed by the NRC. This has been done successfully by other medical device companies. For example, Tri-Med, Inc. manufactures an ingestible capsule containing radioactive material for testing of H. Pylori. The company petitioned the NRC in 1994 for an exemption from the distribution licensing regulation. The NRC evaluated the petition and issued a proposed ruling for comments. After receiving comments on the proposed ruling, the NRC issued a final ruling, in 1997, providing for the exemption. This exemption is narrowly drawn, and specific to the distribution of a “radioactive drug containing one microcurie of carbon-14 urea to any person for ‘in vivo’ diagnostic use.” In creating the exemption, the NRC noted the importance of bringing an inexpensive and effective diagnostic tool to a large number of people, along with the minimum radiation contained in the capsule.
We may consider petitioning the NRC in a similar manner to make the device more widely available. As our C-Scan system imparts comparable radiation exposure toexposures as with the Tri-Med device described above, and has the potential to be used widely for diagnosis, our C-Scan system may be a candidate for such an exemption.
Regulation in Europe, Israel, Japan and Other Countries
The European Union has adopted numerous directives and standards regulating the design, manufacture, clinical trials, labeling and adverse event reporting for medical devices. Each European Union member state has implemented legislation applying these directives and standards at the national level. Other countries, such as Switzerland, have voluntarily adopted laws and regulations that mirror those of the European Union with respect to medical devices. Devices that comply with the requirements of the laws of the relevant member state applying the applicable European Union directive are entitled to bear CE conformity marking and, accordingly, can be commercially distributed throughout the member states of the European Union and other countries that comply with or mirror these directives. The method of assessing conformity varies depending on the type and class of the product, but normally involves a combination of self-assessment by the manufacturer and a third-party assessment by a “Notified Body,” an independent and neutral institution appointed to conduct conformity assessment. This third-party assessment consists of an audit of the manufacturer’s quality system and clinical information, as well as technical review of the manufacturer’s product. An assessment by a Notified Body in one country within the European Union is required in order for a manufacturer to commercially distribute the product throughout the European Union. In addition, compliance with ISO 13845:2016 on quality systems issued by the EU, a company that wishes to bring a medical device to market must CE markInternational Organization for Standards, among other standards, establishes the device following demonstrationpresumption of conformity with the Essential Requirements laid downessential requirements for a CE marking. In addition, many countries apply requirements in Annex Itheir reimbursement, pricing or health care systems that affect companies’ ability to the Medical Devices Directive.market products.
Compliance with these requirements entitles manufacturers to affixOn January 9, 2018, we obtained the CE mark of conformity for the C-Scan system, which is valid until January 1, 2023. We are in a process of obtaining a CE mark according to theirthe MDR.
C-Scan and our operations are also subject to regulation by AMAR, which is responsible for the registration of medical devices withoutin Israel, issuance of import licenses and monitoring of marketing of medical equipment. In September 2018, we received approval AMAR for the marketing and sale of the C-Scan system in Israel, which, the medical devices cannot be commercialized in the EU. To demonstrate compliance with the Essential Requirements laid down in Annex I to the Medical Devices Directive and obtain the right to affixfollowing its extension, is valid until March 31, 2022. After obtaining the CE mark of conformity to our medical devices, we and our products must undergo a conformity assessment procedure, which varies according to the type of medical device and its classification. Apart from low-risk medical devices (Class I with no measuring function and which are not sterile), in relation to which the manufacturer can issue an EC Declaration of Conformity based on self-assessment of the conformity of its products with the Essential Requirements laid down in the Medical Devices Directive, a conformity assessment procedure requires the intervention of a Notified Body, which is an organization designated by the competent authorities of a EU Member States to conduct conformity assessments. The Notified Body will typically audit and examine the Technical File that the manufacturer has created for the medical devices and the quality system for the manufacture, design and final inspection of the devices before issuing a CE Certificate of Conformity demonstrating compliance with the relevant Essential Requirements laid down in Annex I to the Medical Devices Directive or the quality system requirements laid down in the other Annexes to the Directive. Following the issuance of this CE Certificate of Conformity, the manufacturer is required to draw up an EC Declaration of Conformity and to affix the CE mark to the products covered by this CE Certificate of Conformity and the EC Declaration of Conformity.
We will be required to demonstrate that our products comply with the Essential Requirements laid down in Annex I to the Medical Devices Directive through a conformity assessment procedure. We cannot be certain thatMDR, we will be ableneed to fulfill the quality and performance requirements laid down in Annex I to the Medical Devices Directive and to obtain or maintain CE Certificates of Conformityapply for a new AMAR approval for our products. If we are unable to obtain or maintain these CE Certificates of Conformity for our products, we will not be able to sell our products in any EU Member States nor in various other third countries where CE marking is accepted as evidence of compliance with relevant national laws.advanced C-Scan version 4.
In Japan, manufacturing and marketing medical devices are regulated by the Pharmaceutical Affairs Law, or PAL. In accordance with the PAL, manufacturers must obtain a license for manufacturing medical devices from the Ministry of Health, Labour and Welfare, or MHLW. A license is required for each manufacturing plant specified by an MHLW Ministerial Ordinance.
A licensed manufacturer is responsible only for manufacturing medical devices. In regard to the marketing of medical devices, the PAL specifies that a Marketing Authorization Holder, or MAH, licensed by MHLW is responsible for putting medical devices into marketplace. Licenses for marketing medical devices are divided into the following 3 types, which correspond to the classifications below:
No. 1 type license for marketing – Specially controlled medical devices (Class III, IV)
No. 2 type license for marketing – Controlled medical devices (Class II)
No. 3 type license for marketing – General medical devices (Class I)
Generally, the process for obtaining marketing clearance for medical devices in Japan ranges from twelve months (for products with only very minor modifications from previously cleared product versions) to a few years in the case of a completely new device.
In order for us to market our products in countries other than the United States, Israel, the EU and Japan (which were described above), we must obtain regulatory approvals and comply with extensive safety and quality regulations in these countries. These regulations, including the requirements for approvals or clearance and the time required for regulatory review varies from country to country. It is customary that once a product has been cleared for sales in the US and is CE marked in the EU, many other countries will follow. Failure to obtain regulatory approval or clearance in any foreign country in which we plan to market our product may harm our ability to generate revenue and harm our business.
66United Kingdom
The withdrawal of the United Kingdom (UK) from the EU took effect on January 1, 2021, and there are 27 member states remaining in the EU. As of January 1, 2021, the UK is a “third country” with regard to the EU (subject to the terms of the EU UK Trade Agreement) and EU law ceased to apply directly in the UK. However, the UK has retained the EU regulatory regime with certain modifications as standalone UK legislation. Therefore, the UK regulatory regime is currently similar to EU regulations, but under proposed legislation, the Medicines and Medical Devices Bill, the UK may adopt changed regulations that may diverge from the EU legislative regime for medicines and their research, development and commercialization. For a two-year period starting January 1, 2021, the UK has adopted transitional provisions, which inter alia apply to the importation of medical devices into the UK and the acceptance of CE-certificates until the end of June 2023.
Third-Party Reimbursement
Reimbursement in the United States
In the United States, healthcare providers that purchase and/or prescribe medical devices generally rely on third-party payors, such as Medicare, Medicaid, or private health insurance plans, and health maintenance organizations, to reimburse all or a portion of the cost of the devices, as well as any related healthcare services utilizing the devices.device.
Coverage is not guaranteed simply because a product has received FDA clearance or approval.approval or has a CPT or HCPCS code that describes the product or service. For example, Medicare’s general definition of a medically necessary service is one that is reasonable and necessary for the diagnosis or treatment of an illness or injury, or that improves the functioning of a malformed body member.
Colorectal cancer (CRC) is the fourth most common cancer and the second leading cause of cancer deaths in the United States. It is an important issue for the Medicare population. In order2020, the National Institutes of Health (NIH) National Cancer Institute (NCI) estimated that there will be over 147,000 new cases of colon and rectum cancer in the United States with a median age at diagnosis of 67 years. Colorectal cancer is most frequently diagnosed among people aged 65 – 74 years (NIH). Overall mortality rates for CRC have declined over the past decade. Since the 1990s, Medicare has covered a number of CRC screening tests from non-invasive fecal based tests to be eligiblecolonoscopy, providing a range of choices for reimbursement,patients to choose the most individually suitable modalities. Among all races, African-Americans have the highest death rate. Based on data from SEER 18 2010-2016, the five-year relative survival rate was 64.6%.
The cost-effectiveness of a device must(or the service in which a device is used) may be provena key factor in obtaining third-party payer reimbursement for such device or service, but is usually not a factor for Medicare. Medicare covers certain colorectal cancer (CRC) screening tests and procedures for Medicare beneficiaries that meet certain eligibility criteria, as authorized by Sections 1861(s)(2)(R) and 1861(pp) of the Social Security Act and regulations at 42 CFR 410.37. However, Medicare coverage of CRC screening tests as defined under Section 1861(pp)(1)(D) states “Such other tests or procedures, and modifications to be cost-effective, demonstrating potential decreasetests and procedures under this subsection, with such frequency and payment limits, as the Secretary determines appropriate, in spending to the U.S. health economy.consultation with appropriate organizations.” (emphasis added).
According to various studies and publications, a75
A key criterion for reimbursement for colonfactor affecting the cost-effectiveness of colorectal cancer screening is patient adherence (for instance, see “Cost-Effectiveness of Colonoscopy in Screening for CRC,” Annals of Internal Medicine, October 17, 2000 vol. 133 no. 8 573-584).adherence. Adherence is strongly affected by patients’ willingness to use the device (or service incorporating a device) as a screening tool for CRC.
Several models have been designed to demonstrate the cost effectiveness of optical colonoscopy, CTC, fecal testing and optical capsule endoscopy. Today, several technologies achieved Medicare coverage for CRC Screening, including:- FOBT / FIT, Flexible Sigmoidoscopy, Optical Colonoscopy, and Barium Enema, and stool DNA.DNA – are covered for Medicare beneficiaries meeting certain eligibility criteria for screening for colorectal cancer, while other technologies including CT colonography, capsule endoscopy, and liquid biopsy are not currently covered by Medicare for CRC screening.
In 2009, the Centers for Medicare and Medicaid Services (CMS) issued a decision memorandum rejecting federal reimbursementconcluding that the evidence was inadequate to support Medicare coverage of CT colonography (CTC) for CTC screening for CRC.CRC screening. Their main argument for the decision was that based on available evidence that screening with CTC would not necessarily result in cost saving,savings at least at current screening compliance rates. CTC was not seen as a tool which could potentially increase patients’ adherence. This procedure involves bowel preparation, as well as insufflations of the colon and the exposure of patients to very significant amount of radiation. Extracolonic incidental findings on CT colonography are common, with the percentage of participants with extracolonic findings ranging from 58% to 66%. Further, as CTC potentially detects lesions outside of the colon, CMS has no ability to pay for the evaluation of incidental findings in a patient without signs or symptoms unless specifically directed by Congress to do so.
There are benefits of screening for advanced adenomas. The adenoma detection rate (based on colonoscopies) was inversely associated with the risks of interval colorectal cancer, advanced-stage interval cancer, and fatal interval cancer.
An important European study (C. Hassan et al, “Cost Effectiveness“Cost-Effectiveness of Optical capsule endoscopy,Capsule Endoscopy in Screening for Colorectal Cancer,” EndoscopyEndoscopy; 2008 40,40: 414-421) assessed the potential cost effectiveness of screening with optical capsule endoscopy and compared its cost-effectiveness with that of optical colonoscopy. EffectivenessCost-effectiveness of screening was measured in terms of life-yearscost per life-year saved through prevention or down staging of CRC. The conclusion was that the cost effectiveness of capsule endoscopy in CRC screening will depend mainly on its ability to improve compliance in the general population.
Third-party payors in the United States began issuing coverage policies for optical capsule endoscopy in early 2002.2002, subsequent to FDA approval and availability of the technology Initially, all reimbursement policies provided coverage for optical capsule endoscopy of the small bowel only for the diagnosis of obscure gastrointestinal bleeding. Subsequently, reimbursement coverage has been expanded to include other diagnoses and as of December 31, 2012,2020, approximately 220 million people in the United States are covered with most reimbursement policies providinghave coverage of this technology for a number of small bowel indications including obscure gastrointestinal bleeding, suspected Crohn’s disease, suspected small bowel tumors, celiac disease and other small bowel pathologies.pathologies, and screening or surveillance of esophageal varices. However, the FDA has not cleared the colon capsule endoscope for CRC screening.
Currently, there is no opticalMedicare, Medicaid, or commercial insurance reimbursement for capsule endoscopy reimbursement available forof the colon in the United States, nor is theredespite the availability of a category III CPT code 0355T (Gastrointestinal tract imaging, intraluminal (e.g., capsule endoscopy), colon, with interpretation and report) which is scheduled to be converted to a category I CPT code effective January 1, 2022.
In February 2020, CMS received a formal request for a national coverage determination from Epigenomics to consider coverage of Epi proColon, one example of a blood-based biomarker screening test for colorectal cancer. Over the last several years, blood-based biomarker tests have emerged as another potential non-invasive option for the early detection of colorectal cancer. A blood-based biomarker (biological marker in the patient’s blood) is a measurable DNA, RNA or protein component that indicates disease, in this case cancer. Blood-based cancer biomarkers include but are not limited to specific gene mutations, methylation of genes, and antigens. The blood-based biomarker that is measured in a person’s blood can be an indicator of a process, such capsuleas disease risk or related methodprogression, like progression to colorectal cancer, thought to be correlated with a long term outcome, such as mortality. It is typically easier to measure a biomarker than the true outcome of screening. interest, such as mortality from colorectal cancer. However, the biomarker might not be a good surrogate for and not well correlated with the clinical outcome of interest, such as cancer survival or mortality, or it might not identify a patient early enough to alter the clinical course of disease. One example test, Epi proColon, functions as a blood-based colorectal cancer screening test by identifying the circulating mSEPT9 (Septin9) gene in cell-free DNA isolated from plasma. CRC tumors have an increased likelihood of exhibiting aberrant methylation at the promoter region of the SEPT9 gene DNA.
In the past CRC screening NCDs, CMS has discussed appropriate test performance criteria such as point sensitivity and specificity compared to colonoscopy. The determination of appropriateness is similar to the consideration of what is appropriate for the device to be, “at least as beneficial as an existing and available medically appropriate alternative.” Through the evaluation of evidence from published studies, the clinical data for the device must reach the threshold for being appropriate. The direct evidence suggests that there is clinical utility in using FOBT and FIT for early detection of colorectal cancer (CRC) because these tests reduce mortality of the disease. Conversely, there is no direct evidence on outcomes such as mortality for blood-based biomarker tests used in screening for colorectal cancer. By comparing the test performance characteristics, defined as sensitivity, specificity, and positive predictive value, of new screening tests to gFOBT or FIT, CMS can assess whether blood-based tests might translate into similar reductions in disease mortality for Medicare beneficiaries. Thus, if the sensitivity and specificity of the new screening tests are as good as or better than the sensitivity and specificity of gFOBT or FIT, then there is indirect evidence suggesting that the new blood-based biomarker tests may reduce colorectal cancer mortality.
CMS determined that the evidence is sufficient to cover a blood-based biomarker test as an appropriate colorectal cancer screening test once every 3 years for Medicare beneficiaries when performed in a Clinical Laboratory Improvement Act (CLIA)-certified laboratory, when ordered by a treating physician and when all of the following requirements are met:
The patient is:
age 50-85 years, and,
asymptomatic (no signs or symptoms of colorectal disease including but not limited to lower gastrointestinal pain, blood in stool, positive guaiac fecal occult blood test or fecal immunochemical test), and,
at average risk of developing colorectal cancer (no personal history of adenomatous polyps, colorectal cancer, or inflammatory bowel disease, including Crohn’s Disease and ulcerative colitis; no family history of colorectal cancers or adenomatous polyps, familial adenomatous polyposis, or hereditary nonpolyposis colorectal cancer).
The blood-based biomarker screening test must have all of the following:
FDA market authorization with an indication for colorectal cancer screening; and
proven test performance characteristics for a blood-based screening test with both sensitivity greater than or equal to 74% and specificity greater than or equal to 90% in the detection of colorectal cancer compared to the recognized standard (accepted as colonoscopy at this time), based on the pivotal studies included in the FDA labeling.
CMS concluded that the published evidence does not show that the available blood-based biomarker CRC screening test improves health outcomes for Medicare beneficiaries. The indirect evidence (comparing a blood-based screening test to another test that has been shown to improve mortality such as screening fecal immunochemical test) does not show that blood-based screening test is equivalent in the detection of large adenomas or early stage cancer. The test performance of the Epi proColon® test does not meet sensitivity and specificity levels established by prior evidence at which the benefits of using the screening test outweigh harms to Medicare patients.
There can be no assurance that coverage of the C-scan will be obtained in the near future or at all. Third-party payors may deny coverage of the C-scan if they determine that a procedure was not reasonable or necessary as determined by the payor, was experimental, does not improve health outcomes, is not equivalent in the detection of large adenomas or early stage cancers, and/or was used for an unapproved indication. During the past several years, the major third-party payors have substantially revised their reimbursement methodologies in an attempt to contain or reduce their healthcare reimbursement costs.indication (among other factors).
Coverage Outside the United States
In countries outside the United States, coverage for CRC screening ismay be obtained from various sources, including governmental authorities, private health insurance plans, and labor unions. In some countries, private insurance systems may also offer payments for some therapies. Although not as prevalent as in the United States, health maintenance organizations are emerging in certain European countries. Coverage systems in international markets vary significantly by country and, within some countries, by region. Coverage approvals must be obtained on a country-by-country or region-by-region basis.
C. | Organizational Structure |
On May 15, 2015, we formed our wholly-owned subsidiary Check-Cap US, Inc., a Delaware corporation.
D. | Property, Plants and Equipment |
Our principal executive offices and operations are conducted at a facility located in Isfiya, Israel since June 1, 2009. We currently lease approximately 900 square meters at this facility under a lease agreement expiringoriginally scheduled to expire on May 31, 2022, unless earlier terminated by us upon at least 60 days prior written notice. On January 26, 2021, we entered into a new lease agreement, as amended, according to which, commencing April 1, 2021, the existing lease agreement shall terminate and we shall lease approximately 1,550 square meters at the same facility located in Isfiya, Israel. The new lease agreement expires on December 31, 2023, and we have an option to extend the lease for an additional period of three years. We have the right to terminate the new lease agreement at any time, upon at least 60 days prior written notice.
We believe that our current facilities are adequate to meet our current needs for the clinical phase of our development. See Item 4B “Information on Our Company – Business Overview – Manufacturing and Suppliers.”
ITEM 4A.
UNRESOLVED STAFF COMMENTSUnresolved Staff Comments
None.
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our consolidated financial statements and related notes included in this Annual Report beginning on page F-1. The following discussion and analysis contain forward-looking statements that involve risks and uncertainties. Our actual results and the timing of selected events could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under Item 3D “Key Information - Risk factors” and elsewhere in this Annual Report.
Overview
We are a clinical stage medical diagnostics company engaged inaiming to redefine CRC screening through the developmentintroduction of aC-Scan®, the first and only patient-friendly preparation-free test designed to detect polyps before they may transform into cancer to enable early intervention and cancer prevention. The disruptive capsule-based screening technology aims to increase screening adherence worldwide and enable millions of people to stay healthy. The system that utilizes ultra-low-dose X-rays to generate structural information onscan the endoluminal surfaceinner lining of the colon that may be used for screening of the colon to detectprecancerous polyps, masses and CRC. Whileother structural abnormalities. CRC is the second leading causethird most commonly diagnosed cancer, with more than 1.9 million new cases identified every year globally. Nearly 935,000 deaths occur annually worldwide as a result of death from cancer for both sexes combined in the United States and is preventable with early screening and intervention, according to the National Health Interview Survey, in 2015, only 63% of Americans over the age of 50 reported being current with CRC screening recommendations. Unlike other screening modalities that are designed for direct visualization and imagingCRC. While approximately 0.5% of the internal colon, such as optical colonoscopy, CTC and other capsule-based technologies, our C-Scan system is designed to function without any cathartic preparation ofaverage-risk screening population presents with cancerous polyps in the colon and rectum at any given time, approximately 25% of the same population presents with benign polyps that could potentially turn into cancer over time. It can take up to transit10 years before a pre-cancerous polyp develops into invasive cancer. As such, there is a crucial detection window for the prevention of colorectal cancer, through the detection of these benign polyps. While routine screening is recommended by The American Cancer Society for healthy people aged 45 years and older, screening adherence remains low. Currently, colonoscopy is the gold standard for the detection of colorectal polyps, but about 1 in 3 adults among the targeted screening population avoids having a colonoscopy in the U.S., and adherence in other regions of the world such as Europe and Asia is even lower, due to the invasiveness of the procedure and bowel preparation. Most patient-friendly CRC screening tests currently available, or poised to enter the market, such as fecal or liquid biopsy tests, are primarily designed to detect cancer and demonstrate low sensitivity in detecting pre-cancerous polyps. As such, they do not necessarily provide patients with the time window to pre-empt the disease. C-Scan is non-invasive and requires no preparation or sedation, allowing the patients to continue their daily routine with no interruption as the capsule is propelled through the gastrointestinal tract by natural motility while the patient continues his or her normal daily routine. Furthermore, themotility. C-Scan system does not require fasting prior to or during capsule transit. Our C-Scan system is comprised of three main components: (1) C-Scan Cap, aan ingestible X-ray scanning capsule; (2) C-Scan Track, a biocompatible unitthree miniaturized patches worn on the patient’s back for capsuleintegrated positioning, control tracking and data recording; and (3) C-Scan View, a PC-based, standalone application usedproprietary software to process and display structural informationrepresent 2D and 3D maps of the inner surface of the colon. We believe that this solution will be attractivehas the potential to become an alternative for both physicians and patients with the potentialand to increase the number of people completing CRC screening.
Check-Cap LLC was formed in 2004 as a Delaware limited liability company to develop a novel and superior solution for colon cancer screening. In 2009, all of the business operations and substantially all of the assets of Check-Cap LLC were transferred to Check Cap Ltd., a newly-incorporated Israeli company. Our offices are located near Haifa, in the northern part of Israel. Our management team includes an experienced group of executives in the business, research, clinical and regulatory fields. As of FebruaryMarch 15, 2017,2021, our research and development team consists of 5157 experienced professionals (including employees and independent contractors) in thea variety of fields ofsuch as clinics, physics, algorithms, electronics, software, mechanical engineering, verification and softwarevalidation, and mechanical engineering.manufacturing.
Our C-Scansystem is being designed to create a reconstructed three-dimensional image of the interior surface of the colon and to enable detection of clinically significant polyps with a high degree of sensitivity. Colonic polyps are tissue growths that occur on the lining of the colon. Polyps in the colon are extremely common and certain types of polyps can become cancerous over time.
Our C-Scan Cap will be swallowed and propelled by natural motility through the gastrointestinal tract and excreted naturally with no need for retrieval for data collection. Unlike other existing CRC screening methods, this process should not disrupt a patient’s normal activities or require fasting. Our C-Scan Cap employs ultra-low-dose X-rays, which allow the C-Scan system to image the interior lining of the colon even when surrounded by intestinal content. As such, we believe that patients using our C-Scan system will not be required to undergo any prior bowel preparation. The Radiation Safety Division of the Soreq Nuclear Research Center found, as set forth in its report of November 2010 that was prepared at our request and based on the information provided by us and the relevant methods and principles known at such time, or the Report, that the radiation dose to the patient in the proposed screening procedure utilizing the scanning device developed by us at that time in routine operation and normal conditions is low relative to the radiation dose involved in conventional imaging procedures using X-rays (such as fluoroscopy and CT) and is also low when compared to the radiation dose involved in established screening procedures such as mammography, all as more fully described in the Report.
Our C-Scan Cap is being designed to transmit position, motility and the data it collects to the C-Scan Track that will be worn on the patient’s back. The external data recorder is being designed to enable the transfer of the data to our C-Scan View to allow physicians to analyze the data collected by our C-Scan Cap. The C-Scan Track is being designed to provide the physician with accurate localization data aligned with a reconstructed image. We intend for physicians to be able to review the colon’s inner images in less time than is required to perform an optical colonoscopy.
In the event that polyps are identified by our C-Scan system, the patient may be advised to undergo a subsequent traditional colonoscopy procedure to examine, remove and biopsy the polyps. For those patients who require a subsequent colonoscopy, concerns regarding pain, discomfort and embarrassment may still remain. We do not, however, believe that these concerns will make the use of our C-Scan system any less attractive to physicians and patients. Although patients who are initially screened utilizing a traditional colonoscopy could avoid the need for a second colonoscopy if polyps are discovered, we believe that our C-Scan system will still be attractive to physicians and patients as a large number of patients who are screened will not require a subsequent colonoscopy. Published data from a multi-center CT colonography screening study of 2,531 asymptomatic adults published in The New England Journal of Medicine in 2008 showed that if all patients with a lesion measuring 5mm or more on CT colonography were referred for colonoscopy, the colonoscopy-referral rate would have been 17%.
For the past several years, we have focused on the research and development of our imaging technology. We initiatedFor details regarding our first clinical studies in 2010, consisting of two single-center feasibility studies with non-scanning (no X-ray source) capsules for the purposes of measuring gastrointestinal tract activity, colon contractionstrials, see Item 4B “Business Overview—C-Scan System Non-Clinical and associated capsule motility, and shortening capsule transit time.Clinical History.”
In 2013, we initiated a multi-center prospective clinical feasibility study, designed to allow for the recruitment of 100 subjects, to establish clinical proof of concept, safety and functionality of our C-Scan system in patients eligible for CRC screening. Analysis conducted on the first 66 capsules swallowed by participants showed that 65 of 66 capsules swallowed were naturally eliminated, without major or minor side effects, after 62±40.7 hours. The average calculated radiation exposure was 0.06 ± 0.04 mSv (similar to a single chest radiograph). Both pedunculated and sessile polyps were detected in several patients and validated later by colonoscopy.
In the first quarter of 2017, we initiated enrollment in a multi-center study of the C-Scan system in support of CE Mark submission. This prospective study, designed to demonstrate the safety and clinical performance of the C-Scan system, will evaluate polyp detection as compared to colonoscopy.
To date, we have achieved key product development milestones, including the ability of our C-Scan system to reconstruct the human colon and to identify polyps. Following our certification to ISO 13485:2003 by our Notified Body, successful completion of our current multi-center clinical study and achievement of compliance with the requirements of the Medical Devices Directive, we plan to submit during the first half of 2017 a request for CE marking for the marketing and sale of our C-Scan system in the European Union. We expect to initiate post-marketing studies in Europe following CE marking for the purpose of collecting additional evidence of clinical effectiveness and clinical utility to support market adoption. Subject to clinical results, regulatory approvals, available capital and engagement with strategic partners, we anticipate launching our C-Scan system commercially in Europe during 2018.
We conducted a pre-submission meeting with the FDA in December 2016 for the purpose of receiving feedback on the regulatory pathway for our system in the United States. We also sought feedback on a proposed protocol for a feasibility or pilot study, the primary purposes of which is to establish the safety of the C-Scan system and evaluate user compliance and satisfaction. Subject to required approvals, we plan on initiating such a study in 2017. Following the successful completion of the pilot study and receipt of required approvals, we plan to initiate during 2018, a pivotal study in the United States to (i) demonstrate device safety as evidenced by a lack of device-related serious adverse events; and (ii) provide efficacy data concerning our C-Scan system’s performance. We anticipate that FDA approval for the pivotal study will be subject to our providing sufficient clinical data from previous clinical studies, which may include the multi-center clinical feasibility study, the multicenter safety and clinical performance study, and U.S. pilot study. However, there can be no assurance that we will receive approvals for the pilot and/or pivotal studies to be conducted in the United States.
We also intend to pursue clinical trials for regulatory approvals in Japan and China in parallel to the U.S. pivotal study, subject to available capital and engagement with strategic partners. Pivotal studies are expected, among other things, to compare polyps identified by our C-Scan system with the polyps identified by traditional optical colonoscopy. These clinical findings may be analyzed in comparison with results obtained from FOBTs and FITs.
Following and subject to the successful completion of our pivotal trial, our current strategy is to submit a direct de novo reclassification petition, which we anticipate submitting in 2019, for initial FDA approval for the marketing of our C-Scan system in the United States. Direct de novo reclassification typically takes at least 9 to 12 months from filing to clearance. If the FDA determines that our C-Scan system is not a candidate for de novo reclassification, it will require approval of the device for market through the PMA process. The PMA pathway is much more costly and uncertain than the 510(k) clearance process or de novo reclassification, and generally takes at least 12 to 18 months, or even longer, from the time the application is filed with FDA to ultimate approval.
We have submitted patent applications covering our technology in the United States, member states of the European Patent Organisation, Australia, Brazil, Canada, China, Hong Kong, India, Israel, Japan and South Korea. We have been granted patents for our core patent by the U.S. Patent and Trademark Office as well as from the European Patent Office, Australia, China, Hong Kong, Israel, India and Japan. We also filed patent applications describing the use of our technology in several other medical applications.
We have generated significant losses to date, and we expect to continue to generate losses for at least the next several years as we continue our investment in research and development and clinical trials in order to complete the development of ourC-Scan system and to attain regulatory approvals, manufacturing scale up, begin the commercialization efforts for our products, increase our marketing and selling expenses, and incur additional costs as a result of being a public company in the United States. The extent of our future operating losses and the timing of becoming profitable are highly uncertain, and we may never achieve or sustain profitability. As of December 31, 2016,2020, we had accumulated losses of approximately $42.9$91.0 million.
On February 24, 2015, we consummated an initial public offering of 2,000,000 units, each consisting of one ordinary shareOur financing activities are described below under “Liquidity and one half of a Series A Warrant to purchase one ordinary share. The price per unit sold in the initial public offering was $6.00. Each unit in the initial public offering was issued with one and one half Long Term Incentive Warrants. We granted the underwriters in the initial public offering a 45-day over-allotment option to purchase up to 300,000 additional units (together with an accompanying 450,000 Long Term Incentive Warrants) from us to cover over-allotments. On March 6, 2015, the option to purchase additional 100,000 units was partially exercised. On March 18, 2015, the units were separated into one ordinary share and one-half of a Series A Warrant to purchase one ordinary share and the units ceased to exist. On April 6, 2015, the option to purchase additional 150,000 ordinary shares and 75,000 Series A Warrant was partially exercised. The aggregate offering price of the securities sold in the initial public offering (including the over-allotment option) was approximately $13.5 million. The total expenses of the offering, including underwriting discounts and commissions, were approximately $2.9 million (including certain warrants with value of $196,000 issued in connection with the IPO). The net proceeds we received from the initial public offering (including the over-allotment option) was approximately $10.8 million. Concurrently with our initial public offering, we consummated the private placement of 2,000,000 units in a private placement and received aggregate gross proceeds of $12,000,000 from the private placement.Capital Resources.”
On August 11, 2016, we consummated a registered direct offering of 643,614 ordinary shares at a price of $1.90 per share and pre-funded warrants to purchase 2,514,281 ordinary shares at a purchase price of $1.85 per pre-funded warrant. The pre-funded warrants had an exercise price of $0.05 per share, subject to certain adjustments and an expiration date of August 11, 2023, unless otherwise extended in accordance with the terms of the pre-funded warrants. We received gross proceeds from the registered direct offering of approximately $5.9 million (including proceeds from the exercise of 575,000 pre-funded warrants at the closing of the offering). As of December 31, 2016, additional pre-funded warrants to purchase an aggregate 1,649,281 ordinary shares had been exercised, for additional proceeds of $82,500. As of January 23, 2017, all of the remaining pre-funded warrants to purchase an aggregate 290,000 ordinary shares had been exercised, for additional proceeds of $14,500.
Our management has plans to continue the development, clinical development and regulatory activities of increasing our researchC-Scan in 2021 and developmentthat costs associated with such activities are expected to increase in 20172021, to reach market in a timely manner. Such plans will increase the burn rateWe believe that our cash and our management expects that with such increased costs, existing cash equivalents and short-term deposits will be sufficient to fund our projected operating requirements at least until December 31, 2017. Our managementoperations through July 2022. This has led management to conclude that substantial doubt about our ability to continue as a going concern exists. However, management’s plans include additional fund raising in the next year, which management believe is probable. Nevertheless,future in order to secure sufficient cash resources to finance our pivotal study that we plan to initiate in late 2021, attain regulatory approvals, manufacturing scale up and begin the commercialization efforts for our products. If we are not successful in raising capital through public or private offerings or are unable to reduce our expenses, we may exhaust our cash resources and will require significant additional financing in the futurebe unable to fundcontinue our operations if and when we progress with our clinical trials in Europe and the United States as well as other potential territories. If adequate additional financing on acceptable terms is not availablebeyond July 2022. See “Item 3D “Key Information - Risk Factors— Risks Related to us on a timely basis during 2017, we believe that we would have the flexibility to downsize our operations such that our existing cash will be sufficient to fund our cash requirements until June 30, 2018. We have based these estimates on assumptions that may prove to be wrong and we may use our capital resources sooner than we currently expect.Our Financial Position.”
For a more detailed description of our business and plans, see Item 4B “Information on Our Company – Business Overview.”
Financial Operations Overview
Revenue
We have not generated any revenue since our inception. To date, we have funded our operations primarily through equity financings, as well as from grants that we received from NATI (formerly known as the OCS).IIA. If our product development efforts result in clinical success, regulatory approval and the successful commercialization, of our imaging system, we expect to generate revenue from sales of our C-Scan system.C-Scan.
Operating Cost and Expenses
Our operating costs and expenses are classified into two categories: research and development expenses and general and administrative expenses. For each category, the largest component is personnel costs, which consists of salaries, employee benefits and share-based compensation. Operating costs and expenses also include allocated overhead costs for depreciation of equipment. Operating costs and expenses are generally recognized as incurred. We expect personnel costs to continue to increase as we hire new employees to continue to grow our business.
Research and Development Expenses, Net
Research and development activities are central to our business model. We intend to increase our research and development operations in order to complete the development of C-Scan, to conduct our C-Scan systemclinical trials, including the pivotal study in the United States that we plan to initiate in late 2021, and to attain regulatory approvals.
Since 2014,2016, we have spent approximately $14.2$42.0 million on research and development expenses as of December 31, 2016,2020, of which $2.1$1.6 million was funded by government grants. Our total research and development expenses, net of participations in the years ended December 31, 2016, 20152020, 2019 and 20142018 were approximately $5.5$10.0 million, $5.8$10.5 million and $2.8$7.6 million, respectively. All research and development expenses are expensed as incurred. We expect research and development expenses to increase in absolute terms in the near term.
Research and development expenses consist primarily of costs incurred for our researchdevelopment activities, including:including:
employee-related expenses for research and development staff, including salaries, benefits and related expenses, including share-based compensation and travel expenses;
payments associated with clinical activities including payments made to third-party contract research organizations, contract manufacturers,CROs, investigative sites, patients, materials and consultants;
payments associated with the development activities of our advanced C-Scan system and non-clinical activities, including payments made to third-party subcontractors, providers and consultants;
manufacturing development costs and manufacturing scale up costs;
costs associated with preclinical and clinical activities and regulatory operations;
facilities, depreciation and other expenses, which include direct and allocated expenses for rent and maintenance of facilities; and
costs associated with obtaining and maintaining patents.
Our research and development expenses, net, are net of grants we have received from the Government of Israel through NATI (formerly known as the OCS).IIA. Under the terms of the ResearchInnovation Law as currently in effect, in exchange for these grants, we are required to pay NATIthe IIA royalties from our revenues up to an aggregate of 100% (which may be increased under certain circumstances) of the U.S. dollar-linked value of the grant, plus interest at the rate of 12-month LIBOR. Pursuant to regulations under the ResearchInnovation Law, the rate of royalty repayment ranges betweenis 3% toor 5% of revenues (or 6% with respect to certain limited programs and at an(which may be increased rate under certain circumstances). from sales of products and services based on IIA-funded know-how. As of December 31, 2016,2020, we had received funding from NATI (formerly the OCS)IIA in the aggregate amount of $5.1approximately $5.6 million. As of December 31, 2016,2020, we had not paid any royalties to NATIthe IIA and had a contingent obligation to NATIthe IIA in the amount of $5.3approximately $6.1 million. In January 2021, we received an additional IIA grant to support the funding of our transition from research and development to manufacturing in the amount of up to $750,000 (along with a co-investment by us of the same amount), subject to the terms and conditions set forth in the grant approval, of which we received approximately $260,000 in January 2021. For additional information regarding the NATIIIA grants, see Item 10E “Additional Information - Taxation - Israeli Tax Considerations and Government Programs - The Encouragement of Research, Development and Technological Innovation in the Industry Law 5744-1984 (formerly known as the Encouragement of Industrial Research and Development Law, 5744-1984).” There can be no assurance that we will continue to receive grants from the OCSIIA in amounts sufficient for our operations, if at all.
As See also “Item 3D “Key Information - Risk Factors— Risks Related to Our Operations in Israel—“Pursuant to the terms of December 31, 2016,the Israeli government grants we together with Synergy Research Inc., or Synergy, had received funding from the BIRD Foundation of $127,000 for the funding of a project entitled “Collection & Analysis of Gastrointestinal Images for Diagnostic Adenomatic Polypsresearch and Colorectal Cancer.” We shall not be receiving additional funding from the BIRD Foundation for such project, which is no longer active; however,development expenditures and expenditures relating to our transition to manufacturing , we are considering applyingobligated to pay certain royalties on our revenues to the BIRD Foundation for funding for related projects. Based on the aggregate expenses that we incurred for the project, we are required to refund to the BIRD Foundation an amount of approximately $12,000. As of December 31, 2016, we had not paid any royalties to the BIRD Foundation and had a contingent liability to the BIRD Foundation in the amount of $127,000. See Item 5B “Operating and Financial Review and Prospects — Liquidity and Capital Resources — Sources of Liquidity” for a descriptionIsraeli government. The terms of the Cooperationgrants require us to satisfy specified conditions and Project Funding Agreement withto make additional payments in addition to repayment of the BIRD Foundation and Synergy.grants upon certain events.”
General and Administrative Expenses
Our general and administrative expenses consist primarily of salaries and other related costs, including share-based compensation expense, for persons serving as our executive,directors and executives, finance, legal, human resources and administrative personnel, professional service fees, directors’ and officers’ liability insurance and other general corporate expenses, such as communication, office and travel expenses. We expect that our general and administrative expenses will continue to increase in line with the future as we incur additional generalgrowth of our overall operations and, administrativein part, due to costs associated with being a public company in the United States, including compliance under the Sarbanes-Oxley Act of 2002 and rules promulgated by the U.S. Securities and Exchange Commission. These public company-related expense increases will likely include costs of additional legal fees, accounting and audit fees, directors’ and officers’ liability insurance premiums and costs related to investor relations.
Financial Income, and Finance Expensesnet
Our finance income, net in 2020, 2019 and finance expenses in years 2015 and 2014 consist2018 consists primarily of fair value changes with respect to warrants to purchase Series D-1 and D-2 preferred shares issued to investors and service providers in connection with our D1 investment round, and warrants to purchase Series C-1 preferred shares and warrants to purchase Series C-2 preferred shares issued to Pontifax (investing through three affiliated funds: Pontifax (Cayman) II, L.P., Pontifax (Israel) II L.P., Pontifax (Israel) II- Individual Investors L.P. which we collectively refer to as the “Pontifax Funds”), interest earned on our cash, cash equivalents and short-term investments and changes in provision for royalties primarily to Check –Cap LLC unitholders.
Our finance income and finance expenses in 2016 consist of interest earned on our cash cash equivalents and short-term investmentsbank deposits and changes in provision for royalties primarily to Check–Cap LLC unitholders.
Foreign currency transactions are translated into U.S. dollars using the exchange rates prevailing at the dates of the transactions or valuation where items are re-measured. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation of year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognized to “finance income, net” in the consolidated statement of operations to “finance expenses”/”finance income.”operations.
Taxes on Income
The standard corporate tax rate in Israel is 23% for the 20162018 tax year is 25%, decreased from 26.5% for the 2015 and 2014 tax year.thereafter.
We do not generate taxable income in Israel, as we have historically incurred operating losses resulting in carryforward tax losses totaling approximately $30.9$86.0 million as of December 31, 2016.2020. We anticipate that we will be able to carry forward these tax losses indefinitely to future tax years. However, a tax loss that can be utilized in a certain tax year cannot be carried forward to future tax years. Accordingly, we do not expect to pay taxes in Israel until we have taxable income after the full utilization of our carry forward tax losses.
Under the Law for the Encouragement of Capital Investments, 5719-1959 and other Israeli legislation, we may be entitled to certain additional tax benefits, including reduced tax rates, accelerated depreciation and amortization rates for tax purposes on certain assets, deduction of public offering expenses in three equal annual installments and amortization of other intangible property rights for tax purposes. See Item 10E “Additional Information — Taxation— Israeli Tax Considerations and Government Programs” for additional information concerning these tax benefits.
Results of Operations
For convenience purposes, the numbers set forth in the management’s discussion and analysis below are, where applicable, rounded up and presented in millions, whereas the numbers in the tables below are presented in thousands. As result, the percentages set forth in the year-over-year comparisons below are based on numbers that have (where applicable) been rounded up to millions, which may slightly differ than the percentages that would result from the corresponding numbers set forth in the table that are presented in thousands.
Year Ended December 31, 20162020 Compared to Year Ended December 31, 20152019
| | Year Ended December 31, | |
| | 2020 | | | 2019 | |
| | (US$ in thousands, except per share data) | |
Research and development expenses, net | | $ | 10,008 | | | $ | 10,474 | |
General and administrative expenses | | | 3,924 | | | | 3,595 | |
Operating loss | | | 13,932 | | | | 14,069 | |
Finance income, net | | | 86 | | | | 233 | |
Loss before income tax | | | 13,846 | | | | 13,836 | |
Taxes on income | | | - | | | | - | |
Net loss | | $ | 13,846 | | | $ | 13,836 | |
| | Year Ended December 31, | |
| | 2016 | | | 2015 | |
| | (US$ in thousands, except per share data) | |
Research and development expenses, net | | $ | 5,491 | | | $ | 5,837 | |
General and administrative expenses | | | 3,571 | | | | 6,626 | |
Operating loss | | | 9,062 | | | | 12,463 | |
Finance income, net | | | 244 | | | | 173 | |
Loss before income tax | | | 8,818 | | | | 12,290 | |
Taxes on income | | | 8 | | | | - | |
Net loss | | $ | 8,826 | | | $ | 12,290 | |
Research and Development Expenses, net. Our researchResearch and development expenses, net for the year ended December 31, 20162020 were $5.49approximately $10.0 million, as compared with $5.84approximately $10.5 million for the year ended December 31, 2015,2019, a decrease of $0.35$0.5 million or 6.0%4.4%. The decrease in research and development, net expenses between 20162020 and 20152019 was primarily due to:to (i) a $770,000 increasedecrease of approximately $0.7 million in grants from NATI (formerly known asclinical expenses mainly due to higher expenses for the OCS)pilot study in 2016;the U.S and post CE study in 2019 (ii) a $556,000 decrease of approximately $0.4 million in other research and development expenses, (iii) a decrease of approximately $0.3 million in share-based compensation, primarily due to the absencecompensation. The foregoing decrease was offset in 2016part by an increase of approximately $0.8 million in salaries and related expenses mainly as a $448,000 share-based compensation expense that we recordedresult of an expansion in 2015 associated with the one-time grant of options to certain members of our management;head count and a $368,000 decrease in fees to subcontractors and consultants in 2016 as we increased the number of research, development and clinical employees in 2016.currency exchange rate fluctuation. The decrease in research and development expenses, net between 20162020 and 2015 was partially offset by2019 also includes a $1.1$0.1 million increasedecrease in salaries and related expenses as a result ofgrants received from the recruitment of research, development and clinical employees during the course of 2015, the related expenses for whom were fully accounted for in 2016 and a $229,000 increase in other research and development expenses relating to our clinical trials.IIA.
| | 2020 | | | 2019 | | | Change | |
| | (US$ in thousands) | |
Salaries and related expenses | | $ | 6,173 | | | $ | 5,316 | | | $ | 857 | |
Share-based compensation | | | 165 | | | | 421 | | | | (256 | ) |
Materials | | | 1,792 | | | | 1,944 | | | | (152 | ) |
Subcontractors and consultants | | | 807 | | | | 764 | | | | 43 | |
Depreciation | | | 123 | | | | 98 | | | | 25 | |
Cost for registration of patents | | | 164 | | | | 132 | | | | 32 | |
Other research and development expenses | | | 784 | | | | 1,889 | | | | (1,105 | ) |
| | | 10,008 | | | | 10,564 | | | | (556 | ) |
Less participation of the IIA (formerly the OCS) | | | (- | ) | | | (90 | ) | | | 90 | |
Total research and development expenses, net | | $ | 10,008 | | | $ | 10,474 | | | $ | (466 | ) |
| | 2016 | | | 2015 | | | Change | |
| | (US$ in thousands) | |
Salaries and related expenses | | $ | 4,683 | | | $ | 3,585 | | | $ | 1,098 | |
Share-based compensation | | | 234 | | | | 790 | | | | (556 | ) |
Materials | | | 596 | | | | 608 | | | | (12 | ) |
Subcontractors and consultants | | | 320 | | | | 688 | | | | (368 | ) |
Depreciation | | | 121 | | | | 85 | | | | 36 | |
Cost for registration of patents | | | 150 | | | | 153 | | | | (3 | ) |
Other research and development expenses | | | 511 | | | | 282 | | | | 229 | |
| | | 6,615 | | | | 6,191 | | | | 424 | |
Less participation of NATI (formerly known as the OCS) and the BIRD Foundation | | | (1,124 | ) | | | (354 | ) | | | (770 | ) |
Total research and development expenses, net | | $ | 5,491 | | | $ | 5,837 | | | $ | (346 | ) |
General and Administrative Expenses. Our general and administrative expenses for the year ended December 31, 20162020 were $3.6approximately $3.9 million, as compared to $6.6approximately $3.6 million for the year ended December 31, 2015, a decrease2019, an increase of $3.0$0.3 million, or 46.6%9.2%. The decreaseincrease in general and administrative expenses is primarily due to the following:
The absence in 2016 of a $2.0$0.2 million share-based compensation expense that we recorded in 2015 relating to the one-time grant of options to certain of our management and warrants to Pontifax entities (for additional information see Item 7B “Major Shareholders and Related Party Transactions—Related Party Transactions—Pontifax Warrants”).
A $419,000 decreaseincrease in salaries and related expenses, due to the absence$0.1 million increase in 2016 of share-based compensation expenses and $0.2 million increase in other general expenses, offset by a $140,000 one-time severance payment to our former chief executive officer that we recorded in 2015 and a $109,000 decrease in provision for bonuses to certain members of our management in 2016.
A $715,000$0.2 million decrease in professional services and other general and administrative expenses, primarily relating to a $248,000 decrease in recruiting expenses as in 2015 we recruited a new chief executive officer and a large number of research, development and clinical employees, a $155,000 decrease in legal fees due to our recruitment of an in-house counsel, as well as reduced rates or services of certain other professional service providers.
expenses.
| | 2016 | | | 2015 | | | Change | |
| | (US$ in thousands) | |
Salaries and related expenses | | $ | 1,411 | | | $ | 1,830 | | | $ | (419 | ) |
Share-based compensation | | | 975 | | | | 2,934 | | | | (1,959 | ) |
Professional services | | | 354 | | | | 609 | | | | (255 | ) |
Office rent and maintenance | | | 144 | | | | 108 | | | | 36 | |
Depreciation | | | 9 | | | | 7 | | | | 2 | |
Other general and administrative expenses | | | 678 | | | | 1,138 | | | | (460 | ) |
Total general and administrative expenses | | $ | 3,571 | | | $ | 6,626 | | | $ | (3,055 | ) |
82
| | 2020 | | | 2019 | | | Change | |
| | (US$ in thousands) | |
Salaries and related expenses | | $ | 1,698 | | | $ | 1,506 | | | $ | 192 | |
Share-based compensation | | | 243 | | | | 95 | | | | 148 | |
Professional services | | | 574 | | | | 705 | | | | (131 | ) |
Office rent and maintenance | | | 174 | | | | 180 | | | | (6 | ) |
Depreciation | | | 25 | | | | 17 | | | | 8 | |
Other general and administrative expenses | | | 1,210 | | | | 1,092 | | | | 118 | |
Total general and administrative expenses | | $ | 3,924 | | | $ | 3,595 | | | $ | 329 | |
Operating Loss. AsOur operating loss for the year ended December 31, 2020 was approximately $13.9 million, as compared with approximately $14.1 million for the year ended December 31, 2019, a decrease of approximately $0.2 million, or 1.0%. The decrease was as a result of athe $0.5 million decrease in research and development expenses, net for the year ended December 31, 2016approximately 2019 offset by the increase of $0.3 in general and administrative expenses compared to the year ended December 31, 2015, and a $3.0 million decrease in general and administrative expenses in the same period, our operating loss for the year ended December 31, 2016 was $9.1 million, as compared with $12.5 million for the year ended December 31, 2015, a decrease of $3.4 million, or 27.2%.2020.
Finance Income, net. Our finance income, net for the year ended December 31, 20162020 was $244,000,approximately $86,000, as compared to $173,000approximately $233,000 for the year ended December 31, 2015, an increase2019, a decrease of $71,000.approximately $147,000. The change in our finance income, net is primarily due to a decrease of $176,000 of interest income of short term deposits recorded for the following:
| · | The absence in 2016 of $174,000 of finance income that we recorded in 2015 relating to changes in fair value of the warrants to purchase Series D-1 and D-2 preferred shares issued to investors and service providers in connection with our Series D-1 investment round and the warrants to purchase Series C-1 and C-2 preferred shares issued to Pontifax. |
| · | For the year ended December 31, 2016, we recorded $139,000 of interest income on short-term deposits and $56,000 of finance income as a result of exchange rate differences, as compared to $61,000 and $18,000, respectively, for the year ended December 31, 2015. |
| · | For the year ended December 31, 2016, we recorded finance income of $56,000 as a result of changes in provision for royalties, as compared to a finance expense of $33,000 in the year ended December 31, 2015. |
| · | for the year ended December 31, 2016, we had bank fees of $7,000 and interest expenses and fess relating to a loan of $40,000, as compared to bank fees of $7,000 in the year ended December 31, 2015. |
year ended December 31, 2020, as compared to the year ended December 31, 2019
Loss before income tax and net loss. Our loss before income tax for the year ended December 31, 2016 was $8.82 million, as compared to $12.29 million for the year ended December 31, 2015, a decrease of $3.65 million.
Net Loss. Ourand net loss for the year ended December 31, 20162020 was $8.83approximately $13.8 million, as compared to $12.29approximately $13.8 million for the year ended December 31, 2015,2019, a decreaseslight increase of $3.46 million.$10,000.
Year Ended December 31, 20152019 Compared to Year Ended December 31, 20142018
| | Year Ended December 31, | |
| | 2019 | | | 2018 | |
| | (US$ in thousands, except per share data) | |
Research and development expenses, net | | $ | 10,474 | | | $ | 7,618 | |
General and administrative expenses | | | 3,595 | | | | 3,445 | |
Operating loss | | | 14,069 | | | | 11,063 | |
Finance income, net | | | 233 | | | | 473 | |
Loss before income tax | | | 13,836 | | | | 10,590 | |
Taxes on income | | | - | | | | (1 | ) |
Net loss | | $ | 13,836 | | | $ | 10,589 | |
| | Year Ended December 31, | |
| | 2015 | | | 2014 | |
| | (US$ in thousands, except per share data) | |
Research and development expenses, net | | $ | 5,837 | | | $ | 2,832 | |
General and administrative expenses | | | 6,626 | | | | 1,703 | |
Operating loss | | | 12,463 | | | | 4,535 | |
Finance income, net | | | 173 | | | | 3,925 | |
Loss before income tax | | | 12,290 | | | | 610 | |
Taxes on income | | | - | | | | - | |
Net loss | | $ | 12,290 | | | $ | 610 | |
Research and Development Expenses, net. Our researchResearch and development expenses, net for the year ended December 31, 20152019 were $5.8$10.47 million, as compared with $2.8$7.62 million for the year ended December 31, 2014,2018, an increase of $3.0$2.85 million or 107%37.4%. The increase in research and development, net expenses between 2019 and 2018 was primarily due to a $0.9 million increase in salaries and related expenses, $0.19 million increase in share-based compensation, $0.44 million increase in materials, $0.45 million increase in subcontractor and consultant expenses and a $0.79 million increase in other research and development expenses, mainly related to our clinical trials, primarily in connection with our post-CE Mark clinical study and the U.S. pilot study. The increase in research and development expenses, net between 20152019 and 20142018 was primarilyalso due to a $0.12 million decrease in grants received from the progress in the development of our C-Scan system, including increased expenditures due to clinical trial costs associated with the recruitment of 28 employees and independent contractors to the research and development team.IIA.
| | 2015 | | | 2014 | | | Change | |
| | (US$ in thousands) | |
Salaries and related expenses | | $ | 3,585 | | | $ | 2,425 | | | $ | 1,160 | |
Share-based compensation | | | 790 | | | | 104 | | | | 686 | |
Materials | | | 608 | | | | 385 | | | | 223 | |
Subcontractors and consultants | | | 688 | | | | 294 | | | | 394 | |
Depreciation | | | 85 | | | | 72 | | | | 13 | |
Cost for registration of patents | | | 153 | | | | 72 | | | | 81 | |
Other research and development expenses | | | 282 | | | | 123 | | | | 159 | |
| | | 6,191 | | | | 3,475 | | | | 2,716 | |
Less participation of NATI (formerly known as the OCS) and the BIRD Foundation | | | (354 | ) | | | (643 | ) | | | 289 | |
Total research and development expenses, net | | $ | 5,837 | | | $ | 2,832 | | | $ | 3,005 | |
83
| | 2019 | | | 2018 | | | Change | |
| | (US$ in thousands) | |
Salaries and related expenses | | $ | 5,316 | | | $ | 4,410 | | | $ | 906 | |
Share-based compensation | | | 421 | | | | 234 | | | | 187 | |
Materials | | | 1,944 | | | | 1,508 | | | | 436 | |
Subcontractors and consultants | | | 764 | | | | 311 | | | | 453 | |
Depreciation | | | 98 | | | | 138 | | | | (40 | ) |
Cost for registration of patents | | | 132 | | | | 126 | | | | 6 | |
Other research and development expenses | | | 1,889 | | | | 1,099 | | | | 790 | |
| | | 10,564 | | | | 7,826 | | | | 2,738 | |
Less participation of the IIA (formerly the OCS) | | | (90 | ) | | | (208 | ) | | | 118 | |
Total research and development expenses, net | | $ | 10,474 | | | $ | 7,618 | | | $ | 2,856 | |
General and Administrative Expenses. Our general and administrative expenses for the year ended December 31, 20152019 were $6.6$3.6 million, as compared to $1.7$3.45 million for the year ended December 31, 2014,2018, an increase of $4.9$0.15 million, or 288%4.4%. The increase in general and administrative expenses is primarily due to the following:
a $2.7$0.39 million increase in share-based compensation of which $2.0expenses and $0.19 million relates to the grant of options to purchase 581,542 ordinary shares from October 14, 2015 to our management and warrants to purchase 221,539 ordinary shares to Pontifaxincrease on other general expenses, offset in consideration of their commitment to provide us, for no additional consideration, business development services andpart by a representative designated by Pontifax to serve as the chairman of our board of directors (for additional information see Item 7B “Major Shareholders and Related Party Transactions—Related Party Transactions—Pontifax Warrants”).
a $2.2$0.33 million increasedecrease in salaries and related expenses and $0.13 million decrease in professional services and other general administrative expenses incurred in connection with our initial public offering and concurrent private placement and other public company costs.
expenses.
| | 2019 | | | 2018 | | | Change | |
| | (US$ in thousands) | |
Salaries and related expenses | | $ | 1,506 | | | $ | 1,839 | | | $ | (333 | ) |
Share-based compensation | | | 95 | | | | (299 | ) | | | 394 | |
Professional services | | | 705 | | | | 833 | | | | (128 | ) |
Office rent and maintenance | | | 180 | | | | 163 | | | | 17 | |
Depreciation | | | 17 | | | | 10 | | | | 7 | |
Other general and administrative expenses | | | 1,092 | | | | 899 | | | | 193 | |
Total general and administrative expenses | | $ | 3,595 | | | $ | 3,445 | | | $ | 150 | |
| | 2015 | | | 2014 | | | Change | |
| | (US$ in thousands) | |
Salaries and related expenses | | $ | 1,830 | | | $ | 952 | | | $ | 878 | |
Share-based compensation | | | 2,934 | | | | 208 | | | | 2,726 | |
Professional services | | | 609 | | | | 114 | | | | 495 | |
Office rent and maintenance | | | 108 | | | | 105 | | | | 3 | |
Depreciation | | | 7 | | | | 7 | | | | - | |
Other general and administrative expenses | | | 1,138 | | | | 317 | | | | 821 | |
Total general and administrative expenses | | $ | 6,626 | | | $ | 1,703 | | | $ | 4,923 | |
Operating Loss. AsOur operating loss for the year ended December 31, 2019 was $14.1 million, as compared with $11.1 million for the year ended December 31, 2018, an increase of $3.0 million, or 27%. The increase was as a result of a $3.0the $2.85 million increase in research and development expenses, net for the year ended December 31, 20152019 compared to the year ended December 31, 2014, and a $4.9 million increase in general and administrative expenses in the same period, our operating loss for the year ended December 31, 2015 was $12.5 million, as compared with $4.5 million for the year ended December 31, 2014, an increase of $8.0 million, or 178%.2019.
Finance Income, net, net.. Our finance income, net for the year ended December 31, 20152019 was $173,000,$0.23 million, as compared to $3.9$0.47 million for the year ended December 31, 2014,2018, a decrease of $3.8$0.24 million. The change in our finance income, net is primarily due to the following:
For the year ended December 31, 2014,2019, we recorded finance$245,000 of interest income of $3.5 millionon short-term deposits as compared to finance income of $174,000$243,000, for the year ended December 31, 2015. This2018. For the year ended December 31, 2019, we recorded finance income isof $3,000 as a result of changes in fair valuethe royalties provision, primarily related to the reimbursement liability to Check–Cap LLC unitholders, as compared to finance income of $255,000 for the warrants to purchase Series D-1 and D-2 preferred shares issued to investors and service providersyear ended December 31, 2018, a decrease in connection with our Series D-1 investment round and the warrants to purchase Series C-1 and C-2 preferred shares issued to Pontifax.income of $252,000.
For the year ended December 31, 2014,2019, we recorded $26,000 of finance income of $415,000 as a result of changes in provision for royalties,expense as compared to a finance expense of $33,000$34,000 for the year ended December 31, 2015.2018, a decrease of $8,000 mainly as a result of exchange rate differences.
Loss before income tax and net loss. Our loss before income tax for the year ended December 31, 2015 was $12.3 million, as compared to $610,000 for the year ended December 31, 2014, an increase of $11.7 million.
Net Loss. Ourand net loss for the year ended December 31, 20152019 was $12.3$13.84 million, as compared to $610,000$10.59 million for the year ended December 31, 2014,2018, an increase of $11.7$3.25 million.
B. | Liquidity and Capital Resources |
Sources of Liquidity
To date, we have funded our operations primarily with the approximately $24.5 million raised through equity financings consummated prior to our initial public offering, $13.5 million through our initial public offering, (including the over-allotment exercise), $12.0 million through the private placement consummated concurrently with our initial public offering, $6.0 million though ourplacements, registered direct offering (including through theand underwritten public offerings, our warrant exercise of pre-funded warrants issued in the offering), $5.1 million throughtransaction and grants that we received from NATIthe IIA (formerly known as the OCS) and the BIRD FoundationFoundation. As of December 31, 2020, we had approximately $18.1 million cash and cash equivalents, and had invested most of our available cash in short term bank deposits.
On February 4, 2020, we consummated a private placement of 2,720,178 ordinary shares at a purchase price of $1.75 per share. We received gross proceeds of approximately $4.76 million from the private placement.
On April 22, 2020, we consummated a registered direct offering of 6,666,669 ordinary shares in a registered direct offering at a purchase price of $0.60 per share, resulting in gross proceeds of approximately $4,000,000. In addition, we issued to the investors unregistered warrants to purchase an aggregate of 6,666,669 ordinary shares in a private placement. The warrants are immediately exercisable and will expire five and one-half years from the issuance date at an exercise price of $0.80 per ordinary share, subject to adjustment as set forth therein. The warrants may be exercised on a cashless basis if at the time of exercise thereof, there is no effective registration statement registering the ordinary shares underlying the warrants. We paid an aggregate of $280,000 in placement agent fees, a management fee equal to 1.0% of the gross proceeds raised in the offering, a non-accountable expense allowance of $65,000 and clearing expenses of $12,900. We also issued unregistered placement agent warrants to purchase up to an aggregate of 466,667 ordinary shares on the same terms as the warrants issued to the investors in the private placement, except they have a term of five years and an exercise price of $0.75 per share. On July 27, 2020, as part of the Exercise Agreement (see below), aggregate warrants to purchase 5,833,336 ordinary shares were exercised for ordinary shares. As of December 31, 2020, warrants to purchase 833,333 ordinary shares held by certain investors and warrants to purchase 466,667 ordinary shares held by the placement agent, were outstanding. During the first quarter of 2021, all of the outstanding warrants in the aggregate amount of warrants to purchase an aggregate 1,300,000 ordinary shares were exercised into ordinary shares, at exercise prices ranging from $0.75-$0.80 per share, for total gross proceeds to us of approximately $1.0 million drawn down undermillion.
On May 4, 2020, we consummated a credit line.registered direct offering of 7,500,001 ordinary shares in a registered direct offering at a purchase price of $0.60 per share, resulting in gross proceeds of approximately $4,500,000. In addition, we issued to the investors unregistered warrants to purchase up to an aggregate of 7,500,001 ordinary shares in a concurrent private placement. The warrants are immediately exercisable and will expire five and one-half years from the issuance date at an exercise price of $0.80 per ordinary share, subject to adjustment as set forth therein. The warrants may be exercised on a cashless basis if at the time of exercise thereof, there is no effective registration statement registering the ordinary shares underlying the warrants. We paid an aggregate of $315,000 in placement agent fees, a management fee equal to 1.0% of the gross proceeds raised in the offering, a non-accountable expense allowance of $65,000 and clearing expenses of $12,900. We also issued unregistered placement agent warrants to purchase up to an aggregate of 525,000 ordinary shares on the same terms as the warrants issued to the investors in the private placement, except they have a term of five years and an exercise price of $0.75 per share. On July 27, 2020, as part of the Exercise Agreement (see below), aggregate warrants to purchase 5,833,334 ordinary shares were exercised for ordinary shares. As of December 31, 2020, warrants to purchase 1,666,667 ordinary shares held by certain investors and warrants to purchase 525,000 ordinary shares held by the placement agent, were outstanding. During the first quarter of 2021, all the warrants for an aggregate 2,191,667 ordinary shares were exercised into ordinary shares, at exercise prices ranging from $0.75-$0.80 per share, for total gross proceeds to us of approximately $1.7 million.
On May 13, 2020, we consummated a registered direct offering of 5,000,000 ordinary shares in a registered direct offering at a purchase price of $0.60 per share, resulting in gross proceeds of $3,000,000. In addition, we issued to the investors unregistered warrants to purchase up to an aggregate of 5,000,000 ordinary shares in a concurrent private placement. The warrants are immediately exercisable and will expire five and one-half years from the issuance date at an exercise price of $0.80 per ordinary share, subject to adjustment as set forth therein. The warrants may be exercised on a cashless basis if at the time of exercise thereof, there is no effective registration statement registering the ordinary shares underlying the warrants. We paid an aggregate of $210,000 in placement agent fees, a management fee equal to 1.0% of the gross proceeds raised in the offering, a non-accountable expense allowance of $32,500 and clearing expenses of $12,900. We also issued unregistered placement agent warrants to purchase up to an aggregate of 350,000 ordinary shares on the same terms as the warrants issued to the investors in the private placement, except they have a term of five years and an exercise price of $0.75 per share. On July 27, 2020, as part of the Exercise Agreement (see below), aggregate warrants to purchase 3,333,333 ordinary shares were exercised for ordinary shares. As of December 31, 2020, warrants to purchase 1,666,667 ordinary shares held by certain investors and warrants to purchase 350,000 ordinary shares held by the placement agent, were outstanding. During the first quarter of 2021, all the remaining warrants for an aggregate 2,016,667 ordinary shares were exercised into ordinary shares, at exercise prices ranging from $0.75-$0.80 per share, for total gross proceeds to us of approximately $1.6 million.
On July 23, 2020, we entered into a warrant exercise agreement, or the Exercise Agreement, with several existing institutional investors who are the holders, or the Holders, of warrants issued in May 2020, April 2020, February 2019 and November 2017, or the Old Warrants, to purchase our ordinary shares, pursuant to which the Holders agreed to exercise in cash their Old Warrants to purchase up to an aggregate of 16,054,223 ordinary shares having exercise prices ranging from $15.00 to $0.80 per share issued by us, at a reduced exercise price of $0.60 per share, resulting in gross proceeds of approximately $9.6 million. Closing occurred on July 27, 2020. Under the Exercise Agreement, we also issued to the Holders new unregistered warrants to purchase up to 19,265,068 ordinary shares, or the Private Placement Warrants. The Private Placement Warrants are immediately exercisable, expire five and one-half years from issuance date and have an exercise price of $0.80 per share, subject to adjustment as set forth therein. The Private Placement Warrants may be exercised on a cashless basis if at the time of exercise thereof, there is no effective registration statement registering the ordinary shares underlying the warrants. We paid an aggregate of $674,277 in placement agent fees a management fee equal to 1.0% of the gross proceeds raised in the offering, a non-accountable expense allowance of $65,000 and clearing expenses of $12,900 and issued unregistered placement agent warrants to purchase up to an aggregate of 1,123,796 ordinary shares on the same terms as the warrants issued to the Holders, except that they have an exercise price of $0.75 per share. During the first quarter of 2021, certain warrants holders and the placement agent exercised 17,572,552 Private Placement Warrants and 1,123,796 warrants, respectively, at exercise prices ranging from $0.75-$0.80 per share, for total gross proceeds to us of approximately $14.9 million.
For the years ended December 31, 2020, 2019 and 2018, we received cash in the amount of $31,000, $59,000, and $208,000, respectively, in grants from the IIA for the financing of a portion of our research and development expenditure. In January 2021, we received an additional IIA grant to support the funding of our transition from research and development to manufacturing in the amount of up to $750,000, of which we received approximately $260,000 in January 2021.
On July 13, 2014, we entered into a Cooperation and Project Funding Agreement with the BIRD Foundation and Synergy, pursuant to which the BIRD Foundation has agreed to award a grant to Synergy and us in the maximum amount of the lesser of (i) $900,000; and (ii) 50% of the actual expenditures for the funding of a project entitled “Collection & Analysis of Gastrointestinal Images for Diagnostic Adenomatic Polyps and Colorectal Cancer.” The development work was to be performed over a 24 month period by Synergy (or a subcontractor on its behalf) and us. As of December 31, 2016,Synergy. In 2014, we, hadtogether with Synergy, received funding from the BIRD Foundation in the aggregate amount of approximately $127,000. We shall not be receiving additional funding fromare required to repay up to 150% of the total sum granted to us and Synergy by the BIRD Foundation, for the project, which is no longer active; however, we are considering applyinglinked to the BIRD Foundation for funding for related projects. Based on the aggregate expenses that we incurred for the project, we are required to refund to the BIRD Foundation an amount of approximately $12,000. Our research and development expenses, net is presented net of the grant amount received from the BIRD Foundation.U.S. Consumer Price Index. As of December 31, 2016,2020, we had not paid any royalties to the BIRD Foundation and had a contingent obligation to the BIRD foundation in the amount of $127,000.
We are required to repay the total sum granted to us and Synergy by the BIRD Foundation, linked to the U.S. Consumer Price Index from date of receipt of each payment, up to 100%, 113%, 125%, 138% and 150% of the linked sum granted by the BIRD Foundation if repaid within one year, two years, three years, four years and five or more years, respectively, of the original project completion date in accordance with the project proposal. Repayments are made at the rate of 5% of gross revenues derived from the product funded by the project. Under the terms of the agreement, if any portion of the product funded by the project is sold outright to a third party prior to full repayment of the grant to the BIRD Foundation, one-half of the sale proceeds will be applied to the repayment of the grant. If the funded product is licensed to a third party, 30% of all payments received under the respective license agreement must be paid to the BIRD Foundation in repayment of the grant.
On August 20, 2014, we entered into a certain credit line agreement, pursuant to which we obtained a credit line in an aggregate principal amount of $12 million from certain lenders and existing shareholders, or the Lenders. The credit line amount was deposited in an escrow account at the closing, which was consummated on October 14, 2014.approximately $185,000.
We issued toare a clinical and development-stage medical diagnostics company with a limited operating history. We have incurred net losses in each Lender at closing a warrant, collectively referred to as the Credit Line Warrants, to purchase a numberfiscal year since we commenced operations in 2009. We incurred net losses of our ordinary shares constituting 2% of our share capital on a fully diluted basis (assuming conversion of all of our then outstanding convertible securities into ordinary shares at a 1:1 conversion rate) as of the closing for each $1$13.8 million, (or portion thereof) extended by such Lender. We issued Credit Line Warrants to purchase$13.8 million and $10.6 million in the aggregate 2,658,463 of our ordinary shares. The Credit Line Warrants are exercisable for a period of ten years at an exercise price of NIS 0.20 per share,2020, 2019 and may be exercised on a net issuance basis.2018, respectively. As of December 31, 2016, Credit Line Warrants2020, our accumulated deficit was $91.0 million. Our losses could continue for the foreseeable future as we continue our investment in research and development and clinical trials to purchase an aggregate 2,082,325 ordinary shares had been exercisedcomplete the development of our technology and Credit Line Warrants to purchase an aggregate 33,368 warrants expiredattain regulatory approvals, manufacturing scale up, begin the commercialization efforts for C-Scan, increase our marketing and selling expenses, and incur additional costs as a result of being a public company in the exerciseUnited States. Successful completion of certain Credit Line Warrants on a net issuance basis.our development program and, ultimately, the attainment of profitable operations is dependent upon future events, including obtaining adequate financing to fulfill our development activities and our ability to manufacture commercial quantities of C-Scan at an acceptable cost and generate significant revenues. The extent of our future operating losses and the timing of becoming profitable are highly uncertain, and we may never achieve or sustain profitability.
Our accumulated losses and the termsadditional funds needed to maintain our operation raise substantial doubt about our ability to continue as a going concern. Our financial statements include a note describing the conditions which raise this substantial doubt. As a result, our independent registered public accounting firm included a “going concern” explanatory paragraph in its report on our financial statements as of and for the credit line agreement, we directed thatyear ended December 31, 2020 with respect to this uncertainty. Our ability to continue as a going concern will require us to obtain additional financing to fund our operations. The perception of our ability to continue as a going concern may make it more difficult for us to obtain financing for the full credit line amount be investedcontinuation of our operations and could result in the loss of confidence by investors, suppliers and employees. If we are not successful in raising capital through public or private placement that was consummated simultaneously withofferings or reducing our initial public offering that was consummated on February 24, 2015. We issuedexpenses, we may exhaust our cash resources and will be unable to the Lenderscontinue our operations. If we cannot continue as a totalviable entity, our shareholders would likely lose most or all of 2,000,000 units, each consisting of one ordinary share and one half of a Series A Warrant to purchase one ordinary share, together with 3,000,000 Long Term Incentive Warrants for aggregate gross proceeds of $12,000,000.their investment in us.
On January 4, 2015,To meet our capital needs, we entered into a credit line agreement with Bank Leumi le-Israel B.M., or Bank Leumi, pursuantare considering multiple alternatives, including, but not limited to, whichadditional equity financings and other funding transactions. While we were entitled to obtain a credit linehave been successful in raising financing in the principal amount of uppast, there can be no assurance that we will be able to $1,000,000, or the Bank Leumi Credit Facility. The Bank Leumi Credit Facility was required to be repaid in full by us no later than April 1, 2015 and Bank Leumi’s consent was required for early repayment. The drawn portion of the Bank Leumi Credit Facility bore interest at an annual rate of LIBOR plus 5.25% on the basis of a 365-day year, until paid in full. We drew the entire $1,000,000 Bank Leumi Credit Facility. We paid Bank Leumi a facility fee of $20,000 in connection with the facility. To secure the repayment of the Bank Leumi Credit Facility, we granted Bank Leumi (i) a first ranking fixed charge over our goodwill; and (ii) a first ranking floating charge over all of the assets and rights of any type whatsoever, which we had or may acquiredo so in the future subjecton a timely basis on terms acceptable to us, or at all. Uncertain market conditions and approval by regulatory bodies and adverse results from clinical trials may (among other reasons) adversely impact our ability to raise capital in the rights of NATI (formerly known asfuture.
Management expects that we will continue to generate losses from the OCS)development, manufacturing and the BIRD Foundationinfrastructure costs, clinical development and the rights under existing and future liens in favorregulatory activities of the First Intentional Bank of Israel Ltd. securing debt or indentures of up to an aggregate amount of $100,000. On March 16, 2015, we repaid all amounts outstanding under the Bank Leumi Credit Facility with the proceeds of our initial public offering and concurrent private placement.
On February 24, 2015, we consummated an initial public offering in the United States of 2,000,000 units, each consisting of one ordinary share and one half of a Series A Warrant to purchase one ordinary share. The price per unit sold in the initial public offering was $6.00. Each unit in the initial public offering was issued with one and one half Long Term Incentive Warrants. We granted the underwriters in the initial public offering a 45-day over-allotment option to purchase up to 300,000 additional units (together with an accompanying 450,000 Long Term Incentive Warrants) from us to cover over-allotments. On March 6, 2015, the option to purchase additional 100,000 units was partially exercised. On March 18, 2015, the units were separated into one ordinary share and one-half of a Series A Warrant to purchase one ordinary share and the units ceased to exist. On April 6, 2015, the option to purchase additional 150,000 ordinary shares and 75,000 Series A Warrant was partially exercised. The aggregate offering price of the securities sold in the initial public offering (including the over-allotment option) was approximately $13.5 million. The total expenses of the offering, in cash, including underwriting discounts and commissions, were approximately $2.9 million. Issuance expenses include certain warrants with value of $196,000 issued in connection with the initial public offering. The net proceeds we received from the initial public offering (including the over-allotment option) was approximately $10.8 million, (net of issuance cost of approximately $1.2 million, including certain warrants with value of $125 issued in connection with the private placement). In January 2015, we issued a total of 2,452,376 Long Term Incentive Warrants to purchasers of securities in our initial public offering who completed the required registration process by August 23, 2015.
Immediately prior to the consummation of our initial public offering, certain members of our management exercised options to purchase 307,467 ordinary shares granted to them under the 2006 Unit Option Plan.
On August 11, 2016, we consummated a registered direct offering of 643,614 ordinary shares at a price of $1.90 per share and pre-funded warrants to purchase 2,514,281 ordinary shares at a purchase price of $1.85 per pre-funded warrant. The pre-funded warrants had an exercise price of $0.05 per share, subject to certain adjustments and an expiration date of August 11, 2023, unless otherwise extended in accordance with the terms of the pre-funded warrants. We received gross proceeds from the registered direct offering of approximately $5.9 million (including proceeds from the exercise of 575,000 pre-funded warrants at the closing of the offering). As of December 31, 2016, additional pre-funded warrants to purchase an aggregate 1,649,281 ordinary shares had been exercised, for additional proceeds of $82,500. As of January 23, 2017, all of the remaining pre-funded warrants to purchase an aggregate 290,000 ordinary shares had been exercised, for additional proceeds of $14,500.
For the years ended December 31, 2016, 2015 and 2014, we received $1.5 million, $11,000 and $558,000, respectively, in grants from NATI (formerly known as the OCS) for the financing of a portion of our research and development expenditure.
Our management has plans of increasing our research and development costs in 2017 to reach marketC-Scan system, which will result in a timely manner. Such plans will increase the burn ratenegative cash flow from operating activity. We believe that our cash and our management expects that with such increased costs, our existing cash resourcesequivalents and the net proceeds from our initial public offering and concurrent private placement and our registered direct offering short-term deposits will be sufficient to fund our projected operating requirements at least until December 31, 2017. Nevertheless, we will require significant additional financing in the futureoperations through July 2022. This has led management to fundconclude that substantial doubt about our operations if and when we progress with our clinical trials in Europe and the United Statesability to continue as well as other potential territories. Managementa going concern exists. However, management’s plans include additional fund raising in the next year, which management believe is probable. future in order to secure sufficient cash resources to finance our pivotal study that we plan to initiate in late 2021, attain regulatory approvals, manufacturing scale up and begin the commercialization efforts for our products. In the event we are unable to successfully raise additional capital, we will not have sufficient cash flows and liquidity to finance our business operations as currently contemplated. Accordingly, in such circumstances we would be compelled to immediately reduce general and administrative expenses and delay research and development projects and clinical trials, until we are able to obtain sufficient financing. If adequate additionalsuch sufficient financing on acceptable terms is not availablereceived timely, we would then need to us onpursue a timely basis during 2017, we have the flexibility of downsizingplan to license or sell our assets, seek to be acquired by another entity, cease operations such that our existing cash will be sufficient to fund our cash requirements until June 30, 2018. We have used the best evidence, currently available, in making these estimates, and actual results may differ from and/or forecasts.seek bankruptcy protection.
Historical Cash Flows
The following table summarizes our statement of cash flows for the years ended December 31, 2016, 20152020, 2019, and 2014.2018.
| | Year Ended December 31, | |
| | 2020 | | | 2019 | | | 2018 | |
| | (US$ in thousands) | |
Net cash used in operating activities | | $ | (13,113 | ) | | $ | (12,843 | ) | | $ | (10,114 | ) |
Net cash provided by (used in) investing activities | | $ | (10,451 | ) | | $ | 5,445 | | | $ | (5,723 | ) |
Net cash provided by financing activities | | $ | 23,582 | | | $ | 6,511 | | | $ | 17,762 | |
| | Year Ended December 31, | |
| | 2016 | | | 2015 | | | 2014 | |
| | (US$ in thousands) | |
Net cash used in operating activities | | $ | (7,923 | ) | | $ | (8,628 | ) | | $ | (3,855 | ) |
Net cash provided by (used in) investing activities | | $ | 4,691 | | | $ | (5,070 | ) | | $ | (46 | ) |
Net cash provided by financing activities | | $ | 5,424 | | | $ | 22,013 | | | $ | - | |
Operating Activities
Net cash used in operating activities for the year ended December 31, 20162020 was $7.9$13.1 million, as compared to $8.6$12.8 million for the year ended December 31, 2015.2019. The decreaseincrease in net cash used in operating activities in 20162020 was attributable primarily to athe increase in operating loss and decrease in operating loss.
trade accounts payable, accruals and other current liabilities, as compared to 2019. Net cash used in operating activities for the year ended December 31, 20152019 was $8.6$12.8 million, as compared to $3.9$10.1 million for the year ended December 31, 2014.2018. The increase in net cash used in operating activities in 20152019 was attributable primarily to anthe increase in operating loss.loss that resulted primarily due to the increase in research and development expenses, as compared to 2018.
Investing Activities
Net cash used in investing activities for the year ended December 31, 2020 was $10.5 million, comprised primarily of investment in short-term bank and other deposits in the amount of $10.1 million and purchase of property and equipment in the amount of $0.4 million. Net cash provided by investing activities for the year ended December 31, 2016 consists2019 was $5.4 million, comprised primarily of proceeds from short-term bank deposits in the amount of $4.8$5.6 million which was partially offset byand purchase of property and equipment in the amount of $166,000.$0.17 million. Net cash used in investing activities for the year ended December 31, 2015 consists2018 was $5.7 million, comprised primarily of investment in short-term investmentbank deposits in the amount of $4.8$5.6 million and purchase of property and equipment in the amount of $270,000. Net cash used in investing activities for the year ended December 31, 2014 consists of purchase of property and equipment in the amount of $46,000.$0.94 million.
Financing Activities
Net cash provided by financing activities for the year ended December 31, 20162020 was $5.4$23.6 million, comprised primarily of net proceeds of $4.73 million from the issuance of ordinary shares in the February 2020 private placement, net proceeds of $10.2 million from the April 2020 and May 2020 registered direct offering,offerings and net proceeds of issuance expenses in$8.7 million from the amount of $5.3 million.July 2020 warrant exercise transaction. Net cash provided by financing activities for the year ended December 31, 20152019 was $22.0$6.5 million, comprised primarily of proceeds from the issuance of ordinary shares in the private placement consummated simultaneously with our initial publicFebruary 2019 registered direct offering, net of issuance expenses in the amount of $11.0 million and issuance of ordinary shares in the IPO net of issuance cost in the amount of $10.9 million. We have not generatedexpenses. Net cash fromprovided by financing activities for the year ended December 31, 2014.2018 was $17.8 million, comprised of proceeds from the issuance of ordinary shares in the underwritten public offering, net of issuance expenses.
Funding Requirements
We expect to incur losses from operations for the foreseeable future. We expect to incur increasing research and development expenses, including expenses related to the hiring of personnel and conducting additional clinical trials.trials including the pivotal study in the United States that we plan to initiate in late 2021 and costs associated with manufacturing scale up We expect that our general and administrative expenses will also increase as we expand our finance and administrative staff, add infrastructure, and incur additional costs related to being a public company in the United States, including directors’ and officers’ insurance, investor relations programs, and increased professional fees. Our future capital requirements will depend on a number of factors, including the timing and outcome of clinical trials and regulatory approvals, the costs involved in preparing, filing, prosecuting, maintaining, defending, and enforcing patent claims and other intellectual property rights, the availability of financing, the costs involved in manufacturing our product, and our success in developing markets for our products.
Our expected future expenditures related to product, clinical and regulatory clearances includesinclude the follows:following:
completion of the clinical development of our C-Scan system;C-Scan;
conducting clinical trials in Europe, the United States and other territories for purposes of regulatory approval and post-marketing validation;
development of advanced version and future generations of our C-Scan system and future products; and
FDA and additional regulatory filing activities in countries we intend to commercialize our system; andsystem.
patent maintenance fees.Manufacturing scale up costs
See “Item 3D “Key Information - Risk Factors—Risks Related to Our management has plans of increasing our research and development costs in 2017 to reach market in a timely manner. Such plans will increase the burn rate and our management expects that with such increased costs, our existing cash resources and the net proceeds from our initial public offering and concurrent private placement and our registered direct offering will be sufficient to fund our projected operating requirements at least until December 31, 2017. Nevertheless, we will require significant additional financing in the future to fund our operations if and when we progress with our clinical trials in Europe and the United States as well as other potential territories. Management plans include additional fund raising in the next year, which management believe is probable. If adequate additional financing on acceptable terms is not available to us on a timely basis during 2017, we have the flexibility of downsizing our operations such that our existing cash will be sufficient to fund our cash requirements until June 30, 2018. We have used the best evidence, currently available, in making these estimates, and actual results may differ from or forecasts.
In the absence of additional funding, we expect our continuing operating losses to result in increases in our cash used in operations over the next several quarters and years.Financial Position.”
Application of Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with U.S. GAAP. The preparation of our financial statements requires us to make estimates, judgments and assumptions that can affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting periods.periods. We base our estimates, judgments and assumptions on historical experience and other factors that we believe to be reasonable under the circumstances. Materially different results can occur as circumstances change and additional information becomes known. Besides the estimates identified above that are considered critical, we make many other accounting estimates in preparing our financial statements and related disclosures. See Note 2 to our audited consolidated financial statements presented elsewhere in this Annual Report for a description of the significant accounting policies that we used to prepare our consolidated financial statements. The critical accounting policies that were impacted by the estimates, judgments and assumptions used in the preparation of our consolidated financial statements are discussed below.
Share-based compensation
We account for share-based compensation in accordance with ASC No. 718, “Compensation-Stock Compensation.” ASC No. 718 requires companies to estimate the fair value of equity-based payment awards on the date of grant using an Option-Pricing Model, or OPM. We recognize compensation expenses for the value of our awards granted based on the graded-vesting method in our consolidated statements of operations over the requisite service period for each separately vesting portion of the award. ASU 2016-09, Compensation-Stock Compensation (Topic 718) allows companies to account for forfeitures when they occur.
We selected the Black-Scholes-Merton option-pricing model as the most appropriate method for computing the fair value of our share-based awards, using the standard parameters established in that model including estimates relating to the fair value of our ordinary shares, volatility, estimated life of the instruments, risk-free interest rates and dividends yield as described below.
Option Valuations
The determination of the grant date fair value of options using an option pricing-model is affected by estimates and assumptions with respect to a number of complex and subjective variables. These variables include the expected volatility of our share price over the expected term of the options, share option exercise and cancellation behaviors, risk-free interest rates and expected dividends, which are estimated as follows:
Fair Value of our Ordinary Shares.Prior to our initial public offering, due to the absence of a public market for our ordinary shares, we estimated the fair value of our ordinary shares, as discussed below in “—Valuation of our ordinary shares.” Following our initial public offering, the fair value of our ordinary shares is determined based on the trading price of our ordinary shares on the Nasdaq Capital Market.
Expected Volatility.We estimated the expected share price volatility for our ordinary shares by considering the historic price volatility for industry peers based on price observations over a period equivalent to the expected term of the share option grants. Industry peers consist of public companies in the medical device and healthcare industries. We intend to continue to consistently apply this process using the same or similar industry peers until a sufficient amount of historical information regarding the volatility of our ordinary share price becomes available, or unless circumstances change such that the identified companies are no longer similar to us, in which case, more suitable companies whose share prices are publicly available would be utilized in the calculation.
Expected Term.The expected term of options granted represents the period of time that options granted are expected to be outstanding, and is determined based on the simplified method in accordance with ASC No. 718-10-S99-1 (SAB No. 110), as adequate historical experience is not available to provide a reasonable estimate. ASU 2016-09, Compensation-Stock Compensation (Topic 718) permits forfeitures to be accounted for when they occur.
Risk-Free Rate. The risk-free interest rate is based on the yield from U.S. Treasury zero-coupon bonds with a term equivalent to the contractual life of the options.
Expected Dividend Yield. We have never declared or paid any cash dividends and do not presently plan to pay cash dividends in the foreseeable future. Consequently, we used an expected dividend yield of zero.
If any of the estimates and assumptions used in the Black-Scholes-Merton option-pricing model will change significantly, our share-based compensation for future awards may differ materially from those projected and recorded previously.
The fair value for options granted in 2016, 2015 and 2014 is estimated at the date of grant using a Black-Scholes-Merton option-pricing model with the following assumptions:
Parameters | | Year 2016 Grants | | February- December 2015 Grants | | October 2014 Grant |
Expected volatility (in %) | | 59-60 | | 44-62 | | 50-60 |
Expected term (in years) | | 5-10 | | 4-10 | | 5-6 |
Risk free interest rate (in %) | | 1.2-2.1 | | 1.29-2.28 | | 1.45-1.72 |
Anticipated rate of dividends (in %) | | 0 | | 0 | | 0 |
Share Price | | $2.22-$3.2 | | $3-$5.12 | | $3.01 |
For information regarding share-based awards granted to employees and non-employees during the years ended December 31, 2016, 2015 and 2014, as well as the estimated fair value of the underlying ordinary shares on the grant date see Note 11 to our audited consolidated financial statements presented elsewhere in this Annual Report.
Valuation of our ordinary shares
Prior to the completion of our initial public offering, due to the absence of an active public market for our ordinary shares, the fair value of our ordinary shares for purposes of determining the exercise price for awards was determined by our management and approved by our board of directors. In connection with preparing our financial statements, our management considered the fair value of our ordinary shares based on a number of objective and subjective factors consistent with the methodologies outlined in the American Institute of Certified Public Accountants Practice Aid, Valuation of Privately-Held-Company Equity Securities Issued as Compensation, referred to as the AICPA Practice Aid.
Commencing February 24, 2015, the date our units (each consisting of one ordinary share and one half of a Series A Warrant to purchase one ordinary share) began trading on the NASDAQ Capital Market, the fair value of our ordinary shares underlying the share options for purposes of determining the exercise price for awards was derived by reference to the closing price of our unit on NASDAQ Capital Market on the relevant date, using relative fair value for each component in the unit.
After March 18, 2015, the date the units were separated into one ordinary share and one-half of a Series A Warrant to purchase one ordinary share and our ordinary shares began trading on the NASDAQ Capital Market, the grant date fair value for awards is based on the closing price of our ordinary shares on the NASDAQ Capital Market on the date of grant and fair value for all other purposes related to share-based awards is the closing price of our ordinary shares on NASDAQ Capital Market on the relevant date.
Royalties provision
Provision for royalties to an ASIC designer
In December 2007, we entered into an agreement for the development of an application specific integrated circuit, or ASIC, component to be used as an amplifier for the capture of signals at low frequencies from X-ray detectors contained in our product. The ASIC developer is entitled to receive royalties from us in the amount of €0.5 (approximately $0.53)$0.61) for every ASIC component that we will sell, up to €200,000 (approximately $210,000)$245,000). The net present value of the royalty liability to the ASIC designer is dependent upon our management estimates and assumption as to future product shipments and interest rates used to calculate the present value of the cash payments required to repay the royalties to the ASIC designer. In calculating the present value of future royalty payments to the ASIC designer, we used a discount factor of 17.6%, commensurate with our risk at the date of initial recognition of the liability. Any updates in the expected product shipments and the liability will be recorded to profit and loss each period. As of December 31, 2016,2020, it was probable that we will be required to pay the above mentioned royalties, and accordingly, a liability for this reimbursement has been accounted for in our financial statements in the amount of $139,000.$140,000.
Reimbursement liability to Check-Cap LLC unitholders
On May 31, 2009, we entered into an asset transfer agreement with Check-Cap LLC pursuant to which Check-Cap LLC transferred all of its business operations and substantially all of its assets to us. In connection with the transaction we undertook to reimburse the unitholders of Check-Cap LLC for any tax burdens that may be imposed on them due to the reorganization.Reorganization. The reimbursement liability is calculated assuming deemed royalties are paid to the U.S. unitholders of Check-Cap LLC under Section 367(d) of the Code, and is based in part on our forecasted sales.sales with a cap calculated as the fair value of the share as determined at the date of the financial statements. The reimbursement liability is calculated usingby multiplying the provisions of ASC 820, under whichestimated tax rate by the lowest of: (1) expected cash outflows were discounted using a 17.6% discount factor commensurate with the risk of our company’s risk at the date of initial recognitioncompany, and (2) value of the liability. Any updatesshares held by U.S. unit holders of the Predecessor Entity as of December 31, 2020 multiplied by $0.46, the last reported sale price per share of our ordinary shares on the Nasdaq Capital Market on December 31, 2020. Changes in the expected cash outflows and the liability will beis recorded to profit and loss each period. As of December 31, 2016, it was probable that we will be required to reimburse2020, the U.S. unitholdersbalance of Check-Cap LLC, and accordingly, athe reimbursement liability for this reimbursement has been accounted for in our financial statements in the amount of $382,000.totaled $14,000. Due to the fact that we are still in the development stage and have not generated revenues, the sales forecast is highly subjective and may vary significantly in the future. As more information is gathered to assist our management in making forecasts, the liability will be updated.
Fair value of financial instruments
On June 1, 2009, in connection with that certain Series C Preferred Share Purchase Agreement, we issued to the Pontifax Funds, as the lead investor, warrants for the purchase of 41,822 Series C-1 preferred shares and warrants for the purchase of 50,399 Series C-2 preferred shares. These warrants converted into warrants to purchase 92,221 ordinary shares immediately prior to the consummation of our initial public offering (the “Conversion”). These warrants included anti-dilution protection provision requiring a reduction in original exercise price as a result of subsequent issuance below the original exercise price, and therefore were classified as a liability in the balance sheet. Prior to the Conversion, the fair value of this financial instrument was determined based on an option-pricing model using similar assumptions to those used for our share-based compensation awards to employees.
In consideration for brokerage services in connection with the Series C preferred share investment: (i) on December 15, 2009, the Company issued warrants to purchase 18,586 preferred C2 shares, with an exercise price of $5.38 per share, which expired on November 22, 2014; and (ii) on April 27, 2010, the Company issued warrants to purchase 8,366 preferred C2 shares, with an exercise price of $5.38 per share, which expired on January 21, 2015. The warrants were classified as a liability in accordance with ASC No. 480. Immediately prior to our initial public offering upon the conversion of the warrants to purchase preferred shares into warrants to purchase ordinary shares, these warrants were converted into equity.
On March 17, 2011, in connection with Series D Preferred Share Purchase Agreement, we issued warrants for the purchase of 810,013 Series D-2 preferred shares to Series D1 investors. In addition, as consideration for brokerage services and in connection with Series D Preferred Share Purchase Agreement, we issued warrants for the purchase of 25,196 Series D-1 preferred shares and warrants for the purchase of 20,570 Series D-2 preferred shares in consideration for brokerage services. These warrants included price protection provision requiring a reduction in original exercise price as a result of subsequent issuance below the original exercise price, and therefore were classified as a liability in the balance sheet. Prior to the Conversion, the fair value of this financial instrument was determined based on an option-pricing model using similar assumptions to those used for our share-based compensation awards to employees. Series D-1 and Series D-2 warrants expired on March 17, 2015.
Recent Accounting Pronouncements
In February 2016, the Financial Accounting Standards Board (“FASB”)FASB issued Accounting Standards Update (“ASU”)ASU 2016-02 Leases“Leases (Topic 842), which primarily changes”. The purpose of this amendment requires the lessee’s accounting for operating leases by requiring recognition of lease right-of-use assets and lease liabilities.liabilities by lessees for those leases previously classified as operating leases. The amendments in this ASU are effective January 1, 2019,for public business entities for fiscal years, and for interim periods within that year, with earlythose fiscal years, beginning after December 15, 2018. Early adoption was permitted. We are evaluating the effect ofadopted ASU 2016-02 effective January 1, 2019 using the modified retrospective application, applying the new standard to leases in place as of the adoption date. Prior periods have not been adjusted. Leases existing for the reporting period beginning January 1, 2019 are presented under ASU 2016-02.
Arrangements that are determined to be leases at inception are recognized as long-term operating lease assets and lease liabilities in the consolidated balance sheet at lease commencement. Operating lease liabilities are recognized based on the present value of the future lease payments over the lease term at commencement date. As our leases do not provide an implicit rate, we apply our incremental borrowing rate based on the economic environment at the commencement date in determining the present value of future lease payments. Lease terms may include options to extend the lease when it is reasonably certain that we will exercise that option. Lease expense for operating leases or payments are recognized on a straight-line basis over the lease term.
We elected to adopt a package of practical expedients offered by the FASB which removes the requirement to reassess whether expired or existing contracts contain leases and removes the requirement to reassess the lease classification for any existing leases prior to the adoption date of January 1, 2019. We also elected the practical expedient to include both lease and non-lease components as a single component and account for it as a lease. Additionally, we have made a policy election not to capitalize leases with a term of 12 months or less.
In accordance with ASC 360-10, management reviews operating lease assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable based on estimated future undiscounted cash flows. If so indicated, an impairment loss would be recognized for the difference between the carrying amount of the asset and its fair value.
In June 2018, the FASB issued ASU 2018-07, “Compensation—Stock Compensation (Topic 718) Improvements to Nonemployee Share-Based Payment Accounting”. The purpose of this amendment is to address aspects of the accounting for nonemployee share-based payment transactions. The amendments in this ASU are effective for public business entities for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2018. We adopted this ASU 2018-07 effective January 1, 2019. The adoption of this ASU 2018-07 did not have material impact on our consolidated results of operations, financial statements, but expect it would not have material effect on our financial results.position or disclosures.
In MarchJune 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718).2016-13 “Financial Instruments – Credit Losses” to improve information on credit losses for financial assets and net investment in leases that are not accounted for at fair value through net income. The ASU replaces the current incurred loss impairment methodology with a methodology that reflects expected credit losses. This guidance identifies areas for simplification involving several aspects of accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, an option to recognize gross stock compensation expense with actual forfeitures recognized as they occur, as well as certain classifications on the statement of cash flows. This guidance isASU 2016-13 was effective for us in the annual reporting period beginning after December 15, 2016, including interim periods within that reporting period,first quarter of 2020, with early adoption permitted. WeThe adoption of this standard did not have early adopted the update with the most significant areamaterial impact on our consolidated results of change being the accounting for forfeitures, which, as of January 1, 2016, are accounted for on a gross basis and recognizes actual forfeitures as they occur. The update requires the adoption related to forfeitures to be accounted for using the modified retrospective method where the effect of the change relating to previous years was to be recognized as an adjustment to the opening balance of retained earnings. The amount of the adjustment related to previous years was immaterial.operations, financial position or disclosures.
In November 2016,August 2018, the FASB issued ASU 2016-182018-13, “Changes to require amounts generally described as restricted cashDisclosure Requirements for Fair Value Measurements”, which will improve the effectiveness of disclosure requirements for recurring and restricted cash equivalents be included with cashnonrecurring fair value measurements. The standard removes, modifies, and cash equivalents when reconciling the beginning-of-periodadds certain disclosure requirements, and end-of-period total amounts shownwas effective for us beginning on the statement of cash flows. The amendments are effective January 1, 2019, and for interim periods within that year. Early2020. The adoption is permitted. We will adopt the ASU inof this standard did not have material impact on our futureconsolidated results of operations, financial statements.position or disclosures.
JOBS Act ExemptionIn December 2019, the FASB issued ASU No. 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”), which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. This standard is effective for us beginning January 1, 2021 and must be applied on a modified retrospective basis. This standard is not expected to have a material impact on our financial statements or disclosures.
The JOBS Act permits an “emerging growth company,” such as us, to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies. We are choosing to “opt out” of this provision and, as a result, we will comply with new or revised accounting standards as required when they are adopted. This decision to opt out of the extended transition period under the JOBS Act is irrevocable.
C. | Research and development, patents and licenses, etc. |
For a description of our research and development programs and the amounts that we have incurred over the last three years pursuant to those programs, see Item 4B “Information on Our Company—Business Overview—Research and Development.”
Our results of operations and financial condition may be affected by various trends and factors discussed in Item 3D “Key Information—Risk factors,” Item 4 “Information on Our Company” and elsewhere in this Item 5 “Operating and Financial Review and Prospects”
We do not have any material off-balance sheet arrangements.
The following table sets forth information for our executive officers and directors as of the date of this Annual Report.March 10, 2021. Unless otherwise stated, the address for our directors and executive officers is c/o Check-Cap Ltd., 29 Abba Hushi Avenue, P.O. Box 1271, Isfiya, 3009000, Israel.